1.1MB - Pirelli

Pirelli S.p.A. Milan Annual Report 1998

Pirelli S.p.A.
Viale Sarca 222
20126 Milan
The shareholders of Pirelli Società per Azioni are called
to the ordinary and extraordinary shareholders’
meeting to be held in Milan at the Associazione
Industriale Lombarda in Via Pantano 9 at 3:30 P.M.
• on Friday, May 21, 1999 in first call
• on Monday, May 24, 1999 in second call
to pass resolutions on the following
Agenda
Ordinary Part
1. The Board of Directors’ report on operations, the
Board of Statutory Auditors’ report, financial
statements at December 31, 1998, appropriation of
net income.
2. Election of the Directors after establishing the
number of members on the board.
3. Election of the Board of Statutory Auditors and its
Chairman; determination of the emolument for the
standing statutory auditors.
4. Appointment of the audit firm, pursuant to the
provisions of art. 159 of Legislative Decree No. 58 of
February 24, 1998 and the recommendation
contained in the Consob Communiqué No. 97001574
of February 20, 1997, for the audit of the statutory
financial statements, the consolidated financial
statements and the interim six-month financial
statements for the years ending December 31, 1999,
2000 and 2001.
Extraordinary Part
1. Proposal of the merger by incorporation in Pirelli
S.p.A. of Société Internationale Pirelli S.p.A.
according to the merger plan drawn up in
compliance with the provisions of art. 2501 bis of the
Italian Civil Code, by exchanging 83 Pirelli S.p.A.
ordinary shares, with dividend rights from January 1,
1999, for each Société Internationale Pirelli S.p.A.
share, without increasing the share capital of the
merging company since, in the share capital of the
latter company following the same merger, there will
be a sufficient number of Pirelli S.p.A. shares to
service the exchange.
Inherent and consequent resolutions. Conferring of
powers.
2. Procedures for the disposition of treasury shares.
Inherent and consequent resolutions. Conferring of
powers.
3. Translation of share capital into euro as set forth in
article 17.6 of Legislative Decree No. 213 of June 24,
1998, and rounding up the par value of the shares
from Lire 1,000 to euro 0.52; consequent increase in
the share capital through the utilization of the share
premium reserve.
Consequent amendment to article 5 of the articles of
association.
Inherent and consequent resolutions. Conferring of
powers.

Contents
Board of Directors; Board of Statutory Auditors;
General Managers; Independent Auditors 3
Structure of Pirelli Group 4
Pirelli S.p.A. on the Stock Market 5
Five-year Summary of Selected Consolidated Financial Data 6
Directors’ Report on Operations 7
The Group 11
Cables and Systems Sector 16
Tyres Sector 27
Finance 36
Information Systems 38
Ecology and the Environment 40
Personnel 42
Related Party Disclosures 43
Investments held by Directors, Statutory Auditors and General Managers 45
Corporate Governance 46
Pirelli S.p.A. - Condensed financial statements 47
Shareholders’ Resolutions 49
Consolidated Financial Statements at December 31, 1998
Consolidated balance sheets 52
Consolidated statements of income 56
Notes to consolidated financial statements 57
Supplementary information (*) 77
Board of Statutory Auditors’ report 93
Independent Auditors’ report 95
Extraordinary part of shareholders’ meeting
Directors’ report 96
Amendment of the by-laws 116
Merger plan pursuant to art. 2501-bis of the Italian Civil Code 117
Board of Statutory Auditors’ report on the extraordinary part of the shareholders’ meeting 133
(*) Included therein are the financial statements in Euro (balance sheets and statements of income)
calculated by applying the fixed translation rate to the Italian lire financial statements.
page
2

Pirelli S.p.A.
Board of Directors
Chairman and Chief Executive Officer
Deputy Chairman
Directors
Secretary to the Board
Marco Tronchetti Provera
Alberto Pirelli
Carlo Buora
Eugenio Coppola di Canzano
Carlo De Benedetti
Alberto Falck
Giovanni Ferrario
Giuseppe Gazzoni-Frascara
Georg F. Krayer
Angelo Marchiò
Giuseppe Morchio
Luigi Orlando
Riccardo Perissich
Giampiero Pesenti
Ennio Presutti
Carlo Alessandro Puri Negri
Vincenzo Sozzani
Adalberto Castagna
Board of Statutory Auditors
Chairman
Standing members
Alternate members
Luigi Guatri
Mario Brughera
Giorgio Oggioni
Paolo Francesco Lazzati
Alessandro Manusardi
General Managers
Finance and Administration
Tyres Sector
Cables and Systems Sector
Carlo Buora
Giovanni Ferrario
Giuseppe Morchio
Independent Auditors
Reconta Ernst & Young S.p.A.
Note: with respect to the powers conferred to the Chairman and CEO and General Managers, see page 46
under “Corporate governance”.
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3

Structure of Pirelli Group
at December 31, 1998
Pirelli & C.
67.51%
6.53%
Société
Internationale
Pirelli Ltd
39.49%
99.81%
Pirelli S.p.A.
0.19%
Pirelli
Tyre Holding N.V.
100 %
Pirelli
Cavi e
Sistemi S.p.A.
90%
90%
Tyres
Cables and Systems
10 %
10 %
Minority interests
(*) Pirelli & C. esercita il diritto di voto su un ulteriore 5,188% detenuto da azionisti terzi, che porta ad un totale pari al 50,003%.
Tyres
Argentina
Brazil
Germany
Italy
Spain
Turkey
United Kingdom
United States
Venezuela
4
i
Cables
and Systems
Argentina
Australia
Brazil
Canada
China
France
Germany
Hungary
Indonesia
Italy
Ivory Coast
Portugal
Rumania
South Africa
Spain
Turkey
United Kingdom
United States

Pirelli S.p.A. on the Stock Market
Shares outstanding at December 31, 1998
Number
Par
value
Ordinary shares 1,895,117,473 Lire 1000
Savings shares 88,006,016 Lire 1000
1,983,123,489
140
135
130
125
120
115
110
105
100
95
90
Shares outstanding after the resolution of February 2, 1999
Market trading on the Milan stock exchange
Number
Number of shares
traded
Par
value
Ordinary shares 1,896,552,473 Lire 1000
Savings shares 88,006,016 Lire 1000
1,984,558,489
Amount
(Billions of lire)
Stock market 144,218,359,744 818,962
Pirelli S.p.A. - ordinary shares 2,122,129,500 11,473
Pirelli S.p.A. - savings shares 103,107,000 423
85
J F M A M J J A S O N D
1998
MIB index (monthly average)
Market price of ordinary shares
(monthly average)
250
245
240
235
230
225
220
215
210
205
200
195
190
185
180
175
170
165
160
155
150
145
140
135
130
125
120
115
110
105
100
95
90
85
80
J F M A M J J A S O N D
1998
Number of ordinary shares traded
on the Milan stock exchange (in millions)
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5

Five-year Summary of Selected Consolidated Financial Data
Sales revenues
in billions of lire
1996 1997 1998
12000
11000
10000
9000
8000
7000
Gross operating profit
in billions of lire
1996 1997 1998
1500
1400
1300
1200
1100
1000
Net income
in billions of lire
1996 1997 1998
600
500
(in billions of lire) 1994 1995 1996 1997 1998 (1) 1998 (2)
Sales revenues 9,790 10,893 10,240 11,265 10,624) 10,624) (1)
Gross operating profit 975 1,186 1,208 1,329 1,397) 1,397) (1)
Operating profit 433 636 680 760 798) 798) (1)
Net income 147 304 436 512 534) 534) (1)
Net income attributable to Pirelli S.p.A. 110 257 387 460 482) 482) (1)
Earnings per share (in lire) 72 165 249 263 243) 243) (3)
Fixed assets 4,405 4,360 4,098 4,373 4,533) 4,699) (1)
Net working capital 1,625 1,912 1,706 1,832 1,773) 1,962) (1)
Net invested capital 6,030 6,272 5,804 6,205 6,306) 6,661) (1)
Shareholders’ equity 3,483 3,784 3,714 4,421 4,836) 4,750) (1)
Provisions 1,041 1,082 1,075 1,306 1,227) 1,398) (1)
Net financial debt 1,506 1,406 1,015 478 243) 513) (1)
Shareholders’ equity attributable to Pirelli S.p.A. 2,876 3,266 3,273 4,045 4,507) 4,421) (1)
Net equity per share (in lire) 1,889 2,098 2,102 2,314 2,273) 2,229) (3)
Free cash flows 498 371 607 519 617) 347) (1)
Net cash flows 477 38 347 47 (221) (491) (1)
R&D expenditures 287 303 315 355 379) 379) (1)
Capital expenditures 422 485 541 619 699) 804) (1)
400
300
200
100
Shareholders’ equity
in billions of lire
1996 1997 1998
5000
4500
Gross operating profit /
Sales revenues
Operating profit /
Sales revenues
Net income /
Net equity*
Operating profit /
Net invested capital*
Net financial debt /
Net equity
9.96% 10.89% 11.79% 11.80% 13.15% 13.15% (1)
4.42% 5.84% 6.64% 6.74% 7.52% 7.52% (1)
4.42% 8.37% 11.63% 12.58% 11.54% 11.65% (1)
6.93% 10.34% 11.26% 12.65% 12.76% 12.41% (1)
0.43 0.37 0.27 0.11 0.05 )
0.11 )
(1)
4000
3500
3000
2500
Capital expenditures
in billions of lire
1996 1997 1998
900
800
700
600
500
400
Pirelli S.p.A. ordinary shares (No. in millions) 1,435 1,469 1,469 1,660 1,895) 1,895) (3)
Pirelli S.p.A. savings shares (No. in millions) 88 88 88 88 88) 88) (3)
Total Pirelli S.p.A. shares (No. in millions) 1,523 1,557 1,557 1,748 1,983) 1,983) (3)
Factories (number) 74 74 71 72 70) 73) (1)
Personnel (number at 12.31) 38,485 38,106 36,534 36,211 36,226) 38,209) (1)
Sales revenues per employee (in millions of lire) 241 278 271 307 291) 289) (1)
(1) Considering the same companies in consolidation, excluding the effects of the acquisition of the Power Cables Division from
Siemens A.G..
(2) The 1998 consolidated financial statements include the acquisition from Siemens A.G. of the companies in Germany,
consolidated line-by-line in the balance sheet, and the companies in the following countries valued at cost: Hungary, Turkey,
Rumania and South Africa (additional information is disclosed in the notes to consolidated financial statements).
(3) The reduction in the earnings and equity per share attributable to Pirelli S.p.A. is due to the conversion of convertible bonds
1994-1998 and the bonus shares assigned to employees.
* Average amounts
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Directors’ Report on Operations
Shareholders,
The consolidated financial statements of Pirelli S.p.A. at December 31, 1998 show a
net income of Lire 534 billion, after extraordinary expenses, net, of Lire 15 billion,
compared to Lire 512 billion, after extraordinary expenses, net, of Lire 57 billion, in 1997.
Net income attributable to Pirelli S.p.A. is Lire 482 billion (with earnings per share of
Lire 243) compared to Lire 460 billion in 1997 (with earnings per share of Lire 263). The
reduction in earnings per share is due to the conversion of 1994-1998 convertible bonds
and the bonus shares assigned to employees which increased the number of ordinary
shares from 1,660,202,476 at December 31, 1997 to 1,895,117,473 at December 31, 1998.
Net sales revenues amount to Lire 10,624 billion and show a reduction of 5.7 percent
compared to 1997, owing principally to a fall in prices (-7.5 percent) which was only partly
compensated by the increase in volumes and mix (+2.2 percent). The currency exchange
effect produced by translating into Italian lire is almost negligible (-0.4 percent).
Gross operating profit totals Lire 1,397 billion compared to Lire 1,329 billion in 1997,
representing an increase as a percentage of sales revenues (13.1 percent) compared to the
prior year (11.8 percent).
Operating profit totals Lire 798 billion or 7.5 percent of sales revenues, compared to
Lire 760 billion in 1997 (6.7 percent).
In 1998, net cash flows show a negative figure of Lire 491 billion (a positive figure of
Lire 47 billion in 1997). This is due mainly to dividend payments, the first part of the
acquisition of the power cables business from Siemens and the purchase of treasury
shares.
The net debt position went from Lire 478 billion at year-end 1997 to Lire 513 billion. This
amount also reflects the acquisition of the power cables division from Siemens A.G.
(Lire 270 billion) and the purchase of treasury shares (Lire 276 billion), which was partly
compensated by the conversion of Pirelli 1994-1998 bonds during the year for Lire 505 billion.
The financial statements at December 31, 1998 of Pirelli S.p.A., the group holding
company, show a net income of Lire 391 billion, an increase of 37 percent compared to
Lire 285 billion of net income in 1997.
The economic scenario
1998 brought a strong slowdown in the world economy. The overall GDP grew by less
than 2 percent, and trading dynamics were down by half, from about 10 percent in 1997
to 4 percent.
All the data taken together show differing situations in the main world areas. The United
States, thanks to a strong growth in domestic demand, maintained a growth in GDP equal
to 3.9 percent.
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Gross Domestic Product of the main
geographic areas of the world:
1996-98 trend and 1999 forecast (1996=100).
Inflation rate in the main geographic areas
of the world: 1996-98 trend and 1999 forecast
(1996=100).
130
125
120
115
110
105
100
95
1996 1997 1998 1999
Western Europe North America Latin America
Japan China Other Asian Countries
135
130
125
120
115
110
105
100
95
1996 1997 1998 1999
Western Europe North America Latin America
Japan China Other Asian Countries
The European Union has practically confirmed an average growth rate of 2.8 percent, as
in 1997, with improvements in Germany, France and Spain, a slowdown in the United
Kingdom and a moderate gain in Italy.
The Central European countries like Hungary, Poland and Slovakia have maintained a growth
rate of over 5 percent, while a reduction of 2 percent has been confirmed for the Czech economy.
The financial crisis which in 1998 hit Asia, the former Soviet Republics and Brazil is the
cause of the contractions, sometime significant, suffered by the economies of those areas.
In Asia, Japan reports a reduction in GDP of almost 3 percent, but the falloff is quite a
bit higher in the Southeast Asian countries, especially in Indonesia (-13/14 percent).
Although lower than in the past, the economic growth is nevertheless significant for India
(+5 percent) and China (+8 percent) where, notwithstanding, various financial risk
situations are starting to emerge.
In South America, Brazil, being affected by the financial crisis, fell to a level of zero
growth and Argentina has almost reduced its growth rate by half, bringing it to 4 percent.
Venezuela experienced a drop of around 1 percent in GDP largely as a consequence of the
slump in oil prices.
Australia, thanks to strong expansion in consumption and investments, reported a growth
of 5 percent in 1998.
Mention, lastly, should also be made of the reductions in GDP in the East Europe
countries, especially Russia (-5.5 percent), Rumania and the Ukraine.
Over the course of 1998, the developed countries, particularly those in the European
Monetary Union, registered a substantial decline in inflation thanks to the stabilization
policies, the actions undertaken by corporations to improve efficiency, the gradual
reduction in interest rates and the significant drop in the prices of raw materials and oil.
Prices in Brazil and Argentina were more or less stable, while Venezuela registered an
approximate 30-35 percent increase.
In Southeast Asia and Russia, where the financial crisis has caused a sharp devaluation in
currency, prices posted significant increases.
The selection of the eleven countries to join the European Monetary Union and the start of
the single currency concentrated the activities of government and Community institutions
and caught the attention of other world economic powers, particularly the United States
and Japan.
* * *
In 1999, the world economy should post only a moderate growth owing to the crisis
situations in South America, Asia and Russia and a slowdown in the European Union.
Positive performance, instead, is again confirmed for the United States economy.
In the European Union, forecasts are for an economic slowdown caused by both a reduction
in exports to the crisis areas and a deceleration of domestic demand. In terms of figures, the
European Union should post a GDP growth of around 2 percent against 2.8 percent in 1998.
France and Germany are showing slowdowns in the pace of expansion; the United
8
i

Worldwide sale of goods: annual growth
in volume (%).
Kingdom should report a higher decline; for Italy, expectations are for growth of not more
than 1.5 percent, as in 1998.
Europe opened the year 1999 with a new and a no less demanding horizon: to proceed
until the single currency achieves full success according to the established plan and to
favor the integration of the economies and sustain the growth according to the
commitments assumed under the Stability Pact.
At the same time, the goal of augmenting the competitiveness of European corporations,
and the Union as a whole, will be vigorously pursued.
The corporations, in particular, will have to implement the changes needed to gain an edge
over the competition which is becoming ever-more widespread within the Union and
increasingly fiercer in other economic areas.
Governments are called upon to complete the liberalization of the markets for products,
services, employment and the professions from which impetus could arise to create new
activities.
According to recent indications by the European Central Bank, the State’s presence in the
economy of Euroland is equal to 49 percent of GDP, compared to 35 percent in the United
States and 39 percent in Japan. The public presence in its various forms and restrictions
which fall upon citizens and corporations alike needs to be reduced to encourage new
business initiatives and new employment opportunities and raise the level of the Union’s
competitiveness.
In Europe, there is a very strong need to increase economic growth, also to render
integration easier. The low interest rate policy practiced by the European Central Bank is
not enough; besides liberalization, as mentioned before, important infrastructure projects
have to be launched to sustain investments and employment, also through the use of new
forms of financing.
Inflation should remain at 1-1.5 percent throughout most of the euro countries, one of the goals
of the European Central Bank, and similar to the figure for the European Union as a whole.
In Central Europe, Hungary and Poland should post growth of around 4 percent in 1999,
Slovakia somewhat lower figures, and for the Czech Republic, lastly, forecasts are for a
stagnant economy.
The outlook for the United States is for a continuation, although at a slower pace, of the
positive performance seen in 1998. The GDP should again exceed 3 percent, with inflation
around 2 percent.
The forecasts for Asia are not favorable. In Japan, another moderate falloff in GDP
is expected (-1 percent) after the significant drop of 1998. The recently approved fiscal
package should aid in creating a positive turnaround during the course of the year, but
there still remain queries over the widespread financial imbalances. India should post a
growth of around 5 percent like in 1998. China, which is forecast to register growth of
roughly 7 percent, is being affected by the instability of the financial institutions and the
difficulties in shoring up the exchange rate against a slowdown in exports. As far as the
other Southeast Asian countries are concerned, any possible economic improvements
after the 1997-1998 crisis are in any case influenced by unstable political-social
scenarios.
In South America, the crisis in Brazil is producing its effects on the other South American
countries, especially Argentina. Expectations for Brazil are directed to a substantial drop
12
10
8
6
4
2
0
1996 1997 1998
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9

1997-1998 trend in raw materials prices,
compared to that of Brent oil.
110
100
90
80
70
60
50
40
1997 1998 1999
All items
Brent oil
in GDP and a rise in inflation. The stability plan will generate negative effects on domestic
demand but a weaker currency will help exports. For the Argentine economy, which trades
heavily with Brazil, a drop in GDP is forecast, with inflation remaining at limited levels. In
Venezuela, the trends in internal demand and exports remain negative and GDP is again
expected to fall.
After the strong expansion of 1998, Australia is being affected by the crisis in Asia and
South America, with growth tending toward a more moderate figure of 2.5 percent.
In East Europe, finally, the forecasts are still negative for Russia, which up to now has
not initiated any real stabilization plan such as to justify the investment of resources by
international institutions. Russia should record a new reduction in GDP of an estimated
6 percent. As for the other major former Soviet countries, a falloff in activities or a
moderate growth are forecast.
10
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The acquisition of the Siemens energy cables
division has provided Pirelli Cables and
Systems with the advanced R&D laboratories
in Berlin.
A P6000 Powergy in the semi-anechoic room
to test its levels of silence.
The Group
1998 economic and financial performance
1998 saw fiercer price pressure and strong competition on all markets in which the Group
operates.
The strategic and operating guidelines outlined in the 1997 annual report continued to be
applied into 1998 and significant improvements in efficiency were achieved, which were
reflected in the level of variable and fixed costs. The development objectives were also
pursued, which led to the acquisition, among other things, of the Power Cables Division of
Siemens A.G., announced on October 30, 1998, and described in the six-month report on
the financial statements at June 30, 1998 as a significant subsequent event. The German
units were consolidated line-by-line in the 1998 balance sheet, while the units in Hungary,
Turkey, Rumania and South Africa were valued at cost in the consolidated financial
statements since effective control was only obtained during the last days of 1998.
The results of the consolidated financial statements can be summarized as follows:
(in billions of lire) 1998) 1998) (1) 1997)
• Sales revenues 10,624) 10,624) 11,265)
• Gross operating profit 1,397) 1,397) 1,329)
% of sales 13.1%) 13.1%) 11.8%)
• Operating profit 798) 798) 760)
% of sales 7.5%) 7.5%) 6.7%)
• Extraordinary items, net (15) (15) (57)
• Net income 534) 534) 512)
% of sales 5.0%) 5.0%) 4.5%)
• Shareholders’ equity 4,750) 4,836) 4,421)
• Net financial debt 513) 243) 478)
• Capital expenditures 804) 699) 619)
• R&D expenditures 379) 379) 355)
• Personnel (number) 38,209) 36,226) 36,211)
• Factories (number) 73) 70) 72)
(1) Considering the same companies in consolidation, excluding the effect of the acquisition of the Power Cables Division
from Siemens A.G..
• Sales revenues – the decrease of 5.7 percent can be explained as follows:
– Currency exchange effect (0.4%)
– Prices (7.5%)
– Volumes (1.1%
– Mix and other (1.1%
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Distribution of Pirelli Group 1998 sales
by sector and geographic area.
The breakdown of sales revenues by Sector and geographic area is as follows:
Tyres
Cables and
Systems
Sector 1998 1997
Cables and Systems 51% 52%
Tyres 49% 48%
Geographic area 1998 1997
Italy 15.0% 13.4%
Other European countries 39.5% 37.9%
North America 13.9% 13.5%
Central and South America 22.5% 23.9%
Australia, Africa and Asia 9.1% 11.3%
Italy
Other European
Countries
North America
Central and
South America
Australia, Africa
and Asia
• The operating profit of Lire 798 billion shows an increase over Lire 760 billion in 1997;
it represents 7.5 percent of sales revenues (6.7 percent in 1997). Although prices
decreased, there was a reduction in variable costs, raw materials in particular, and fixed
costs.
• The balance of extraordinary items shows a net expense of Lire 15 billion compared
to a net expense of Lire 57 billion in 1997.
Details are provided in the notes to consolidated financial statements.
• Net income reached Lire 534 billion compared to Lire 512 billion in 1997, an increase of
Lire 22 billion.
The gain over the previous year at the level of gross operating profit (+Lire 68 billion),
has been reduced due to higher depreciation and amortization (+Lire 30 billion) and tax
charges which, owing to the higher results and having utilized tax loss carryforwards,
increased by Lire 76 billion, from Lire 173 billion to Lire 249 billion. In contrast,
compared to 1997, the net balance of financial income and expenses improved
by Lire 18 billion, as did the net balance of extraordinary items, by Lire 42 billion.
• Shareholders’ equity rose from Lire 4,421 billion at the end of 1997 to Lire 4,750 billion
at the end of 1998 despite a negative translation adjustment of over Lire 267 billion; the
increase of Lire 329 billion is due to:
– Translation adjustment (267)
– Net income for the year 534
– 1994-1998 bond conversions 505
– Dividends to third parties:
• Pirelli S.p.A. (234)
• Other Group companies (64) (298)
– Effect of consolidating Power Cables Division
in Germany acquired from Siemens A.G. (86)
– Other changes (59)
329)
12
i

Comfort, silence and low rolling resistance
characterise the new high performance P6000
Powergy.
In the USA, research continued into
superconductivity, the new technological
frontier in power transmission.
• Net financial debt rose from Lire 478 billion at December 31, 1997 to Lire 513 billion at
December 31, 1998; the increase of Lire 35 billion is composed as follows:
– Exchange difference 50) (*)
– Operating profit (798)
– Depreciation and amortization (599)
– Net investments: 879
• Intangible assets and property,
plant and equipment 793
• Financial assets 86
– Change in working capital 151
– Change in provisions (30)
– Other changes 50
– Free cash flows (347) (*)
– Dividends paid 298 (*)
– Purchase of treasury shares 276 (*)
– Income taxes 249 (*)
– Extraordinary items, net 15 (*)
– Net cash flows 491) (*)
– Bond conversions (505) (*)
– Other changes in shareholders’ equity (1) (*)
35) (*)
(*) Includes the effect of the acquisition of the Power Cables Division from Siemens A.G. for Lire 270 billion.
• The debt to equity ratio has remained unchanged compared to 1997 at 0.11. It was
affected by the investment for the acquisition of the business from Siemens A.G.,
without which the ratio would have been 0.05.
• Capital expenditures reached Lire 699 billion during the year compared to
Lire 619 billion in 1997, considering the same companies in consolidation. The capital
expenditures to depreciation ratio is 1.27 (1.19 in 1997). Investments were mainly
concentrated in Europe in the Telecommunications and Submarine Systems business for
the Cables and Systems Sector and in the car area for the Tyres Sector.
1998 saw a further increase in net property, plant and equipment for Lire 105 billion
following the consolidation of the Power Cables Division acquired from Siemens A.G.,
which brings the total to Lire 804 billion.
• R&D expenditures were completely charged to the profit and loss account for
Lire 379 billion compared to Lire 355 billion in 1997 and represent 3.6 percent of sales
(3.2 percent in 1997).
• Personnel number almost the same as in 1997, with an increase of 15 units reaching a
total of 36,226 (+560 personnel hired under temporary labor contracts with a reduction
in the permanent work force of 545 units), without considering the employees of the
German units acquired from Siemens, consolidated line-by-line in the balance sheet; if
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13

The added value of submarine systems,
laid mainly by Pirelli’s cableship Giulio Verne,
has increased.
The strategic alliance with Cooper Tire
will increase competitiveness in the American
replacement market.
the German units are counted, the consolidated work force rises to 38,209 units. Sales
per person, considering the same companies in consolidation, equal Lire 291 million.
• Factories went from 72 at the end of 1997 to 70 at the end of 1998. The reduction is due
to the Tyres Sector for the sales of the Tivoli factory to Trelleborg Wheel Systems S.p.A.
and the San Pietro all’Olmo (Mi) factory; with the acquisition of the German units bought
from Siemens and consolidated line-by-line, the number of factories becomes 73.
• Economic value added has for a number of years now been included by Pirelli Group
among its measurements of operating results. It is defined as the difference between the
net return on capital invested and its cost.
During 1998, the economic value added remained at levels similar to 1997, considering
the same companies in consolidation, excluding the acquisition of the business segment
from Siemens.
(billions of lire) 1998 1997
• Economic value added 30 24
Economic value added in 1998 was affected by higher tax charges compared to 1997,
which reduced the net return on capital invested.
Significant subsequent events
During 1999, the process continued for the acquisition of Siemens A.G.’s world power
cables business, in compliance with the resolution passed by the Board of Directors of
Pirelli S.p.A. on July 15, 1998. In particular, the acquisition has been completed for OEKW
Montagegesellschaft der Österreichischen Kabelwerke GmbH in Austria, Codelca Due
S.p.A. in Italy, Fercable S.A. in Spain.
During the same month of January, Pirelli Cavi e Sistemi S.p.A., through its 51 percentowned
Australian subsidiary, Pirelli Cables Australia Limited, concluded the agreement by
which Pirelli Cables Australia Limited will purchase the Power Cables and Construction
Division of the Australian company Metal Manufacturers Ltd. The total amount of the deal,
which is subject to the approval of the authorities according to the normal procedures
existing in these cases, is about Australian $65 million (about Lire 65 billion). The Cables
and Systems Sector will thus further strengthen its position on the Australian market with
this purchase, and complete the offering of its products and expand its customer portfolio.
On February 9, 1999, Pirelli Pneumatici S.p.A., through its american subsidiary, Pirelli Tire
LLc, and Cooper Tire & Rubber Company entered into a strategic alliance which will allow
both companies to effectively pool their respective resources, with the objective of
increasing the competitive position on the replacements market in North and South America.
The alliance, which is only based on contractual agreements and does not call for any joint
stock ownership, will create synergies founded upon the strong points of both companies.
Pirelli will contribute its state-of-the-art technology in premium tyres and its well-known
brand name and Cooper will contribute not only its extensive sales network, acting as a
sales agent for Pirelli Tire LLc, but also its experience in the production of low cost tyres
for the replacements market. The new venture will also bring synergies in the area of raw
materials purchases.
14
i

A co-operation agreement has been signed
between Pirelli and Michelin for the joint
development of the Pax System.
Following page: Pirelli Cables and Systems
Sector’s manufacturing presence.
On February 22, 1999, in the Tyres Sector, Pirelli and Michelin signed a cooperation
agreement to further develop the Pax System together, with Pirelli adding its greater
technological experience in the area of Total Mobility and high performance to the
Michelin project.
As from January 1, 1999, the Pirelli Group has decided to adopt the euro as its currency of
account and settlement; after approval of the 1998 financial statements, the euro will
become the currency of account for the Group companies operating in the eleven
countries that are part of the European Monetary Union.
A great deal of attention is being paid to customer relations; as far as invoicing is
concerned, the companies operating in EMU countries have sent their customers a letter
advising them of the Group’s position to adopt euro from the start of the transition period
and to find out the choice made by the counterpart, under the neither-nor principle of
“neither compulsion, nor prohibition”; the same letter has also been sent to suppliers.
Consistent with the accounting system, in 1999 the internal reporting cycle and the
consolidated financial statements of the Group will also be expressed in euro.
As regards the information systems, the SAP system which was introduced over the last
few years at the Group companies, has allowed the use of Release 3.1.I, updated for the
conversion of the euro within the framework of corporate procedures.
The installation of this system made it possible to cope with the problems associated with
the year 2000 with greater clarity and timeliness.
The Board of Directors of Pirelli S.p.A., on February 2, 1999, with the power vested in it by
the shareholders’ meeting of May 15, 1998, passed a resolution for the increase of share
capital for Lire 1,435,000,000 through the issue of shares with a nominal value of Lire 1,000
each to be assigned to management of the Group. The resolution was approved by the
Milan Courts on March 3, 1999 and therefore the share capital of Pirelli S.p.A. amounts to
Lire 1,984,558,489,000 consisting of 1,896,552,473 ordinary shares and 88,006,016 savings
shares, of nominal value Lire 1,000 each.
Future outlook
The outlook for the current year will be affected by contrasting factors. On the one hand,
the cost reduction and efficiency improvement programs are rapidly being implemented,
together with the recent acquisitions and strategic agreements, will begin to show the first
positive results in the second half of the year. On the other hand, the weakness of the
world markets, with the exception of the United States, connected above all to the
turbulence of the South American, Asian, and former Soviet Union markets, will constitute
an element of instability.
Taking into account the above, and while it is still too early to have a precise picture
concerning the possible results for the current year, we do estimate, however, that
operating profit, and, therefore, the results before financial expenses and the tax charge,
can be kept in line with the previous year.
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15

Cables and Systems Sector
Overall performance
As in the last few years, the operating profit for 1998 again rose over the prior year.
All sectors of activity showed a fall in prices, set against higher volumes, a reduction in the
unit cost of materials and improved efficiency in transformation costs. However, trends in
the various segments varied considerably.
In general, in 1998, the cables and systems for telecommunications business recorded
lower selling prices, especially in fiber optic cables, although total sales remained much
the same as the previous year.
In the field of fiber optics, the investments decided in previous years generated an
increase in volumes, within a framework of falling international prices, especially in the
second half of the year.
As far as photonics are concerned, despite the recovery begun in the last part of the year,
the levels of sales of the previous year were not equaled; however, this business acquired a
large order portfolio at the end of the year.
There was a slight increase in sales for power cables as a result of a gradual fall in the quotation
of copper and the erosion of prices, while volumes rose. The operating result improved as a
result of the positive efficiency of production and a fall in the price of raw materials.
The submarine systems business has maintained a good level of profitability.
As regards the telecommunications submarine systems business, work was completed on
the Seamewe3, Lev, Pomezia-Golfo Aranci connections, while production was started for
the Atlantis 2, Columbus 3 and Mazara-Tripoli contracts.
As far as submarine power systems are concerned, Italy and Greece signed a contract
(scheduled for completion in 2000), for which the production of land cables has already
been completed and the production of submarine cables has already begun.
Still on the power front, the laying of the cables at Kansai in Japan was completed, thanks
to our cable-laying vessel “Giulio Verne”.
Exports showed an increase in volumes thanks to important contracts concluded in
Southeast Asia, India and Africa. This expansion of activity compensated for the fall in
prices which occurred during the year.
In the area of joint ventures, the economic crisis that affected much of Southeast Asia
particularly influenced Indonesia, where the internal market remains stagnant. The
activity of PT Pirelli Cables Indonesia was thus totally focused on the export market.
In China, the process of consolidation of our presence on the telecommunications cables
market continued, with a selective approach towards customers, favoring reliability over
the expansion of sales volumes.
16
i

Aerial picture of the Berlin factory,
to which Pirelli has transferred the German
headquarters of Cables and Systems.
A section of submarine optical amplifier.
Having obtained the necessary approval from the EU authorities and the antitrust bodies,
and after the completion of the due diligence review, in the last quarter of 1998 the
acquisition began of the Power Cables Division of Siemens, as announced in July. The units
are located in Germany, Hungary, Slovakia, South Africa, Turkey, Rumania, Italy, Spain,
Austria, China and Russia. The new activities will generate strong synergies, starting with
the integration of the markets, and will bring hi-tech production capacity, advanced
research laboratories and top quality products.
At December 31, 1998, the acquisitions of the companies in the following countries had
been finalized: Germany, Hungary, South Africa, Turkey and Rumania. These companies
were consolidated in the financial statements of the Cables and Systems Sector at
December 31, 1998, line-by-line in the balance sheet for the German units and at purchase
cost as far as the Hungarian, Turkish, Rumanian and South African units are concerned.
Furthermore, in February 1999, the acquisition of companies located in Austria, Italy and
Spain was finalized; the acquisition of the remaining activities is scheduled to take place
during 1999.
The following tables summarize the companies of the Siemens Group:
Subsidiaries consolidated line-by-line in the balance sheet at December 31, 1998
Company
Pirelli Kabel und Systeme Holding GmbH
Pirelli Kabel Grundstücksverwaltungs GmbH
Pirelli Kabel und Systeme Beteiligungs GmbH
Bergmann Kabel und Leitungen GmbH
Pirelli Kabel und Systeme GmbH & Co. KG
Pirelli Kabel und Systeme Verwaltungs GmbH
Country
Germany
Germany
Germany
Germany
Germany
Germany
Subsidiaries valued at purchase cost in the balance sheet at December 31, 1998
Company
MKM Magyar Kabel Muvek RT.
"Kabel" Gepgyarto Epitoipari Es Szolgaltato KFT.
MKM Balassagyarmati Kabelgyar KFT.
MKM Erosaramu Kabelgyar KFT.
MKM Kisteleki Kabelgyar KFT.
MKM Szegedi Kabelgyar KFT.
Kabel Keszletertekesito BT.
S.C. Elcaro S.A.
Turk Siemens Kablo ve Elektrik Sanayii A.S.
AFCAB Holdings (Proprietary) Ltd
African Cables Ltd
Country
Hungary
Hungary
Hungary
Hungary
Hungary
Hungary
Hungary
Rumania
Turkey
South Africa
South Africa
Subsidiaries purchased after year-end 1998
Company
Oekw Montagegesellschaft der Österreichischen Kabelwerke GmbH
Codelca Due S.p.A.
Fercable S.A.
Country
Austria
Italy
Spain
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17

