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2003 Consolidated Financial Statements 1 SUMMARY Report and consolidated financial statements of the Amplifon Group Report on operations Highlights for 2003 Principal economic and financial information Letter to the Shareholders Corporate bodies Shareholder information Company profile Trade network and markets Notes to the economic and financial results Investments Research and development Other information 3 4 5 7 8 9 10 12 24 25 26 Consolidated financial statements 2 Balance sheet Income statement Notes to the financial statements Attachments 41 45 47 83 Auditing Company report Board of Auditor’s report 88 89 HIGHLIGHTS FOR 2003 • Increase in revenues The revenues form consolidated sales and services for 2003 (443.388 thousand Euro) increased by 51.447 thousand Euro (+13,1%) compared to the previous period. If the effect of differences on the rate of exchange were excluded (16.922 thousand Euro), revenues would have amounted to 68.369 thousand Euro. 500.000 400.000 Ricavi - 443.388 360.843 391.941 300.000 200.000 100.000 2001 2002 2003 Esercizio • Improvement of economic operating income the gross operating income (EBITDA) for 2003 (60.273 thousand Euro) increased by 11.008 thousand Euro (+22,3%) compared to the previous year. 70.000 60.273 60.000 50.000 EBITDA - 49.265 40.911 40.000 30.000 20.000 - in 2003 the Group net income (12.667 thousand Euro) decreased by 2.466 thousand Euro compared to the previous year on account of extraordinary charges connected to company restructuring and reorganization operations concluded in 2003 and pertaining to the biomedical sector which the Group no longer deems to be a core business. 10.000 - 2001 2002 2003 Esercizio • Decrease in net financial borrowing and high cash generation from operating activities: the net financial borrowing as of December 31, 2003 (95.349 thousand Euro) decreased by 6.674 thousand Euro compared to the previous year, notwithstanding the use of financial resources in investing activities during the year, which amounted to 39.669 thousand Euro, and the distribution of dividends for 2.943 thousand Euro, thanks to cash flows generated by operating activities which amounted to 47.756 thousand Euro. • Proposed dividend per share for 2003: Euro 0,18 (Euro 0,15 in 2002). 3 PRINCIPAL FINANCIAL AND ECONOMIC INFORMATION (thousand Euro) Year 2003 Y ear 2002 443.388 (404.595) 60.273 35.750 29.777 23.230 12.667 391.941 (359.342) 49.265 29.439 21.947 21.899 15.133 51.447 (45.253) 11.008 6.311 7.830 1.331 (2.466) 31/12/2003 31/12/2002 Change 168.279 232.930 95.349 47.756 168.061 239.374 102.023 21.269 218 (6.444) (6.674) 26.487 Economic information: Revenues from sales and services Operating costs (a) Gross operating income (EBITDA) Operating results (EBIT) Income before extraordinary items and taxes Income before taxes Net Group income (thousand Euro) Financial information: Fixed assets Net invested capital Net financial borrowing Cash flow generated from assets (a) Costs for raw materials, other materials, consumables and goods, change in inventories, cost of external services, other operating costs and labor costs 4 Change Change % 13,1% 12,6% 22,3% 21,4% 35,7% 6,1% (16,3%) LETTER TO THE SHAREHOLDERS Dear Shareholders, 2003 was a positive year: during the period the Group achieved the highest ever operating income performance; the EBITDA amounted to 60.273 thousand Euro (49.265 thousand Euro in 2002 and 40.911 thousand Euro in 2001 ) with a 13,6% incidence on revenues (12,6% in 2002 and 11,3% in 2001). As a result, high cash flows, amounting to 47.756 thousand Euro, were generated from the operating activities (21.269 thousand Euro in 2002 and negative for 2.127 thousand Euro in 2001). The results for 2003 confirm the soundness of the strategies and actions implemented in order to create value for the Stockholders. In view of the significant results achieved, the four guidelines underpinning our performance during the year have become the foundations on which to build future ventures; the guidelines are detailed below: • the focalization on the core business of the distribution and fitting of hearing aids by way of the Group network which currently includes approximately 2.000 outlets, 3.000 authorized distribution centers and 1.800 licensed network affiliates; • the ongoing improvement of operating and commercial efficiency; • the continuance of an attractive dividends policy; • the continuance of the Group policy of expansion and international development. The choice to focus on the core business was based on the high profitability margins and on the estimated market growth potential connected to factors including a longer average life expectancy, cultural changes influencing the life-style of people over 60 and growing acoustic pollution. Conversely, in the biomedical sector, both marginal and non-core for the Group, the persisting cyclical malaise and internal crisis lead the management to implement a plan for the strategic redirection and the radical restructuring of the business by way of operations including staff reduction and the abandonment of a number of production lines which were no longer deemed to be strategic: the economic effects of the above operations are included in the extraordinary charges for the period. The measures aimed at reducing costs significantly enhanced efficiency that was mirrored in the containment of operating costs, in the increase of profitability and the ensuing cash generation. In the context of the Group expansion and international development process the company division of National Hearing Center Inc. which was acquired in August 2003; the division deals in the retail of hearing aids on the United States market and has a distribution network counting 54 direct outlets. The acquisition, concluded for the total 15 million US Dollars which was paid at the time of purchase, in addition to guaranteeing the further consolidation of the group position, is strategic since it will open 5 up new distribution channels which include outlets located in the largest chain stores in America, WAL*MART, which counts 1.600 discount Stores and 1.300 super centers. The Group international development process continued in 2004 with the acquisition of the 100% equity stake in Horen Nederland, a Dutch company dealing in the retail of hearing aids, for 16.800 thousand Euro; 16.000 thousand Euro was paid at the time of purchase. The Group, which had already acquired the leadership on the Dutch market with a 27% market share, has further consolidated its position and completed the territorial coverage which is now deemed to be 35%. Horen Nederland operates in Holland by way of a commercial network which counts