Distribution of 1998 Cables and Systems sales
by geographic area and product category.
At the beginning of January 1999, an agreement was also signed on the basis of which the
Australian subsidiary Pirelli Cables Australia Ltd. will acquire the Power Cables and Construction
Division of the Australian company Metal Manufacturers Ltd.. The acquisition is scheduled for
completion by March 31, 1999, once the necessary local authorizations have been secured.
The key figures of the consolidated financial statements of the Cables and Systems Sector
are as follows:
(in billions of lire) 1998) 1998) (1) 1997)
• Sales revenues 5,397) 5,397) (1) 5,843)
• Gross operating profit 758) 758) (1) 720)
% of sales 14%) 14%) (1) 12.3%)
• Operating profit 496) 496) (1) 491)
% of sales 9.2%) 9.2%) (1) 8.4%)
• Extraordinary items, net (24) (24) (1) (53)
• Net income 280) 280) (1) 260)
% of sales 5.2%) 5.2%) (1) 4.4%)
• Net financial debt 771) 501) (1) 488)
• Capital expenditures 404) 299) (1) 270)
• R&D expenditures 180) 180) (1) 168)
• Personnel (number) 16,906) 14,923) (1) 14,245)
• Factories (number) 52) 49) (1) 49)
(1) With the same companies in consolidation as in 1997, excluding the effect of the acquisition of the Power Cables Division
of Siemens A.G.
Sales revenues show a drop of 7.6 percent compared to 1997, with the exchange effect
being equal to a negative 0.2 percent. The reduction is due to a 4.7 percent decrease in the
price of copper and 5.5 percent decline in other prices while the volumes and mix have
presented a gain of 2.8 percent.
Europe (of which
Italy: 14.8%)
The breakdown of sales revenues by geographic area and product is as follows:
South America
North America
Asia
Other areas (of which
Oceania: 3%)
Geographic area 1998 1997
Europe (of which Italy: 14.8%) 48% 47%
South America 21% 22%
North America 21% 19%
Oceania 3% 3%
Asia 5% 8%
Other areas 2% 1%
Product category 1998 1997
Power 28% 23%
Telecommunications 29% 27%
Building wires, special cables,
enameled wires 32% 34%
Accessories, installation,
other activities 11% 16%
Telecommunications
Power
Bulding wires,
special cables,
enameled wires
Accessories,
installation,
other activities
Operating profit rose from 8.4 percent to 9.2 percent of sales.
Extraordinary items show a net expense balance of Lire 24 billion in 1998 (Lire 53 billion
in 1997) as a result of the costs for the continuation of productive rationalization in some
countries, particularly France.
Net income posted a 7.7 percent increase over the prior year, reaching an amount of
Lire 280 billion, equal to 5.2 percent of sales (4.4 percent in 1997).
18
i

Detail of the production of active optical fiber
for submarine optical amplifiers.
The new DeskWave TM cables, which made
their debut in 1999, improve the efficiency
of buildings’infrastructures.
Net financial debt totals Lire 771 billion at December 31, 1998, a change of Lire 283
billion compared to Lire 488 billion at year-end 1997. The increase in debt is essentially due
to the financing secured by Pirelli S.p.A., at the best market terms, to purchase Siemens.
At the end of 1998, considering the same companies in consolidation, the number of
factories totaled 49, the same as the prior year: 32 in Europe, 6 in North America, 6 in
South America and 5 in Australia, Asia and Africa. To these must be added the 3 factories
acquired from Siemens A.G. in Germany and consolidated line-by-line, bringing the total to
52. The factories of the other units include 3 in Hungary, 1 in Turkey, 1 in South Africa and
1 in Rumania.
During 1999, following the conclusion of the process to acquire the Power Cables Division
from Siemens A.G., the number of factories will increase by another 5, bringing the total
number of production units of the Cables and Systems Sector to 63.
During the year, while producing much higher volumes than in the previous year, the
factories have continued to limit product costs by steadily improving productivity and
materials efficiency.
According to corporate strategic guidelines, in 1998 there were significant improvements
in the quality of the product and the level of service, as a tangible sign of the considerable
degree of attention being focused on the customer.
The process to obtain the ISO 14001 Environmental Certification, begun last year in the
various subsidiaries, is proceeding according to schedule; in 1998, 7 factories were
awarded certification, which, with the 3 certified in 1997, brings the total to 10 factories.
The overall work force of the Sector at December 31, 1998, considering the same
companies in consolidation, numbered 14,923 (including 1,877 under temporary
employment contracts). Compared to the end of the prior year, this corresponds to an
increase of 678 units, equal to 4.7 percent of the total. The acquisition of the Power Cables
Division from Siemens A.G. led to an increase of 1,983 units for the companies in Germany,
hence reaching a consolidated total of 16,906 persons. The employees of the companies in
Hungary, Turkey, Rumania and South Africa number 3,026 units; when the acquisitions are
completed, this will bring additions to the work force of approximately 1,590 units.
The organizational structures of the Sector have been further strengthened to cope with
evolving markets and specialization.
The integration of the organization of the Power Cables Business acquired from Siemens
was started immediately, which will enable further rationalization on a regional basis to
take place in 1999.
At December 31, 1998, the breakdown of the work force was as follows:
1998 1998 1997
excluding
Siemens
• Management 1.8% 1.9% 2.1%
• Staff 30.3% 30.3% 30.9%
• Operatives 67.9% 67.8% 67.0%
Capital expenditures in 1998 amounted in total to Lire 299 billion (+11 percent compared
to 1997), and are equivalent to 126 percent of depreciation.
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19

Advanced studies within the laboratories
of CoreCom, a consortium formed between
Pirelli and the Milan Politecnico.
Pirelli is to supply its maximum safety cables
for the new home of the Guggenheim Museum
in the historic Villa Panza di Biumo at Varese
(Italy).
Capital expenditures in the “Telecommunications” and “Submarine Systems” business
areas were particularly significant, and may be analyzed as follows:
Geographic area 1998 1997
Europe 66% 72%
South America 13% 12%
North America 17% 11%
Oceania, Asia, Other 4% 5%
As far as materials are concerned, purchase prices fell during 1998 compared to 1997,
especially with regard to products derived from the petrochemical sector.
Similarly, as far as non-ferrous metals were concerned, there was a net fall in the average
quotations of copper (-28 percent), aluminum and lead (-15 percent).
Since a slight rise in quotations is anticipated in the second half of the year, provided that
there are no substantial changes in the international economic scenario and in supply and
demand, the average prices for the current year should settle around values no higher than
those of the previous year.
R&D activities, coordinated at the worldwide level, are conducted by an integrated
structure of research centers and development and engineering units located in various
countries.
For the year just ended, these activities involved 767 people and entailed Lire 180 billion of
expenditures, equal to 3 percent of total sales, much the same as in 1997.
The distribution of R&D expenditures by geographic area is as follows:
1998 1997
• Europe 89% 83%
• South America 4% 7%
• North America 6% 9%
• Australia 1% 1%
Among the most important research activities during the year are:
in the field of power cables:
• the development, qualification and marketing of a new family of low-voltage cables and
building wires, characterized by the absence of toxic and corrosive emissions in the case
of fire;
• the production and installation of a prototype medium-voltage cable with expanded
polymer protection;
• the continuation of research on superconductivity and on direct current high-voltage
cables for submarine applications.
in the photonics sector:
• the development and supply, for the telecom network of American customers, of a new
dense wavelength division multiplexing system (DWDM) for optic communications,
20
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Another step forward was taken in WDM
photonics systems with the launch of the 128
channel WaveMux TM .
Production has begun of the new submarine
telecom network between Italy and Libya.
capable of transmitting up to 128 channels, each of which can carry a transmission
signal with a speed of up to 10 Gbit/s, reaching a capacity of more than 16 million
simultaneous phone calls.
• the development and installation, on the Corfu-Bar section, of an optical system for
submarine transmission with remote pumping for links up to 350 km long without
submerged active repeaters.
in the telecommunications cables and fiber optics sector:
• the introduction of high-capacity ribbon fiber optic cables (with up to 864 fibers) with a
compact design to optimize performance in the access network;
• the first deliveries of fibers with a highly advanced design, specially created for the latest
systems with high transmission capacity.
Cables and Systems Sector holding company
The unconsolidated balance sheet and statement of income of Pirelli Cavi e Sistemi S.p.A.
are presented as follows:
Mazara
Balance sheet (in billions of lire)
1998 1997
Intangible assets 25.3 19.8
Property, plant and equipment, net 232.6 144.1
Financial assets 1,484.3 1,478.9
Net working capital 185.1 121.0
1,927.3 1,763.8
Shareholders’ equity 1,148.1 1,083.7
Provisions 121.3 105.4
Net financial position 657.9 574.7
1,927.3 1,763.8
Tripoli
Statement of income (in billions of lire)
1998) 1997)
Production value 1,422.6) 1,182.4)
Production costs:
• Raw materials and services (1,175.4) (897.1)
• Personnel (246.1) (211.9)
• Depreciation (50.7) (39.8)
• Other 28.7) (2.4)
Operating profit (20.9) 31.2)
Financial income and expenses 256.9) 134.2)
Income before extraordinary items and income taxes 236.0) 165.4)
Extraordinary items, net 5.0) 4.8)
Income taxes (21.8) (13.6)
Net income for the year 219.2) 156.6)
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21

The first submarine optical amplifier, being
loaded aboard a cable-laying ship for
installation between Rome and Palermo.
Trégastel factory (France): the white room
where integrated photonics components are
finished.
Performance by geographic area
Sales of Pirelli Cavi e Sistemi S.p.A. in Italy were down compared to the previous year,
both because of the lower value of copper contained in cables and because of lower prices
and volumes. The various segments showed markedly different trends.
In the power cables sector, volumes increased considerably, especially in the second half
of the year, as a result of the decision by ENEL to invest in medium- and low-voltage lines
to bring the national network in line with European quality and safety standards.
Prices fell yet again; volumes sent to installers, contractors and other industrial customers,
like export sales, remained around the levels of the previous year; actions continued to
promote innovative products and laying techniques.
In the general market, the demand was heavy for the first half of the year, but showed
signs of falling in the second half; prices fell constantly, both as a result of the drop in the
prices of raw materials, and because of ever-fiercer competition. The end of the year saw
the launch of the new AFUMEX cables of the LSOH range.
For enameled wires, the year was characterized by a great deal of discontinuity on the
market, which affected volumes and prices, especially in the second half of the year.
Telecommunications cables were affected negatively by the total halt called on the
SOCRATE project by Telecom Italia, as well as by the reduction to minimum maintenance
program levels for the fixed network. As a consequence of the lower market volumes,
there was a marked fall in prices. There was a positive start to the activities of the new
telephone operating companies, which are equipping their own infrastructures and which
see the Company as one the major partners contributing new technologies.
The affiliate FOS (Fibre Ottiche Sud — F.O.S. S.p.A.) recorded a fall in sales due mainly to
the drop in prices which occurred on international markets.
The current year began with a performance similar to the second half of 1998 and
described above, with prices gradually declining even further.
In France, the affiliate Câbles Pirelli S.A. is still passing through a phase of stabilization
on the main traditional markets in which it operates, maintaining the levels of profitability
of the previous year.
In the general market, there was a climate of extreme pressure over prices, with copper
prices falling compared to the previous year; the global sales remained around the levels of
1997, thanks to an increase in volumes.
The power utilities market, despite the persisting recession that has lasted for many
years, allowed the affiliate to fulfill its expectations completely, with exports making a
considerable contribution and good results.
The special cables business was positively affected by the restructuring process still in
progress.
The level of activity on the telecommunications market recorded considerable growth,
particularly in optic cables, however this was accompanied by substantial price pressure.
The profitability trends of car cables and connections remained stable. During the year,
Câbles Pirelli began to shift its accessory production from the factory at Marne la Vallée
and concentrate them in the cable factories at Sens.
Photonics manufacturing, which takes place at the Tregastel factory, operate in a context
that is totally integrated with the units in the United States and Italy.
Actions continued to monitor working capital, which had a positive effect on the financial
position of the affiliate.
In the United Kingdom, Pirelli General Plc continues, through its operating units, to
22
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In 1998, Pirelli received the Investing in
Excellence award from British Telecom for
its progress in technology and services.
An agreement was signed with the University
of Southampton in the United Kingdom
for joint research on photonics.
produce, market and install telecommunications and power cables on both the domestic
and foreign markets.
As to the telecommunications cable sector, demand in 1998 was very strong in all
market segments.
With respect to Pirelli Cables Ltd., the domestic telecommunications sector recorded a
stable demand in 1998 and the affiliate maintained its market position, despite increasing
pressure from competition. The export markets, particularly those in the Far East,
weakened following the general economic trend of the region and, for 1999, these
conditions are expected to persist.
As far as power cables are concerned, there was a growth in the demand for high-voltage
cables and accessories. Important contracts were concluded in the U.K., Thailand,
Singapore and Lebanon. The demand for other cables destined for “Utilities” remained
stable.
As for the general market, in 1998, the affiliate strengthened its position on the domestic
market, while exports weakened as a result of the instability seen in the Far East.
In the field of installations, Pirelli Construction Co. operates on both the domestic and
foreign markets. Its specific activities are directed to the development and management of
a wide range of installation projects relating to power and telecommunications networks.
Sales, spread across 20 countries, rose compared to the previous year, despite the
persisting problems of the market, and were accompanied by a high level of profitability.
In the power cables segment, in Great Britain the contract was completed with Northern
Ireland Electricity to lay 110 kV XLPE cables, which led to the replacement of aerial cables
by underground cables.
Work also began at Manchester Airport to replace aerial lines with sections of
underground 400 kV lines using laminated polypropylene (PPL) cables which ensure high
performance. A similar installation was completed in Singapore.
British Telecom awarded Pirelli its award for the best supplier, within the framework of
the three-year contract stipulated last year.
As far as exports of telecommunications cables are concerned, the company acquired a
contract in Hungary.
At the end of 1998, the order portfolio of the affiliate was considerable, both in terms of
the domestic and export market.
Despite an increase in sales, the Spanish affiliate Pirelli Cables y Sistemas S.A. was
affected by the fall in prices.
The telecommunication cables segment showed a marked increase, especially connected
to the exports of OPGW cables; there was also a considerable increase in the sale of fiber
optic cables. The Spanish affiliate continues to be the main supplier of fiber optic cables
for Telefonica de España.
On the power cables market, the lower demand from Utilities was compensated by the
growth of the general market and exports. In 1999, once the electricity companies have
finished investing in the diversification and the privatization processes which constituted
their priorities in 1998, they are expected to return to their normal levels of activity.
In North America, for the second year running, Pirelli Cables and Systems LLc in the
United States and Pirelli Cables and Systems Inc. in Canada reached satisfactory
results.
The net financial position was also positive as a result of greater profitability and careful
management of working capital.
In North America, the telecommunications market continued its expansion, characterized
i
23

In Iceland, Pirelli installed 150 kilometres
of optical Ground Wires with 24 fibres.
by the acquisition of a number of new customers during 1998. This made it possible for the
telecommunications division to post never-before-reached sales, despite the marked fall in
prices; the satisfactory results are much in line with those of the previous year.
As for the power cables market, the trend in 1998 was similar to that of the previous year,
both in terms of prices and volumes. Continuous progress on the front of internal
production efficiency and a greater market share allowed the power cables division to
improve profitability considerably compared to 1997.
In the photonics business, the patent infringement lawsuit with the American competitor
Ciena was positively concluded.
The telecommunications cables market will continue to grow in 1999, albeit at more
moderate levels than in 1998. Prices are expected to continue to erode.
In 1999, the power cables market will grow slowly, and will also suffer from a continuous
reduction in prices, due to the generalized increase of production capacity. The efforts of
the power cables division will be concentrated on developing new products and on
achieving continuous improvement in levels of service.
On the other hand, considerable growth is forecast for photonics products, since
important supply contracts were signed with new customers at the end of 1998.
In Brazil, where Pirelli Cabos S.A. operates, 1998 was affected by the fluctuations of the
world economy and by government action to control the fiscal deficit (8 percent of GDP).
The reduction of international credit after the Asian crisis and, especially after the Russian
moratorium, led to a considerable increase in the effective interest rate in an attempt to
stem capital outflows. In the last quarter, there was also a marked fall in economic activity.
Despite the rather unfavorable context, the profitability of the company improved
considerably compared to the prior year. The growth in sales and the reduction of costs
compensated at least in part for the fall in the prices of products.
There were appreciable improvements in the market share in the sectors of power, general
wiring and enameled wires. In the automotive and telecom sectors, the market share
remained steady, in the presence of a marked fall in prices.
The first phase of expansion of the optic system for the Rio de Janeiro - Natal link using
Pirelli WDM 5 Gbit/sec technology was completed. This is the first system in South
America to use this technology, which allows 60,000 phone calls to be made
simultaneously with a single pair of optical fibers.
Pirelli Cabos S.A. is the first Brazilian conductor company to be awarded the ISO 14000
quality certification for two factories, testifying to its commitment to environmental
management.
Changes are forecast in 1999 in the Brazilian economic policy with the aim of stabilizing
economic growth and reducing unemployment. The Government will probably increase
fiscal pressure and reduce public expenditures to limit the deficit, with negative effects on
the growth of GDP, which is expected to drop by 2 percent.
Marked falls in prices are expected, especially in the telecommunications segment. The
continuous drive to achieve greater efficiency will be a decisive factor in maintaining
profitability and market position.
In Argentina, where Pirelli Cables SAIC operates, in the second half of 1998, economic
activity, which has been growing significantly in the last three years, came to a sudden
standstill as a result of the international financial crisis.
Despite this, even in a context of a marked fall in prices, the volumes of the affiliate were
higher than the prior year, thanks to the demand for telecommunications cables, in
continuous growth, and the contribution made by the general market.
24
i

Pirelli was at the 1998 World Cup Final:
320 kilometres of energy transmission cables
were installed at the new Stade de France
in Paris.
Bathymetric profile of the submarine energy
link between Italy and Greece, to be laid at the
record depth of 1,000 metres under the sea.
The negative effects of the Brazilian crisis are expected to influence results in 1999, and
will presumably lead to an increase in imports.
With the current market conditions, it is essential to improve global efficiency in order to
maintain a high level of competitiveness.
In Australia, where Pirelli Cables Australia Ltd. operates, 1998 was characterized by
radical changes within the cables industry, especially among manufacturers, and by
market conditions which were not particularly favorable. However, the Australian affiliate
achieved levels of profitability which were comparable to those of the prior year.
Pirelli won the contract for the exclusive supply of telecommunications cables to Telstra
until June 2001. Moreover, the continuous attention to reducing production costs will
make it possible to secure an ever more dominant market position.
As far as power cables are concerned, the introduction of new products allowed entry into
new markets, compensating for the fall in exports.
The acquisition of the Power Cables and Construction Division of Metal Manufacturers Ltd.,
announced recently, will allow the affiliate to assume a leadership position on the
Australian cables market.
0
100
200
300
400
500
600
700
800
900
1000
1100
Italy
Greece
0 25 50 75 100 125 150 Km.
Performance of the main companies in the Sector
The most significant figures as they appear in the financial statements prepared by the
boards of directors and approved or being approved by the respective shareholders’
meetings are given below.
The amounts are expressed in local currency and are compared to those of the preceding
year:
Câbles Pirelli S.A. - France (in thousands of FF) 1998) 1997)
• Sales revenues 3,220,336) 3,360,477)
• Net income 74,181) 95,250)
• Net financial position (77,822) 52,345)
• Shareholders’ equity 1,261,781) 1,137,616)
Pirelli Cables y Systemas S.A. - Spain - consolidated (in millions of Pesetas) 1998) 1997)
• Sales revenues 29,257) 24,753)
• Net income 1,567) 1,183)
• Net financial position (913) (783)
• Shareholders’ equity 8,549) 9,517)
Pirelli General plc - U.K. - consolidated (in thousands of £) 1998) 1997)
• Sales revenues 349,193) 267,517)
• Net income 22,887) 13,134)
• Net financial position 24,570) 43,465)
• Shareholders’ equity 133,622) 143,297)
Pirelli Cables and Systems LLC - U.S.A. (in thousands of US$) 1998) 1997)
• Sales revenues 524,922) 545,115)
• Net income 61,805) 20,280)
• Net financial position 26,638) 16,253)
• Shareholders’ equity 95,050) 76,001)
i
25

The rotating platform of the Pirelli cable-laying
ship Giulio Verne, which in 1998 completed
the laying of Kansai cables in Japan.
A detail of the installation of a line of optical
Ground Wires produced by Pirelli in Spain.
Following page: Pirelli Tyre Sector’s
manufacturing presence and distribution
of 1998 sales by geographic area and product
category.
Pirelli Cables and Systems Inc. - Canada (in thousands of $ Canadian) 1998) 1997)
• Sales revenues 240,493) 207,699)
• Net income 15,674) 14,273)
• Net financial position (13,933) 8,452)
• Shareholders’ equity 46,398) 47,129)
Pirelli Cabos S.A. - Brazil - consolidated (in thousands of Brazilian reais) 1998) 1997)
• Sales revenues 523,113) 609,767)
• Net income 56,049) 44,698)
• Net financial position (68,071) (54,996)
• Shareholders’ equity 221,267) 213,265)
Pirelli Cables SAIC - Argentina (in thousands of Pesos) 1998) 1997)
• Sales revenues 189,765) 138,032)
• Net income 7,329) 4,267)
• Net financial position (39,471) (31,020)
• Shareholders’ equity 94,161) 90,358)
Pirelli Cables Australia Ltd - consolidated (in thousands of $ Australian) 1998) 1997)
• Sales revenues 137,454) 128,900)
• Net income 5,018) 4,659)
• Net financial position (2,388) (3,467)
• Shareholders’ equity 44,484) 51,972)
Future outlook
The instability of the markets and economic growth that was lower than expected,
resulting in ever fiercer competition in terms of prices, will affect the activities of the
Cables and Systems Sector.
These negative factors will be countered by curbing structural costs, reducing product
costs by means of continuous improvements in production efficiency, launching new
products and offering better service.
1999 will also bring the integration of the business acquired from Siemens with foreseeable
advantages in terms of synergies, and the conclusion of the acquisition of the Power
Cables and Construction Division from Metal Manufacturers Limited in Australia.
26
i

Tyres Sector
In 1998, the world automotive market showed a slight gain, but with very varied trends in
the different geographic areas.
In Europe, the increase in the market was the result of the satisfactory trend by Spain,
followed by France, Germany and the United Kingdom; however this was set against the
negative performance of Italy, owing to the end of the program of government incentives
for the purchase of new cars.
In North America, the market remained fairly stable, while the South American market
showed a slight fall, being affected by the crisis in Brazil during the second half of the year.
Finally, in Turkey, after two years of sustained growth, the economic and political crisis in
the country led to a marked fall in internal demand.
Overall performance
The consolidated balance sheet and statement of income of the Tyres Sector are presented
as follows:
(in billions of lire) 1998 1997)
• Sales revenues 5,218 5,417)
• Gross operating profit 657 626)
% of sales 12.6% 11.6%)
• Operating profit 340 313)
% of sales 6.5% 5.8%)
• Extraordinary items, net 16 28)
• Net income 231 233)
% of sales 4.4% 4.3%)
• Net financial debt 602 425)
• Capital expenditures 373 336)
• R&D expenditures 199 187)
• Personnel (number) 20,697 21,361)
• Factories (number) 21 23)
Sales revenues, in nominal terms, have registered a drop of 3.7 percent from 1997 due to
price reductions (-4.6 percent) that were only partly compensated by the positive gains in
volumes and mix (+1.5 percent); the exchange effect is only marginal (-0.6 percent).
The breakdown of sales revenues by geographic area and product is as follows:
Italy
Other European
Countries
North America
South America
Asia
Other areas
Geographic area 1998 1997
Italy 15% 13%
Other European countries 45% 42%
North America 7% 8%
South America 24% 26%
Asia 7% 9%
Other areas 2% 2%
Product 1998 1997
Car tyres 52% 51%
Industrial and comm. vehicle tyres 30% 30%
Motorcycle tyres 7% 7%
Agriculture tyres 4% 5%
Other tyres 7% 7%
Car tyres
Industrial and
commercial
vehicles tyres
Motorcycle tyres
Agriculture tyres
Other tyres
i
27

The new Audi TT is fitted with ultra-low
profile P6000 and PZero tyres: a further step
forward in collaboration between Pirelli
and the Volkswagen Group.
In 1998, a commercial vehicle tyre made
its debut with its sidewalls decorated
by a designer.
Operating profit rose by 8.6 percent, with a gain also in terms of the percentage of sales
(from 5.8 percent in 1997 to 6.5 percent in 1998), where the positive mix of products sold,
the reduction in raw materials prices and the effects of the steps taken to reduce costs
have more than compensated for the negative variation in the sales prices.
Contributing to this result are, in South America, the buoyant performance of Brazil and
Argentina, with Venezuela still in a loss position owing to the persistence of an unfavorable
local economic picture, whereas, in Europe, Spain led with a good showing.
Extraordinary items registered a net balance of extraordinary income of Lire 16 billion.
The income includes gains of Lire 34 billion realized on the sale of the Tivoli factory to a
joint venture with Trelleborg Wheel Systems S.p.A. for the agriculture tyre business
purpose, in which Pirelli has a 40 percent investment. The favorable conclusion to the
lawsuit with Titan in North American brought extraordinary income of Lire 11 billion.
Extraordinary expenses of Lire 29 billion include Lire 24 billion referring to actions taken
to restructure the operational processes of certain functions of the Sector so as to more
effectively respond to the continual evolution of the competitive scenario, and
Lire 5 billion to land reclamation.
Net income, Lire 231 billion, was affected by the significant increase in tax charges
compared to 1997, and is therefore basically the same as that in 1997.
Net financial debt records an increase of Lire 177 billion, which, net of the negative
exchange effect of Lire 38 billion, is attributed to higher investments and a higher average
balance of receivables from customers.
Capital expenditures in 1998 were Lire 373 billion, representing 123 percent of
depreciation and 7.1 percent of sales. This is an increase of 11 percent over the prior year.
As far as industrial investments are concerned, about 70 percent of them are in Europe
and Turkey, 25 percent in South America and the remaining 5 percent in North America.
Overall production, in tons, reported an increase of 0.9 percent. While production was a
good levels in Europe (+4.4 percent), negative trends were posted by Brazil (-1.6 percent)
owing to the effects of a contraction in demand in the second half and by Venezuela
(-18 percent) on account of the continuing negative local economic situation.
The production breakdown by geographic area and product is as follows:
1998 1997
Europe + Turkey 57% 55%
North America 5% 5%
South America 38% 40%
Total 100% 100%
R&D expenditures totaled Lire 199 billion in 1998, representing 3.8 percent of sales
revenues.
As a result of the measures taken in 1997, the improved efficiency and the higher degree of
integration among the research centers in the Sector made it possible to speed up projects
to renew and broaden the product range, with Italy increasingly playing the leading role in
28
i

The new asymmetric Snow Sport tyre has been
developed for winter use.
A futuristic prototype of an ultra-high
performance car, shod with Pirelli PZero
in the extreme diameter of 19 inches.
basic research and advanced development. In this sense, cooperation programs have been
developed with universities and research institutes.
In Brazil, 1998 saw the launch of the P3000 Energy, the top product in the standard
segment of the new generation of car tyres with low rolling resistance, achieving a high
level of appreciation from the market. With the increasing success of new type-testing and
thanks to its continuous technological development, the P3000 has become an important
benchmark for leading car manufacturers.
In the premium market segment, the range of sizes of the products launched in 1997 (the
P5000 Drago and the P6000 Sport Veloce) was extended, consolidating a competitive
position in the replacement market. The new technological version of the P6000, now with
improved comfort, lower noise levels and low rolling resistance, has strengthened its
competitiveness in the original equipment segment.
The PZero, in its category, is consolidating its image as a benchmark tyre thanks to
constant and innovative technological development, which, together with the P7000, has
made it possible to recently launch a new series of “super” tyres in the 19” and 20”
diameters destined for the sophisticated cars of the “tuners”’ as well as the “concept cars”
of the car manufacturers.
In the Winter segment, the new asymmetrical SnowSport was developed during the year,
scheduled for presentation on the market in the first months of 1999.
At December 31, 1998, the work force numbered 20,697, a reduction of 664 units
compared to the prior year. The work force includes 332 persons under temporary
employment contracts.
Measures aimed at improving the efficiency of the structure led to a significant reduction
in staff and management (-4 percent). Within the framework of the joint venture with
Trelleborg, relating to the sale of activities associated with the production and sale of tyres
for agriculture equipment, there was also a further reduction of 478 units, effective
January 1, 1999.
In parallel to this, numerous university graduates were hired, mainly in the industrial,
R&D, commercial and marketing areas.
Actions have continued to renew management, especially by promoting young staff and
hiring from outside.
The breakdown of the work force at December 31, 1998 is as follows:
1998 1997
Management 1.2% 1.2%
Staff 26.1% 26.3%
Operatives 72.7% 72.5%
The prices of raw materials remained about 10 percent below the average of 1997, in a
similar way in the various geographic areas. By type of product, the fall was mainly
concentrated on natural rubber (-33 percent), with other materials showing a reduction of
5 percent on average, while, in contrast, the prices of reinforcing textile materials rose by
1 percent, owing to a scarcity of rayon.
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29

The Lamborghini Diablo is among
the reference cars for the ultra-low profile
Pirelli PZero.
The new Pirelli tyre distribution centre
at Novara, Italy, is the biggest of its kind
in Europe.
Tyres Sector holding company
The unconsolidated balance sheet and statement of income of Pirelli Tyre Holding N.V. are
presented as follows:
Balance sheet (in millions of Dutch guilders)
1998) 1997)
• Intangible assets 0.8) 2.3)
• Financial assets 1,921.1) 2,750.6)
• Net working capital 8.0) 9.9)
1,929.9) 2,762.8)
• Shareholders’ equity 1,835.8) 2,192.0)
• Net financial position 94.1) 570.8)
1,929.9) 2,762.8)
Statement of income (in millions of Dutch guilders)
1998) 1997)
• Net income of subsidiaries 237.1) 245.9)
• Other income and expenses (22.7) (23.9)
• Net income for the year 214.4) 222.0)
Performance by geographic area and business unit
In Europe, the positive trend in demand continued. Vehicle production and the
replacements and original equipment tyre markets recorded significant increases. Within
the individual segments, the premium range was again dynamic, while sport/recreational
tyres recorded higher than average increases. The demand for tyres for commercial
vehicles remained at the good levels seen in 1997. Levels in 1999 are expected to grow
moderately, depending on the impact of the turbulence of the financial markets in the
general economic scenario.
The closing estimate for 1998 and the forecast for 1999 are the following:
Size of European market 1995 1996 1997 1998 1999
(in millions of units sold) (estimate) (forecast)
Car tyres:
• original equipment 66.1 69.5 74.2 76.8 78.0
• replacements 138.9 141.5 147.3 154.9 158.0
total 205.0 211.0 221.5 231.7 236.0
Truck tyres:
• original equipment 3.3 3.0 3.3 3.7 3.7
• replacements 10.8 10.3 10.4 10.8 10.9
total 14.1 13.3 13.7 14.5 14.6
30
i

Outdoor research at Pirelli’s Vizzola Ticino
test track.
Sales showed positive results in all product lines, with further improvements in the
product and customer mix.
In car tyres, the replacement market share improved, not only for Pirelli itself, but also
with a considerable contribution from other brand names (Ceat, Courier and Armstrong).
The new P3000E is well established in the standard segment, while the renovated P6000,
with more than 20 million units sold in the world and its use on the most prestigious cars,
confirms the brand-name/product’s high market level recognition. In the Sport Utility
Vehicles/Recreational segment a good gain was recorded thanks to the Scorpion line,
which was recently expanded by the introduction of the Scorpion Zero. In truck tyres, the
positive trend was accompanied by an appreciable improvement in profitability.
In the original equipment segment, in a scenario of growth in the manufacture and sale of
cars, Pirelli increased its market shares, achieving a new and prestigious presence in
Ford/Jaguar Group (Focus/S Type), PSA (new 206), Volvo (S 80), Mercedes Benz (A Class)
and VW Audi (TT). Market shares in the most successful models of the main car
manufacturers were also maintained and consolidated.
In Turkey, after the slowdown in the last quarter following the marked growth of activity in
the automotive sector, Pirelli succeeded in consolidating its traditional position.
The demand in North America again showed a positive trend in a market rendered even
more competitive by importers who, with their low-price products, continue their policy of
attacking market shares.
The local unit, now that its restructuring program has started, is focusing increasingly on
the Pirelli brand name in the premium and sports utility vehicles segments, by operating
through specialized dealers.
Size of North American market 1995 1996 1997 1998 1999
(in millions of units sold) (estimate) (forecast)
Car tyres:
• original equipment 46.1 44.2 43.5 43.7 43.4
• replacements 164.6 174.3 175.4 179.9 182.5
total 210.7 218.5 218.9 223.6 225.9
In South America, the effects of the turbulence on the financial markets suggest a period
of slowdown in growth rates in the medium-term and, even in the short-term, a certain
weakness in internal demand caused by the liquidity crisis.
Despite the difficulties of the local scenario, in the second half of the year, in Brazil, the
results overall were positive, with market shares at the usual high levels and with
satisfactory economic results, thanks partly to solid customer relationships. The recent
devaluation of the real, with the effect of a generally better level of competitiveness of
local industry, should further strengthen Pirelli’s operations.
Initiatives in the commercial field, aimed at consolidating and developing the main
markets of the area, include two new units which became operative during the year: Pirelli
Neumaticos Chile Ltda (Chile) and Pirelmex S.A. de CV (Mexico).
In original equipment, Pirelli was able to expand its presence by providing tyres for local
manufacturers, despite the difficulties being experienced by the automotive industry, with
vehicle manufacture and registration levels well below those originally planned.
i
31

The trend of truck tyres in Brazil was positive.
The joint venture agreement between Pirelli
and Abe Shokai has strengthened the Group’s
activities in Japan, optimising commercial
efficiency.
The market trend for the whole area is as follows:
Size of South American market 1995 1996 1997 1998 1999
(in millions of units sold) (estimate) (forecast)
Car tyres:
• original equipment 11.5 12.9 14.9 12.6 12.4
• replacements 27.5 29.4 29.9 29.5 30.2
total 39.0 42.3 44.8 42.1 42.6
Truck tyres:
• original equipment 0.7 0.5 0.8 0.7 0.7
• replacements 8.8 8.9 9.5 9.0 9.0
total 9.5 9.4 10.3 9.7 9.7
Specifically, in Brazil, the economy recorded a slight growth in GDP, close to zero,
compared to 3.7 percent in 1997, and was affected by the generalized fall of the third
quarter (Agriculture: -7.7 percent, Industry: -5.5 percent and Services: -0.4 percent)
compared to the previous one.
Consequently, sales volumes on the internal market fell sharply by 4 percent compared to
the prior year, albeit with very different trends in the various segments.
In replacements, sales of car and light vehicle tyres increased by more than 8.5 percent, while
sales of tyres for trucks and buses remained around the levels of the previous year.
Sales of original equipment fell by approximately 18 percent, mainly in passenger car tyres,
which were affected by the fall in car manufacturing in the second half of the year. In contrast,
there was a positive (+7 percent) trend in tyre sales in the truck and bus segment. Exports
were 10 percent higher than in 1997, partly compensating for the fall in original equipment.
In 1998, the economy in Argentina fluctuated, with a first half showing good levels of growth,
and signs of a slowdown appearing in the second half of the year, in harmony with the crisis
which gradually encompassed developing countries, including Brazil, its main trading partner.
Overall, the tyre market showed a trend in line with the prior year, with growth in original
equipment following the trend in vehicle manufacturing, but with a slight reduction in
replacements, which suffered from the marked growth in imported products.
The trend in sales was very similar to that of 1997, with market shares which, in
replacements, showed a modest fall in passenger cars, while tyres for trucks remained
much in line with the previous year.
For Venezuela, the macroeconomic scenario did not present substantial variations
compared to 1997. With inflation slightly lower (down from 38 percent to 30 percent), the
local currency still remained overvalued, with devaluation of only 12 percent against the
dollar. Overall, the economy took a downturn, with the fall in GDP concentrated in the
first half of the year.
In this scenario, with the internal market demand heavily penalized by a further reduction
in purchasing power, the local volume of manufacturing and sales was lower than in 1997
(-17 percent and -22 percent respectively), affected in part by the high volumes of imported
products made competitive by the persisting overvaluation of the bolivar.
As a result of this, the demand for car tyres in the replacements segment fell by 26 percent,
while the light/derivative segment showed a growth led by the gains in the number of cars
in circulation in the two-year period 1997-1998.
32
i

Motorcycle tyres celebrate 100 years: a history
of technological development in the name
of sportiness, as the new-born Dragon Evo
and Dragon GTS demonstrate.
In line with the generalized slowdown of production, the demand for commercial vehicles
also fell by approximately 10 percent.
Exports to countries in the area, particularly to Columbia and Ecuador, also fell sharply.
In other geographic areas, Pirelli marketed its car and recreational tyre ranges by
constantly expanding distribution networks and by lending support for marketing, logistics
and technical assistance to the representative offices in the main markets (Beijing, Dubai,
Hong Kong, Moscow, Sydney, Singapore, East and West Africa and India).
Despite the difficulties caused by the economic situation, volumes and sales maintained
satisfactory levels, thanks to the complete range of products and the strong image of the
brand name. One of the initiatives designed to support a further growth of volumes and
presence took off in January 1999, in Japan, in the form of a joint venture, in which Pirelli
has a majority interest, with Abe Shokai, formerly the local distributor for Pirelli products.
Activities in the Business Units can be described as follows:
• In the Agriculture Tyre B.U., 1998 saw the finalization of the incorporation of the new
company Trelleborg Wheel Systems S.p.A., between the Swedish industrial group of the
same name and Pirelli, which holds 40 percent of the capital. The initiative has the aim
of creating a wider coverage of the various potential segments of the European market,
through the integration of the Pirelli radial tyre range with the Trelleborg line, for use
with farming and forestry equipment and industrial lifts.
• Sales of the Motorcycle Tyre B.U. maintained the same levels as the previous year. The
favorable trend in sales volumes on markets in general was neutralized by the fall in sales in
Germany, caused by the unfavorable weather conditions. Although sales remained largely
unchanged, the net result improved, drawing benefit from the effects of measures in the
area of manufacturing, with generalized cost efficiencies and the adoption of a new kind of
“lean factory” organization. Investments, aimed at revitalizing the product portfolio and
processes, remained high. New products include: for high-performance motorcycles, the
Dragon EVO and the Dragon GTS, in the recent Zero degree technology and with innovative
materials behind a decisive improvement in performance; in the Enduro segment, the
Metzeler Tourance and the new Pirelli Scorpion line; in Touring, the Metzeler Marathon ME
880; in moto-cross, the new Pirelli MT 480 Super Cross. In the context of sporting activities,
there were important results, including a first place in the World Moto Cross Championship
in the 500-cc category and first place in the European Supersport 600 Championship.
• The Industrial Projects and Licenses B.U. acquired contracts to supply machines to
licensed dealers in Egypt and Tunisia. A new contract has also come into force to double
the capacity of the Hualin factory in China, supplied by us in the early 90’s. Considerable
effort has also been devoted to preparing an industrial design to expand the Alexandria
Tyre plant which involves doubling truck production and the introduction of car
manufacture. Activities associated with existing contracts in China and India (car
projects) and in Egypt (trucks) continued.
• In 1998, the Steel Cord B.U. operated in a world market which showed a slight growth
(+2.5 percent), characterized by stability in Europe and North America. Within this
scenario it proved possible to seize market opportunities associated with the departure
of small manufactures.
i
33

New types and sizes of the “Scorpion” line
have enriched the 4x4 range.
Testing Pirelli high performance tyres
in the wet.
Performance of the main companies in the Sector
The most significant figures as they appear in the financial statements prepared by the
boards of directors and approved or being approved by the respective shareholders’
meetings are given below.
The amounts are expressed in local currency and are compared to those of the preceding
year:
Pirelli Pneumatici S.p.A. - Italy (in millions of Lire) 1998) 1997)
• Sales revenues 1,517,733) 1,479,443)
• Net income 100,479) 82,874)
• Net financial position (197,670) (152,066)
• Shareholders’ equity 615,252) 586,197)
Pirelli Reifenwerke GmbH & Co. K.G. - Germany (in thousands of DM) 1998) 1997)
• Sales revenues 943,792) 921,362)
• Net income 17,710) 25,520)
• Net financial position 54,981) 22,764)
• Shareholders’ equity 79,318) 87,128)
Pirelli UK Tyres Ltd - consolidated (in thousands of £) 1998) 1997)
• Sales revenues 248,011) 245,065)
• Net income 4,706) 12,597)
• Net financial position 14,325) 4,191)
• Shareholders’ equity 65,273) 70,168)
Pirelli Neumaticos S.A. - Spain (in millions of Pesetas) 1998) 1997)
• Sales revenues 35,958) 32,936)
• Net income (loss) 346) (5)
• Net financial position (2,548) (1,235)
• Shareholders’ equity 11,614) 12,266)
Metzeler Reifen GmbH - Germany (in thousands of DM) 1998) 1997)
• Sales revenues 189,078) 191,215)
• Net income 10,813) 19,446)
• Net financial position 9,211) 4,963)
• Shareholders’ equity 42,813) 51,446)
Türk Pirelli Lastikleri S.A. - Turkey (in thousands of US$) 1998) 1997)
• Sales revenues 220,726) 251,165)
• Net income 32,426) 33,648)
• Net financial position (36,798) (23,160)
• Shareholders’ equity 72,413) 60,823)
Pirelli Pneus S.A. - Brazil - consolidated (in thousands of Brazilian reais) 1998) 1997)
• Sales revenues 756,556) 746,480)
• Net income 101,519) 78,434)
• Net financial position (124,414) (156,501)
• Shareholders’ equity 366,892) 350,941)
34
i

The poster which shows Ronaldo at Rio on the
Corcovado is the subject of numerous
imitations and quotations across the world.
Pirelli Tire LLC - USA (in thousands of US$) 1998) 1997)
• Sales revenues 197,498) 222,656)
• Net loss (8,501) (12,370)
• Net financial position (8,321) (19,051)
• Shareholders’ equity 41,509) 50,010)
Pirelli Neumaticos S.A.I.C. - Argentina (in thousands of pesos) 1998) 1997)
• Sales revenues 138,831) 145,443)
• Net income 7,962) 4,826)
• Net financial position (6,193) (3,959)
• Shareholders’ equity 60,544) 57,083)
Pirelli de Venezuela C.A. - Venezuela (in thousands of US$) 1998) 1997)
• Sales revenues 70,409) 100,868)
• Net loss (9,690) (5,478)
• Net financial position 4,762) 18,155)
• Shareholders’ equity 63,700) 53,700)
Future outlook
The economic trend for 1999 is difficult to quantify, because of the complexity of the
current world economic scenario. In fact, the growth of market demand seems to be
conditioned inevitably by the persisting crisis among the developing countries which were
harder hit by the turbulence on the financial markets.
The strategy of the Sector can only be directed towards internal efficiency programs,
which must be pursued through a selective investment policy oriented towards innovating
products and processes and by restructuring operational, central and peripheral functions.
i
35

Pirelli supplied the Berlin electricity utility
with a 380 kV superjoint.
Pirelli and Porsche strengthened their
technical collaboration in the International
Grand Touring Championship.
Finance
The net financial debt position of Lire 513 billion can be analyzed as follows:
• medium- and long-term debt of Lire 2,112 billion, equal to 68 percent of gross financial debt;
• short-term debt of Lire 979 billion, including the current portion of long-term debt of
approximately Lire 432 billion;
• liquidity and financial receivables of Lire 2,578 billion, represented by Lire 994 billion
of available liquidity of the Group and Lire 1,584 billion of financial receivables.
Available liquidity is concentrated in Europe for an amount of about Lire 919 billion,
in South America for Lire 52 billion, in North America for Lire 13 billion, in Turkey for
Lire 4 billion and in other countries for Lire 6 billion.
On October 21, 1998, Pirelli S.p.A. issued non-convertible bonds for Euro 500 million,
maturing on October 21, 2008, at a fixed yield of 4.88 percent per year.
On December 10, 1998, Pirelli S.p.A. received a loan of Lire 290 billion from Mediocredito
Lombardo S.p.A. coming from the issue of “indirect” bonds for the same amount issued by
Mediocredito Lombardo S.p.A. itself, placed by Caboto Holding Sim, and subscribed to by
Fondazione Cariplo Iniziative Patrimoniali S.p.A. (a company owned 100 percent by
Fondazione Cariplo). Each bond will carry a warrant to subscribe, in the next five years,
up to a maximum number of 46,154,000 Pirelli S.p.A. ordinary shares. The bonds, which
mature in five years, yield interest of 2.20 percent per year. The bond regulation contains a
so-called cash equivalent clause under which Pirelli S.p.A. shall have the right, should
Fondazione Cariplo exercise the warrants, to choose between delivery of the shares or
payment of the difference between the listed price of the shares at the date the warrants
are exercised and the price to exercise the warrants.
Medium-term financing was obtained during the year to cover R&D expenditures
for Lire 10 billion.
The Italian companies of the Group have received capital grants under laws 46/82, 64/86
and 488/92 for Lire 11 billion.
Risk Management
The annual volume of insurance premiums paid by the Group has been reduced by 9 percent.
One of the largest premium reductions in 1998 (-17 percent) was for the Group insurance
plan for Property Damage and Business Interruption. Just to underscore the positive effect
of the efforts undertaken in the last five years in the area of loss prevention, the overall
reduction for this plan during that period was about 50 percent of the starting premium.
Furthermore, as in prior years, all the reductions were obtained while maintaining at least
the same coverage, and, in many cases, with better terms of coverage in relation to the
deductibles, ceilings and conditions.
36
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In Europe, truck tyres recorded a positive
commercial trend.
Activities for loss prevention have continued and include, among other things, the
completion of some important installations of automatic fire-fighting systems and an
overall reduction in risk which is measured by the HPR Rating, a parameter recognized by
insurers internationally used to quantify risk in relation to the level of protection available.
As part of the due diligence review carried out for the acquisition of the Siemens business
segment, the risks and insurance coverage were analyzed, laying the groundwork for the
integration of the new acquisition into the Group’s insurance plan.
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The Pirelli Corporate Web, the Intranet network
for the distribution of information within the
Group, has been further developed.
Information Systems
1998 saw the completion of the first cycle of the innovation process for the Pirelli Group
information technology which was based on the framework of the diffusion of SAP, the
shift to a client/server-type architecture and the expansion of the network.
The state-of-the-art reached in information systems constitutes a solid base on which to
build to create a competitive advantage (development of electronic marketing, advanced
systems of reporting and decision support).
This level of excellence was also confirmed by the International Innovation Award
awarded to Pirelli by Gartner Group for 1998; this was the first time in 13 years that the
award has been bestowed on a non-American company.
In 1998, the use of the SAP platform, as the main vehicle for a gradual standardization and
functional integration was expanded to the following Operating Units:
– Tyres : Pirelli Reifenwerke GmbH & Co. K.G. (Germany);
Pirelli Neumaticos S.A.I.C. (Argentina);
Turk Pirelli Lastikleri A.S. (Turkey);
Pirelli UK Tyres Ltd (Great Britain);
– Cables and Systems : Pirelli Cables and Systems LLc (North America);
Cables Pirelli S.A. (France);
Pirelli Cavi e Sistemi S.p.A. - Photonics Business.
In addition, in the areas that are also involved in the program, new applications modules
were developed:
– Tyres : Logistics/Commercial in Brazil and Production in Spain;
– Cables and Systems : Logistics/Commercial in Brazil and Australia.
In 1998, the basic prototypes were completed relating to the SAP PP model for Production
systems and the SAP PM model for Maintenance systems for both Sectors.
A boost was given to the spread of the standard infrastructure based on Client/Server
framework and open systems (APIS Project - Advanced Pirelli Information System) which
has the goal of simplifying the information flow and reducing the paper support.
At December 31, 1998 the total number of APIS users is equal to 7,000 units, compared to
4,700 at December 31, 1997.
During the year, a new kind of international link (frame-relay solutions) was created which
enabled higher speed in the communications network (at the same cost) and a further
increase in the number of connected localities (163 compared to the 125 of the previous year).
During the last quarter, intensive support was given to the completion of the due diligence
review associated with the acquisition of the Power Cables Division from Siemens A.G. in
10 different countries.
The Group made a great effort to improve the efficiency of its activities, which led to a
reduction in costs over and beyond those that had been estimated.
Particular emphasis was given to two very topical themes in 1998: the introduction of the
euro and the prevention of risks associated with the change of the century. These are
described in the following paragraphs.
38
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Since 1 January 1999, the Euro has been the
currency of the Pirelli Group accounts. A new
EuroWeb site on the Intranet gives a constant
internal flow of information on the subject.
Introduction of the euro
The SAP systems in European countries affected by the introduction of the single
European currency were successfully converted to accommodate the euro by means of the
Release SAP 3.1.I.
Work on the Pirelli Information System will be completed for the conversion of accounting
systems from the local currency to the euro after the approval of the financial statements
at December 31, 1998.
The “Year 2000” problem
In mid-1997, Pirelli initiated the “Year 2000” Plan for all its subsidiaries, to be
coordinated by the Group holding company, with the aim of pinpointing and solving the
problems associated with the year 2000.
The activities, which directly involved all the Directors of the affiliates and their
operational structures, including information technology managers, involved both the
areas traditionally associated with information systems and non-information technology
areas, with special attention being paid to the activities of administration, factory
operations, R&D, procurement and logistics.
Many of the requirements for the adjustment to the year 2000 were included within the
context of a highly diversified process, already begun in previous years, to re-define the
most important software applications used by the Group holding company and its
subsidiaries. Over the last three years, this same process has led to a complete update of
the whole basic infrastructure of information technology, including the data-transmission
network, telephone switchboards and personal computers.
In 1998:
– all the analysis and verification activities to ensure conformity by the operating and
factory systems were completed;
– all the necessary measures were begun, and are in the process of completion;
– a certificate of compatibility was awarded to all the important suppliers, with the aim
of ensuring the minimum impact possible on the business operations of its affiliates.
During the second quarter of 1999, tests will take place to verify the efficacy of the action
that has been taken; in addition, a plan will be drawn up to ensure the continuity of
business, even in the presence of critical situations at the beginning of the new year.
In 1998, costs incurred were equal to approximately Lire 7 billion; in 1999, approximately
Lire 20 billion more will be needed to reach the conclusion of the plan. The write-downs
made to property, plant and equipment sold in 1998 had no significant impact.
On the basis of analyses carried out in-house, as well as external surveys and a careful
cost-benefit analysis, in 1998, extending insurance to cover the risks connected with the
passing into 2000 was not thought to be advisable. This problem is still being carefully
assessed and the correct decision will be reached in the course of the current year.
Overall, internal and external costs incurred for the activities associated with the “Year
2000” project have been directly charged to the statement of income. In accordance with
the concepts of prudence and accrual basis accounting, amounts capitalized — as is the
practice — refer only to the part of the cost relating to the replacement of assets made
necessary to comply with this singular event.
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Certification activities in line with ISO 14001
standard are proceeding.
Ecology and the Environment
The activities to implement an Environmental Management System (EMS) according to the
ISO 14001 standard and according to a homogeneous approach within the whole Group,
begun in 1997, continued in 1998 according to schedule, with the aim of acquiring
certification for all sites by the year 2000.
In 1998, the following factories in the Tyres Sector were awarded the ISO 14001
certification: Santo André, Campinas, Izmit, Carlisle; in the Cables and Systems Sector: the
factories at Sorocaba (fiber optics), Solac, Giovinazzo, Minto, Southampton and
Bishopstoke (power cables and fiber optics).
In 1999, 24 more companies are expected to be certified, while the remainder will be
certified in 2000.
In organizational terms, the institution of the Environmental Steering Committee,
composed of the ecology departments of Pirelli S.p.A. and the two Sectors, ensures
effective co-ordination in defining and controlling the activities realized by means of a
centralized audit system.
The implementation of an EMS has resulted in a great effort both to involve people
through information and training activities, and in terms of action to improve the
environmental performance of operational units, which, in some cases, has made it
possible to highlight areas where savings can be made, for example, through a better
exploitation of the waste produced.
Another activity which is part of the implementation of the EMS was the introduction of an
environmental performance evaluation of the main suppliers of the two Sectors, in order
to assess already existing procedures (vendor rating). In this way, Pirelli is playing an
important proactive role with regard to the market.
In synergy with the ISO 14001 standard initiative, a series of data and information is being
collected with the aim of systematizing the various types of indicators of eco-efficiency at
Group level, so that comparisons can be made between the various situations, over the
years, and to enable management of the company to identify areas requiring improvement
where action must be taken.
The protocol agreement between Pirelli and the Italian Ministry for the Environment, signed
on December 16, 1998, with the aim of creating a series of joint initiatives to protect the
environment, is further proof of Pirelli’s commitment to sustainable development, allowing it
not to lose sight of, but, indeed to highlight the economic value of given initiatives.
An increase in the production of tyres with low rolling resistance, the production of power
cables with low transmission loss, the reduction of the use of raw materials and the
adoption of other materials with low environmental impact are some of the initiatives with
a high level of ecological compatibility, involving both production processes and products,
which Pirelli intends to realize in the near future.
In 1998, research continued into the environmental impact of products throughout their
life cycle according to the ISO 14040 standard. Original studies were conducted on some
medium- (ARE4H1RX 12-20 kV) and low-voltage (FG7OR 0.6-1 kV) power cables and on
steel cord (7x4x0.75). During the year, the process of integration between this
40
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The Burial of Santa Petronilla by Guercino: the
most representative picture of the Capitolina
Gallery in Rome, entirely restored thanks
to Pirelli support.
Almost 10,000 people visited the Pirelli
Calendar Exhibition at the Carrousel
du Louvre in Paris in December.
methodology and engineering design led to further development and the planning of a
series of initiatives including studies and analyses of a wide range of products.
With reference to the acquisition of the Power Cables Division of the Siemens Group,
Pirelli has defined an extremely detailed program to verify the environmental conditions of
the various sites acquired, as well as a summary of the action required to bring them up to
the Pirelli standard.
Finally, in 1998, there was greater and more systematic participation in various
associations, institutions and working groups on a national and international level to
enable Pirelli to make its own contribution to the cultural evolution and development of
standards now in progress, and to act in a proactive way.
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Distribution of Group personnel by sector
and geographic area.
Tyres
Cables and
Systems
Others
Europe (of which
Italy: 23%)
North America
South America
Australia, Africa, Asia
Personnel
The effective work force of the Group at December 31, 1998, considering the same
companies in consolidation, and thus excluding the acquisition of the Power Cables
Division of Siemens A.G., numbered 36,226, with an increase of 15 units compared to the
same date in the prior year.
The distribution of the work force by sector and geographic area is as follows:
Sector
Cables and Systems 41%
Tyres 57%
Others 2%
Geographic area
Europe (of which Italy 23%) 60%
North America 7%
South America 27%
Australia, Africa, Asia 6%
The breakdown of work force by category is as follows:
Management 598 2%
Staff 10,240 28%
Operatives 23,177 64%
Temporary employment 2,211 6%
Total 36,226
Personnel costs for the year totaled Lire 2,585 billion, an increase of 1.2 percent
compared to the prior year, representing 24.3 percent of total sales revenues (22.7 percent
in 1997).
If we also consider the work force of the operational units in Germany, purchased from
Siemens and consolidated line-by-line in Pirelli Group, the total number rises to 38,209
units.
Training activities in the Group grew for all personnel in both Sectors, particularly in the
industrial area. Two new initiatives were started at management level: the “Leadership for
Development” seminar and the workshop entitled “Developing Managerial Excellence”,
which constitutes the highest level of international training and involves young executives
with high development potential.
Despite considerable reductions in staffing, many young university graduates (especially in
the Tyres Sector and in Pirelli S.p.A.) and specialists (especially in the Cables and Systems
Sector) were recruited. A significant number of executives were also hired as a result of a
corresponding outflow of staff.
A survey was carried out among the young university graduates hired by the Group in the
last few years to verify the quality of work and to obtain useful suggestions that will help
to improve policies and programs for professional development.
42
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Related party disclosures
Required disclosures according to article 2359 of the Italian Civil code referring to Consob
Communication No. 97001574 of February 20, 1997 and No. 98015375 of February 27, 1998,
which deal with related party transactions among Group companies, are listed below
according to the effects of such transactions on the balance sheet and statement of income
of the consolidated financial statements at December 31, 1998.
As allowed by IAS 24, no disclosure is made of the effects deriving from the transactions
between Pirelli S.p.A. and its subsidiaries since they are already eliminated upon the
preparation of the consolidated financial statements.
All the transactions fall within the ordinary operations of the Group, governed by market
terms, and there are no transactions of an unusual and exceptional nature.
The following table presents the major transactions at December 31, 1998 that Pirelli S.p.A.
Group has entered into with the parent companies (Pirelli & C. A.p.A., Pirelli & C.
Luxembourg S.A., Société Internationale Pirelli S.p.A., Pirelli Partecipazioni Limited) and
the subsidiaries of the latter companies, which are included in the consolidation area of
Pirelli & C..
(in billions of lire)
Type of transaction With parent With subsidiaries Total
companies
of
Pirelli & C. A.p.A.
• Trade receivables and other 23.7) 0.4) 24.1)
• Trade payables and other (0.0) (7.1) (7.1)
• Financial receivables 501.2) 150.8) 652.0)
• Financial payables (57.5) (88.4) (145.9)
• Revenues for goods and services 2.0) 0.7) 2.7)
• Costs for goods and services (3.9) (14.8) (18.7)
• Financial income 5.3) 5.9) 11.2)
• Financial expenses (23.4) (3.5) (26.9)
Transactions of Pirelli S.p.A. and its subsidiaries with the parent companies mainly refer
to the following:
• trade receivables and other, relating to the transfer of tax receivables by Pirelli S.p.A.
and some of its subsidiaries to Pirelli & C. A.p.A., for purposes of compensation as
allowed by tax laws;
• financial receivables, relating to loans receivable by Pirelli Finance Holding N.V.
(subsidiary of Pirelli S.p.A.) from Pirelli & C. Luxembourg S.A. and receivables from
transactions on the current account by Pirelli Servizi Finanziari S.p.A. (subsidiary of
Pirelli S.p.A.) from Pirelli & C. A.p.A. and Pirelli Partecipazioni Limited and by Pirelli
Finance Holding N.V. from Société Internationale Pirelli S.p.A.;
• financial payables, relating to a deposit made by Société Internationale Pirelli S.p.A. to
Pirelli Finance Holding N.V. (subsidiary of Pirelli S.p.A.);
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43

• revenues for goods and services, relating to the performance of various services
rendered by Pirelli S.p.A. to Pirelli & C. A.p.A.;
• costs for goods and services, relating to costs for the corporate secretarial services
rendered by Pirelli & C. A.p.A. on behalf of Pirelli S.p.A.;
• financial income and expenses, relating to interest income and expense on the
aforementioned current account transactions and loans, as well as costs and revenues
for hedging transactions carried out by Pirelli Finance Holding N.V. (subsidiary of
Pirelli S.p.A.) on behalf of Pirelli & C. A.p.A..
Transactions of Pirelli S.p.A. and its subsidiaries with the subsidiaries of Pirelli & C.
A.p.A. mainly refer to the following:
• trade receivables and other, relating to commercial transactions between Pirelli
Reifenwerke GmbH & Co. K.G. (indirect subsidiary of Pirelli S.p.A.) and Pirelli Energie
Deutschland GmbH (indirect subsidiary of Pirelli & C. A.p.A.);
• trade payables and other, relating to services rendered by companies in the Group of
Milano Centrale S.p.A. (subsidiary of Pirelli & C. A.p.A.) to Pirelli S.p.A. and its
subsidiaries;
• financial receivables, relating to receivables from transactions on the current account
by Pirelli Servizi Finanziari S.p.A. from companies of the group of Milano Centrale S.p.A.
(subsidiary of Pirelli & C. A.p.A.);
• financial payables, relating to payables from transactions on the current account by
Pirelli Servizi Finanziari S.p.A. to companies of the group of Milano Centrale S.p.A.
(subsidiary of Pirelli & C. A.p.A.);
• revenues from goods and services, relating to leases payments made by Milano
Centrale e Servizi S.p.A. (subsidiary of Pirelli & C. A.p.A.) to Pirelli S.p.A. and the
recovery of telephone charges by Pirelli Informatica S.p.A. (subsidiary of Pirelli S.p.A.)
from Milano Centrale e Servizi S.p.A.;
• costs for goods and services, relating to costs for property management services
incurred by Pirelli S.p.A. and its subsidiaries against the services rendered by companies
of the group of Milano Centrale S.p.A. (subsidiary of Pirelli & C. A.p.A.);
• financial income and expenses, relating to interest income and expense on the
aforementioned current account transactions.
Furthermore, Pirelli S.p.A. acquired the investment in Pirelli Finance (Luxembourg) S.A.
from Pirelli & C. A.p.A. and sold the investment in Pirelli Prodotti Diversificati S.p.A. to a
company in Pirelli & C. A.p.A. Group.
44
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Investments held by Directors, Statutory Auditors
and General Managers
Pursuant to article 33 of Consob Regulation No. 11520 of July 1, 1998 and Legislative
Decree No. 58 of February 24, 1998, the following information is provided as regards the
investments held in the company Pirelli S.p.A., and its subsidiaries, by the Directors,
Statutory Auditors and General Managers, either directly or through subsidiaries, trustee
companies or individual persons, as resulting from the shareholders’ register at December
31, 1998, from notices received or other information acquired from the same Directors,
Statutory Auditors and General Managers.
Name Company No. of shares No. of No. of No. of shares
in which held at prior shares shares held at
investment year-end acquired sold current
held
year-end
• Pirelli Alberto Pirelli spa 0 682,517 (*) 0 682,517
• Buora Carlo Pirelli spa 0 2,390,517 (*) 648,000 1,742,517
• Coppola
di Canzano Eugenio Pirelli spa 39,152 0 (*) 0 39,152
• Ferrario Giovanni Pirelli spa 0 1,227,517 (*) 0 1,227,517
• Morchio Giuseppe Pirelli spa 0 2,390,517 (*) 1,088,000 1,302,517
• Perissich Riccardo Pirelli spa 0 577,517 (*) 0 577,517
• Presutti Ennio Pirelli spa 30,000 0 (*) 0 30,000
• Puri Negri
Carlo Alessandro Pirelli spa 0 430,000 (*) 0 430,000
• Sozzani Vincenzo Pirelli spa 32,483 0 (*) 0 32,483
• Castagna Adalberto Pirelli spa 1 802,517 (*) 325,000 477,518
• Guatri Luigi (**) Pirelli spa 60,000 30,000 (*) 30,000 60,000
(*) Bonus shares assigned by Company.
(**) Shares held by spouse.
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45

Corporate Governance
As represented in the previous two years, the Board of Directors, at the proper time,
conferred to the Chairman-CEO the powers necessary to carry out all the acts pertaining
to corporate activity, to have single signature powers, with the exception of the power to
issue guarantees for obligations of the Company and the subsidiaries in excess of single
amounts of Lire 50 billion or guarantees in the interest of third parties for obligations in
excess of single amounts of Lire 20 billion; in these last cases, a joint signature with the
General Manager of the Finance and Administration Department is required.
Specific and more limited powers were conferred to the General Managers and
Management, to be used in carrying out their specific responsibilities.
Also during 1998, the Chairman, the General Managers and Management used the powers
conferred to them to carry out the normal operations of the company (of which the
Directors of the company were periodically informed), waiving such powers in the case of
significant transactions in terms of quality or value from an economic and financial
standpoint, and submitting them to the same Board of Directors. By resolution of the
extraordinary shareholders’ meeting of December 22, 1998, the by-laws were amended to
include the procedures which up to then had been adopted, by which the directors advise
the board of statutory auditors concerning the activities and any important economic,
financial or equity transactions carried out by the company or the subsidiaries as well as
transactions involving any potential conflict of interest.
It should also be considered that in view of the organization structure of the Group,
characterized by the existence of autonomous companies in several countries operating in
the two main business segments, individual acts are not frequently carried out - within the
Group holding company taken alone - which have a considerable impact on the economicequity
situation of the Group itself; instead, at this level, strategic and operating guidelines
are carried out, as well as the coordination of the specific segments and functions of the
Group.
Both the Group holding company and the subsidiary companies, however, are required to
follow the policies and rules which govern the main areas of business, in addition to the
administrative principles and rules of the Group governing the accounting treatment of
administrative events and the preparation of the consolidated financial statements and
period statements.
Within the internal control system of the Group, organized in such a way as to ensure
proper disclosure and an adequate system of control of all its activities and, in particular,
in the major areas of corporate risk, there is also a planning and control system, by sector
and operating unit, which monthly produces a detailed report to the General Managers - so
that they have a useful instrument with which to monitor specific activities.
In order to follow through on the strategies and guidelines adopted by the Group holding
company, the General Managers of the Sectors and Management also sit on the boards of
directors of the largest subsidiaries.
Finally, reporting directly to the Chairman-CEO is the Auditing Department (not involved
in financial operating activities and in the preparation of the financial statements and
period statements) which has the main responsibility for seeing that the system of internal
control is functioning and is adequate in terms of effectiveness and efficiency.
46
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Pirelli S.p.A.
Condensed financial statements
(in billions of lire) 1998) 1997)
BALANCE SHEET
• Intangible assets 21.7) 14.6)
• Property, plant and equipment 60.5) 61.9)
• Investments 3,695.5) 3,118.5)
• Net working capital 295.2) 330.6)
4,072.9) 3,525.6)
• Shareholders’ equity 4,054.5) 3,393.8)
• Provisions 90.9) 100.0)
• Net financial position (72.5) 31.8)
4,072.9) 3,525.6)
STATEMENT OF INCOME
• Financial income and expenses 492.0) 413.1)
• Value adjustment to financial assets (10.2) (7.8)
• Other operating expenses (10.9) (30.2)
Income before extraordinary items and income taxes 470.9) 375.1)
• Extraordinary items, net (6.8) (33.1)
• Income taxes (73.2) (57.5)
Net income for the year 390.9) 284.5)
Financial position
The financial position of the company shows the following changes between December 31,
1997 and December 31, 1998:
• net invested capital rose compared to the prior year mainly due to the increase in the
investment in Pirelli Finance (Luxembourg) S.A., purchased from Pirelli & C. A.p.A..
As per the shareholders’ resolution of May 12, 1997 and in observance of the procedures
established therein, during the year, 53,495,000 ordinary treasury shares were
purchased on the market for Lire 269.4 billion. On December 31, 1998, a total of
58,872,500 ordinary shares, equal to 2.969 percent of share capital, were purchased for
Lire 292.6 billion at a weighted average price of Lire 4,969.3 per share.
• shareholders’ equity increased by the net income for the year (Lire 390.9 billion) and
by the conversion, before the redemption date, of the remaining 5% 1994-1998
convertible debentures (Lire 505.5 billion).
These movements had a consequent effect on the net financial position, which went from
a debt position of Lire 31.8 billion at December 31, 1997 to a liquidity position of
Lire 72.5 billion at December 31, 1998.
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47

Results of operations
The 1998 results of Pirelli S.p.A., the Group holding company, show a net income of
Lire 390.9 billion, compared to Lire 284.5 billion in the prior year. The improvement is
mainly due to the increase in investment income, revenues from services and
extraordinary income, counterbalanced by an increase in the income tax charge.
Components of the results of operations
• Financial income and expenses of Lire 492 billion (Lire 413.1 billion in 1997) is
composed of investment income of Lire 458.4 billion (Lire 376 billion in 1997) and by
interest income, net, of Lire 33.6 billion (Lire 37.1 billion in 1997).
• Extraordinary items, net, includes extraordinary income of Lire 27.9 billion and
extraordinary expenses of Lire 34.7 billion.
Board of Directors and Board of Statutory Auditors
The Board of Directors was elected by the shareholders’ meeting on May 20, 1996
and its term of office is thus about to expire.
The shareholders’ meeting is therefore asked to elect a new Board after determining
the number of its members.
For the same reasons, the shareholders’ meeting is also called to elect a new Board
of Statutory Auditors and set the remuneration for the standing members.
48
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Shareholders’ Resolutions (°)
Appropriation of net income
The year ended December 31, 1998 shows a net income of Lire 390,934,995,321.
The Board of Directors proposes the distribution of a dividend, before withholding taxes, of:
• Lire 140 for each ordinary share
and
• Lire 160 for each savings share.
The proposed dividends carry a tax credit equal to 58.73 percent. Specifically, the tax
credit amounts to:
• Lire 82.222 for the proposed dividends on ordinary shares;
• Lire 93.968 for the proposed dividends on savings shares.
The small amount of taxes available according to art. 105, paragraph 1, letter a) of D.P.R.
917/86 does not permit the assignment of a tax credit with the right of refund (ordinary
credit) for a significant amount; therefore, a proposal is made for the assignment of the tax
credit without the right of refund (limited credit) for the entire amount of the credit due.
If in agreement with our proposal, we ask you to pass the following
Resolution
The shareholders' meeting:
• having taken note of the directors’ report to the financial statements;
• having taken note of the board of statutory auditors’ report;
• having examined the financial statements at December 31, 1998 which show a net
income of Lire 390,934,995,321;
Passes a resolution
a) to approve:
• the directors’ report to the financial statements;
• the balance sheet, statement of income, the notes to financial statements for the year ended
December 31, 1998 which show a net income of Lire 390,934,995,321 as presented by the
Board of Directors in their entirety and in the individual entries, with the proposed accruals;
b)to appropriate the net income for the year of Lire 390,934,995,321 as follows:
Lire
• 5 percent to the legal reserve 19,546,749,766
• to the shareholders:
Lire 140 to each of the 1,836,810,538 ordinary shares for a total of (*) 257,153,475,320
Lire 160 to each of the 88,006,016 savings shares for a total of 14,080,962,560
• to the directors, 1 percent of the amount established
in art. 23 of the by-laws 2,704,002,008
• an additional appropriation to the legal reserve
in order to reach 20 percent of share capital 27,436,249,634
• to retained earnings 70,013,556,033
(*) Net of 58,872,500 treasury shares held by the Company at December 31, 1998, as well as a further
869,435 shares purchased up to today’s date.
c) to assign the following tax credits to the profits distributed:
• to the ordinary shares, a limited tax credit (art. 105, paragraph 1, letter b)
of D.P.R. 917/86) of Lire 82.222;
• to the savings shares, a limited tax credit (art. 105, paragraph 1, letter b)
of D.P.R. 917/86) of Lire 93.968.
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49

Appointment of the audit firm
Upon issuance of the audit report on the financial statements for the current year, the
appointment will expire for the audit and certification of the financial statements of our
company which had been renewed for a second time with Reconta Ernst & Young S.p.A.
(formerly Reconta Ernst & Young S.a.s. di Bruno Gimpel).
Therefore, in accordance with art. 159 of the “Draghi Law”, it becomes necessary to appoint
the firm for the audit of the statutory financial statements, the consolidated financial
statements, and, in compliance with the Consob recommendation of February 20, 1997, the
interim six-month financial statements for the years ending December 31, 1999, 2000 and 2001.
As you will recall, last year, a proposal was set forth to make this appointment but,
following Consob’s recommendation, in view of changes in the procedures that would
have been shortly introduced by the so-called “Draghi Law”, it was decided to refrain from
passing a resolution; however, it was disclosed that the choice made by the Board of
Directors fell upon Price Waterhouse S.p.A..
We therefore now confirm the choice made by the Board, taking note of the favorable opinion of
the Board of Statutory Auditors, after having examined the revised proposal drawn up according
to the criteria established by Consob in its communication No. 96003556 of April 18, 1996.
The annual fee requested amounts to a total of Lire 381 million, of which Lire 72 million is for
the statutory financial statements, Lire 206 million for the consolidated financial statements of
the Group and Lire 103 million for the limited review of the interim six-month financial statements.
We would also like to inform you that the major subsidiaries will appoint the same audit
firm of Price Waterhouse S.p.A. for the audit of their financial statements and directly bear
the costs of the audits which will amount to Lire 710 million for the Italian subsidiaries and
Lire 2,533 million for the foreign subsidiaries.
If in agreement with our proposals, we ask you to pass the following
Resolution
The shareholders’ meeting:
• having taken note of the proposal by the Board of Directors;
• having taken note of the favorable opinion of the Board of Statutory Auditors regarding
the proposal of the audit firm of Price Waterhouse S.p.A.;
Passes a resolution
• to appoint Price Waterhouse S.p.A., pursuant to art. 159 of Legislative Decree No. 58 of
February 24, 1998, and taking into consideration the recommendation made by Consob
on February 20, 1997, auditors of the annual statutory and consolidated financial
statements and interim six-month financial statements of the Company for the years
ending December 31, 1999, 2000 and 2001;
• to fix, on the basis of the estimate prepared in accordance with the criteria established
by Consob in its communication No. 96003556 of April 18, 1996, the annual fee due to the
appointed audit firm in Lire 381 million, of which Lire 72 million for the statutory
financial statements, Lire 206 million for the consolidated financial statements and
Lire 103 million for the limited review of the interim six-month financial statements.
The hourly rates upon which the above fees are based are valid up to June 30, 2000. On
July 1, 2000, and on every July 1 thereafter, they will be adjusted on the basis of the total
variation in the ISTAT cost of living index, if higher than 3 percent.
Furthermore the fees will be adjusted in the event of any exceptional or unforeseen
circumstances, including significant changes in the structure and operations of the
company, which could require additional time to carry out the engagement.
The Board of Directors
Milan, March 29, 1999
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Consolidated Financial Statements at December 31, 1998
i

Consolidated balance sheets
Assets
(in millions of lire)
12.31.1998 12.31.1997
A) Capital subscription rights
Portion uncalled 39 40
B) Fixed assets
I) Intangible assets
Formation costs 11,484 6,103
Patents and design patent rights 13,733 8,177
Concessions, licenses, trademarks and similar rights 1,156 598
Goodwill 25,152 35,116
Intangible assets in progress and payments on account 13,478 2,834
Other intangible assets 85,292 80,476
Total intangible assets 150,295 133,304
II) Property, plant and equipment
Land and buildings 1,158,009 1,174,226
Plant and machinery 2,170,484 2,157,948
Industrial and commercial equipment 220,823 166,818
Other property, plant and equipment 173,206 187,522
Assets under construction and payments on account 269,270 313,711
Total property, plant and equipment 3,991,792 4,000,225
III) Financial assets
Investments in:
a) Subsidiaries 48,678 –
b) Associated companies 62,237 64,279
c) Other companies 153,500 152,376
Financial receivables:
b.2) Associated companies due beyond 1 year 390 234
d.1) Other companies due within 1 year – 150
d.2) Other companies due beyond 1 year 111,887 100,425
Other securities 34,747 14,142
Treasury shares 292,556 23,143
Total financial assets 703,995 354,749
Total fixed assets 4,846,082 4,488,278
C) Current assets
I) Inventories
Raw materials, auxiliaries and consumables 373,493 312,927
Work in process and semifinished products 317,245 275,907
Work in progress against orders 471,636 69,874
Finished products and goods for resale 968,047 707,417
Advances 13,705 14,957
Total inventories 2,144,126 1,381,082
II) Receivables
Trade 2,477,375 2,648,608
Subsidiaries 11,025 –
Associated companies 92,773 22,088
Parent companies 524,905 113,479
Other receivables 1,357,198 1,366,195
Total receivables 4,463,276 4,150,370
III) Current financial assets
Other securities 581,677 815,243
Total current financial assets 581,677 815,243
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Assets (continued)
(in millions of lire)
12.31.1998 12.31.1997
IV) Cash and banks
Bank and postal deposits 968,417 817,317
Checks 11,727 1,624
Cash on hand 13,600 8,118
Total cash and banks 993,744 827,059
Total current assets 8,182,823 7,173,754
D) Accrued income and prepaid expenses
Accrued income 306,169 54,156
Prepaid expenses 41,400 38,882
Total accrued income and prepaid expenses 347,569 93,038
Total assets 13,376,513 11,755,110
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Liabilities and shareholders’ equity
(in millions of lire)
12.31.1998 12.31.1997
A) Shareholders’ equity
– of Pirelli S.p.A. 4,420,691 4,045,476
I) Share capital 1,983,123 1,748,208
II) Share premium reserve 894,027 835,252
III) Revaluation reserves 5,528 5,528
IV) Legal reserve 349,642 311,418
V) Reserve for treasury shares in portfolio 292,556 23,143
VI) Statutory reserves – –
VII) Other reserves:
a) Consolidation reserve 275,580 476,094
b) Sundry reserves 83,264 83,264
VIII) Retained earnings 55,446 102,474
IX) Net income for the year 481,525 460,095
– Minority interest 329,520 375,229
a) Capital and reserves 276,760 323,628
b) Net income for the year 52,760 51,601
Total shareholders’ equity 4,750,211 4,420,705
B) Provisions for liabilities and expenses
Pensions and similar obligations 489,352 408,298
Income taxes 270,008 292,064
Other 330,342 271,834
Total provisions for liabilities and expenses 1,089,702 972,196
C) Provision for employees’ leaving indemnity 308,056 333,654
D) Payables
Bonds 968,173 2,202
Convertible bonds – 507,409
Bank borrowings 1,762,450 1,696,917
Other financial companies 265,799 196,953
Advances from customers 708,851 598,144
Trade 1,788,360 1,540,648
Associated companies 23,938 22,077
Parent companies 57,481 63,826
Taxes 447,271 451,012
Social security 89,297 100,160
Other payables 482,399 452,643
Total payables 6,594,019 5,631,991
E) Accrued liabilities and deferred income
Accrued liabilities 607,158 370,026
Deferred income 27,367 26,538
Total accrued liabilities and deferred income 634,525 396,564
Total liabilities and shareholders’ equity 13,376,513 11,755,110
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Memorandum accounts
(in millions of lire)
12.31.1998 12.31.1997
Personal guarantees
– Guarantees on behalf of other companies 2,243 23,408
2,243 23,408
Third party assets held in deposit
– Securities held in deposit 860,907 829,464
– Goods in process 2,682 1,482
863,589 830,946
Assets held by third parties
– Securities held as guarantees and sureties 24,678 25,783
– Securities held in deposit 1,773,490 1,900,407
– Goods in process 7,308 10,623
1,805,476 1,936,813
Commitments
– Capital expenditures 31,515 79,708
– Lease obligations – 623
– Other commitments – 126
31,515 80,457
Other memorandum accounts
– Potential losses for risk of default on discounted bills 3,442 30,460
3,442 30,460
2,706,265 2,902,084
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Consolidated statements of income
(in millions of lire)
1998) 1997)
A) Production value
Revenues from sales and services 10,623,504) 11,265,227)
Changes in inventories of work in process, semifinished and finished products 194,678) (29,044)
Changes in work in progress against orders 200,165) (22,136)
Increase in property, plant and equipment 19,864) 23,378)
Other revenues and income:
a) Miscellaneous 226,036) 152,956)
b) Government grants 8,160) 11,116)
Total production value 11,272,407) 11,401,497)
B) Production costs
Raw materials, auxiliaries, consumables and goods for resale (5,017,504) (5,125,160)
Service expenses (1,915,688) (1,860,140)
Lease and rent expenses (112,241) (108,566)
Personnel costs (2,585,069) (2,553,360)
Amortization, depreciation and write-downs:
a) Amortization of intangible assets (47,371) (50,523)
b) Depreciation of property, plant and equipment (550,790) (519,411)
c) Other write-downs of fixed assets (218) (1,084)
d) Write-downs of receivables included in current assets and cash and banks (24,913) (18,440)
Changes in inventories of raw materials, auxiliaries, consumables and goods for resale 75,395) (41,060)
Other accruals (23,830) (17,114)
Other operating expenses (271,746) (347,077)
Total production costs (10,473,975) (10,641,935)
Difference between production value and production costs 798,432) 759,562)
C) Financial income and expenses
Investment income 15,226) 16,837)
Other financial income:
a) from receivables included in fixed assets 1,231) 96)
b) from securities included in fixed assets 6,940) 10,642)
c) from securities included in current assets 88,825) 86,221)
d) Income other than the above 427,913) 316,909)
Interest and other financial expenses (529,590) (436,979)
Total financial income and expenses 10,545) (6,274)
D) Valuation adjustments to financial assets
Revaluations 1,530) 1,533)
Write-downs (12,527) (13,018)
Total adjustments (10,997) (11,485)
E) Extraordinary items
Extraordinary income 102,058) 60,532)
Extraordinary expenses (117,110) (117,401)
Total extraordinary items (15,052) (56,869)
Income before income taxes 782,928) 684,934)
Income taxes (248,643) (173,238)
Net income for the year 534,285) 511,696)
Pirelli S.p.A. 481,525) 460,095)
Minority interest 52,760) 51,601)
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Notes to consolidated financial statements
at December 31, 1998
Form and content
The consolidated financial statements for the year ended December 31, 1998 have been drawn up in accordance with the
provisions introduced by Legislative Decree No. 127 of April 9, 1991 which incorporate those of the VII directive of the EC.
The consolidated financial statements include the financial statements of Pirelli S.p.A., the Group holding company,
and the Italian and foreign companies in which Pirelli S.p.A. holds, directly or indirectly, control as defined by Legislative
Decree 127/91, art. 26.
A list of the companies included in consolidation is provided on pages to 86, and is considered an integral part of these notes.
The co-ordination of the audits and the aggregation of the audit reports have been carried out by Reconta Ernst & Young S.p.A..
The audit report on the consolidated financial statements has been issued by Reconta Ernst & Young S.p.A. for a fee of
Lire 58 million.
The fees for the audit of the individual Group companies have been borne directly by the companies concerned; the fees for
the year 1998 have amounted to approximately Lire 3,544 million, including the fees for the limited review of the six-month
financial statements.
Principles of consolidation
The financial statements used in consolidation are those at December 31, 1998 prepared locally for approval by the
shareholders of the individual companies adjusted, where necessary, to agree with the "Common Accounting Principles" of the
Group which conform to those established by Legislative Decree 127/91 and those issued by the I.A.S.C. (International
Accounting Standards Committee) and the National Boards of Dottori Commercialisti and Ragionieri.
The financial statements of subsidiaries operating in high-inflation countries have been adjusted to take into account the
changed purchasing power of the local currency, in accordance with the principles for inflation accounting.
The financial statements expressed in foreign currency have been translated into Italian lire at rates prevailing at year-end for
the balance sheet and at average exchange rates for the statement of income, with the exception of the financial statements of
companies operating in high-inflation countries, whose statements of income have been translated at rates ruling at year-end.
The differences arising from the translation of beginning shareholders' equity at year-end exchange rates have been recorded
in the consolidation reserve.
The exchange rates which have been applied are presented under "Other information" in the notes.
All the subsidiaries in consolidation have been consolidated on the line-by-line consolidation method, which may be
summarized as follows:
– the assets, liabilities, revenues and costs are consolidated in full and the share of net equity and results of operations
attributable to minority interest are shown separately;
– the carrying value of companies consolidated have been eliminated against the related underlying net equity;
– the gains and losses arising from transactions between consolidated companies, if not yet realized through transactions
with third parties, have been eliminated if the amount is significant, just as receivables, payables, revenues and costs
related to transactions between consolidated companies have been eliminated, if the amount is significant.
For investments in consolidated companies and for those valued using the equity method, the differences between the
carrying value of the investments and the corresponding share of net equity are accounted for as follows:
– negative differences have been recorded in the consolidation reserve;
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57

– positive differences, where not attributable to the assets or liabilities of the investee companies, have been recorded as a
reduction of the consolidation reserve.
The reconciliation between the net results and shareholders' equity of Pirelli S.p.A. at December 31, 1998 and the
corresponding consolidated figures is presented on page 80.
Summary of significant accounting policies
The accounting principles applied in the valuation of the components of the consolidated financial statements are in
conformity with those adopted in the financial statements of the Group holding company and consistent with those applied in
the prior year, except for the change in accounting principle used in the determination of the deferred income taxes whose
effects are disclosed on page 66.
• Intangible assets
"Formation costs" relate to the capital increase costs of consolidated companies and are amortized over a period of five years.
"Research and development expenditures and advertising costs" are charged to the statement of income in the year
incurred.
"Patents and design patent rights", "concessions, licenses, trademarks and similar rights" are amortized over their expected
economic lives, estimated in a period of five years.
"Goodwill" related to the acquisition of equity investments is amortized over the future period of utilization, considered to
be a period of ten years.
The caption "other intangible assets" includes sundry costs benefiting future periods, and in particular refers to:
– applied software acquisition costs, amortized over a period of five years;
– leasehold improvements, amortized over the duration of the lease and, in any case, not more than five years;
– image awareness costs benefiting future periods, amortized over the duration of the contract and, in any case, not more
than five years;
– loan acquisition costs, amortized over a period not exceeding the duration of the loan and, in any case, not more than five years.
• Property, plant and equipment
Property, plant and equipment are stated at purchase or production cost including directly attributable incidental expenses
and increased by revaluations effected in accordance with specific laws.
Depreciation is calculated starting from the month in which the asset is available and ready for use or potentially able to
provide economic benefits.
Depreciation is calculated on the straight-line method on a monthly basis at rates designed to completely write-off the
assets over their estimated useful lives or, for disposals, up to the last month of utilization, as follows:
– Buildings 3% - 10%
– Plant 7% - 10%
– Machinery 5% - 10%
– Tools and equipment 10% - 33%
– Furniture 10% - 33%
– Vehicles 10% - 25%
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In addition, property, plant and equipment are written down when there is a permanent diminution in their net book value,
in accordance with article 2426, point 3 of the Italian Civil Code.
Ordinary maintenance costs are expensed in the year incurred.
Government investment grants relating to land, buildings, plant and machinery are recorded in a special provision under
liabilities and are released to income in proportion to the future depreciation of the assets to which they refer.
Assets acquired under financial leasing contracts are accounted for as property, plant and equipment and are therefore
capitalized and depreciated over their estimated useful lives; the additional cost of the lease is considered as a financial
expense and residual lease payments are recorded as a financial liability.
• Investments
Equity investments in subsidiaries are valued at cost, reduced for any permanent diminution in value, in accordance with
art. 2359 of the Italian Civil Code.
Equity investments in associated companies are valued using the equity method, in accordance with article 2359 of the
Italian Civil Code.
Equity investments in other companies are valued at cost and reduced for any permanent diminution in value.
• Receivables and payables
Receivables (under both fixed assets and current assets) are stated at estimated realizable value. Payables are stated at
nominal value.
Receivables and payables in foreign currencies other than the recording currency of the individual companies are adjusted
to the year-end exchange rates or the agreed exchange rates under hedging contracts; related exchange gains or losses are
recorded in the statement of income.
• Other securities
Other securities are stated at the lower of cost and estimated realizable value.
• Inventories
Inventories are stated at the lower of cost, determined on the FIFO basis, and estimated realizable value. Work in process
on long-term contracts is stated in proportion to the stage of completion of the work on the basis of agreed prices and
taking into account estimated losses.
• Provisions for pensions and similar obligations
These provisions refer to pensions, health care and other benefits in favor of employees, not included in specific laws but
covered by local labor agreements, and benefit plans operating at some Group companies.
The principle applied is that of allocating the entire cost at maturity over the service lives of the employees based on
entitlement earned, using actuarial methods.
In accordance with FAS 106, which states that United States companies which in the past recorded such costs on a cash
basis must set up or adjust existing provisions in the financial statements so that adequate funds exist at retirement to
cover the payment of future benefits, Pirelli Group has decided to amortize the amount prospectively over a period
of 20 years starting from the year 1993.
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• Provision for income taxes
The provision for income taxes includes the liabilities for income taxes likely to be incurred but uncertain as to amount or
as to the date on which they will arise; definite income tax liabilities are recorded separately in a specific caption of the
balance sheet.
The provision also includes deferred income taxes on the timing differences arising between the results in the financial
statements for tax purposes of the individual companies and the results in the financial statements used for their consolidation.
Prudent accounting policy dictates that no account should be taken of deferred tax assets in excess of deferred tax
liabilities, and the tax benefits arising from the utilization of tax losses carried forward from prior years or the current year
should be credited to the statement of income in year utilized.
• Provision for employees’ leaving indemnity
The provision for employees' leaving indemnity includes amounts payable to employees accrued on their behalf in
accordance with specific laws or national labor contracts.
• Financial instruments
Financial instruments used for hedging, and derivatives, are recorded under commitments at the time the contract is
stipulated, for the notional amount. Income and expenses, as well as any effects, corresponding to the difference between
the original contract amount and the fair value at the end of the year, are accounted for on the accrual basis.
BALANCE SHEET
Assets
B) Fixed assets
I) Intangible assets
Intangible assets may be analyzed as follows:
(in millions of lire)
12.31.1997 Translation Increase Decrease Amortization 12.31.1998
difference
• Formation costs 6,103 12) 9,864 (34) (4,461) 11,484
• Patents and design patent rights 8,177 –) 8,830 –) (3,274) 13,733
• Concessions, licenses, trademarks
and similar rights 598 (28) 866 (161) (119) 1,156
• Goodwill 35,116 (1,017) 139 (41) (9,045) 25,152
• Other 83,310 (2,116) 51,086 (3,038) (30,472) 98,770
133,304 (3,149) 70,785 (3,274) (47,371) 150,295
"Formation costs" refer to the corporate formation expenses and capital increase costs of subsidiaries. The increase is
principally due to the transfer fee on the conversion of 5% bonds 1994-1998 (Lire 5.7 billion) and partly to the effect of the
inclusion in consolidation of the Power Cables Germany Division (Lire 0.7 billion), purchased from Siemens A.G..
The increase in “patents and design patent rights” refers mainly to the acquisition by Pirelli Cavi e Sistemi S.p.A. of the
utilization rights to the patents relating to fiber optics and fiber optic cables.
The major items included in "other" refer to software applications costs, corporate reorganization expenses, loan acquisition
costs, leasehold improvements, image awareness costs etc.. The effect of the Power Cables Germany Division, purchased
from Siemens A.G., is Lire 0.6 billion.
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II) Property, plant and equipment
The movements in property, plant and equipment during the year are as follows:
(in millions of lire)
12.31.1998) 12.31.1997)
Gross value
Opening balances 10,189,150) 9,748,903)
Translation difference (465,871) 502,447)
Additions 804,158) 619,403)
Disposals (419,801) (681,603)
10,107,636) 10,189,150)
Accumulated depreciation
Opening balances 6,188,925) 5,997,823)
Translation difference (333,282) 300,388)
Depreciation charge for the year 550,790) 519,411)
Disposals (290,589) (628,697)
6,115,844) 6,188,925)
Net values 3,991,792) 4,000,225)
The net decrease in comparison with the prior year is due to the combination of the following:
– translation differences, in reference to property, plant and equipment included in the financial statements of foreign companies,
and due to the revaluation of the Italian lira against the currencies of the countries in which the Group companies operate;
– additions, higher than those of the prior year by Lire 185 billion and including Lire 105 billion due to the effect of the
inclusion in consolidation of the Power Cables Germany Division purchased from Siemens A.G.; capital expenditures,
considering the same companies in consolidation as in 1997, are equal to 127 percent of depreciation;
– disposals, mainly in reference to plants as a consequence of production rationalization;
– depreciation increased by 6 percent over 1997.
Gross values include Lire 181 billion of assets which are no longer in use and are being held for transfer to other Group
companies or disposal.
III) Financial assets
“Investments in subsidiaries” amount to Lire 48,678 million and refer to the following:
(in millions of lire)
Company Country % of holding Amount
Pirelli Exploitation S.A. France 99.76% 74
Pirelli Kabelwerke und Systeme G.m.b.H. Austria 100.00% 70
MKM Magyar Kabel Muvek RT. Hungary 80.51% 13,881
Turk Siemens Kablo ve Elektrik Sanayii A.S. Turkey 55.88% 32,358
AFCAB Holdings (Proprietary) Ltd South Africa 50.00% 2,295
Total 48,678
The above subsidiaries, of which MKM Magyar Kabel Muvek RT., Turk Siemens Kablo ve Elektrik Sanayii A.S., AFCAB
Holdings (Proprietary) Ltd were purchased from Siemens A.G., have not been consolidated line-by-line in the financial
statements at December 31, 1998, as allowed by art. 28, paragraph 2c of Legislative Decree No. 127/91, since they were
acquired at the end of the year 1998.
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"Investments in associated companies" amount to Lire 62,237 million and show a reduction compared to
Lire 64,279 million at the end of the prior year; they are primarily composed of the following:
(in millions of lire)
• Drahtcord Saar GmbH & Co. K.G. (Germany) 11,974
• Upper Bright Ltd (British Virgin Islands) 9,383
• K.M.P. Cabos Especiais e Sistemas Ltda (Brazil) 6,542
• SICREM S.p.A. (Italy) 7,055
• Rodco Ltd (United Kingdom) 8,522
• SMP Melfi S.r.l. (Italy) 5,344
• Kabeltrommel Gesellschaft mbH & Co K.G. (Germany) 5,972
• Eurofly Service S.p.A. (Italy) 4,903
• Maristel S.p.A. (Italy) 989
• Trelleborg Wheel Systems S.p.A. (Italy) 800
• Other minor amounts 753
62,237
The principal movements during the year regard the acquisition of the investment in Kabeltrommel Gesellschaft mbH & Co
K.G. from Siemens A.G. and the sale of the investment in ABF Factoring S.p.A. by Pirelli S.p.A..
"Investments in other companies" include Lire 68.6 billion of stocks owned in companies listed on the stock exchange and
held in the portfolios of Pirelli S.p.A., Trefin S.r.l. and Pirelli Cavi e Sistemi S.p.A.. The stocks refer to Mediobanca, Sirti, Cartiere
Burgo, Impregilo, Società Metallurgica Italiana, Generale Industrie Metallurgiche, Compagnia Finanziaria De Benedetti.
“Financial receivables from other companies” amount to Lire 111,887 million and include:
– Lire 8,480 million of fixed rate loans; the carrying value approximates fair value at the end of the year;
– Lire 94,095 million of fixed rate obligatory deposits;
– Lire 269 million of floating rate loans;
– Lire 5,754 million of non-interest bearing guarantee deposits;
– Lire 3,289 million of non-interest bearing loans.
"Other securities" total Lire 34,747 million and largely relate to long-term securities held by Pirelli Financial Services
Company N.V..
“Treasury shares” amount to Lire 292.6 billion, compared to Lire 23.1 billion in the prior year. They refer to the purchase of
58,872,500 ordinary shares, equal to 2.969 percent of share capital (3.106 percent of ordinary shares), at a weighted average price of
Lire 4,969.3 per share, according to the procedures set forth in the resolution passed by the shareholders’ meeting of May 12, 1997. As
provided by art. 2357-ter of the Italian Civil Code, a “reserve for treasury shares in portfolio” has been established for the same amount.
C) Current assets
I) Inventories
Inventories total Lire 2,144.1 billion, compared to Lire 1,381.1 billion in the prior year, and may be analyzed as follows:
(in millions of lire)
12.31.1998 12.31.1997
• Cables and Systems 1,421,550 612,996
• Tyres 722,565 768,067
• Other 11 19
Total 2,144,126 1,381,082
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The increase in the inventories of the Cables and Systems Sector also reflects the consolidation of the Power Cables Germany
Division acquired from Siemens A.G. for Lire 192.5 billion.
II) Receivables
Receivables rose from Lire 4,150.4 billion in the prior year to Lire 4,463.3 billion in 1998, and can be analyzed as follows:
(in millions of lire)
12.31.1998 12.31.1997
Financial Commercial and other Financial Commercial and other
• Trade 2,477,375 2,648,608
• Subsidiaries 11,025
• Associated companies 13,560 79,213 18,800 3,288
• Parent companies 501,238 23,667 112,974 505
• Other receivables 315,118 1,042,080 144,402 1,221,793
829,916 3,633,360 276,176 3,874,194
The consolidation of the Power Cables Germany Division acquired from Siemens A.G. led to an increase in commercial and
other receivables of Lire 123.6 billion.
Specifically:
– Trade receivables from customers
These may be analyzed by due as follows:
(in millions of lire)
12.31.1998) 12.31.1997)
• due within 12 months 2,597,757) 2,755,898)
• due beyond 12 months 19,724) 18,377)
• less: allowance for doubtful receivables (140,106) (125,667)
2,477,375) 2,648,608)
No receivables are due after five years.
The carrying value of receivables, adjusted for probable future losses, approximates estimated fair value at the end of the year.
– Receivables from associated companies
With respect to financial receivables, these receivables refer to Drahtcord Saar & Co. K.G. (Lire 17,617 million
at December 31, 1997) consequent to transactions with Pirelli Deutschland A.G..
As for commercial receivables, the most significant refer to Maristel S.p.A. (Lire 44,780 million compared to
Lire 2,878 million at December 31, 1997) consequent to transactions with Pirelli Cavi e Sistemi S.p.A., and Trelleborg
Wheel Systems S.p.A. (Lire 33,995 million) as a result of transactions with Pirelli Pneumatici S.p.A..
All amounts are receivable within one year.
– Receivables from parent companies
These amount to Lire 524,905 million and mainly relate to financial receivables of Pirelli Finance Holding N.V. from
Pirelli & C. Luxembourg S.A. (Lire 385,108 million), and Pirelli Servizi Finanziari S.p.A. from Pirelli & C. A.p.A.
(Lire 71,202 million).
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– Other receivables
Other receivables include financial receivables of Lire 315,118 million primarily consisting of receivables from banks on
forward exchange transactions and receivables from companies in the Pirelli & C. A.p.A. Group; the carrying value
approximates the estimated fair value at the end of the year.
Other receivables also include Lire 1,042,080 million of sundry receivables representing amounts due from the tax
authorities of Lire 575,500 million, dividends receivable of Lire 4,168 million, receivables from the sale of fixed assets of
Lire 2,834 million, advances to suppliers of Lire 35,600 million, receivables from employees of Lire 12,305 million and
receivables from social security agencies, export refunds and other minor amounts of Lire 411,673 million.
The amount due beyond one year and within five years is Lire 166,882 million, while receivables due beyond five years total
Lire 19,589 million.
III) Current financial assets
– Other securities
Other securities amount to Lire 581,677 million and consist of:
• Lire 170,113 million of floating rate securities issued and guaranteed by banking institutions;
• Lire 48,759 million of floating rate securities issued and guaranteed by governments of various countries;
• Lire 19,433 million of fixed rate securities issued and guaranteed by governments of various countries;
• Lire 22,208 million of equity shares intended for sale;
• Lire 313,395 million of fixed rate securities issued and guaranteed by banking institutions;
• Lire 7,706 million of fixed rate bonds;
• Lire 63 million of warrants.
The securities are held in safe-keeping at leading banking institutions.
IV) Cash and banks
– Bank and postal deposits
Bank and postal deposits are concentrated in the financial companies, holding companies and subholding companies of the
Group. Available liquidity is mainly invested in the short-term deposit market at leading banking counterparts primarily at
interest rates reflecting the market rates at year-end.
The consolidation of the Power Cables Germany Division acquired from Siemens A.G. increased the amount of available
liquidity by Lire 35.7 billion.
D) Accrued income and prepaid expenses
– Accrued income
Accrued income is determined on the accrual principle and shows an increase from Lire 54.2 billion to Lire 306.2 billion.
Accrued income mainly relates to the portion of exchange gains on hedging transactions (Lire 261.3 billion), interest
income, insurance, rent, hedging revenues.
– Prepaid expenses
Prepaid expenses rose from Lire 38.9 billion at December 31, 1997 to Lire 41.4 billion at December 31, 1998 and mainly
refer to prepaid insurance, property rent, etc..
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Liabilities and shareholders’ equity
A) Shareholders’ equity
Of Pirelli S.p.A.
“Share capital” totals Lire 1,983,123 million and consists of 1,895,117,473 ordinary shares and 88,006,016 savings shares, all
with a par value of Lire 1,000 per share and normal dividend rights.
The “share premium reserve” went from Lire 835,252 million to Lire 894,027 million; the change can principally be ascribed
to the withdrawal of Lire 252,351 million to integrate the “Reserve for treasury shares in portfolio” for the purchase of shares
made during the year and the increase of Lire 311,064 million for the conversion of Pirelli S.p.A. convertible bonds.
The “revaluation reserves”, ex law No. 413/1991, have remained unchanged compared to the prior year.
The “consolidation reserve” amounts to Lire 275,580 million (Lire 476,094 million in the prior year) and represents the
difference between the carrying value of equity investments in consolidated companies and the underlying share of net equity.
The changes in shareholders' equity are presented on page 79.
Minority interest
The minority interest in shareholders' equity of Lire 329,520 million shows a reduction compared to the prior year
(Lire 375,229 million at December 31, 1997), due to the difference between translation adjustment for the foreign currency
financial statements and the increase in the net income for the year.
The percentage ownership of investments held by the minority interest is as follows:
12.31.1998 12.31.1997
Celikord A.S. (Turkey) 49.00% 49.00%
Sicable S.A. (Ivory Coast) 49.00% 49.00%
Pirelli Cables Australia Ltd (Australia) 49.00% 49.00%
Turk Pirelli Lastikleri S.A. (Turkey) 37.81% 37.78%
Pirelli Pneus S.A. (Brazil) 13.23% 13.23%
Pirelli Cabos S.A. (Brazil) 15.08% 15.08%
Pirelli Tyre Holding N.V. (The Netherlands) 0.19% 0.26%
Pirelli de Venezuela C.A. (Venezuela) 3.78% 3.78%
Solac Soc. Laminadora Ltda (Brazil) 11.00% 11.00%
PT Pirelli Cables Indonesia (Indonesia) 50.00% 50.00%
B) Provisions for liabilities and expenses
Provisions for pensions and similar obligations
These provisions include accruals for pensions, health care and other benefits in favor of employees, not governed by specific
laws but covered by local labor agreements and benefit plans operating at some Group companies.
The consolidation of the Power Cables Germany Division acquired from Siemens A.G. had the effect of increasing these
provisions by Lire 66.2 billion.
They also include, in accordance with FAS 106, funds to cover the payment of future benefits which United States companies
must set aside that are being amortized prospectively over a period of 20 years. At December 31, 1998, the liabilities still to be
accrued for this purpose amount to Lire 22 billion.
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Provisions for income taxes
The provisions for income taxes include accruals relating to income taxes likely to be incurred but uncertain as to the amount
or as to the date on which they will arise, as well as deferred taxation, as follows:
(in millions of lire)
12.31.1998 12.31.1997
• Provision for current taxes 58,725 68,523
• Provision for deferred taxes 211,283 223,541
270,008 292,064
The tax charge for the year is composed of the following:
(in millions of lire)
1998 1997)
• Current taxes 235,547 175,924)
• Deferred taxes 13,096 (2,686)
248,643 173,238)
When considering only companies which closed the year with a net income, income taxes represented 26 percent of pre-tax
income (compared to 23 percent last year), generally less than the average tax rate in the various countries in which the
Group operates, mainly made possible by the utilization of tax loss carryforwards.
Furthermore, by using dividend tax credits it was possible to recover a part of the income taxes payable by subsidiary companies.
Current income taxes which are definite and certain in amount are shown under income taxes payable, whereas the income
taxes paid in advance are shown under taxes receivable.
The tax rates in the principal countries in which the Group operates are as follows:
Europe: United States 35%
Italy 41% Canada 38%
France 42% Australia 36%
Spain 35% South America:
Germany 45% Argentina 34%
United Kingdom 33% Brazil 33%
Turkey 43% Venezuela 34%
Potential tax savings to the Group in future years as a result of tax loss carryforwards amount to approximately
Lire 155 billion.
As for deferred taxes, as described in the financial statements at December 31, 1997, the method of calculation was changed
in order to conform to international practice. The change in accounting principle resulted in a higher tax charge for the
current year of approximately Lire 13 billion, whereas no adjustment was made to the provision for deferred taxation since
effect was given in the financial statements at December 31, 1997.
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Other provisions
The movements during the year in other provisions are as follows:
(in millions of lire)
Provision for restructuring costs) Other) Total
Balance at December 31, 1997 94,978) 176,856) 271,834)
Translation difference (1,840) (4,331) (6,171)
Utilizations (67,790) (85,719) (153,509)
Increases 157,377) 60,811) 218,188)
Balance at December 31, 1998 182,725) 147,617) 330,342)
Utilizations of the provision for restructuring costs were in respect of the Cables and Systems Sector for
Lire 21,870 million and the Tyres Sector for Lire 45,920 million. The balance of the provision relates to the Cables and Systems
Sector for Lire 137,030 million and the Tyres Sector for Lire 45,695 million.
The increase in the provision for restructuring costs is mainly in reference to the reorganization plan for the industrial
structures of the companies in the Cables and Systems Sector, particularly in Germany, due to the acquisition of the Power
Cables Division from Siemens A.G..
The total of other provisions of Lire 147,617 million consists of accruals for litigation, industrial and commercial risks,
product warranties, and other contingencies.
D) Payables
Payables show an increase from Lire 5,632.0 billion to Lire 6,594.0 billion and may be analyzed as follows:
(in millions of lire)
12.31.1998 12.31.1997
Financial Commercial and other Financial Commercial and other
• Bonds 968,173 2,202
• Convertible bonds 507,409
• Banks borrowings 1,762,450 1,696,917
• Other financial companies 265,799 196,953
• Advances from customers 708,851 598,144
• Trade 1,788,360 1,540,648
• Associated companies 3,420 20,518 2,900 19,177
• Parent companies 57,460 21 62,762 1,064
• Taxes 447,271 451,012
• Social security 89,297 100,160
• Other payables 482,399 452,643
3,057,302 3,536,717 2,469,143 3,162,848
The effect of the consolidation of the Power Cables Germany Division acquired from Siemens A.G. is Lire 127.4 billion on
commercial and other payables and Lire 27.2 billion on financial payables.
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An analysis of payables by due date is as follows:
Financial payables
(in millions of lire)
12.31.1998 12.31.1997
within beyond within beyond
1 year 1 year 1 year 1 year
• Bonds 38 968,135 2,202
• Convertible bonds 507,409
• Bank borrowings 650,624 1,111,826 504,046 1,192,871
• Other financial companies 234,116 31,683 145,940 51,013
• Associated companies 3,420 1,200 1,700
• Parent companies 57,460 62,762
945,658 2,111,644 1,223,559 1,245,584
Financial payables are covered by liens and mortgages for Lire 893,106 million.
Financial payables due beyond five years total Lire 1,156,560 million.
Additional disclosure is provided as follows:
Bonds
These refer to the Pirelli S.p.A. 1998-2008 bonds of Euro 500 million, issued on October 21, 1998 and yielding 4.875 percent.
Following the early redemption of 5% 1994-1998 convertible bonds, 742,358 bonds were redeemed for Lire 1.9 billion and
194,414,997 ordinary shares were issued for Lire 505.5 billion.
Bank borrowings
Bank borrowings due within one year amount to Lire 650,624 million, and include the current portion of long-term debt for
Lire 431,902 million.
Bank borrowings due beyond one year amount to Lire 1,111,826 million and consist of floating rate loans for
Lire 1,079,564 million and fixed rate loans for Lire 32,262 million.
Payables to other financial companies
The amount due beyond one year includes an amount of Lire 24,314 million payable after five years.
Payables to associated companies
As regards financial payables, the most significant amount refers to loans payable by Pirelli Pneumatici S.p.A. to SMP Melfi
S.r.l. (Lire 2,350 million) and by Pirelli Cavi e Sistemi S.p.A. to Maristel S.p.A. (Lire 1,070 million).
Payables to parent companies
These primarily refer to a deposit by Société Internationale Pirelli S.p.A. with Pirelli Finance Holding N.V.
(Lire 56,484 million).
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Commercial and other payables
(in millions of lire)
12.31.1998 12.31.1997
within beyond within beyond
1 year 1 year 1 year 1 year
• Advances from customers 708,851 598,144
• Trade 1,788,360 1,540,648
• Associated companies 20,518 19,177
• Parent companies 21 1,064
• Taxes 384,214 63,057 387,120 63,892
• Social security 89,297 96,807 3,353
• Other payables 447,565 34,834 427,666 24,977
3,438,826 97,891 3,070,626 92,222
Payables to associated companies
As for commercial payables, the most significant amounts refer to SICREM S.p.A. (Lire 15,570 million), Drahtcord Saar & Co.
K.G. (Lire 3,858 million), Servizio Titoli S.r.l. (Lire 318 million), Eurofly Service S.p.A. (Lire 208 million) and Maristel S.p.A.
(Lire 499 million).
Payables to parent companies
These mainly refer to amounts payable by Pirelli S.p.A. to Pirelli & C. A.p.A. for corporate secretarial services.
Other payables
These amount to Lire 482,399 million and include Lire 116,022 million of payables to employees, Lire 29,165 million for
guarantee deposits from customers for packaging, Lire 13,532 million for legal and consulting fees, Lire 57,883 for purchases
of fixed assets and Lire 265,797 million for other minor items.
E) Accrued liabilities and deferred income
Accrued liabilities
Accrued liabilities rose from Lire 370 billion to Lire 607.2 billion and include the portion of exchange differences on hedging
transactions (Lire 267 billion), property rent expenses, insurance premiums, hedging costs, etc..
Deferred income
Deferred income rose from Lire 26.5 billion to Lire 27.4 billion and refers to deferred revenues and insurance premiums.
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MEMORANDUM ACCOUNTS
Memorandum accounts total Lire 2,706.3 billion compared to Lire 2,902.1 billion in the prior year.
Personal guarantees
Guarantees on behalf of other companies
These are mainly given to guarantee loans received and job orders in the process of being delivered or tested.
Third party assets held in deposit
Securities held in deposit
These include securities stated at par value, owned by third parties and held in deposit by Pirelli S.p.A., in addition to
securities entrusted for administration.
Assets held by third parties
Securities held as guarantees and sureties
These include securities owned by the Group and held by third parties in deposit as guarantees or entrusted for
administration, and sureties against commitments and contractual obligations given by Pirelli S.p.A..
FINANCIAL INSTRUMENTS
It is the Group's policy to reduce financial risks deriving from international activities conducted in research, manufacturing
and distribution through operating and financial management decisions.
To this end, the Group uses foreign exchange contracts and derivatives to protect its operating results from fluctuations in
exchange and interest rates and in the prices of raw materials. The Group has a policy of being party to financial instruments
in the normal course of business and not for speculative purposes. With an overall view towards reducing exposure to risk the
Group deals exclusively with leading bank counterparts and in highly liquid instruments.
Outstanding financial instruments and related fair values at December 31, 1998 are presented in the following table together
with maturity dates:
(in billions of lire)
Gross contractual amounts Fair value Maturing within Maturing beyond
(at year-end exchange rates) one year one year
Exchange rate risk
• Forward contracts 8,640 8,693 8,613 80
• Swaps contracts 270 270 270 –
Interest rate risk
• Cross currency rate interest rate swaps 43 – – –
• Interest rate swaps 20 1 1 –
Raw materials price risk
• Futures contracts 82 81 81 –
The fair value of the financial instruments used to hedge exchange, interest rate and materials price risks approximates the
fair value of the positions being hedged.
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CONSOLIDATED STATEMENTS OF INCOME
A) Production value
Revenues from sales and services
Sales by geographic area of destination and industry sector are reported in the following table.
(in millions of lire)
1998 1997
Geographic area
Europe:
• Italy 1,589,205) 14.96%) 1,509,980) 13.40%)
• Other European countries 4,196,608) 39.50%) 4,269,749) 37.90%)
North America 1,477,134) 13.90%) 1,515,026) 13.45%)
Central and South America 2,394,227) 22.54%) 2,695,343) 23.93%)
Oceania, Africa and Asia 966,330) 9.10%) 1,275,129) 11.32%)
10,623,504) 100.00%) 11,265,227) 100.00%)
Sector
Cables and Systems 5,396,582) 50.80%) 5,842,567) 51.86%)
Tyres 5,217,537) 49.11%) 5,416,964) 48.09%)
Other sectors 158,999) 1.50%) 119,801) 1.06%)
Inter-eliminations (149.614) (1.41%) (114,105) (1.01%)
10,623,504) 100.00%) 11,265,227) 100.00%)
The distribution of sales by destination and by major product category for the two sectors has been commented on in the two
sections of the report which discuss the performance of the sectors.
Other revenues and income
The caption "miscellaneous" includes rent income, commissions, insurance indemnities and refunds, gains from the ordinary
disposal of property, plant and equipment and other minor items.
B) Production costs
Service expenses
Service expenses total Lire 1,915.7 billion and include selling expenses of Lire 717.7 billion, ordinary maintenance of
Lire 137.9 billion, electrical power of Lire 206.2 billion, travel of Lire 107.7 billion, insurance of Lire 54.3 billion, consulting
fees of Lire 52.7 billion, technical assistance, etc..
Lease and rent expenses
Lease and rent expenses mainly consist of rent expenses of Lire 74.5 billion and operating lease expenses of Lire 28.2 billion
and patent utilization rights.
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Personnel costs
Personnel costs consist of the following:
(in millions of lire)
1998 1997
Salaries and wages 2,003,070 1,949,665
Social security costs 426,726 439,571
Leaving indemnity 60,697 60,730
Pension and similar costs 35,970 44,255
Other costs 58,606 59,139
2,585,069 2,553,360
Amortization, depreciation and write-downs
The depreciation charge for property, plant and equipment may be analyzed as follows:
(in millions of lire)
1998 1997
Buildings 66,495 56,163
Plant and machinery 364,908 353,360
Commercial and industrial equipment 62,145 51,197
Other assets 57,242 58,691
550,790 519,411
Other operating expenses
Other operating expenses went from Lire 347.1 billion to Lire 271.7 billion and mainly include administrative expenses of
Lire 33.6 billion, revenue stamps and local taxes of Lire 49.0 billion, losses on the elimination of property, plant and
equipment of Lire 2.3 billion, legal fees of Lire 20.8 billion, association dues of Lire 16.0 billion, entertainment, audit fees, etc..
C) Financial income and expenses
Investment income
Investment income refers to dividends received from equity investments in other companies.
Other financial income
“Income other than the above” consists of the following:
(in millions of lire)
1998 1997
Interest from associated companies 762 2,489
Interest from parent companies 5,007 3,439
Bank interest 118,264 95,503
Other financial income from parent companies 289 –
Miscellaneous financial income 143,528 105,876
Gains on exchange 160,063 109,602
427,913 316,909
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Miscellaneous financial income includes revenues on forward contracts, gains on the sale of fixed rate securities, interest
on receivables to be collected from the tax authorities, etc..
Interest and other financial expenses
These expenses include:
(in millions of lire)
1998 1997
Interest to associated companies 219 226
Interest to parent companies 2,162 13,730
Bond interest 9,177 4,439
Bank interest 166,995 161,797
Other financial interest to parent companies 21,263 –
Miscellaneous financial expenses 144,340 118,842
Losses on exchange 185,434 137,945
529,590 436,979
Miscellaneous financial expenses include costs on forward contracts, losses on the sale of fixed rate securities, bank
commissions, etc..
Financial expenses, net, with specific reference to currency transactions, reflect increased currency operations by Group
companies in 1998, which led to an increase in losses on exchange and a corresponding increase in related gains on exchange,
as seen in the preceding table.
Financial expenses, net, excluding amounts not directly associated with receivables and payables, amount to Lire 54.5 billion.
E) Extraordinary items
Extraordinary income
Extraordinary income amounts to Lire 102.1 billion compared to Lire 60.5 billion in the prior year, and may be analyzed
as follows:
(in millions of lire)
1998 1997
Gains on disposals 21,985 28,280
Miscellaneous 80,073 32,252
102,058 60,532
"Gains on disposals" include gains on the sale of land by Pirelli Cabos S.A. for Lire 11.7 billion, the sale of a building located
in Athens by Pirelli Hellas S.A. for Lire 2 billion, the sale of a warehouse by Turk Pirelli Lastikleri A.S. for Lire 2.2 billion, the
sale of the investments in Olivetti S.p.A., ABF Factoring S.p.A., Pirelli Prodotti Diversificati S.p.A. (sold to a Pirelli & C. A.p.A.
Group company) for Lire 5.2 billion realized by Pirelli S.p.A. and other minor items for Lire 0.9 billion.
"Miscellaneous" includes a gain of Lire 34 billion on the sale by Pirelli Pneumatici S.p.A. of the agriculture tyre
manufacturing and marketing activities to Trelleborg Wheel Systems S.p.A., a gain of Lire 17.4 billion on the reimbursement of
the share capital of Pirelli Finance (Holding) N.V. to Pirelli S.p.A., an amount of Lire 17.2 billion released from the provisions
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73

for liabilities and expenses accrued in prior years considered in excess of the current valuation of requirements for the
affiliates in the United States, Brazil, Australia and Italy and the remaining Lire 11.5 billion relates to the capital
reimbursement by Muriaé S.A. to Pirelli S.p.A., the sale of Olivetti S.p.A. warrants by Pirelli S.p.A. and other minor items.
Extraordinary expenses
Extraordinary expenses amount to Lire 117.1 billion compared to Lire 117.4 billion in the prior year, and may be analyzed
as follows:
(in millions of lire)
1998 1997
Losses on disposals 7,368 7,347
Miscellaneous 109,742 110,054
117,110 117,401
"Losses on disposals" mainly include losses on the disposal of property, plant and equipment of Lire 6.6 billion and
Lire 0.8 billion of losses on the disposal of investments.
The caption "miscellaneous" includes Lire 58.6 billion of reorganization and restructuring costs, Lire 10.7 billion connected
to land reclamation of abandoned areas, Lire 30 billion for the special bonus paid to the Chairman-CEO and Lire 10.4 billion
for claims, sales commissions and other minor items.
Other information
Directors’ and statutory auditors’ fees
Fees to the directors and statutory auditors of Pirelli S.p.A., who also carry out these functions in other companies included in
consolidation, are as follows:
(in millions of lire)
Directors 39,571
Statutory auditors 280
39,851
Employees
The average number of employees by category in companies included in consolidation is as follows:
Management 617
Staff 10,472
Operatives 23,414
Temporary employment 2,203
36,706
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Exchange rates (against Italian lire)
Average
Year-end
Change
Change
1998 1997 in % 12.31.1998 12.31.1997 in %
Europe
Swiss franc 1,198.74 1,175.64 1.96%) 1,208.41 1,209.90 (0.12%)
German mark 986.88 984.47 0.24%) 990.00 981.69 0.85%)
British pound 2,886.25 2,787.96 3.53%) 2,763.16 2,913.04 (5.15%)
Dutch guilder 875.48 874.71 0.09%) 878.64 871.06 0.87%)
French franc 294.41 292.53 0.64%) 295.18 293.44 0.59%)
Spanish peseta 11.62 11.64 (0.14%) 11.64 11.60 0.34%)
Belgian franc 47.84 47.71 0.27%) 48.00 47.59 0.87%)
Greek drachma 5.88 6.24 (5.76%) 5.80 6.22 (6.75%)
North America
American dollar 1,737.71 1,697.03 2.40%) 1,653.10 1,759.19 (6.03%)
Canadian dollar 1,168.51 1,223.44 (4.49%) 1,066.17 1,222.85 (12.81%)
South America
Brazilian real 1,497.87 1,575.56 (4.93%) 1,368.12 1,576.34 (13.21%)
Argentine peso 1,737.71 1,697.03 2.40%) 1,653.10 1,759.19 (6.03%)
Oceania
Australian dollar 1,095.83 1,255.11 (12.69%) 1,013.35 1,151.39 (11.99%)
Africa
Ivory Coast franc 2.94 2.93 0.48%) 2.95 2.93 0.59%)
Net financial position
The composition of the net debt position presented below, which shows an increase compared to the prior year, was
commented on in the introduction to the report:
(in millions of lire)
12.31.1998) 12.31.1997)
Short-term financial payables 945,658) 1,223,559)
Accrued interest expenses 34,001) 60,972)
Cash and banks (993,744) (827,059)
Other securities (581,677) (815,243)
Short-term financial receivables (829,916) (276,326)
Accrued interest income (25,606) (18,155)
Capital subscription rights - portion called up (39) (40)
Net short-term financial position (1,451,323) (652,292)
Medium/long-term financial payables 2,111,644) 1,245,584)
Medium/long-term financial receivables (112,277) (100,659)
Other securities (34,747) (14,142)
Net medium/long-term financial position 1,964,620) 1,130,783)
Net financial debt position 513,297) 478,491)
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R&D expenditures
In 1998 the Group incurred research and development expenditures and technical management costs for a total of
Lire 379 billion, entirely charged to operating expenses, compared to Lire 355 billion in the prior year. 1998 expenditures
represent 3.6 percent of consolidated sales revenues.
The geographical breakdown of these expenditures is as follows:
Europe 87% South America 7%
North America 5% Oceania 1%
A number of research programs are subsidized by the governments of various countries. In particular, in Italy, where the
research activities are mainly concentrated, the projects financed under the various laws are numerous and apply, in differing
proportions, to all sectors of activity.
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Supplementary information
i

Consolidated statements of cash flow
1998 1997
Net debt at beginning of year (478,491) (1,014,915)
Translation adjustment (50,380) (14,718)
Operating profit 798,432) 759,562)
Depreciation and amortization 598,161) 569,934)
Increase in intangible assets (70,785) (77,511)
Increase in property, plant and equipment (804,158) (619,403)
Increase in financial assets (89,147) (154,609)
Disposal of intangible assets 136) –)
Disposal of property, plant and equipment 82,279) 27,934)
Disposal of financial assets 3,047) 12,958)
Net investments (878,628) (810,631)
Changes in inventories (844,233) 113,189)
Changes in trade and other accounts receivable/payable 693,489) (131,300)
Changes in working capital (150,744) (18,111)
Changes in provisions for liabilities and expenses 30,339) 14,426)
Other changes (50,746) 3,632)
Free cash flow 346,814) 518,812)
Extraordinary items, net (15,052) (56,869)
Financial income/expenses (4,218) (19,486)
Income taxes, net (248,643) (173,238)
Treasury share investments (276,482) (23,143)
Other 5,074) 25,030)
Cash flow before dividends (192,507) 271,106)
Dividends paid (298,086) (224,597)
Net cash flow (490,593) 46,509)
Share capital increase Pirelli S.p.A. for conversion of bonds 505,479) 496,909)
Share capital increase (minority interest) 688) 7,724)
Changes in share capital 506,167) 504,633)
(in millions of lire)
Changes in net debt (*) (34,806) 536,424)
Net debt at end of year (513,297) (478,491)
(*) Financed by:
Increase (decrease) in long-term loans 833,837) (930,512)
Increase (decrease) in short-term loans (865,912) 479,154)
Decrease (increase) in cash and banks 66,881) (85,066)
34,806) (536,424)
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Consolidated statements of changes in shareholders’ equity
(in millions of lire)
Legal reserve
Share Share premium Consolidation other reserves
capital reserve reserve retained earnings Total
and net income
for year
Balance at December 31, 1996 1,557,089 537,836) 350,310) 827,702) 3,272,937)
Profit distribution, as per resolution of May 12, 1997:
• dividends to shareholders (173,495) (173,495)
• to directors (1,738) (1,738)
Conversion of bonds:
• 5% Lire 1,011,309,130,000 191,119 305,790) 496,909)
Withdrawal for tax on equity 1997 (8,374) (8,374)
Withdrawal for substitute equalization tax on reserves 1997 (786) (786)
Adjustment of net equities of subsidiary companies (129,274) (125,856) (255,130)
Translation adjustment 255,058) 255,058)
Net income for the year 460,095) 460,095)
Balance at December 31, 1997 1,748,208 835,252) 476,094) 985,922) 4,045,476)
Profit distribution, as per resolution of May 15, 1998:
• dividends to shareholders (234,068) (234,068)
• to directors (1,714) (1,714)
Conversion of bonds:
• 5% Lire 1,011,309,130,000 194,415 311,064) 505,479)
Assignment of bonus shares to employees 40,500 (40,500)
Reinstatement of share premium reserve for tax on equity 1997 62) 62)
Withdrawal from share premium reserve to set up reserve
for treasury shares in portfolio (252,351) 252,351)
Adjustment of net equities of subsidiary companies 35,449) (175,555) (140,106)
Translation adjustment (235,963) (235,963)
Net income for the year 481,525) 481,525)
Balance at December 31, 1998 1,983,123 894,027) 275,580) 1,267,961) 4,420,691)
i
79

Reconciliation of net results and shareholders’ equity of Pirelli S.p.A.
and corresponding consolidated figures
(in millions of lire)
Share
Consolidation
capital Reserves reserve Net income Total
Pirelli S.p.A. 1,983,123 1,680,463 390,935) 4,054,521)
Earnings for the year of consolidated companies
(before consolidation adjustments) 491,803) 491,803)
Capital and reserves of consolidated companies
(before consolidation adjustments) 3,502,816) 3,502,816)
Consolidation adjustments:
– carrying value of investments in consolidated companies (3,561,869) (3,561,869)
– intragroup dividends 403,354) (403,354) –)
– other (68,721) 2,141) (66,580)
Consolidated 1,983,123 1,680,463 275,580) 481,525) 4,420,691)
80
i

Consolidated balance sheets (in thousands of euro)
Assets
(in thousands of euro)
12.31.1998 12.31.1997
A) Capital subscription rights
Portion uncalled 20 21
B) Fixed assets
I) Intangible assets
Formation costs 5,931 3,152
Patents and design patent rights 7,093 4,223
Concessions, licenses, trademarks and similar rights 597 309
Goodwill 12,990 18,136
Intangible assets in progress and payments on account 6,961 1,464
Other intangible assets 44,050 41,562
Total intangible assets 77,622 68,846
II) Property, plant and equipment
Land and buildings 598,062 606,437
Plant and machinery 1,120,961 1,114,487
Industrial and commercial equipment 114,046 86,154
Other property, plant and equipment 89,453 96,847
Assets under construction and payments on account 139,066 162,018
Total property, plant and equipment 2,061,588 2,065,943
III) Financial assets
Investments in:
a) Subsidiaries 25,140 –
b) Associated companies 32,143 33,197
c) Other companies 79,276 78,696
Financial receivables:
b.2) Associated companies due beyond 1 year 201 121
d.1) Other companies due within 1 year – 77
d.2) Other companies due beyond 1 year 57,785 51,865
Other securities 17,945 7,304
Treasury shares 151,093 11,952
Total financial assets 363,583 183,212
Total fixed assets 2,502,793 2,318,001
C) Current assets
I) Inventories
Raw materials, auxiliaries and consumables 192,893 161,613
Work in process and semifinished products 163,843 142,494
Work in progress against orders 243,580 36,087
Finished products and goods for resale 499,955 365,350
Advances 7,078 7,725
Total inventories 1,107,349 713,269
II) Receivables
Trade 1,279,457 1,367,892
Subsidiaries 5,694 –
Associated companies 47,913 11,407
Parent companies 271,091 58,607
Other receivables 700,934 705,581
Total receivables 2,305,089 2,143,487
III) Current financial assets
Other securities 300,411 421,038
Total current financial assets 300,411 421,038
i
81

Assets (continued)
(in thousands of euro)
12.31.1998 12.31.1997
IV) Cash and banks
Bank and postal deposits 500,146 422,109
Checks 6,056 839
Cash on hand 7,024 4,193
Total cash and banks 513,226 427,141
Total current assets 4,226,075 3,704,935
D) Accrued income and prepaid expenses
Accrued income 158,123 27,969
Prepaid expenses 21,381 20,081
Total accrued income and prepaid expenses 179,504 48,050
Total assets 6,908,392 6,071,007
82
i

Liabilities and shareholders’ equity
(in thousands of euro)
12.31.1998 12.31.1997
A) Shareholders’ equity
– of Pirelli S.p.A. 2,283,097 2,089,314
I) Share capital 1,024,198 902,874
II) Share premium reserve 461,726 431,372
III) Revaluation reserves 2,855 2,855
IV) Legal reserve 180,575 160,834
V) Reserve for treasury shares in portfolio 151,093 11,952
VI) Statutory reserves – –
VII) Other reserves:
a) Consolidation reserve 142,325 245,882
b) Sundry reserves 43,003 43,003
VIII) Retained earnings 28,635 52,923
IX) Net income for the year 248,687 237,619
– Minority interest 170,183 193,790
a) Capital and reserves 142,935 167,140
b) Net income for the year 27,248 26,650
Total shareholders’ equity 2,453,280 2,283,104
B) Provisions for liabilities and expenses
Pensions and similar obligations 252,729 210,868
Income taxes 139,447 150,838
Other 170,607 140,391
Total provisions for liabilities and expenses 562,783 502,097
C) Provision for employees’ leaving indemnity 159,098 172,318
D) Payables
Bonds 500,020 1,137
Convertible bonds – 262,055
Bank borrowings 910,229 876,384
Other financial companies 137,274 101,718
Advances from customers 366,091 308,916
Trade 923,611 795,678
Associated companies 12,363 11,402
Parent companies 29,686 32,963
Taxes 230,996 232,928
Social security 46,118 51,728
Other payables 249,138 233,771
Total payables 3,405,526 2,908,680
E) Accrued liabilities and deferred income
Accrued liabilities 313,571 191,102
Deferred income 14,134 13,706
Total accrued liabilities and deferred income 327,705 204,808
Total liabilities and shareholders’ equity 6,908,392 6,071,007
i
83

Memorandum accounts
(in thousands of euro)
12.31.1998 12.31.1997
Personal guarantees
– Guarantees on behalf of other companies 1,158 12,089
1,158 12,089
Third party assets held in deposit
– Securities held in deposit 444,621 428,382
– Goods in process 1,385 765
446,006 429,147
Assets held by third parties
– Securities held as guarantees and sureties 12,745 13,316
– Securities held in deposit 915,931 981,478
– Goods in process 3,774 5,486
932,450 1,000,280
Commitments
– Capital expenditures 16,276 41,166
– Lease obligations – 322
– Other commitments – 65
16,276 41,553
Other memorandum accounts
– Potential losses for risk of default on discounted bills 1,778 15,731
1,778 15,731
1,397,668 1,498,800
84
i

Consolidated statements of income (in thousands of euro)
(in thousands of euro)
1998) 1997)
A) Production value
Revenues from sales and services 5,486,582) 5,818,004)
Changes in inventories of work in process, semifinished and finished products 100,543) (15,000)
Changes in work in progress against orders 103,377) (11,432)
Increase in property, plant and equipment 10,259) 12,074)
Other revenues and income:
a) Miscellaneous 116,738) 78,995)
b) Government grants 4,213) 5,741)
Total production value 5,821,712) 5,888,382)
B) Production costs
Raw materials, auxiliaries, consumables and goods for resale (2,591,325) (2,646,924)
Service expenses (989,370) (960,682)
Lease and rent expenses (57,968) (56,070)
Personnel costs (1,335,077) (1,318,700)
Amortization, depreciation and write-downs:
a) Amortization of intangible assets (24,465) (26,093)
b) Depreciation of property, plant and equipment (284,459) (268,253)
c) Other write-downs of fixed assets (113) (560)
d) Write-downs of receivables included in current assets and cash and banks (12,866) (9,523)
Changes in inventories of raw materials, auxiliaries, consumables and goods for resale 38,938) (21,206)
Other accruals (12,307) (8,839)
Other operating expenses (140,345) (179,251)
Total production costs (5,409,357) (5,496,101)
Difference between production value and production costs 412,355) 392,281)
C) Financial income and expenses
Investment income 7,864) 8,696)
Other financial income:
a) from receivables included in fixed assets 636) 50)
b) from securities included in fixed assets 3,584) 5,496)
c) from securities included in current assets 45,874) 44,529)
d) Income other than the above 220,999) 163,670)
Interest and other financial expenses (273,511) (225,681)
Total financial income and expenses 5,446) (3,240)
D) Valuation adjustments to financial assets
Revaluations 790) 792)
Write-downs (6,470) (6,723)
Total adjustments (5,680) (5,931)
E) Extraordinary items
Extraordinary income 52,709) 31,262)
Extraordinary expenses (60,482) (60,633)
Total extraordinary items (7,773) (29,371)
Income before income taxes 404,348) 353,739)
Income taxes (128,413) (89,470)
Net income for the year 275,935) 264,269)
Group 248,687) 237,619)
Minority interest 27,248) 26,650)
i
85

List of investments
Companies consolidated using the full consolidation method
Percentage
Company Activity Headquarters Share Capital ownership Held by
Subsidiaries
Europe
Austria
Pirelli Gesellschaft mbH Tyres Vienna AS/000 10,000 100.00% Lunares S.A.
Belgium
Pirelli Tyres Belux S.A.
(formerly Pirelli Tyres Benelux S.A.) Tyres Brussels B.F./000 28,000 100.00% Lunares S.A.
France
Cables Pirelli S.A. Cables and Systems Saint Maurice FF/000 900,000 100.00% Pirelli Cable Holding N.V.
Eurelectric S.A. Cables and Systems La Bresse FF/000 26,325 100.00% Cables Pirelli S.A.
Pneus Pirelli S.A. Tyres Puteaux FF/000 20,064 100.00% Lunares S.A.
Germany
Bergmann Kabel und Leitungen GmbH Cables and Systems Schwerin DM/000 2,000 100.00% Pirelli Kabel und Systeme Holding GmbH
Deutsche Pirelli Reifen Holding GmbH Financial Breuberg/Odenwald DM/000 15,050 100.00% Pirelli Tyre Holding N.V.
ISO Ind. Spedition Odenwald GmbH Tyres Breuberg/Odenwald DM/000 50 100.00% Pirelli Reifenwerke GmbH & Co. K.G.
Materialverwertungsgesellschaft
Breuberg GmbH Tyres Breuberg/Odenwald DM/000 50 100.00% Deutsche Pirelli Reifen Hold. GmbH
Metzeler Reifen GmbH Tyres Breuberg/Odenwald DM/000 32,000 100.00% Pirelli Deutschland A.G.
Pirelli Deutschland A.G. Tyres Breuberg/Odenwald DM/000 51,000 98.94% Deutsche Pirelli Reifen Hold. GmbH
Pirelli Elektrik GmbH Cables and Systems Breuberg/Odenwald DM/000 200 100.00% Pirelli Cable Holding N.V.
Pirelli Kabel und Systeme Holding GmbH
(formerly Elvira 98
Vermögensverwaltungs GmbH) Cables and Systems Berlin DM/000 50 99.00% Pirelli Cable Holding N.V.
1.00% Pirelli Cavi e Sistemi S.p.A.
Pirelli Kabel Grundstücksverwaltungs GmbH
(formerly Betty 98
Vermögensverwaltungs GmbH) Cables and Systems Berlin DM/000 50 100.00% Pirelli Kabel und Systeme Holding GmbH
Pirelli Kabel und Systeme Beteiligungs GmbH
(formerly Daisy
Vermögensverwaltungs GmbH) Cables and Systems Berlin DM/000 50 100.00% Pirelli Kabel und Systeme Holding GmbH
Pirelli Quante GmbH Cables and Systems Wuppertal DM/000 6,050 70.00% Pirelli Cable Holding N.V.
Pirelli Reifenwerke GmbH & Co. K.G. Tyres Breuberg/Odenwald DM/000 70,000 100.00% Pirelli Deutschland A.G.
Pirelli Reifenwerke Geschaeftsfuehrungs GmbH Services Breuberg/Odenwald DM/000 50 100.00% Pirelli Deutschland A.G.
Pneumobil GmbH Tyres Breuberg/Odenwald DM/000 507 99.62% Pirelli Reifenwerke GmbH & Co. K.G.
Pirelli Kabel und Systeme GmbH & Co. KG
(formerly Siemens Starkstromkable
GmbH & Co. KG) Cables and Systems Berlin DM/000 10,000 100.00% Pirelli Kabel und Systeme Beteiligungs GmbH
Pirelli Kabel und Systeme Verwaltungs GmbH
(formerly Siemens Starkstromkable
Verwaltungsgesellschaft mbh) Cables and Systems Berlin DM/000 50 100.00% Pirelli Kabel und Systeme Beteiligungs GmbH
Veith Wohnungsbau GmbH Real Estate Breuberg/Odenwald DM/000 250 100.00% Pirelli Deutschland A.G.
Greece
Antem Representations & Trading Co.
Ltd in liquidation Tyres Athens Drs./000 1,000 95.00% Pirelli Hellas S.A.
Diafimisis Roda Ltd (in liquidation) Advertising Athens Drs./000 3,000 99.33% Elastika Pirelli S.A.
0.33% Antem Repr.&Trading Co Ltd
Elastika Pirelli S.A. Tyres Athens Drs./000 557,000 99.90% Lunares S.A.
0.10% Pirelli Pneumatici Holding S.p.A.
Pirelli Hellas S.A. in liquidation Tyres Athens US$/000 22,050 79.86% Pirelli Tyre Holding N.V.
Hungary
Pirelli Construction Hungary Limited Cables and Systems Budapest HF/000 1,000 100.00% Pirelli Cable Holding N.V.
Pirelli Hungary Tyre Trading
and Services Limited Tyres Budaors HF/000 1,000 100.00% Lunares S.A.
86
i

Percentage
Company Activity Headquarters Share Capital ownership Held by
Italy
Centro Servizi Amministrativi Pirelli S.r.l. Services Milan Lire/mill. 100 100.00% Pirelli S.p.A.
Cerrini Gomme S.r.l. Tyres Genoa Lire/mill. 536 70.00% Sistema Puntogomme S.p.A.
Fibre Ottiche Sud - F.O.S. S.p.A. Optical fibers Battipaglia (SA) Lire/mill. 10,000 50.00% Pirelli Cavi e Sistemi S.p.A.
Fintheta S.p.A. Real estate Milan Lire/mill. 500 100.00% Steelcord S.p.A.
Kallithea Immobiliare S.r.l. Real estate Milan Lire/mill. 20 100.00% Pirelli S.p.A.
Istituto Piero Pirelli S.p.A. Training Milan Lire/mill. 400 80.00% Pirelli S.p.A.
10.00% Pirelli Pneumatici Holding S.p.A.
10.00% Pirelli Cavi e Sistemi S.p.A.
Italagom S.r.l. Tyres Varese Lire/mill. 100 98.00% Agom S.A. Bioggio
Neri Gomme & C. S.r.l. (in liquidation) Tyres Milan Lire/mill. 20 100.00% Sistema Puntogomme S.p.A.
Operazione Zara S.r.l. Real estate Milan Lire/mill. 20 100.00% Pirelli S.p.A.
Pirelli Cavi e Sistemi S.p.A. Cables and Systems holding comp. Milan Lire/mill. 351,335 98.75% Pirelli S.p.A.
1.25% Pirelli Société Générale S.A.
Pirelli Informatica S.p.A. Inform. systems Milan Lire/mill. 1,000 100.00% Pirelli S.p.A.
Pirelli Metzeler Motovelo S.r.l. Tyres Milan Lire/mill. 9,000 100.00% Metzeler Reifen GmbH
Pirelli Nastri Tecnici S.p.A. Sundry Milan Lire/mill. 754 100.00% Pirelli S.p.A.
Pirelli Pneumatici Holding S.p.A.
(formerly Pirelli Pneumatici Holding
Italia S.r.l.) Financial Milan Lire/mill. 115,000 100.00% Pirelli Tyre Holding N.V.
Pirelli Pneumatici S.p.A. (formerly
Pirelli Coordinamento Pneumatici S.p.A.) Tyres Milan Lire/mill. 366,000 100.00% Pirelli Pneumatici Holding S.p.A.
Pirelli Servizi Finanziari S.p.A. Financial Milan Lire/mill. 3,800 100.00% Pirelli S.p.A.
P S F S.r.l. (in liquidation) Cables and Systems Milan Lire/mill. 198 51.00% Pirelli Cavi e Sistemi S.p.A.
Polo Viaggi S.r.l. Travel Agency Milan Lire/mill. 90 100.00% Pirelli S.p.A.
Servizi Aziendali Pirelli S.C.p.A. Services Milan Lire/mill. 200 93.00% Pirelli S.p.A.
1.00% Pirelli Cavi e Sistemi S.p.A.
1.00% Pirelli Pneumatici S.p.A.
1.00% Polo Viaggi S.r.l.
1.00% Pirelli Pneumatici Holding S.p.A.
Soc. Italiana Cavi Elettrici - Sice S.p.A.
(in liquidation) Cables and Systems Milan Lire/mill. 10,000 100.00% Pirelli Cavi e Sistemi S.p.A.
Sistema Puntogomme S.p.A. Tyres Milan Lire/mill. 6,000 100.00% Pirelli Pneumatici Holding S.p.A.
Steelcord S.p.A. Financial Milan Lire/mill. 1,000 100.00% Pirelli S.p.A.
Tortona Test Area S.p.A. (in liquidation) Tyres Milan Lire/mill. 1,000 100.00% Pirelli Pneumatici S.p.A.
Trefin S.r.l. Financial Milan Lire/mill. 8,159 100.00% Pirelli S.p.A.
Luxembourg
Gamirco S.A. Financial Luxembourg SF/000 2,100 99.99% Pirelli Société Générale S.A.
Pirelli Finance (Luxembourg) S.A.
(formerly Pirelli & C. International
(Luxembourg) S.A.) Financial Luxembourg Lire/mill. 460,000 100.00% Pirelli S.p.A.
The Netherlands
Pirelli Cable Holding N.V. Cables and Systems holding comp. Breukelen Nlg/000 405,490 100.00% Pirelli Cavi e Sistemi S.p.A.
Pirelli Finance (Holding) N.V. Financial Breukelen Nlg/000 53,966 100.00% Pirelli S.p.A.
Pirelli Tyre Holding N.V. Tyre holding comp. Amsterdam Nlg/000 1,240,880 99.81% Pirelli S.p.A.
Pirelli Tyres Nederland B.V. (formerly
Pirelli UK International Finance B.V.) Tyres Breukelen Nlg/000 40 100.00% Lunares S.A.
Sipir Finance N.V. Financial Rotterdam Nlg/000 139,500 100.00% Pirelli Tyre Holding N.V.
Poland
Pirelli Polska Sp.zo.o. Tyres Warsaw Zloty 6,257,708,500 100.00% Lunares S.A.
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87

Percentage
Company Activity Headquarters Share Capital ownership Held by
Portugal
Desco Fabrica Portuguesa de Material
Electrico e Electronico S.A. Cables and Systems Arcozelo Vngaia Escudos/000 309,000 70.91% Cables Pirelli S.A.
29.09% Eurelectric S.A.
Spain
Pirelli Cables y Systemas S.A.
(formerly Cables Pirelli S.A.) Cables and Systems Barcelona Ptas./000 5,700,000 100.00% Pirelli Cable Holding N.V.
Omnia Motor S.A. Tyres Barcelona Ptas./000 250,000 100.00% Pirelli Neumaticos S.A.
Pirelli Neumaticos S.A. Tyres Barcelona Ptas./000 7,500,000 100.00% Pirelli Tyre Holding N.V.
Pirelli Esmar S.A. Cables and Systems Torredembarra Ptas./000 1,450,000 100.00% Pirelli Cables y Sistemas S.A.
Sweden
Pirelli Scandinavia AB Tyres Stockholm SK/000 950 100.00% Lunares S.A.
Switzerland
Agom S.A. Tyres Conthey SF/000 50 51.00% Lunares S.A.
Agom S.A. Bioggio Tyres Bioggio SF/000 250 51.00% Lunares S.A.
Agom S.A. Locarno Tyres Locarno SF/000 50 51.00% Lunares S.A.
Agom S.A. Lugano Tyres Lugano SF/000 102 51.00% Lunares S.A.
Biasi S.A. Tyres Lugano SF/000 250 51.00% Lunares S.A.
Lunares S.A. Tyre holding comp. Basel SF/000 10,000 100.00% Pirelli Tyre Holding N.V.
Pirelli Cables and Systems S.A. Cables and Systems Basel SF/000 500 95.00% Pirelli Cable Holding N.V.
5.00% Pirelli Société Générale S.A.
Pirelli Produkte A.G. Cables and Systems Basel SF/000 9,500 100.00% Pirelli Cable Holding N.V.
Pirelli Société de Services S.a.r.l. Financial Basel SF/000 50 100.00% Pirelli Société Générale S.A.
Pirelli Société Générale S.A. Financial Basel SF/000 140,000 100.00% Pirelli S.p.A.
Pirelli Tyre (Europe) S.A. Tyres Basel SF/000 1,000 100.00% Lunares S.A.
RTS Ring Tread System (Suisse) S.A. Tyres Bioggio SF/000 50 51.00% Lunares S.A.
Turkey
Celikord A.S. Tyres Istanbul TL/mil. 2,100,000 50.47% Pirelli Tyre Holding N.V.
0.27% Pirelli Pneumatici Holding S.p.A.
0.27% Pirelli Deutschland A.G.
Turk-Pirelli Lastikleri A.S. Tyres Istanbul TL/mil. 9,300,000 61.58% Pirelli Tyre Holding N.V.
0.08% Pirelli Deutschland A.G.
0.08% Pirelli UK Tyres Ltd
0.08% Pirelli Pneumatici S.p.A.
0.08% Lunares S.A.
0.08% Pirelli Pneumatici Holding S.p.A.
0.08% Metzeler Reifen GmbH
0.08% Pirelli Reifenwerke GmbH & Co. K.G.
0.08% Pirelli Neumaticos S.A.
United Kingdom
Aberdare Cables Ltd Cables and Systems London £/000 610 100.00% Pirelli General plc
CTC 1994 Limited Tyres London £ 984 100.00% Central Tyre Ltd
Central Tyre Ltd Tyres London £/000 100 100.00% Pirelli UK Tyres Ltd
Courier Tyre Company Ltd Tyres London £/000 10 100.00% Pirelli UK Tyres Ltd
CPK Auto Products Ltd Tyres London £/000 10 100.00% Pirelli UK Tyres Ltd
P&AJ Limited (formetly E.W. Avent Ltd)
in liquidation Cables and Systems London £/000 6,250 100.00% Pirelli General plc
Focom Systems International Ltd Cables and Systems London £/000 10 100.00% Pirelli General plc
Pirelli Cables Ltd Cables and Systems London £/000 100 100.00% Pirelli General plc
Pirelli Construction Company Ltd Cables and Systems London £/000 8,000 100.00% Pirelli General plc
Pirelli Focom Ltd Cables and Systems London £/000 6,447 100.00% Pirelli General plc
Pirelli Focom Networks Ltd Cables and Systems London £ 2 100.00% Pirelli General plc
88
i

Percentage
Company Activity Headquarters Share Capital ownership Held by
Pirelli General plc Cables and Systems London £/000 102,100 100.00% Pirelli UK plc “B”
Pirelli Tyres Ltd Tyres London £/000 16,000 100.00% Pirelli UK Tyres Ltd
Pirelli UK Employee Share Trustee Limited Financial London £ 2 100.00% Pirelli UK plc “C”
Pirelli UK Finance Ltd Financial London £/000 6,969 100.00% Pirelli UK plc “C”
Pirelli UK plc “A” Tyre holding comp. London £/000 57,354 100.00% Pirelli Tyre Holding N.V.
Pirelli UK plc “B” Cables and Systems holding comp. London £/000 54,299 100.00% Pirelli Cable Holding N.V.
Pirelli UK plc “C” Finance holding comp. London £/000 11,626 100.00% Pirelli S.p.A.
Pirelli UK Tyres Ltd Tyres London £/000 56,819 100.00% Pirelli UK plc “A”
North America
Canada
Pirelli Cables and Systems Inc.
(formerly Pirelli Canada Inc.) Cables and Systems St Jean sur Richelieu Can$/000 2,800 100.00% Pirelli Cable Holding N.V.
Pirelli Tire Inc. Tyres Ottawa Can$/000 6,000 100.00% Lunares S.A.
U.S.A.
Metzeler Motorcycle Tire
North America Corp. Tyres Seattle (Washington) US$/000 150 100.00% Metzeler Reifen GmbH
Pirelli Cables and Systems LLC Cables and Systems Wilmington (Delaware) US$ 1 100.00% Pirelli North America Inc. “B”
Pirelli Construction Services Inc. Cables and Systems Dover (Delaware) US$/000 1 100.00% Pirelli Cables and Systems LLC
Pirelli Jacobson Inc. Cables and Systems Dover (Delaware) US$/000 2 100.00% Pirelli Cables and Systems LLC
Pirelli Newco, Inc. Cables and Systems Wilmington (Delaware) US$ 0.1 100.00% Pirelli Cable Holding N.V.
Pirelli North America Inc. “A” Tyres Wilmington (Delaware) US$ 3 100.00% Pirelli Tyre Holding N.V.
Pirelli North America Inc. “B” Cables and Systems Wilmington (Delaware) US$ 7 100.00% Pirelli Cavi e Sistemi S.p.A.
Pirelli Tire LLC Tyres Wilmington (Delaware) US$ 1 100.00% Pirelli North America Inc. “A”
Central/South America
Argentina
Fipla S.A. Cables and Systems Buenos Aires Peso 1 66.97% Pirelli Cons. Cond. Inst. SAIC
Pirelli Consultora Conductores
e Instalaciones S.A.I.C. Cables and Systems Buenos Aires Peso 2,227 100.00% Pirelli Cable Holding N.V.
Pirelli Argentina de Mandatos S.A. Services Buenos Aires Peso/000 500 100.00% Pirelli Société Générale S.A.
Pirelli Cables S.A.I.C. Cables and Systems Buenos Aires Peso/000 46,588 69.45% Pirelli Cons. Cond. Inst. SAIC
23.59% Pirelli Cable Holding N.V.
4.46% Pirelli Cables S.A.I.C.
1.85% Pirelli Financ. Services Co NV
Pirelli Neumaticos S.A.I.C. Tyres Buenos Aires Peso/000 19,017 99.02% Pirelli Tyre Holding N.V.
0.98% Pirelli Pneum. Hold. S.p.A.
Tel 3 S.A. Cables and Systems Buenos Aires Peso/000 11,075 51.00% Pirelli Cables S.A.I.C.
Brazil
Muriae’ Ltda Financial Santo Andrè Real 52,000 100.00% Pirelli Pneus S/A
Pirelli Pneus Nordeste Ltda
(formerly Brasildocks Ltda) Tyres Feira de Santana Real 4,784,343 100.00% Pirelli Pneus S/A
Pirelli Produtos Especiais Ltda Cables and Systems Cerquilho Real 42,020,506 100.00% Pirelli Cabos S/A
Pirelli S.A. Financial Santo Andrè Real 29,545,309 100.00% Pirelli S.p.A.
Pirelli Componentes Industriais Ltda Tyres Sao Paulo Real 99,927,547 100.00% Pirelli Pneus S/A
Pirelli Pneus S/A Tyres Santo Andrè Real 264,618,982 42.45% Pirelli Pneumatici S.p.A.
41.32% Pirelli Tyre Holding N.V.
3.00% Pirelli S.A.
Pirelli Cabos S/A Cables and Systems Santo Andrè Real 153,367,981 73.81% Pirelli Cavi e Sistemi S.p.A.
11.11% Pirelli S.A.
Pneuac Comercial e Importadora Ltda Tyres Sao Paulo Real 13,929,454 100.00% Pirelli Pneus S/A
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Percentage
Company Activity Headquarters Share Capital ownership Held by
Same da Amazonia S/A Cables and Systems Manaus Real 45,558,000 99.99% Pirelli Cabos S/A
0.01% Pneuac Com. e Import. Ltda
Solac - Sociedade Laminadora
de Cobre Ltda Cables and Systems Jacarei Real 8,346,000 89.00% Pirelli Cabos S/A
Chile
Pirelli E y T S.A. Cables and Systems Santiago Ch.Peso/000 600,000 60.00% Pirelli Instalaciones Chile S.A.
Pirelli Instalaciones Chile S.A. Cables and Systems Santiago Ch.Peso/000 918,707 90.00% Pirelli Cons. Cond. Inst. SAIC
10.00% Cite S.A.
Pirelli Neumaticos Chile Limitada Tyres Santiago US.$/000 20 95.00% Pirelli Pneus S/A
5.00% Pneuac Com. e Import. Ltda
Dutch Antilles
Pirelli Financial Services
Company N.V. Financial Curaçao US$/000 11,000 100.00% Pirelli Société Générale S.A.
Pirelli Insurance & Reinsurance
Company N.V. Insurance Curaçao US$/000 10,000 100.00% Pirelli Financ. Services Co NV
Mexico
Pirelmex S.A. de C.V. Tyres Mexico City Mex. Peso 425,000 98.00% Pirelli Pneus S.A.
2.00% Pneuac Comercial e Importadora Ltda
Uruguay
Cite S.A. Cables and Systems Montevideo Ur. Peso/000 4,900 100.00% Pirelli Cables S.A.I.C.
Venezuela
Neumaticos de Venezuela C.A. Tyres Caracas Bol. 4,650,980 96.21% Pirelli Tyre Holding N.V.
Pirelli de Venezuela C.A. Tyres Valencia Bol./000 9,429,570 96.22% Pirelli Tyre Holding N.V.
Africa
Ivory Coast
SICABLE - Société Ivoirienne
de Cables S.A. Cables and Systems Abidjan Fr.CFA/mil. 740 51.00% Cables Pirelli S.A.
Oceania
Australia
Pirelli Cables Australia Ltd Cables and Systems Minto - N.S.W. Austr.$/000 21,500 51.00% Pirelli Cavi e Sistemi S.p.A.
Pirelli Tyres Australia Pty Ltd Tyres Pymble - N.S.W. Austr.$/000 150 100.00% Lunares S.A.
New Zealand
Pirelli Cables NZ Ltd Cables and Systems Auckland nz$/000 10 100.00% Pirelli Cables Australia Ltd
Pirelli Tyres (NZ) Ltd Tyres Wellington nz$ 100 100.00% Pirelli Tyres Australia Pty Ltd
Asia
India
Pirelli Cables (India) Private Limited Cables and Systems New Delhi Ind. Rupie1,954,940 99.99% Pirelli Cable Holding N.V.
0.01% Pirelli Cavi e Sistemi S.p.A.
Indonesia
PT Pirelli Cables Indonesia Cables and Systems Jakarta US$/000 35,000 50.00% Pirelli Cable Holding N.V.
Japan
P & A Y.K. (formerly Saoki International Y.K.) Tyres Tokyo Yen/000 6,000 50.00% Pirelli Tyre Holding N.V.
Pirelli K.K. Tyres Tokyo Yen/000 40,000 100.00% Lunares S.A.
Malaysia
Submarine Cable Installation Sdn Bhd Cables and Systems Kuala Lumpur Ringgit/000 10 99.00% Pirelli Cavi e Sistemi S.p.A.
1.00% Pirelli Cable Systems Pte Ltd
Singapore
Materials Purchasing Pte Ltd Tyres Singapore Sing. $/000 250 100.00% Pirelli Tyre Holding N.V.
Pirelli Asia Pte Ltd Tyres Singapore Sing. $ 2 100.00% Lunares S.A.
Pirelli Cable Systems Pte Ltd Cables and Systems Singapore Sing. $/000 25 50.00% Pirelli General plc
50.00% Pirelli Cable Holding N.V.
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Investments accounted for using the equity method
Percentage
Company Activity Headquarters Share Capital ownership Held by
Associated companies
Europe
Germany
Drahtcord Saar Geschäftsführungs GmbH Tyres Merzig DM/000 60 50.00% Pirelli Deutschland A.G.
Drahtcord Saar GmbH & Co. K.G. Tyres Merzig DM/000 9,000 50.00% Pirelli Deutschland A.G.
Kabeltrommel Gesellschaft mbH & Co. K.G. Cables and Systems Cologne DM/000 20,000 27.48% Pirelli Kabel und Systeme GmbH & Co. KG
Italy
Axxium Italia S.r.l. (formerly CEN.SER. S.r.l.) Tyres Acqui Terme (AL) Lire/mill. 90 49.00% Sistema Puntogomme S.p.A.
Bologna Gomme S.r.l. Tyres Bologna Lire/mill. 510 40.00% Sistema Puntogomme S.p.A.
Eurofly Service S.p.A. Services Caselle Torinese (TO) Lire/mill. 1,750 43.17% Pirelli S.p.A.
Incubatore Tecnologico Bicocca S.r.l.
(in liquidation) Services Milan Lire/mill. 100 40.00% Pirelli S.p.A.
Maristel S.p.A. Cables and Systems Milan Lire/mill. 2,000 50.00% Pirelli Cavi e Sistemi S.p.A.
Servizio Titoli S.r.l. Services Turin Lire/mill. 100 25.00% Pirelli S.p.A.
SMP Melfi S.r.l. Tyres Melito (NA) Lire/mill. 6,800 50.00% Pirelli Pneumatici Holding S.p.A.
Sicrem S.p.A. Tyres Pizzighettone (CR) Lire/mill. 18,000 33.33% Pirelli Pneumatici Holding S.p.A.
Trelleborg Wheel System S.p.A. Tyres Milan Lire/mill. 2,000 40.00% Pirelli Pneumatici S.p.A.
Spain
Optiwire S.L. Cables and Systems Barcelona Ptas./mil. 1 50.00% Pirelli Cables y Sistemas S.A.
United Kingdom
Rodco Ltd Cables and Systems Gravesend £/000 5,000 40.00% Pirelli General plc
Central/South America
Argentina
Lineas de Transmision de Buenos Aires S.A. Cables and Systems Buenos Aires Peso/000 12 20.00% Pirelli Argentina de Mandatos S.A.
Brazil
K.M.P. Cabos Especiais e Sistemas Ltda Cables and Systems Sao Paulo Real 6,600,916 40.00% Pirelli Cabos S.A.
Milano Centrale Mercosul Ltda Real estate Barueri Real 2,000,000 30.00% Pirelli S.A.
British Virgin Islands
Upper Bright Ltd Cables and Systems Tortola US$/000 17,100 50.00% Pirelli Produkte A.G.
Asia
China
Wuxi Tong Ling Cable Company Ltd Cables and Systems Xuelang Town US$/000 25,141 68.02% Upper Bright Ltd
Saudi Arabia
Sicew-Saudi Italian Co.
for Electrical Works Ltd Cables and Systems Jeddah Saudi Rials/000 1,000 34.00% Pirelli Cable Holding N.V.
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Other investments in subsidiaries and associated companies
Percentage
Company Activity Headquarters Share Capital ownership Held by
Europe
Austria
Pirelli Kabelwerke und Systeme Gmbh Cables and Systems Traiskirchen AS/000 500 100.00% Pirelli Cavi e Sistemi S.p.A.
France
LDS France - Soc. de Transport
et Distribution S.A. Distribution La Courneuve FF 657,500 100.00% Steelcord S.p.A.
Pirelli Exploitation S.A. Cables and Systems Saint Maurice FF/000 250 99.76% Cables Pirelli S.A.
S.T.L. France S.a.r.l. Diversified Prod. Saint Maurice FF 56,600 70.67% Eurelectric S.A.
29.33% Cables Pirelli S.A.
Hungary
“Kabel” Gepgyarto Epitoipari
Es Szolgaltato KFT. Cables and Systems Budapest HF/000 328,330 100.00% MKM Magyar Kabel Muvek Rt.
MKM Balassagyarmati Kabelgyar KFT. Cables and Systems Balassagyarmat HF/000 3,000 100.00% MKM Magyar Kabel Muvek Rt.
MKM Erosaramu Kabelgyar KFT. Cables and Systems Budapest HF/000 3,000 100.00% MKM Magyar Kabel Muvek Rt.
MKM Kisteleki Kabelgyar KFT. Cables and Systems Kistelek HF/000 3,000 100.00% MKM Magyar Kabel Muvek Rt.
MKM Magyar Kabel Muvek RT. Cables and Systems Budapest HF/000 7,407,920 80.51% Pirelli Cable Holding N.V.
MKM Szegedi Kabelgyar KFT. Cables and Systems Szeged HF/000 3,000 100.00% MKM Magyar Kabel Muvek Rt.
MKM-Eldra Zomanchuzal Gyarto KFT. Cables and Systems Budapest HF/000 1,534,800 43.40% MKM Magyar Kabel Muvek Rt.
Ipoly Kabeldob KFT. Cables and Systems Szecseny HF/000 36,330 25.16% MKM Magyar Kabel Muvek Rt.
Kabel Keszletertekesito BT. Cables and Systems Budapest HF/000 1,239,841 100.00% MKM Magyar Kabel Muvek Rt.
Rumania
S.C. Elcaro S.A. Cables and Systems Slatina RL/000 42,221,625 53.61% Turk Siemens Kablo ve Elektrik Sanayii A.S.
Turkey
Turk Siemens Kablo
ve Elektrik Sanayii A.S. Cables and Systems Bursa TL/mil. 1,260,000 55.88% Pirelli Cable Holding N.V.
Africa
South Africa
AFCAB Holdings (Proprietary) Ltd Cables and Systems Sandton Rands 4,000 50.00% Pirelli Cable Holding N.V.
African Cables Ltd Cables and Systems Vereeniging Rands 9,886,098 100.00% AFCAB Holdings (Proprietary) Ltd
ATC (Proprietary) Ltd Cables and Systems Brits Rands 632,912 21.00% African Cables Ltd
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Board of Statutory Auditors’ Report
The Board of Directors has presented us with the draft financial statements of the Group
holding company, Pirelli S.p.A., together with the consolidated financial statements of the
Group at December 31, 1998, prepared in accordance with the provisions of Legislative
Decree No. 127 of April 9, 1991.
The consolidated financial statements show a net income for the year of Lire 534,285
million compared to a net income of Lire 511,696 million for the prior year.
The Board of Directors in its report has commented on the consolidated operations of the
Group and has disclosed, by summarizing the global profit components, the performance
of the Group for the year.
The report also discloses the activities and results of the major Group companies included
in consolidation, R&D activities, significant subsequent events as well as the future
outlook on operations.
The consolidated financial statements have been audited by Reconta Ernst & Young S.p.A..
Based on the procedures carried out, as agreed with the audit firm in accordance with the
provisions of D.P.R. No. 136/1975, as far as our responsibilities are concerned, we would
like to state the following:
– the determination of the companies to be included in consolidation is in compliance
with articles 26 and 28 of Legislative Decree No. 127/1991;
– the investments in subsidiary companies have been consolidated on the line-by-line
consolidation method and the related assets and liabilities have been eliminated against
the underlying net equities, with the exception of the companies of the business
acquired from Siemens that are located in Hungary, Turkey, Rumania and South Africa
which are included in the consolidated financial statements at cost since effective
control was only acquired during the last days of 1998;
– receivables and payables and economic transactions between Group companies have
been eliminated;
– all the financial statements and information used in consolidation refer to the calendar
year 1998;
– the principles adopted in the valuation of the various components of the consolidated
financial statements have been disclosed in the notes, with which we agree. In
particular:
• investments in associated companies are stated using the equity method;
• investments in other companies are stated at cost, reduced by any permanent
diminution in value;
• intangible assets are stated at cost less amortization; amortization is generally
calculated at 20 percent per year, whereas image awareness costs, leasehold
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improvements and loan acquisition costs are amortized over the duration of the
related contract (in any case, not more than 5 years) and patents, concessions,
licenses, trademarks and goodwill are amortized over the residual period to be
benefited (in any case, not more than 10 years);
• deferred taxes have been accounted for by adopting the full allocation method
according to international accounting principles.
The change in accounting principle resulted in a tax charge for the current year of
approximately Lire 13 billion, whereas no adjustment was made to the provision for
the deferred taxation for the deferred taxes of previous years since effect was given in
the financial statements at December 31, 1997;
• exchange differences deriving from the translation into euro of the monetary elements
expressed in the currencies of the countries participating in the euro have been
recorded in the statement of income;
• the amounts shown under the various captions of the consolidated financial
statements are taken from the accounting records of the Group holding company and
from the information transmitted by the investee companies, as verified by the audit
firm of Reconta Ernst and Young S.p.A., which coordinated the audit work and the
aggregation of the audit reports.
Milan, April 26, 1999
The Board of Statutory Auditors
Luigi Guatri - Mario Brughera - Giorgio Oggioni
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Independent Auditors’ Report
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Extraordinary part of the shareholders’ meeting
Dear shareholders,
You have been convened to the extraordinary part of the shareholders’ meeting to
discuss three proposed resolutions: the first relating to the merger of Société
Internationale Pirelli S.p.A. in our company, the second relating to the procedures for the
disposition of treasury shares and the third relating to the translation of share capital
from Italian lire to euro.
1. Merger
1.a - Illustration and reasons for the merger – Operational objectives
The proposed merger of Société Internationale Pirelli S.p.A. in Pirelli S.p.A. is part of
broader plan to simplify the corporate structure of the Group.
This plan is being followed according to guidelines outlined and announced in the press
release of the Company on December 3 of the prior year.
In particular, Pirelli Partecipazioni, a subsidiary of Société Internationale Pirelli and a
shareholder of Pirelli S.p.A., was merged by incorporation in Société Internationale Pirelli
on January 26, 1999 so that the latter would then hold a direct interest in Pirelli S.p.A..
Société Internationale Pirelli S.p.A. has transferred its own registered office to Milan and
was recorded on the Companies’ Register at file No. 247693.
The merger, upon which you are now called to pass a resolution, will be effected through
the merger by incorporation of Société Internationale Pirelli S.p.A. in the subsidiary
Pirelli S.p.A..
Therefore this is a so-called inverse merger between a party listed on the Italian stock
exchange (Pirelli S.p.A., the merging company, the subsidiary) and a subject that has
shares that are not listed on markets regulated by the European Union (Société
Internationale Pirelli S.p.A., the company to be merged, the parent company).
The strategic objective of the plan to simplify the corporate structure, of which the merger
is a part, consists not only of optimizing financial flows but also reducing costs.
The merger, therefore, has a neutral effect on the objectives regarding the industrial
operations of the Group which is headed by Pirelli S.p.A. and constitutes, instead, a pure
simplification of the corporate chain that links Pirelli S.p.A. to the group holding company
Pirelli & C. Accomandita per Azioni.
Since the main business of Société Internationale Pirelli S.p.A. is constituted by the same
merging company Pirelli S.p.A., it would be appropriate to summarize the prospects of the
latter company for the current year.
Pirelli S.p.A. coordinates the management of an industrial Group that has traditionally
been engaged in the cables and systems sector and in the tyres sector.
Generally speaking, the acquisitions made over the last few months (the Power Cables
Divisions of Siemens A.G. and the Australian company Metal Manufacturers Limited)
should begin to contribute to the Group’s results in the second half of the year, thus
lending a balancing effect to the instability caused by the evolution of the crisis in South
America and the recession in the Far East.
As regards the Cables and Systems Sector, in particular, market instability and lower
economic growth below expectations could affect the business. In this context, a
continuation of the decline in prices is also to be expected. The curbing of structure costs,
the reduction of product costs through continual gains in product efficiency, the launch of
new products and the improvement in service will counter the negative factors.
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During 1999, the Company will proceed with the integration of the business bought from
Siemens, with predictable synergic advantages, and the execution of the acquisition of the
Power Cables and Construction Division of Metal Manufacturers Limited in Australia.
As far as the Tyres Sector is concerned, the economic outlook for 1999, although positive,
remains difficult to quantify in view of the complex world economic scenario. The growth
of market demand, in fact, appears inevitably influenced by the persisting crisis in the
emerging nations most affected by the turbulence of the financial markets.
The Sector’s strategy cannot but be directed towards valid programs for internal efficiency,
to be pursued together with a selective investment policy aimed at product and process
innovation and through a decisive restructuring of the operational, corporate and
peripheral functions.
1.b - Value attributed to the companies for the purpose of the exchange – Existence
of appraisals
For purposes of determining the exchange ratio, the companies involved in the merger
were attributed the following values:
Method/Company Earnings Financial
Total value Per unit value Total value Per unit value
(Billions of lire) (Lire) (Billions of lire) (Lire)
Société Internationale
Pirelli S.p.A. 13,896 474,415 13,797 462,383
Pirelli S.p.A. 11,484 115,718 11,219 115,586
The exchange ratio was determined on the basis of the indications contained in the
appraisal report drawn up by two independent experts, Prof. Angelo Miglietta and Prof.
Paolo Vantellini charged by the companies to the merger to conduct the appraisal.
1.c - Exchange ratio and criteria followed in determining it
The choice of the valuation method used to determine the exchange ratio was founded on
these following considerations implied by the specifics of the merger: the need to arrive at
the definition of the theoretical exchange ratio, the particular relationship which binds the
merging company to the company to be merged, the opportunity to obtain share values
that also reflect the “pure” value, the need to verify that the homogeneity of the estimates
is respected, the opportunity to resort to more than one valuation method to estimate the
exchange ratio and verification methods to control the results reached.
The need to arrive at a theoretical exchange ratio can be explained by the specifics
relating to the control structure of the companies involved in the merger. Société
Internationale Pirelli S.p.A. is, in fact, the controlling shareholder of Pirelli S.p.A., and its
capital is to a large degree controlled by the group holding company Pirelli & C. A.p.A..
Pirelli S.p.A. is, however, a company with a large amount of shares traded on the market
(about 51% of ordinary share capital is held by minority interests); therefore this category
of shareholders clearly needs to be protected by determining an exchange ratio that is
both fair and congruous.
The particular relationship which binds the merging company to the company to be
merged is quite important in this case. The latter company, as previously mentioned, holds
the controlling interest in Pirelli S.p.A., the merging company, and this investment
constitutes the predominant amount of its assets. From the standpoint of substance, it
should be pointed out that there is a particularly strong relationship between the value of
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the two companies, given that that of Société Internationale Pirelli S.p.A. is substantially
dependent upon that of Pirelli S.p.A., being its predominant asset.
This means that the value of Société Internationale Pirelli S.p.A. is less susceptible to
factors than is Pirelli S.p.A.; thus, this makes it possible to point out that the variations
in such value (due to different elements, such as the choice of valuation method or the
definition of size to be used) do not lead to any appreciable changes in the exchange
ratio, the congruity of which is almost automatically guaranteed by the roughly
proportional link between the value of Société Internationale Pirelli S.p.A. and that of
Pirelli S.p.A..
It has also been observed that, if possible, methods should be used which allow the
“pure” value of the company to be reflected. Of course, this does not mean that the
principles upon which the estimates are based for determining the exchange ratio should
be disregarded, but simply that these principles should be respected as much as possible
in the methods that are considered suitable for best reflecting the value of the company.
This need can be explained by the fact that the two companies are listed. Although it is
clear that the values of the shares that will be arrived at do not have the purpose of
expressing an opinion as to the congruity of their value but only on that of their
exchange ratio, it is also clear that this measurement should be provided for the factor
of congruity, by primarily using those methods which also reflect the value.
The need to verify the observance of the principle of homogeneity of the estimates is, as
previously stated, a condition not be ignored in ensuring the congruity of the exchange
ratio. In these circumstances, a particular case of the principle of homogeneity applies:
the need to use different methods for the estimates of the two companies because the
vectors generating the value of in the two cases are different. Without yet identifying the
choice of the methods employed, it should be emphasized that while Pirelli S.p.A. has
the characteristics of an industrial holding company diversified into two separate
sectors, in which there is also a component of financial service activities, Société
Internationale Pirelli S.p.A. is practically only an investment holding company, and the
holding in Pirelli S.p.A. is such as to render the percentage held in other investments
only modest. These considerations, which are quite apparent in view of the economic
structure of the two companies, will have important implications in terms of the choice
of valuation method used in the estimates. However, it can be seen that the two methods
need to be different in order to guarantee the homogeneity of the comparison of the
values, a homogeneity that can be interpreted as the capacity of the pre-chosen methods
to reflect the diverse economic rationales which lead to the formation of the value in the
two cases.
The need to resort to more than one valuation method can be explained by the exigency to
arrive at a pure exchange ratio. Since, in our case, it can be demonstrated that even by
adopting different methods the exchange ratio converges into a tight range, it can be
verified that the pre-chosen ratio represents a “general” value which is almost independent
of the method chosen. In these circumstance, the use of different valuation methods can
only be applied to the case of Pirelli S.p.A. since its profitability can be examined from the
various aspects of its vectors of value taken into account by the various methods. In the
case of Société Internationale Pirelli S.p.A. it is not possible to contemplate a fruitful
application of a number of methods since its value is defined almost exclusively by that of
its subsidiary Pirelli S.p.A..
It should also be recalled that Pirelli S.p.A. and Société Internationale Pirelli S.p.A. are
listed companies. Consequently, there is a reference market for their value. This is an
interesting fact to take into account, even though the purpose of the estimate is to
determine the pure exchange ratio, that only occasionally can it coincide with the market
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prices, in carrying out verification checks. However, it should be pointed out that even
in this application of the principle of homogeneity in the comparison of the two methods
the degree of importance of the market prices of the two stocks is quite different.
Pirelli S.p.A., in particular, has a large amount of stock traded on the market, in terms of
both the size of the share capital of the company and the percentage which is not part of
the majority interest and is not concentrated in the hands of minority shareholders that
carry a certain influence. Société Internationale Pirelli S.p.A., instead, is in a completely
different situation, at least in its recent history over the last few years. Apart from the
different capitalization of the two companies, for Société Internationale Pirelli S.p.A., equal
to a fraction of that of Pirelli S.p.A., it should be emphasized that Société Internationale
Pirelli S.p.A.’s stock on the market was practically cancelled by the creation of a minority
stockholder base carrying considerable weight. The reduction in the amount of shares
floated and the presence of a minority shareholder of such importance has effectively
polarized the process of determining the market prices, which occur with trading that if
often discontinuous because of the quantity traded. This market situation signifies that the
use of the market price for Société Internationale Pirelli S.p.A. is not meaningful. The use
of the market price method, in observing the need for homogeneity, can only be applied to
data regarding Pirelli S.p.A. ordinary shares.
Société Internationale Pirelli S.p.A. was valued solely by using the equity method, thus
without resorting to a number of methods. To be precise, different values of Société
Internationale Pirelli S.p.A. can only be generated in the event that different values are
assumed for the holding in Pirelli S.p.A.. This choice was decided, as already
mentioned, by the need to choose a method capable of representing the vectors of value
which characterize the economic structure of the company. Société Internationale
Pirelli S.p.A., in fact, is an investment holding company and its predominant asset is the
investment held in Pirelli S.p.A.. Changes to the value of the investment can be
translated into almost proportional changes in the value of Société Internationale
Pirelli S.p.A..
In order to determine the economic capital of Société Internationale Pirelli S.p.A., it is
also important to indicate the potential tax treatment arising on gains generated from the
investments. In this respect, a distinction has to be made between the position generated
by the investment in Pirelli S.p.A. and that connected to the other equity investments. For
the latter, the general principle is followed which calls for the determination of a
potential tax charge that is connected to the right to tax the gains at the time of recording
the merger deficit pursuant to the provisions of art. 6 of Legislative Decree No. 358 of
October 8, 1997. In particular, the law grants the right to tax the deficit charged to the
investment account by paying a rate of 27% on the gain over a five year period. This gives
rise to a rounding off of the potential tax rate to 23%. There are no potential tax charges
calculated on the potential gain on the investment in Pirelli S.p.A.. This choice is
motivated by the characteristics of the merger transaction. In fact, the merger calls for
the Pirelli S.p.A. shares held by Société Internationale Pirelli S.p.A. to be almost
completely used for the exchange of the same shares which will be cancelled by the
merger. In this way, the shares avoid being taxed for any reason whatsoever by being
excluded from the assets of the company resulting from the merger, since the assignment
of shares does not constitute taxable material as set forth by article 123 of D.P.R. No. 917
of December 22, 1986.
The valuation of Pirelli S.p.A. has been effected by aggregating the results of the valuation
of the three macro areas of its business (Cables and Systems, Tyres and Finance) using the
financial method and the earnings methods based on the consolidated figures. The choice
of the method is justified by the need to give economic value to the factors which define
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the formation of the value in this case, also considering the congruity of the exchange
ratio. A group operating on fiercely competitive global markets, such as Pirelli S.p.A.,
shows a value which is obviously strongly explained by competitive factors rather than
elements outside the arena with which its competition operates. Since everyone knows
that the effects of competition reverberate directly on flows — whether they be income or
cash flows — the definition of the value of the group must clearly show how such factors
affect the determination of the value. It is also clear that the choice of methods based on
flows leads to the expression of potential values: but only the potential values carry a
significance in the representation of today’s economic reality in the case of a company
characterized by its participation in a competitive global context and one marked by fierce
competition. In other words, it must be recognized that, in Pirelli S.p.A.’s case, estimates
based on methods which make reference to values other than those determined by
carrying out the competitive process, perhaps appropriate for the representation of
economic capital, will lead to results that are not useful, since they do not take into
account the determining value of a company introduced into a competitive global context:
the competition.
Unlevered discounted cash flows method
The financial valuation methods are based on the concept by which the value of a
company is equal to the present value of the cash flows that a company is able to generate
in the future. In effect, different alternative methodologies were developed, among which
the unlevered discounted cash flows analysis method received special attention.
According to this method, used in the estimate for the exchange ratio, the value of the
company can be obtained by adopting the following formula:
n
W = [ ∑ F t / (1 + K o ) t ] + TV + SA - D
t = 1
where:
W = value of economic capital of the company
F t = net operating cash flows during the period
n = number of years in the period for the analytical forecast of cash flows
K o = weighted average costs of capital (WACC)
TV = present value of total final value
D = net financial position
SA = value of surplus assets
In effect, according to such formula, the value of a company is equal to:
– sum of operating net cash flows generated in each of the years assumed for the
analytical forecast, brought to present value using a rate equal to the weighted average
cost of capital, plus
– the market value of the beginning net financial position,
– the value of all the other “surplus assets”, if any, not inherent to operating management
or in any case not considered, for other methodological reasons, among the factors which
contribute to generating operating cash flows,
– the total value, understood as the present value of the operating flows which the
company will continue to generate in periods after those referring to the analytical
forecast.
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In particular, the single important parameters in the formula described are determined as
follows:
Net operating cash flows. These express the financial size of the operating management of
the company and therefore are determined both by transforming the pertinent economic
quantities (operating profit) into effective movements of monetary resources generated in
the normal course of business operations and by considering the outlays made for
investments. These can therefore be determined as follows:
+ EBIT (Operating profit)
- figurative tax effect on operating profit
= NOPLAT (Operating profit net of figurative taxes)
+ depreciation
+ nonmonetary accruals
± ∆ net working capital
± ∆ other liabilities/assets
- investments
+ disposals net of tax effects
= Net operating cash flows
The sum of the present value of the net operating cash flows expresses, in fact, the total
value of the total operating assets of a company and therefore the current value of
operating invested capital. The difference between this value and the value of debt (net
financial position) gives rise to the concise value of the capital attributable to
shareholders.
The net financial position. This expresses the present value of the net debt of the
company and can be different from the simple accounting value when some of the forms
of financing undertaken by the company show an effective cost which is different from the
market terms. Since, in this case, the rate used for the present value calculations of the
flows of remuneration of debt are different from the rate paid to the lender, there is a
differential which emerges between the nominal value and the current value of the debt
which affects the value of the economic capital of the company.
Surplus assets. These are components of the invested capital of the company that are not
inherent to the normal operations of the same and which, since they do not give rise to
“operating cash flows”, have not been valued during the present value calculation of the
same flows. Such assets must therefore be valued separately using specific and
appropriate methodologies. In this specific case, reference is being made to the current
value of unconsolidated investments.
Residual value. Since the operating cash flows which can be generated by a company do
not end at the end of the period used for the analytical forecast, the residual value
expresses the concise present value of all those flows which will in any case be generated
by the company itself later in time. Since this is a concise component, even though its
manifestation is postponed in time, the residual value, expressed at present value, should
not take on excessive importance in the total value so as not to augment the uncertainties
surrounding the valuation process and not to curtail its reliability. Such residual value is
determined as follows:
TV = [ F n+1 / (K o -g)] / (1+K o ) n
where g expresses the nominal rate of average growth sustainable perpetually by the net
operating cash flow F n+1 in the first year after the explicit period of the forecast.
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The weighted average cost of capital. This expresses the rate used to calculate the present
value of the operating cash flows and the residual value. Since such flows are used to
determined the total value of the operating assets of the company, set against the net
financial position and own capital, they will be calculated at present value using a rate
which expresses the weighted average between the costs of both such components. In
relation to the purpose of this present work, the calculation of the weighted average cost
of capital (K o = WACC) is carried out in the following manner:
K o = [D/(D+E)]*K d *(1-t) + [E+(D+E)]*K e
where:
D = net debt position
E = current value of net equity
K d *(1-t) = cost of debt net of the tax effect generally calculated using the weighted average
effective costs for the specific sources of financing
K e = cost of own capital.
The structure of capital, intended as the debt ratio, is calculated based on the current
value of debt and shareholders’ equity at the time of valuation.
The cost of own capital, assumed to be the same as the rate of return on the same, can
easily be determined on the theoretical level of the relationship: K e = R f + s, where R f
expresses the rate of return on the assets without risk and s is the premium for the specific
risk of the investment in capital of the company in question.
In this case, the rate of return is determined for the assets without risk as the gross annual
yield on medium/long-term government securities.
The second component (s) of the cost of own capital (K e ) expresses the premium for the
specific investment under consideration and therefore it should represent a concise
measure of the risk of the sector and the company under examination. Such component is
usually quantified by making reference to the following relationship:
s = β (R m - R f )
where:
R m = average rate of return of the stock market
R f = average rate of return on assets without risk
β = coefficient expressing the variability of the specific security compared to the market.
In conclusion, it is assumed that the difference (R m - R f ), which expresses the premium for
stock risk, is multiplied by the beta of the specific company to take into account the risk
component which cannot be diversified, that is, the risk which cannot be eliminated by the
investor through an adequate diversification of his own portfolio.
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Earnings method
In the case under examination, the earnings method was used in the version which calls
for recourse to the earnings flows that result from a detailed forecast, at least for the first
years, starting from the end of the period of the plan an estimate is determined of a final
value which is connected to the normal earnings sustainable starting from that moment.
The following formula illustrates the method:
n
W = [ ∑ R t / (1 + K e ) t ] + TV
t = 1
where:
R t = normal net earnings of explicit period
K e = cost of own capital
TV = present value of residual value, intended as the present value of the earnings which
the company will continue, through or according to a determined rate of expected average
growth, to generate in periods successive to those in the analytical forecast.
Equity method
The equity method of valuation expresses the value of a company in relation to its equity,
that is, it analyzes the values of the single asset and liability elements from which the
entity of net equity arises. This method offers, by its very nature, a vision of the company
founded on a representation of its equity components, the estimated valuation of which
takes place using appropriate methodologies in relation to the nature and the
characteristics of the same.
The equity method is applied at certain fundamental times:
1) Calculation of the Net Capital of the financial statements.
This derives from the sum of share capital and reserves (composed of profits or
revaluations), less any amounts for which it was decided to distribute dividends or
emoluments to directors. In the event that reference is made to an interim date, the
results for that period should also be considered, net of the tax charge. Lastly, any
adjustments for potential tax charges should be determined.
2) Revaluation of the nonmonetary asset elements (property, plant and equipment,
inventories, investments, marketable securities, etc.) to current values and calculation
of the present value of receivables and payables.
It is important to emphasize how the verification of the values inherent to fixed assets
can give rise to gains or losses due to the fact the fixed assets will be valued on the
basis of a realistic market value or the cost or reproduction or replacement. To this end,
these extraordinary items, if recorded, can occasionally be subject to an eventual later
figurative tax charge. The expressive rate of potential tax charges, if any, varies around
the value determined by calculating the present value of the tax rate which can
effectively be applied depending on the nature of the gain.
In general, in the application of the equity method, the determination of adjusted capital
(K) is obtained using the following formula:
K = C + [(P 1 +P 2 +...) - (M 1 +M 2 +...)]* (1 - t)
where C indicates the Net Accounting Capital, P and M indicate, respectively, the gains and
the losses and t the potential rate of tax charges.
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Result of the valuation and the share exchange ratio
Based on the calculations carried out in the application of the methods used, the following
conclusions were reached:
Method/Company Earnings Financial
Total value Per unit value Total value Per unit value
(Billions of lire) (Lire) (Billions of lire) (Lire)
Société Internationale
Pirelli S.p.A. 13,896 474,415 13,797 462,383
Pirelli S.p.A. 11,484 115,718 11,219 115,586
If the earnings method is applied, the exchange ratio is equal to 82.97 Pirelli S.p.A.
ordinary shares for every Société Internationale Pirelli S.p.A. share; if the financial method
is used the ratio is 82.78 Pirelli S.p.A. ordinary shares for every Société Internationale
Pirelli S.p.A. share. The proposal is made to use the rounded up exchange ratio indicated
by the appraisers equal to 83 Pirelli S.p.A. ordinary shares for every Société Internationale
Pirelli S.p.A. share. A simple comparison shows that the share exchange ratio was rounded
up by 0.03 from 82.97 (using the earnings method) and 0.22 from 82.78 (using the financial
method).
1.d - Procedures for assigning the shares of the incorporating company – Date from
which dividend rights accrue
The exchange ratio, determined on the basis of the balance sheets at December 31, 1998
for both companies, is established as:
No. 83 Pirelli S.p.A. ordinary shares for each Société Internationale Pirelli S.p.A. ordinary share.
There will be no payment differences in cash.
At the time the merger is perfected, Pirelli S.p.A. will proceed to cancel all the shares of
the capital of Société Internationale Pirelli S.p.A. and replace them, at the exchange ratio
reported in the preceding point, with Pirelli S.p.A. shares, by utilizing the Pirelli S.p.A.
shares that shall, after the merger, be held by the same Pirelli S.p.A..
Accordingly, there will be no increase in share capital.
The Pirelli S.p.A. ordinary shares assigned in the exchange will have dividend rights as
from January 1, 1999, and therefore will have the right to the dividends declared by
Pirelli S.p.A. for the year ending December 31, 1999.
1.e -Date of recording the merger between the two companies in the financial statements
of the merging company
1.f -Tax considerations regarding the merger
Generally speaking, Italian law, in harmony with Community law, considers a merger
within the context of a corporate reorganization. Such transactions are not subject to
taxes since they do not give rise, in effect, to any assumptions for realization, or the
distribution of gains and losses of the assets of the merged companies.
Considering the basic principle, which is therefore applicable in cases of both direct
mergers and inverse mergers, it follows that the amounts fiscally recognized for the assets
of the merged company are maintained in the merging company.
It may however occur that the merger gives rise to deficits. Under civil laws, should this be
the case, such merger differences can be absorbed by revaluing the assets of the merged
company.
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For purposes of the recognition of all or a part of such values in question, also for fiscal
purposes, Legislative Decree No. 358 of October 8, 1997 calls for the possibility of
subjecting the higher value recorded to cover the deficit, to the substitute tax, as set forth
by art. 1 of the law in question at a rate of 27%. Such higher values may be given tax
status, without paying the tax of 27%, only when the shares of the merged company,
cancelled upon the merger, gave rise to gains that were previously subjected to ordinary
taxation.
In particular, the above-mentioned higher values are not taxable to the extent of the total
net amount:
a) of the gains net of the losses subjected to the substitute tax;
b) the higher and lower values, compared to the relative acquisition values, deriving from
the sale of the shares or quotas, which formed part of the earnings of a resident
company (the higher or lower values are important only for the reason that they
formed part of the earnings of the company and are therefore independent of a tax
payment);
c) the write-downs as well as the revaluations of the shares or quotas that formed part of
the earnings of a resident company or which by law do not form part of it, not even in
the case of later realization.
The possibility of not subjecting the deficit to the substitute tax, up to the amount of the
sum of the higher or lower values referred to in the preceding letters a), b), c), is
conditioned by the demonstration, through suitable documentation, by the merging
company or beneficiary, of the positive and negative components of earnings relating to
the cancelled shares or quotas realized by the same company and by the previous
owners.
The tax laws on mergers also provide that the funds in abeyance of taxes of the merged
companies should form part of the earnings of the company resulting from the merger if
and to the extent of which they were not re-established in its financial statements.
This law is not applied for funds which can only be taxed in the event of distribution
which, if and to the extent of any merger surplus or capital increase in excess of the total
capital of the companies taking part in the merger net of the share of the capital of each of
them already held by the same or by others, form part of the earnings of the company
resulting from the merger or incorporation in the event of distribution of the surplus or the
reduction of capital in excess.
There is also a specific law regarding tax loss carryforwards. Such losses relating to the
companies taking part in the merger, including the merging company, can be deducted
from the earnings of the company resulting from the merger or incorporation for that part
of the amount which does not exceed the amount of the respective net equities shown on
the most recent financial statements or, if lower, shown on the balance sheets pursuant to
article 2502 of the Italian Civil Code, without taking into account the contributions and
payments made during the previous twenty-four months before the date of the same
balance sheet.
All of the above is upon condition that, in the income statement of the company which has
loss carryforwards, in relation to the previous year to that in which the merger was
approved, there is an amount of revenues, and an amount of personnel expenses and
related social security contribution, in excess of 40% of the average that was shown in the
last two prior years.
As for indirect taxation, Italian law incorporates the Community law regarding the raising
of capital. It provides for the application of a fixed registration tax for mergers.
The law also allows that a date for the accounting and tax effects for a merger can be set
before that established for civil compliance.
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Entering into the merits of the merger in question, it is pointed out that:
• the deficit that arises from the merger will be covered by revaluing, for statutory
purposes, certain investments of the company to be merged which, instead, will
maintain their fiscal value recognized at the time of merger;
• the company to be merged does not have any funds in abeyance of taxes to be reestablished
in the merging company;
• the merging company and the company to be merged do not have tax loss
carryforwards;
• the registration tax is applicable in the fixed amount of Lire 250,000 at the time of
registering the merger deed;
• effect will be given to the merger for accounting and tax purposes starting from
January 1, 1999.
1.g - Estimated composition of the most important shareholders of the merging
company subsequent to the merger
The shareholders of Pirelli S.p.A. at March 29, 1999, as reported in the book of
shareholders plus communications received by Consob, are composed of the following
(holdings of more than two percent of share capital with voting rights are indicated):
Shareholder No. of shares % of total % of ordinary
share capital share capital
Société Internationale Pirelli S.p.A. 748,324,035 (1) 37.71 39.46
Pirelli & C. Accom. per Azioni 123,796,250 6.24 6.53
Pirelli S.p.A. 59,741,935 (2) 3.01 3.15
Others 964,690,253 48.61 50.86
Total 1,896,552,473 (3) 95.57 100.00
Shareholders of savings shares 88,006,016 4.43 –
Grand total 1,984,558,489 100.00 100.00
Note:
1. Already registered to Pirelli Partecipazioni S.p.A. and coming from the above-mentioned merger
by incorporation of Pirelli Partecipazioni in Société Internationale Pirelli.
2. Treasury shares.
3. Divided by major class of ownership, according to the book of shareholders:
– 105 shareholders with over 1,000,000 shares represent 78.19% of capital;
– 353 shareholders with shares of between 100,001 and 1,000,000 represent 6.01% of capital;
– 3,106 shareholders with shares of between 10,001 and 100,000 represent 4.35% of capital;
– 38,000 shareholders with shares of between 1,001 and 10,000 shares represent 7.38% of capital.
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The shareholders of Pirelli S.p.A. which will result after the merger of Société Internationale
Pirelli S.p.A, simulating the mere corporate effect of the merger compared to the
information at March 29, 1999 is the following (holdings of more than two percent of share
capital with voting rights are indicated):
Shareholder No. of shares % of total % of ordinary
share capital share capital
Pirelli & C. Luxembourg S.A. 417,278,101 (1) 21.03 22.00
BZ Group Holding S.A. 179,374,537 (1) 9.04 9.46
Pirelli & C. Accom. per Azioni 162,702,500 (2) 8.20 8.58
Pirelli S.p.A. 126,412,949 (3) 6.37 6.67
Others 1,010,784,386 (4) 50.93 53.29
Total 1,896,552,473 95.57 100.00
Shareholders of savings shares 88,006,016 4.43 –
Grand total 1,984,558,489 100.00 100.00
Note:
1. Already shareholders of Société Internationale Pirelli S.p.A..
2. Sum of the investment already held in Société Internationale Pirelli S.p.A. and the original
investment in Pirelli S.p.A..
3. Sum of the treasury shares coming from the inverse merger and the original treasury shares, net
of the treasury shares used to service the exchange ratio.
4. Sum of the investment already held in Société Internationale Pirelli S.p.A. by shareholders not in
the Pirelli Group and BZ Group and the original investment in Pirelli S.p.A. held by shareholders
not in the Pirelli Group.
Two diagrams are shown on the following page which illustrate the Group structure at
December 31, 1998 and the future structure.
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Group structure
at December 31, 1998
Pirelli & C. A.p.A.
100%
BZ Group
Holding S.A.
24.87%
Pirelli & C.
Luxembourg S.A.
67.51%
Société Internationale
Pirelli Ltd
91.96%
3.12% Pirelli
4.92%
Partecipazioni Ltd
39.49%
Pirelli S.p.A.
6.53%
99.81%
Pirelli
Tyre Holding N.V.
100 %
Pirelli
Cavi e Sistemi S.p.A.
Future structure
Pirelli & C. A.p.A.
BZ Group
Holding S.A.
not less than
30.01%
10%
Pirelli S.p.A.
99.82%
Pirelli
Tyre Holding N.V.
100 %
Pirelli
Cavi e Sistemi S.p.A.
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1.h - Effects of the merger on the shareholder pacts
Pirelli S.p.A. is aware of the existence of three shareholder pacts, two of which are
interconnected, that are considered important pursuant to article 122 of the Testo Unico
with respect to the provisions regarding financial intermediation.
The first of these, stipulated between Pirelli & C. Accomandita per Azioni and BZ Group
Holding S.A., was published in the newspapers on March 28, 1998, in an extract form.
The second and third, respectively, stipulated between Pirelli S.p.A. and Fondazione
Cariplo Iniziative Patrimoniali S.p.A. and the same Pirelli S.p.A. and Mediocredito
Lombardo S.p.A., were published in the newspapers on December 15, 1998, in an extract
form.
The above pacts, which were communicated to Consob and filed in the Companies’
Register in accordance with the law, are herein attached in an extract form.
As for the first pact, it should be pointed out that, as the simple effect of the merger by
incorporation of Société Internationale Pirelli S.p.A., Pirelli & C. Accomandita per Azioni
and BZ Group Holding S.A. would hold an interest in the ordinary share capital of
Pirelli S.p.A. that is substantially in line with indications contained in the pact.
Therefore, the part of the agreement referring to the exercising of the voting rights comes
into force for the part – of the share of investment in the ordinary share capital of Pirelli
S.p.A which will be held by BZ Group Holding S.A. – equal to 5% of the same share capital.
Likewise, the part comes into force regarding the sales options to Pirelli & C. A.p.A. given
by this company to BZ Group Holding S.A., as well as parallel purchase options – always
by BZ Group Holding S.A. – which are in reference to the same Pirelli & C. A.p.A., options
which all refer to a number of shares equal to 5% of the share capital of Pirelli S.p.A. with
voting rights.
As far as the other pacts are concerned, it should be pointed out that they do not involve
any limitation regarding the disposition of the shares by the same Pirelli S.p.A., nor any
restrictions regarding their sale, except in the case that the treasury shares of Pirelli S.p.A.,
by its express choice, should be used to service the holders of warrants.
In this latter case, and always, therefore, under the assumption that Pirelli S.p.A. has not
opted to fulfill its obligation by paying cash for equivalent amounts (the so-called cash
equivalent clause), the net quantity of the shares coming from the merger (or the shares
coming from the merger calculated net of those used to service the exchange) would be
amply sufficient.
There are no shareholder agreements involving the shares of the merging company Société
Internationale Pirelli S.p.A..
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Notice pursuant to art. 10, paragraph 4, Law No. 149 of February 18, 1992 and Consob resolution
No. 7835 of March 8, 1994
Agreement between Pirelli & C. and BZ Group Holding Limited reached as part of the corporate
reorganization of Pirelli Group (announced March 24, 1998) at the conclusion of which the parties would
hold an investment in the share capital of Pirelli S.p.A. expressed in ordinary shares, respectively, of not
less than 30.01% and equal to 10%.
Pirelli & C. and BZ Group Holding Limited have agreed, each to the extent of their powers in relation to their
holdings, to act so that, at the conclusion of the corporate restructuring of the Group, Société Internationale
Pirelli S.A. and Pirelli S.p.A. shall pass resolutions for the merger of the two companies.
Furthermore, as to a 5% holding which BZ Group Holding Limited shall then have in Pirelli S.p.A., the following has
been agreed:
a) for a period of three years, the voting rights relating to the number of PIRELLI S.p.A. shares equal to 5% of capital
with voting rights, shall be exercised according to the instructions provided by Mr. Marco Tronchetti Provera, on
condition that, and up to the time in which, he shall maintain a significant personal interest in Pirelli Group. To this
end, a number of PIRELLI S.p.A. shares equal to 5% of capital with voting rights, shall be deposited by BZ at the BZ
Bank Limited, which shall exercise the voting rights to which they have a right on the basis of the instructions
received from Mr. Marco Tronchetti Provera;
b) PIRELLI & C. shall grant BZ a sales options on a number of PIRELLI S.p.A. shares equal to 5% of capital with
voting rights having the following features:
i. a first sales option, relating to a number of shares equal to 2.5% of capital with voting rights, can be exercised
during the period between March 10, 1999 and March 10, 2003, at a price calculated on the average of the stock
market prices of the shares in the ninety previous sessions prior to the date of exercising the option;
ii. a second sales option, relating to a number of shares equal to 2.5% of capital with voting rights can be exercised
on March 10, 2003, at a price calculated on the average of the stock market prices of the shares in the ninety
previous sessions prior to the date of exercising the option;
c) BZ shall grant PIRELLI & C. a purchase option on a number of PIRELLI S.p.A. shares which, added to those
eventually already sold by BZ to PIRELLI & C. following the exercise of the rights referred to in point b), can not
exceed 5% of the capital with voting rights. Such option can be exercised on March 13, 2003, at a price calculated
on the average of the stock market prices of the shares in the ninety previous sessions prior to the date of
exercising the option;
d) should Mr. Marco Tronchetti Provera cease to hold a significant personal interest in Pirelli Group, the options
described in points b) and c) can be exercised within thirty days of communication of such event, at a price
calculated on the average of the stock market prices of the shares in the ninety previous sessions prior to the date
of exercising the option. On his part, Mr. Marco Tronchetti Provera undertakes to communicate to PIRELLI & C.
and BZ that he has less than a significant personal interest in Pirelli Group within 5 days of this taking place;
e) should the agreement described in point a) relative to the exercise of the voting rights on the part of PIRELLI
S.p.A. shares deposited by BZ in BZ Bank Limited not be renewed at least up to March 13, 2003 or, should there be
a breach of the agreement, the voting rights are not exercised according to Mr. Marco Tronchetti Provera’s
instructions, PIRELLI & C. shall have the right to acquire from BZ a number of ordinary shares which, together
with those eventually already sold by BZ to PIRELLI & C. subsequent to the exercise of the option rights described
in point b), can not exceed 5% of capital with voting rights. Such right of purchase can be exercised within the
following thirty days subsequent to the expiration of the agreement, if before March 13, 2003, or the eventual
breach of the agreement, at a price calculated on the average of the stock market prices of the shares in the ninety
previous sessions prior to the date of exercising the option;
f) for purposes of the preceding points, for capital with voting rights is meant the share capital expressed in ordinary
shares calculated on the basis of the ordinary shares existing at the time of exercising the rights provided by this
agreement;
g) the parties shall not undertake any actions which can have a substantial effect on the price of the options
described in the previous points for the entire period of the ninety sessions of the Stock Market preceding the date
of exercise of the options.
The entire agreement resolutely depends upon obtaining the necessary approval from the appropriate boards of the
Pirelli Group companies involved in the reorganization.
Milan, March 28, 1998
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Notice pursuant to art. 10, paragraph 4, Law No. 149 of February 18, 1992 and Consob resolution
No. 7835 of March 8, 1994
Pirelli S.p.A. reached an agreement for a loan of about Lire 290 billion coming from the issue of “Mediocredito Lombardo S.p.A.
1998/2003 2.2% special series bonds with warrants for Pirelli S.p.A. ordinary shares” (the “Loan”) issued by Mediocredito
Lombardo S.p.A. (“Mediocredito”) and subscribed to by Fondazione Cariplo Iniziative Patrimoniali S.p.A. (“Fondazione”).
Each bond carries a “Mediocredito Lombardo Warrant - Pirelli S.p.A. ordinary shares 1998-2003” (the “Warrants”) to
acquire at pre-fixed prices, over the next five years, up to a maximum of 46,154,000 Pirelli S.p.A. ordinary shares (the
“Shares”). The Shares will be made available by the same Pirelli S.p.A. which will draw them from the treasury shares.
The Loan contains the so-called cash equivalent clause whereby Pirelli S.p.A. has the right, should Mediocredito
declare that the holder of the Warrants intends to exercise them, to choose between delivering the shares or paying the
difference, if positive, between the market price of the stock, in reference to the arithmetic average of the last three
official prices available at the time the warrants are exercised, and the price of exercising the Warrants.
Agreement between Pirelli S.p.A. and Mediocredito Lombardo S.p.A.
1. Type of agreement and purpose
Compendium agreement having the purpose of guaranteeing the issuer Mediocredito the amount of Pirelli S.p.A.
ordinary shares or money needed to allow the same Mediocredito to fulfill its obligations to the carriers of
Warrants at the time they are eventually exercised.
2. Parties to the agreement
The parties to the agreement are Mediocredito and Pirelli S.p.A..
3. Financial instruments covered by the agreement
The Pirelli S.p.A. ordinary shares covered by the agreement are a maximum of No. 46,154,000.
They represent 2.44% of the ordinary share capital of Pirelli S.p.A. as of today’s date.
4. The party, if any, which, through the agreement, can exercise control over the company
There is no party which, through the agreement, can exercise control over Pirelli S.p.A..
5. Restrictions to the sale of the shares
There are no restrictions whatsoever on the Shares or destined in any way whatsoever to limit their disposition.
6. Disposition of the shares
The Shares remain at the disposition of Pirelli S.p.A..
7. Bodies governing the agreement
They are not envisaged by the agreement.
8. Matters covered by the agreement
Those covered in point 1.
9. Duration, renewal and cancellation of the agreement
The agreement runs until the expiry date for exercising the Warrants (July 31, 2003) and it is not renewable nor is
it subject to cancellation or withdrawal.
10. Penalties for non-fulfillment of the obligations contained in the agreement
They are not envisaged by the agreement.
Agreements between Pirelli S.p.A. and Fondazione Cariplo Iniziative Patrimoniali S.p.A.
1. Type of agreement and purpose
Pre-emptive agreement having the purpose of guaranteeing Pirelli S.p.A., or parties indicated by it, the
pre-emptive right to acquire the Warrants (or the rights to the Warrants) assigned, at issue, to the Loan.
2. Parties to the agreement
The parties to the agreement are Fondazione and Pirelli S.p.A..
3. Financial instruments covered by the agreement
Warrants covered by the agreement are a maximum of No. 46,154,000.
In the event the Warrants are exercised they give the right to acquire Shares representing 2.44% of the ordinary
share capital of Pirelli S.p.A. as of today’s date.
4. The party, if any, which, through the agreement, can exercise control over the company
There is no party which, through the agreement, can exercise control over Pirelli S.p.A..
5. Restrictions to the sale of the shares
There are no restrictions whatsoever on the Warrants or destined in any way whatsoever to limit their disposition.
The sale of the Warrants, or the rights to them, to subsidiaries as set forth by art. 2359, first paragraph, point l, of
the Italian Civil Code and to the parent companies of the Fondazione, is freely permitted; to third parties it is
allowed by pre-emption; to commercial competitors of Pirelli S.p.A. it is permitted with approval.
6. Disposition of the shares
The Warrants remain at the disposition of the holders.
7. Bodies governing the agreement
They are not envisaged by the agreement.
8. Matters covered by the agreement.
Those covered in points 1 and 5.
9. Duration, renewal and cancellation of the agreement
The agreement runs until August 1, 2003 and it is not renewable nor is it subject to cancellation or withdrawal.
10. Penalties for non-fulfillment of the obligations contained in the agreement
They are not envisaged by the agreement.
Milan, December 15, 1998
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1.i - Evaluations by the Board of Directors regarding the recurrence, if any, of the right
to withdrawal.
The Board of Directors states that there are no cases for the recurrence of the right to
withdrawal covered by art. 131 of Legislative Decree No. 58 of February 24, 1998 and
art. 2437 of the Italian Civil Code.
2. Procedures for the disposition of treasury shares.
As to the second matter of business on the agenda, we let it be known that, in the case the
aforementioned merger plan is approved, the company will receive No. 748,324,035
ordinary shares of the same; of these, 681,653,021 will be used for the exchange and
66,671,014 will become part of the assets of the company.
We also point out that the shareholders’ meeting held on May 15, 1998 passed a resolution,
amongst other things, to assign bonus shares on the occasion of the celebration of the
125 th anniversary of the founding of Pirelli to employees of the Group for No. 23,000,000
new ordinary shares as well as No. 11,000,000 ordinary shares to be allocated as incentives
to the managers of the Group companies, according to the incentive plan drawn up by the
Board of Directors.
It should be pointed out that as far as the shares assigned for the 125 th anniversary are
concerned, the assignment was rejected with respect to 54,435 shares and, as for those
utilized for the allocation of incentives, it is expected, as described during the course of
the aforementioned meeting, that they will put at the disposition of those to whom they
were assigned only in the case that the prefixed goals in the incentive plan are met; should
they not be met or only partly met, the assigned shares will have to be sold gratis, in total
or in part, to Pirelli S.p.A..
This having been said, with regards to both the shares that are certain of becoming part of
the assets of the company and those that might eventually become a part thereto, it
becomes necessary to ask you to establish the procedures for their eventual disposition.
To this end, we suggest that they should be established as indicated in the proposed
resolution which, if you are in agreement, we ask you to approve.
3. Translation of share capital into euro
As to the third matter of business on the agenda, this refers to the adoption of the euro,
covered by Legislative Decree No. 213 of June 24, 1998.
The adoption of euro as the currency of account, in particular, is mandatory as from
January 1, 2002.
Pirelli S.p.A. has nevertheless decided to comply before it becomes mandatory and has
chosen to adopt euro for its accounting records with effect from January 1, 1999.
To this end, we propose that the share capital should be translated into euro by rounding
up the par value of Lire 1,000 of the shares of which it is made up to Euro 0.52, according
to the provisions of art. 17.6 of the above-cited legislative decree.
The rounding up to Euro 0.52 of the par value of the shares of par value Lire 1,000 each
(equal to Euro 0.516) fixes the total share capital in Euro 1,031,970,414.28 (equal to
Lire 1,998,173,354,058, against a share capital up to now expressed in Italian lire
and amounting to Lire 1,984,558,489,000).
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As regard this increase, it is proposed that the corresponding amount of
Lire 13,614,865,058 should be drawn from the share premium reserve.
Besides the translation of share capital into euro, the Board of Directors proposes that the
amounts represented in Italian lire in the articles of association should be changed to euro,
with particular and exclusive regard to the present wording of the second and fourth
paragraphs of article 5, describing the share capital, which refers to the rights granted to
the Directors for the issue of shares and bonds.
If you are in agreement on what has been proposed to you, we ask you to pass the
following resolutions:
First resolution
Merger by incorporation in Pirelli S.p.A. of Société Internationale Pirelli S.p.A.
“The shareholders’ meeting:
• having taken note of the Board of Directors’ report;
• having reviewed the merger plan drawn up according to article 2501 bis of the Italian
Civil Code, which involves, amongst other things:
1) cancellation without replacement of all the shares of the company to be merged;
2) the assignment to the shareholders of the company to be merged of No. 83
Pirelli S.p.A. ordinary shares of par value Lire 1,000 each (after the eventual approval
of the translation into euro: Euro 0.52) with normal dividend rights from January 1,
1999, for every Société Internationale Pirelli S.p.A. share of par value Euro 62.00;
3) the utilization, for purposes of satisfying the exchange ratio, of a part of the
No. 748,324,035 shares of the merging company held by the company to be merged
and coming from the effect of the merger to the same merging company, which
therefore will not increase its share capital,
• given the balance sheets at December 31, 1998 of Pirelli S.p.A. and Société Internationale
Pirelli S.p.A. prepared according to article 2501 ter of the Italian Civil Code and
approved by the respective Boards of Directors in the meetings held on March 29, 1999;
• having taken note of the recording of the merger plan in the Companies’ Register of
Milan on April 6, 1999, as well as the deposit of the documentation required by article
2501 sexies of the Italian Civil Code;
• having taken note of the statement by the Board of Statutory Auditors that attests to the
fact that the share capital of Lire 1,984,558,489,000 is fully subscribed to and paid-in;
• having taken note concerning the opinions as to the congruity of the exchange ratio of
the shares issued, for Pirelli S.p.A., in compliance with article 2501 quinquies of the
Italian Civil Code, by Reconta Ernst & Young S.p.A. and, for Société Internationale
Pirelli S.p.A., following the decree of March 13, 1999 by the President of the Milan
Courts, by KPMG S.p.A.
Passes a resolution
1. to approve the merger plan (attached to the minutes) drawn up according to article
2501 bis of the Italian Civil Code, and therefore the merger by incorporation in
Pirelli S.p.A. of Société Internationale Pirelli S.p.A., with registered office in Milan and
share capital of Euro 509,186,594, on the basis of the respective balance sheets at
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December 31, 1998, with the cancellation — without replacement — of all the shares of
the company to be merged and without a share capital increase by the merging
company since, in the share capital of the latter following the same merger, there are
sufficient Pirelli S.p.A. shares to service the exchange;
2. to confer to the Chairman and Deputy Chairman all and every power, excluding none,
separately, to fulfill all the requirements so that this resolution can be implemented and
thus effect the merger and in particular stipulate the relative public deed, establishing
every clause and the manner to implement them, proceed to cancel the shares, request
transfers, registrations and notes also in the real estate registries and in the other public
registers and however comply with all that is necessary and useful for completely
implementing the resolution that was passed, also through special procurators, fulfill the
formalities so that the resolution can be approved under law, with the right to introduce
any changes required of a formal nature for this purpose, also at the time of homologation.”
Second resolution
Procedures for the disposition of treasury shares
“The shareholders’ meeting:
• having taken note of the Board of Directors’ report;
• having taken note that, following the merger by incorporation of Société Internationale
Pirelli S.p.A. in Pirelli S.p.A., the merger plan of which was just approved, the company
will receive No. 66,671,014 Pirelli S.p.A. ordinary shares that were not used to service
the exchange ratio;
• having taken note that, following the bonus assignment of No. 23,000,000 ordinary
shares by resolution of the shareholders’ meeting of May 15, 1998, No. 54,435 shares
were rejected;
• having taken note that, following the bonus assignment of No. 11,000,000 ordinary shares
for designation as incentives to the managers of the Group, it was agreed with the same that
the shares would be sold gratis to Pirelli S.p.A., in total or in part, in the event the goals that
were assigned to them under the incentive plan were not reached or only partly reached;
Passes a resolution
1. to authorize the Board of Directors so that it can dispose, without any time limits, of the
treasury shares as stated; the disposition can take place, at one or more times; the
shares can be disposed of by sale (also through a public offer, to the shareholders, to
employees) at a price of not less than 10% of the average reference price recorded on
the Italian stock market in the thirty stock market sessions preceding each single sales
transaction; they can also be disposed of by being attached to bonds or warrants to be
exercised for the same;
2. to confer to the Board of Directors, and on its behalf, to the Chairman and Deputy
Chairman, all power, separately, necessary to effect the dispositions and however to
implement the preceding resolution, also through procurators, fulfilling all that is
eventually required by the competent authorities.”
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Third resolution
Translation of share capital into euro
“The shareholders’ meeting:
• having taken note of the Board of Directors’ report;
Passes a resolution
1. to translate into euro the par value of No. 1,984,558,489 shares of par value Lire 1,000
each, constituting the present share capital with:
• the rounding up, pursuant to art. 17.6 of Legislative Decree No. 213 of June 24, 1998,
to Euro 0.52;
• the corresponding increase in share capital, with a rounding up for a total
of Euro 7,031,490.99, equal to Lire 13,614,865,058, by drawing from the share
premium reserve;
• the consequent translation of share capital, currently Lire 1,984,558,489,000 into
Euro 1,031,970,414.28;
2. to change any other reference to the term “lira” or “lire” in the articles of association to
“euro”, by translating in like manner the amounts expressed in lire into amounts
expressed in euro;
3. to consequently change article 5, first paragraph (representation of share capital),
second paragraph (assignment to the Directors of the right to issue shares for a
maximum amount of par value Lire 500 billion), fourth paragraph (assignment to the
Directors of the right to issue bonds that are also convertible for a maximum amount of
face value Lire 1,000 billion), by adopting the following wording:
first paragraph:
“The share capital is Euro 1,031,970,414.28 divided into No. 1,896,552,473 ordinary
shares and No. 88,006,016 savings shares, with a par value of Euro 0.52 each.”
second paragraph:
“With a resolution passed by the extraordinary general meeting held on the 15 May 1998
the Directors were granted the power to increase the share capital, in one or more
instances, by a maximum amount of Euro 258,228,449.54 and for a maximum time
period of five years as from the date of the said resolution.”
fourth paragraph:
“With a resolution passed by the extraordinary general meeting held on the
22 December 1998 the Directors were granted the power to issue bonds, in one or more
instances, including bonds that are convertible both into ordinary shares or into savings
shares, or with warrants valid for the underwriting of the said shares, for a maximum
face value amount of Euro 516,456,899.08 and for a maximum time period of five years
as from the date of the said resolution, with the consequent possible increase of the
share capital serving the bond conversion”.
4. to confer separately to the Chairman and Deputy Chairman all and every power to fulfill
the formalities so that the resolution can be approved under law, with the right to
introduce any changes required of a formal nature for this purpose, also at the time of
homologation”.
The Board of Directors
Milan, March 29, 1999
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Amendment of the by-laws
Present wording
Article 5
The share capital is Italian lire 1,984,558,489,000
divided into No. 1,896,552,473 ordinary shares
and No. 88,006,016 savings shares, with a par
value of Italian lire 1,000 each.
With a resolution passed by the extraordinary
general meeting held on the 15 May 1998 the
Directors were granted the power to increase
the share capital, in one or more instances, by a
maximum amount of Italian lire 500 billion and
for a maximum time period of five years as
from the date of the said resolution.
The share capital increase may be carried out
by issuing, also with a premium, both ordinary
and savings shares, with the same features as
those already outstanding and must be
reserved for shareholders and holders of
convertible bonds.
With a resolution passed by the extraordinary
general meeting held on the 22 December 1998
the Directors were granted the power to issue
bonds, in one or more instances, including
bonds that are convertible both into ordinary
shares or into savings shares, or with warrants
valid for the underwriting of the said shares, for
a maximum face value amount of Italian lire
1,000 billion and for a maximum time period of
five years as from the date of the said
resolution, with the consequent possible
increase of the share capital serving the bond
conversion.
With a resolution passed by the shareholders’
meeting held on the 15 May 1998 the Directors
were granted the power to issue up to a
maximum of No. 45 million ordinary shares, in
one or more instances, by the date of 30 April
2003 to be attributed to executives and cadres
of the company and of the companies
controlled by same and of those controlling
same and likewise of the other companies
controlled by the latter, both in Italy and
abroad, pursuant to the terms of articles 2441
and/or 2349 of the Civil Code.
In the event of the issue of bonds which are
convertible into shares, the amount of share
capital will be determined according to the
extent to which conversion rights on same are
exercised.
New wording
Article 5
The share capital is Euro 1,031,970,414.28
divided into No. 1,896,552,473 ordinary shares
and No. 88,006,016 savings shares, with a par
value of Euro 0.52 each.
With a resolution passed by the extraordinary
general meeting held on the 15 May 1998 the
Directors were granted the power to increase
the share capital, in one or more instances, by
a maximum amount of Euro 258,228,449.54
and for a maximum time period of five years as
from the date of the said resolution.
The share capital increase may be carried out
by issuing, also with a premium, both ordinary
and savings shares, with the same features as
those already outstanding and must be
reserved for shareholders and holders of
convertible bonds.
With a resolution passed by the extraordinary
general meeting held on the 22 December 1998
the Directors were granted the power to issue
bonds, in one or more instances, including
bonds that are convertible both into ordinary
shares or into savings shares, or with warrants
valid for the underwriting of the said shares,
for a maximum face value amount of Euro
516,456,899.08 and for a maximum time
period of five years as from the date of the said
resolution, with the consequent possible
increase of the share capital serving the bond
conversion.
With a resolution passed by the shareholders’
meeting held on the 15 May 1998 the Directors
were granted the power to issue up to a
maximum of No. 45 million ordinary shares, in
one or more instances, by the date of 30 April
2003 to be attributed to executives and cadres
of the company and of the companies
controlled by same and of those controlling
same and likewise of the other companies
controlled by the latter, both in Italy and
abroad, pursuant to the terms of articles 2441
and/or 2349 of the Civil Code.
In the event of the issue of bonds which are
convertible into shares, the amount of share
capital will be determined according to the
extent to which conversion rights on same are
exercised.
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Merger plan pursuant to art. 2501-bis
of the Italian Civil Code
1. Companies involved in the merger
a) Merging company
• Type: joint stock company.
• Name: Pirelli Società per Azioni.
• Registered office: in Milan, Viale Sarca 222.
• Share capital: Lire 1,984,558,489,000 fully paid-in (after the eventual approval for the
translation into euro: euro 1,031,970,414.28), consisting of No. 1,896,552,473 ordinary
shares and No. 88,006,016 savings shares of nominal value Lire 1,000 each (after the
eventual approval for the translation in euro: euro 0.52).
• Company recorded in the Companies’ Register under No. 15901.
• Incorporated by the deed filed by the notary public Gerolamo Serina, in Milan, on
November 3, 1920 file No. 18657.
b) Company to be merged
• Type: joint stock company.
• Name: Société Internationale Pirelli S.p.A..
• Registered office: in Milan, Viale Sarca 222.
• Share capital: Euro 509,186,594 consisting of No. 8,212,687 ordinary shares of nominal
value Euro 62.00.
• Company recorded in the Companies’ Register under No. 247693/1985.
• Incorporated by the deed filed by the notary public Max Vischer, in Basel (Switzerland),
on December 1, 1937.
2. Articles of association of merging company
The articles of association in force of the merging company Pirelli S.p.A., herein attached,
shall not undergo any changes as a consequence of the merger.
Also attached to the merger plan are the revised articles of association containing the
amendments to article 5 which would result should the shareholders’ meeting pass a
resolution to translate share capital into euro, which is being proposed to the same
shareholders’ meeting which will examine the merger plan.
3. Exchange ratio
The exchange ratio, determined by reference to the balance sheets at December 31, 1998
for both companies, is set at:
No. 83 Pirelli S.p.A. ordinary shares for every Société Internationale Pirelli S.p.A. ordinary share.
There will be no payment differences in cash.
4. Procedure for assigning shares
At the time the merger is perfected, Pirelli S.p.A. will proceed to cancel all the shares of
the capital of Société Internationale Pirelli S.p.A. and replace them, at the exchange ratio
reported in the preceding point, with Pirelli S.p.A. shares, by utilizing the Pirelli S.p.A.
shares that shall, after the merger, be held by the same Pirelli S.p.A..
Accordingly, there will be no increase in share capital.
5. Date from which the shares assigned in the exchange have rights to dividends
The Pirelli S.p.A. ordinary shares assigned in the exchange will have dividend rights
as from January 1, 1999, and therefore will have the right to the dividends declared by
Pirelli S.p.A. for the year ending December 31, 1999.
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6. Effects of the merger
The transactions of the company to be merged Société Internationale Pirelli S.p.A. will be
given effect to in the financial statements of the merging company Pirelli S.p.A. as from
January 1, 1999.
The tax effect of the merger will also come into force from that date.
The merger documents will also establish the date of the effects of merger pursuant to ex
article 2504 bis of the Italian Civil Code, which can also be after the date of the last of the
registrations set forth by art. 2504 of the Italian Civil Code.
7. Special treatment eventually reserved for specific categories of shareholders
There is no special treatment reserved for specific categories of shareholders and/or
holders of securities other than shares.
8. Special advantages, if any, set aside for directors
There are no special advantages set aside for the directors of the companies involved in
the merger.
Milan, March 29, 1999
PIRELLI S.p.A.
The Chairman and CEO
Dott. Marco Tronchetti Provera
SOCIETE INTERNATIONALE PIRELLI S.p.A.
The Deputy Chairman
Ing. Leopoldo Pirelli
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Attachment 1
Pirelli S.p.A. - Milan
Articles of association
Company’s name, purpose, registered office and duration
Article 1
A joint stock Company is hereby incorporated under the name Pirelli Società per Azioni.
Article 2
The purpose of the Company is the following:
a) the acquisition of participating interests in other companies or corporations, both in
Italy and abroad;
b) the financing, and the technical and financial co-ordination of the companies or
corporations in which it has interests;
c) the sale, ownership, management or placement of both government and private
securities.
The Company may carry out all transactions of any type whatsoever - excluding the
collection of savings deposits from the public - connected to its corporate business
purpose.
Article 3
The registered office of the Company is in Milan, at Viale Sarca No. 222.
Article 4
The duration of the Company is fixed until the 31 December 2100.
Share Capital
Article 5
The share capital is Italian lire 1,984,558,489,000 divided into No. 1,896,552,473 ordinary
shares and No. 88,006,016 savings shares, with a par value of Italian lire 1,000 each.
With a resolution passed by the extraordinary general meeting held on the 15 May 1998 the
Directors were granted the power to increase the share capital, in one or more instances,
by a maximum amount of Italian lire 500 billion and for a maximum time period of five
years as from the date of the said resolution.
The share capital increase may be carried out by issuing, also with a premium, both
ordinary and savings shares, with the same features as those already outstanding and must
be reserved for shareholders and holders of convertible bonds.
With a resolution passed by the extraordinary general meeting held on the 22 December
1998 the Directors were granted the power to issue bonds, in one or more instances,
including bonds that are convertible both into ordinary shares or into savings shares, or
with warrants valid for the underwriting of the said shares, for a maximum face value
amount of Italian lire 1,000 billion and for a maximum time period of five years as from the
date of the said resolution, with the consequent possible increase of the share capital
serving the bond conversion.
With a resolution passed by the shareholders’ meeting held on the 15 May 1998 the
Directors were granted the power to issue up to a maximum of No. 45 million ordinary
shares, in one or more instances, by the date of 30 April 2003 to be attributed to executives
and cadres of the company and of the companies controlled by same and of those
controlling same and likewise of the other companies controlled by the latter, both in Italy
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and abroad, pursuant to the terms of articles 2441 and/or 2349 of the civil code.
In the event of the issue of bonds which are convertible into shares, the amount of share
capital will be determined according to the extent to which conversion rights on same are
exercised.
Article 6
The shares are divided into ordinary shares and savings shares.
Ordinary shares give the right to one vote per share; they may be either registered or
bearer shares insofar as the law permits, and in this case may be converted, especially at
the holder’s request and expense, from one class to the other.
Savings shares, unless the law provides otherwise, are bearer shares; at the request and
expense of the shareholder they may be converted into registered shares.
As well as any rights and privileges provided for by law and in other parts of the present
articles of association, savings shares shall have pre-emptive rights in the matter of payingoff
of capital up to the full par value of same; in the event of a capital reduction due to
loss, the par value of the saving shares will be reduced only by that part of loss exceeding
the total par value of the other shares.
Savings shares keep the rights and privileges foreseen by law and by the present articles
even in the event of exclusion of ordinary shares and savings shares from trading.
In order to ensure the common representative of the holders of savings shares, of adequate
information about any transactions which might influence the trend in quotations of the
shares in that class, any communications concerning said transactions will promptly be
sent to same through a legal representative.
Article 7
The share capital may be increased, by resolution of the extraordinary shareholders’
meeting, by means of issuing new shares, including any having different rights, in
compliance with the formalities prescribed by the present articles of association.
In the event of a share capital increase being carried out by issuing shares of only one
class, same must be offered on option to the shareholders of all classes of shares.
In the event of both ordinary shares and savings shares being issued:
a) the holders of ordinary shares shall have the right to receive ordinary shares on option,
and savings shares to make up any difference;
b) the holders of savings shares shall have the right to receive savings shares on option,
and ordinary shares to make up any difference.
General Shareholders’ Meeting
Article 8
The convocation of the general meeting, which may take place anywhere in Italy including
in a place other than the registered office, the right to attend meetings and representation
at same are all governed by law.
Article 9
The due convocation of the meeting and the validity of its resolutions are governed by law.
The voting quorum for the appointment of directors is established as a relative majority of
the votes.
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Article 10
In view of the nature of the Company’s business and the special requirements arising
therefrom, the ordinary general meeting may be convened within six months of the end of
the financial period.
Article 11
The meeting shall be presided over by the Chairman of the Board of Directors, by a Vice-
Chairman or by a Managing Director, in that order; whenever there are two or more Vice-
Chairmen or Managing Directors, the chair shall be taken respectively by the senior in age.
The Chairman is assisted by a Secretary appointed by the meeting; there is no need to
appoint a Secretary when the minutes of the meeting are drawn up by a notary public.
It is the duty of the Chairman of the meeting to verify the right to attend the meeting,
including by means of proxy; to ascertain whether or not the meeting has been duly
constituted and has achieved the quorum required in order to pass resolutions; to conduct
and moderate the discussion; and to establish the order and manner of voting as well as
announce the results thereof.
The resolutions of the meeting shall be recorded in the minutes, which shall be signed by
the Chairman and the Secretary to the meeting or the notary public.
The minutes of the extraordinary general shareholders’ meeting must be drawn up by a
notary public appointed by the Chairman.
Any copies and extracts thereof, that have not been drawn up by a notary public, shall be
certified as true copies by the Chairman of the Board of Directors.
Management of the Company
Article 12
The Company is managed by a Board of Directors composed of between seven and
nineteen members who shall remain in office for three years (unless the meeting fixes a
shorter term of office at the time of making the appointment) and may be re-appointed.
Unless otherwise decided by the meeting the Directors are not bound by the prohibition
mentioned under art. 2390 of the Civil Code of Law.
If, due to resignation or any other cause, more than half the Directors should leave office,
then the entire Board of Directors is considered to have resigned with effect as from the
time of its re-election.
The emoluments of the Board of Directors consist of the part-share of profits established
under article 23 of the present articles.
Furthermore, the shareholders’ meeting may assign a fixed annual amount to the members
of the Board, to be recorded under general management expenses. This sum shall remain
fixed and unchanged until such time as the meeting resolves otherwise.
In addition to this, the members of the Board shall be reimbursed for all expenses incurred
by them during the course of their duties.
Article 13
A Chairman, and if necessary, one or more Vice-Chairmen shall be appointed from
amongst the members of the Board.
In the event of the Chairman being absent, the chair shall be taken by a Vice-Chairman or a
Managing Director, in that order; if there should happen to be two or more Vice-Chairmen
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or Managing Directors, the chair shall be taken respectively by the senior in age.
The Board shall appoint a Secretary who need not necessarily be a member of the Board.
Article 14
The Board shall meet at the invitation of the Chairman or whomsoever is acting for same,
at the registered office of the Company or in any other place stated in the notice of
convocation, every time same considers it best in the interests of the Company, or
whenever a meeting has been requested by one of the Managing Directors or by at least
two Statutory Auditors.
Meetings of the Board and of the Executive Committee, as foreseen under article 19
hereinunder, may be held through an audiovisual connection.
In this case the following must be guaranteed:
a) identification of all the participants at each point in the connection;
b) the possibility for each participant to intervene, to orally put forward same’s own
opinion, to view, receive and transmit all documentation, as well as the contextuality of
considerations and resolutions.
Meetings of the Board of Directors and of the Executive Committee are considered to be
held in the place in which the Chairman and the Secretary must be simultaneously.
Article 15
Board meetings shall be convened by means of a letter, telegram, telex or fax sent to the
address of each Director and each Statutory Auditor, at least five days before (or in urgent
cases at least two days before) the day set for the meeting.
The Board may however validly pass resolutions, even failing any formal convocation, if all
the board members and all the statutory auditors in office are present.
Article 16
The presence of at least half the members plus one is necessary for the resolutions of the
Board to be deemed valid, and the favorable vote of the majority of those present is
required.
In the event of a tie in votes, the casting vote shall be that of the Chairman.
Article 17
The resolutions of the Board, even when passed by meetings held through
videoconference, are recorded in a special book signed by the Chairman and the Secretary.
Any copies and extracts thereof, that have not been drawn up by a notary public, shall be
certified as true copies by the Chairman.
Article 18
The Board shall undertake the management of the Company and for that purpose is
invested with the fullest powers of administration, except for those which by provisions of
law or the present Articles are reserved to the general shareholders’ meeting.
The Board of Directors shall promptly refer back to the Board of Statutory Auditors,
including through delegated bodies, about the business activities carried on and the
transactions of greatest importance from an economical, financial and capital viewpoint,
performed by the Company and its subsidiaries; in particular, it shall inform same of any
transactions involving a potential conflict of interests. This information shall be supplied
at least on a three monthly basis, on the occasion of board meetings or meetings of the
Executive Committee, or by means of a written notice to the Board of Statutory Auditors.
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Article 19
The Board is authorized to confer such powers as it deems fit, for the management of the
Company’s business activities, on one or more of its members who may hold the position
of Managing Directors, granting same separate or joint signatory powers, on behalf of the
Company, as appropriate.
Furthermore, the Board may delegate its own attributions to an Executive Committee
composed of some of its members, whose emoluments shall be established by the General
Shareholders’ Meeting.
The Board may also appoint General Managers, Vice General Managers, Managers and
deputy Managers. The appointment of the Managers and deputy Managers may also be
delegated, by the Board, to the Managing Directors and General Managers.
Article 20
Legal representation of the Company vis-à-vis third parties and in court proceedings shall
be the duty, with separate signatory powers, of the Chairman of the Board of Directors
and, if appointed, of the Vice Chairmen and Managing Directors, within the limits of the
powers granted to them by the Board of Directors.
Each one of the aforesaid shall in any case have full powers to take legal action and file
appeals before any judicial authority and any court of any degree, including in revocation
or cassation (supreme court) proceedings, to file statements and prosecute in criminal
cases, to sue on behalf of the Company in criminal proceedings, to begin legal proceedings
and file petitions before all administrative jurisdictions, to intervene and protect the
Company’s interests in case of proceedings and claims against the Company, granting for
this purpose all necessary mandates and powers of attorney ad litem.
The Board of Directors and, within the limits of the powers granted to them by said Board,
the Chairman of the Board and, if appointed, the Vice Chairmen and the Managing Directors,
are authorized to grant Managers and staff in general, and when necessary third parties, the
power to represent the Company vis-à-vis third parties and in court proceedings.
Board of Statutory Auditors
Article 21
The Board of Statutory Auditors is composed of three statutory auditors and two deputy
statutory auditors.
The ordinary General Shareholders’ Meeting shall appoint the Board of Statutory Auditors
and determine the fees thereof. The minority interest shall appoint one statutory auditor
and one deputy statutory auditor.
With the exception of the provisions of the second to last paragraph of the present article,
the appointment of the Board of Statutory Auditors is made on the grounds of lists put
forward by the shareholders in which candidates are listed under progressive numbers.
Each list contains a number of candidates which does not exceed the number of members
to be appointed. All shareholders who, alone or together with other shareholders,
represent at least 2 per cent of the shares with voting rights in the ordinary general
meeting, have the right to put forward a list.
The lists of candidates, undersigned by the parties presenting them, must be filed at the
Company’s registered office at least ten days before the day fixed for the meeting in first
call. A description of the professional résumé of the individuals standing for election must
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e enclosed with the lists together with statements whereby the single candidates accept
the nomination and attest, under their own personal responsibility, to the non-existence of
any reasons for ineligibility or incompatibility as well as to the existence of the requisites
prescribed by law or by the articles for the position.
Any lists put forward which do not comply with the aforesaid provisions shall be
considered not to have been put forward.
Each candidate may be included on only one list, under penalty of ineligibility.
Likewise, any individuals who are not in possession of the requisites established by the
applicable rules and regulations or who already hold the position of statutory auditor in
more than five companies with stocks listed on official Italian markets, with the exception
of controlling companies and subsidiaries of Pirelli S.p.A., may not be appointed as
statutory auditors.
Each individual with voting rights may vote for only one list.
The election of the members of the Board of Statutory Auditors is performed as follows:
two statutory members and one deputy are taken from the list which has obtained the
highest number of votes, in the progressive order in which same are listed thereon; the
remaining statutory member and the other deputy member are taken from the list which
has obtained the highest number of votes from the meeting after the first list, again in the
progressive order in which same are listed thereon; in the event of several lists obtaining
the same number of votes, a new run-off vote between the said lists will be cast by all the
shareholders present at the meeting, and the candidates on the list which obtains the
simple majority of the votes will be appointed.
The Chairman of the Board of Statutory Auditors shall be the statutory member indicated
as the first candidate on the list which obtained the highest number of votes.
In case of death, waiver or resignation of a statutory auditor, the deputy belonging to the
same list as the resigned statutory auditor shall take the place of same. In the event of
substitution of the Chairman of the Board of Statutory Auditors, the chair shall be taken by
the other statutory member on the list to which the resigning chairman belonged; if it is
not possible to perform substitutions and replacements as set out hereinabove, then a
meeting shall be convened to integrate and complete the Board of Statutory Auditors and
which shall pass resolutions with a relative majority.
When the meeting has to make provisions, pursuant to the terms of the aforegoing
paragraph or to the terms of law, for the appointment of statutory auditors and/or deputies
needed to complete the Board of Statutory Auditors, it shall proceed as follows: if statutory
auditors appointed from the majority list have to be replaced, then the appointment is made
with a relative majority vote without being tied to any list; if on the other hand statutory
auditors appointed by the minority have to be replaced, the meeting shall replace same with
a relative majority vote choosing names where possible from amongst the candidates
indicated on the list on which the statutory auditor to be substituted appeared.
If only one single list has been put forward, then the meeting shall cast its vote regards same;
if the list obtains a relative majority, then the first three candidates on the list in progressive
order shall be appointed as statutory auditors, and the fourth and fifth candidate shall be
appointed as deputy statutory auditors; Chairman of the Board of Statutory Auditors shall be
the person indicated at the top of the list put forward; in case of death, waiver or resignation
of a statutory auditor, and in the event of substitution of the Chairman of the Board of
Statutory Auditors, same shall be replaced respectively by a deputy statutory auditor and a
statutory auditor in the order arising from the progressive numbering of the said list.
Failing any lists, the Board of Statutory Auditors and its Chairman shall be appointed by
the general meeting with the majorities prescribed by law.
Outgoing statutory auditors may be re-appointed.
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Financial Statements - Distribution of profits
Article 22
The company’s financial period shall end on the 31st December each year.
Article 23
After all the appropriations to the reserves prescribed by law have been carried out, the
annual profits shall be distributed as follows:
- savings shares shall be attributed an amount of up to seven per cent of their par value; if,
in any financial period, a dividend of less than seven per cent of the par value has been
distributed to the savings shares, the said difference is calculated as an increase to be
added to the preference dividend during the following two financial periods;
- the Board of Directors is attributed an amount equivalent to 1% of the net profits
remaining in excess of:
a) the relevant appropriation to the legal reserve;
b) the quota equivalent to 7% of the par value of the savings shares;
c) the quota equivalent to 5% of the par value of paid-up share capital represented by
ordinary shares;
- any profits remaining after the aforesaid appropriations and provisions and which the
meeting resolves to distribute, shall be distributed amongst all the shares in such a manner
that the savings shares shall receive a total dividend which is increased, compared to the
dividend received by the ordinary shares, by an amount equivalent to 2% of their par value.
In the event of distribution of reserves, savings shares shall have the same rights as the
other shares.
General Provisions
Article 24
Insofar as their relationships with the Company are concerned, the domicile of the
shareholders is understood, for all legal purposes, to be that shown in the Book of
Shareholders.
Article 25
All matters not provided for in the present Articles of Association shall be governed by the
provisions of law.
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Attachment 2
Pirelli S.p.A. - Milan
Articles of association
Company’s name, purpose, registered office and duration
Article 1
A joint stock Company is hereby incorporated under the name Pirelli Società per Azioni.
Article 2
The purpose of the Company is the following:
a) the acquisition of participating interests in other companies or corporations, both in
Italy and abroad;
b) the financing, and the technical and financial co-ordination of the companies or
corporations in which it has interests;
c) the sale, ownership, management or placement of both government and private
securities.
The Company may carry out all transactions of any type whatsoever - excluding the
collection of savings deposits from the public - connected to its corporate business
purpose.
Article 3
The registered office of the Company is in Milan, at Viale Sarca No. 222.
Article 4
The duration of the Company is fixed until the 31 December 2100.
Share Capital
Article 5
The share capital is Euro 1,031,970,414.28 divided into No. 1,896,552,473 ordinary shares
and No. 88,006,016 savings shares, with a par value of Euro 0.52 each.
With a resolution passed by the extraordinary general meeting held on the 15 May 1998 the
Directors were granted the power to increase the share capital, in one or more instances,
by a maximum amount of Euro 258,228,449.54 and for a maximum time period of five
years as from the date of the said resolution.
The share capital increase may be carried out by issuing, also with a premium, both
ordinary and savings shares, with the same features as those already outstanding and must
be reserved for shareholders and holders of convertible bonds.
With a resolution passed by the extraordinary general meeting held on the 22 December
1998 the Directors were granted the power to issue bonds, in one or more instances,
including bonds that are convertible both into ordinary shares or into savings shares, or
with warrants valid for the underwriting of the said shares, for a maximum face value
amount of Euro 516,456,899.08 and for a maximum time period of five years as from the
date of the said resolution, with the consequent possible increase of the share capital
serving the bond conversion.
With a resolution passed by the shareholders’ meeting held on the 15 May 1998 the
Directors were granted the power to issue up to a maximum of No. 45 million ordinary
shares, in one or more instances, by the date of 30 April 2003 to be attributed to executives
and cadres of the company and of the companies controlled by same and of those
controlling same and likewise of the other companies controlled by the latter, both in Italy
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and abroad, pursuant to the terms of articles 2441 and/or 2349 of the civil code.
In the event of the issue of bonds which are convertible into shares, the amount of share
capital will be determined according to the extent to which conversion rights on same are
exercised.
Article 6
The shares are divided into ordinary shares and savings shares.
Ordinary shares give the right to one vote per share; they may be either registered or
bearer shares insofar as the law permits, and in this case may be converted, especially at
the holder’s request and expense, from one class to the other.
Savings shares, unless the law provides otherwise, are bearer shares; at the request and
expense of the shareholder they may be converted into registered shares.
As well as any rights and privileges provided for by law and in other parts of the present
articles of association, savings shares shall have pre-emptive rights in the matter of payingoff
of capital up to the full par value of same; in the event of a capital reduction due to
loss, the par value of the saving shares will be reduced only by that part of loss exceeding
the total par value of the other shares.
Savings shares keep the rights and privileges foreseen by law and by the present articles
even in the event of exclusion of ordinary shares and savings shares from trading.
In order to ensure the common representative of the holders of savings shares, of adequate
information about any transactions which might influence the trend in quotations of the
shares in that class, any communications concerning said transactions will promptly be
sent to same through a legal representative.
Article 7
The share capital may be increased, by resolution of the extraordinary shareholders’
meeting, by means of issuing new shares, including any having different rights, in
compliance with the formalities prescribed by the present articles of association.
In the event of a share capital increase being carried out by issuing shares of only one
class, same must be offered on option to the shareholders of all classes of shares.
In the event of both ordinary shares and savings shares being issued:
a) the holders of ordinary shares shall have the right to receive ordinary shares on option,
and savings shares to make up any difference;
b) the holders of savings shares shall have the right to receive savings shares on option,
and ordinary shares to make up any difference.
General Shareholders’ Meeting
Article 8
The convocation of the general meeting, which may take place anywhere in Italy including
in a place other than the registered office, the right to attend meetings and representation
at same are all governed by law.
Article 9
The due convocation of the meeting and the validity of its resolutions are governed by law.
The voting quorum for the appointment of directors is established as a relative majority of
the votes.
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Article 10
In view of the nature of the Company’s business and the special requirements arising
therefrom, the ordinary general meeting may be convened within six months of the end of
the financial period.
Article 11
The meeting shall be presided over by the Chairman of the Board of Directors, by a Vice-
Chairman or by a Managing Director, in that order; whenever there are two or more Vice-
Chairmen or Managing Directors, the chair shall be taken respectively by the senior in age.
The Chairman is assisted by a Secretary appointed by the meeting; there is no need to
appoint a Secretary when the minutes of the meeting are drawn up by a notary public.
It is the duty of the Chairman of the meeting to verify the right to attend the meeting,
including by means of proxy; to ascertain whether or not the meeting has been duly
constituted and has achieved the quorum required in order to pass resolutions; to conduct
and moderate the discussion; and to establish the order and manner of voting as well as
announce the results thereof.
The resolutions of the meeting shall be recorded in the minutes, which shall be signed by
the Chairman and the Secretary to the meeting or the notary public.
The minutes of the extraordinary general shareholders’ meeting must be drawn up by a
notary public appointed by the Chairman.
Any copies and extracts thereof, that have not been drawn up by a notary public, shall be
certified as true copies by the Chairman of the Board of Directors.
Management of the Company
Article 12
The Company is managed by a Board of Directors composed of between seven and
nineteen members who shall remain in office for three years (unless the meeting fixes a
shorter term of office at the time of making the appointment) and may be re-appointed.
Unless otherwise decided by the meeting the Directors are not bound by the prohibition
mentioned under art. 2390 of the Civil Code of Law.
If, due to resignation or any other cause, more than half the Directors should leave office,
then the entire Board of Directors is considered to have resigned with effect as from the
time of its re-election.
The emoluments of the Board of Directors consist of the part-share of profits established
under article 23 of the present articles.
Furthermore, the shareholders’ meeting may assign a fixed annual amount to the members
of the Board, to be recorded under general management expenses. This sum shall remain
fixed and unchanged until such time as the meeting resolves otherwise.
In addition to this, the members of the Board shall be reimbursed for all expenses incurred
by them during the course of their duties.
Article 13
A Chairman, and if necessary, one or more Vice-Chairmen shall be appointed from
amongst the members of the Board.
In the event of the Chairman being absent, the chair shall be taken by a Vice-Chairman or a
Managing Director, in that order; if there should happen to be two or more Vice-Chairmen
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or Managing Directors, the chair shall be taken respectively by the senior in age.
The Board shall appoint a Secretary who need not necessarily be a member of the Board.
Article 14
The Board shall meet at the invitation of the Chairman or whomsoever is acting for same,
at the registered office of the Company or in any other place stated in the notice of
convocation, every time same considers it best in the interests of the Company, or
whenever a meeting has been requested by one of the Managing Directors or by at least
two Statutory Auditors.
Meetings of the Board and of the Executive Committee, as foreseen under article 19
hereinunder, may be held through an audiovisual connection.
In this case the following must be guaranteed:
a) identification of all the participants at each point in the connection;
b) the possibility for each participant to intervene, to orally put forward same’s own
opinion, to view, receive and transmit all documentation, as well as the contextuality of
considerations and resolutions.
Meetings of the Board of Directors and of the Executive Committee are considered to be
held in the place in which the Chairman and the Secretary must be simultaneously.
Article 15
Board meetings shall be convened by means of a letter, telegram, telex or fax sent to the
address of each Director and each Statutory Auditor, at least five days before (or in urgent
cases at least two days before) the day set for the meeting.
The Board may however validly pass resolutions, even failing any formal convocation, if all
the board members and all the statutory auditors in office are present.
Article 16
The presence of at least half the members plus one is necessary for the resolutions of the
Board to be deemed valid, and the favorable vote of the majority of those present is
required.
In the event of a tie in votes, the casting vote shall be that of the Chairman.
Article 17
The resolutions of the Board, even when passed by meetings held through
videoconference, are recorded in a special book signed by the Chairman and the Secretary.
Any copies and extracts thereof, that have not been drawn up by a notary public, shall be
certified as true copies by the Chairman.
Article 18
The Board shall undertake the management of the Company and for that purpose is
invested with the fullest powers of administration, except for those which by provisions of
law or the present Articles are reserved to the general shareholders’ meeting.
The Board of Directors shall promptly refer back to the Board of Statutory Auditors,
including through delegated bodies, about the business activities carried on and the
transactions of greatest importance from an economical, financial and capital viewpoint,
performed by the Company and its subsidiaries; in particular, it shall inform same of any
transactions involving a potential conflict of interests. This information shall be supplied
at least on a three monthly basis, on the occasion of board meetings or meetings of the
Executive Committee, or by means of a written notice to the Board of Statutory Auditors.
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Article 19
The Board is authorized to confer such powers as it deems fit, for the management of the
Company’s business activities, on one or more of its members who may hold the position
of Managing Directors, granting same separate or joint signatory powers, on behalf of the
Company, as appropriate.
Furthermore, the Board may delegate its own attributions to an Executive Committee
composed of some of its members, whose emoluments shall be established by the General
Shareholders’ Meeting.
The Board may also appoint General Managers, Vice General Managers, Managers and
deputy Managers. The appointment of the Managers and deputy Managers may also be
delegated, by the Board, to the Managing Directors and General Managers.
Article 20
Legal representation of the Company vis-à-vis third parties and in court proceedings shall
be the duty, with separate signatory powers, of the Chairman of the Board of Directors
and, if appointed, of the Vice Chairmen and Managing Directors, within the limits of the
powers granted to them by the Board of Directors.
Each one of the aforesaid shall in any case have full powers to take legal action and file
appeals before any judicial authority and any court of any degree, including in revocation
or cassation (supreme court) proceedings, to file statements and prosecute in criminal
cases, to sue on behalf of the Company in criminal proceedings, to begin legal proceedings
and file petitions before all administrative jurisdictions, to intervene and protect the
Company’s interests in case of proceedings and claims against the Company, granting for
this purpose all necessary mandates and powers of attorney ad litem.
The Board of Directors and, within the limits of the powers granted to them by said Board,
the Chairman of the Board and, if appointed, the Vice Chairmen and the Managing
Directors, are authorized to grant Managers and staff in general, and when necessary third
parties, the power to represent the Company vis-à-vis third parties and in court
proceedings.
Board of Statutory Auditors
Article 21
The Board of Statutory Auditors is composed of three statutory auditors and two deputy
statutory auditors.
The ordinary General Shareholders’ Meeting shall appoint the Board of Statutory Auditors
and determine the fees thereof. The minority interest shall appoint one statutory auditor
and one deputy statutory auditor.
With the exception of the provisions of the second to last paragraph of the present article,
the appointment of the Board of Statutory Auditors is made on the grounds of lists put
forward by the shareholders in which candidates are listed under progressive numbers.
Each list contains a number of candidates which does not exceed the number of members
to be appointed. All shareholders who, alone or together with other shareholders,
represent at least 2 per cent of the shares with voting rights in the ordinary general
meeting, have the right to put forward a list.
The lists of candidates, undersigned by the parties presenting them, must be filed at the
Company’s registered office at least ten days before the day fixed for the meeting in first
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call. A description of the professional résumé of the individuals standing for election must
be enclosed with the lists together with statements whereby the single candidates accept
the nomination and attest, under their own personal responsibility, to the non-existence of
any reasons for ineligibility or incompatibility as well as to the existence of the requisites
prescribed by law or by the articles for the position.
Any lists put forward which do not comply with the aforesaid provisions shall be
considered not to have been put forward.
Each candidate may be included on only one list, under penalty of ineligibility.
Likewise, any individuals who are not in possession of the requisites established by the
applicable rules and regulations or who already hold the position of statutory auditor in
more than five companies with stocks listed on official Italian markets, with the exception
of controlling companies and subsidiaries of Pirelli S.p.A., may not be appointed as
statutory auditors.
Each individual with voting rights may vote for only one list.
The election of the members of the Board of Statutory Auditors is performed as follows:
two statutory members and one deputy are taken from the list which has obtained the
highest number of votes, in the progressive order in which same are listed thereon; the
remaining statutory member and the other deputy member are taken from the list which
has obtained the highest number of votes from the meeting after the first list, again in the
progressive order in which same are listed thereon; in the event of several lists obtaining
the same number of votes, a new run-off vote between the said lists will be cast by all the
shareholders present at the meeting, and the candidates on the list which obtains the
simple majority of the votes will be appointed.
The Chairman of the Board of Statutory Auditors shall be the statutory member indicated
as the first candidate on the list which obtained the highest number of votes.
In case of death, waiver or resignation of a statutory auditor, the deputy belonging to the
same list as the resigned statutory auditor shall take the place of same. In the event of
substitution of the Chairman of the Board of Statutory Auditors, the chair shall be taken by
the other statutory member on the list to which the resigning chairman belonged; if it is
not possible to perform substitutions and replacements as set out hereinabove, then a
meeting shall be convened to integrate and complete the Board of Statutory Auditors and
which shall pass resolutions with a relative majority.
When the meeting has to make provisions, pursuant to the terms of the aforegoing
paragraph or to the terms of law, for the appointment of statutory auditors and/or deputies
needed to complete the Board of Statutory Auditors, it shall proceed as follows: if
statutory auditors appointed from the majority list have to be replaced, then the
appointment is made with a relative majority vote without being tied to any list; if on the
other hand statutory auditors appointed by the minority have to be replaced, the meeting
shall replace same with a relative majority vote choosing names where possible from
amongst the candidates indicated on the list on which the statutory auditor to be
substituted appeared.
If only one single list has been put forward, then the meeting shall cast its vote regards
same; if the list obtains a relative majority, then the first three candidates on the list in
progressive order shall be appointed as statutory auditors, and the fourth and fifth
candidate shall be appointed as deputy statutory auditors; Chairman of the Board of
Statutory Auditors shall be the person indicated at the top of the list put forward; in case
of death, waiver or resignation of a statutory auditor, and in the event of substitution of the
Chairman of the Board of Statutory Auditors, same shall be replaced respectively by a
deputy statutory auditor and a statutory auditor in the order arising from the progressive
numbering of the said list.
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Failing any lists, the Board of Statutory Auditors and its Chairman shall be appointed by
the general meeting with the majorities prescribed by law.
Outgoing statutory auditors may be re-appointed.
Financial Statements - Distribution of profits
Article 22
The company’s financial period shall end on the 31st December each year.
Article 23
After all the appropriations to the reserves prescribed by law have been carried out, the
annual profits shall be distributed as follows:
- savings shares shall be attributed an amount of up to seven per cent of their par value; if,
in any financial period, a dividend of less than seven per cent of the par value has been
distributed to the savings shares, the said difference is calculated as an increase to be
added to the preference dividend during the following two financial periods;
- the Board of Directors is attributed an amount equivalent to 1% of the net profits
remaining in excess of:
a) the relevant appropriation to the legal reserve;
b) the quota equivalent to 7% of the par value of the savings shares;
c) the quota equivalent to 5% of the par value of paid-up share capital represented by
ordinary shares;
- any profits remaining after the aforesaid appropriations and provisions and which the
meeting resolves to distribute, shall be distributed amongst all the shares in such a manner
that the savings shares shall receive a total dividend which is increased, compared to the
dividend received by the ordinary shares, by an amount equivalent to 2% of their par value.
In the event of distribution of reserves, savings shares shall have the same rights as the
other shares.
General Provisions
Article 24
Insofar as their relationships with the Company are concerned, the domicile of the
shareholders is understood, for all legal purposes, to be that shown in the Book of
Shareholders.
Article 25
All matters not provided for in the present Articles of Association shall be governed by the
provisions of law.
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Board of Statutory Auditors’ report
on the extraordinary part of the shareholders’ meeting
Dear Shareholders,
You have been convened to the extraordinary part of the meeting to pass a series of
resolutions regarding the merger by incorporation in your company of the parent company
Société Internationale Pirelli S.p.A.; the procedures for the disposition of the treasury
shares which will remain available to your company, due to the both the effect of the
above-mentioned merger and due to the rejection of the assignment of the bonus shares
and, lastly, for the effect of not meeting, either totally or partially, the pre-fixed goals by
those who were assigned shares under the incentive plan (as far as the last two cases are
concerned, in compliance with the resolution passed in the shareholders’ meeting of
May 15, 1998); the translation into euro of the share capital of your company, which results,
due to rounding up as allowed by the law, to Euro 0.52 of the par value of Lire 1,000 of the
shares which make up the share capital.
As to the first point, the proposed exchange ratio, determined on the basis of the balance
sheet at December 31, 1998 of Pirelli S.p.A. and Société Internationale Pirelli S.p.A. is fixed
at 83 Pirelli S.p.A. shares for every Société Internationale Pirelli S.p.A. ordinary share.
There will be no payment differences in cash.
The Board of Directors arrived at the exchange ratio by considering the findings of the
appraisals performed by independent experts. The Board of Statutory Auditors has
examined the merger plan, the Directors’ report on operations and the prescribed opinions
as the congruity of the ratio expressed by Reconta Ernst & Young S.p.A. for Pirelli S.p.A.
and by KPMG S.p.A. for Société Internationale Pirelli S.p.A..
As for the second point, procedures are proposed for the disposition of treasury shares
coming to our company as a result of the comments made at the beginning of the report.
In relation to the third point, consistent with the adoption of euro for the accounting
records effective January 1, 1999, a proposal is made to translate into euro the share
capital of your company and the consequent increase of the same, to Euro 1,031,970,414.28
(equal to Lire 1,998,173,354,058 against a share capital as of today expressed in Italian lire
and amounting to Lire 1,984,558,489,000) which derives from the adoption of Euro 0.52 as
the per unit par value of the shares making up the share capital.
The Board of Statutory Auditors states that the current share capital of Pirelli S.p.A., equal
to Lire 1,984,558,489,000 has been fully paid-in and expresses its favorable opinion as to
the three proposals.
Milan, April 26, 1999
The Board of Statutory Auditors
Luigi Guatri - Mario Brughera - Giorgio Oggioni
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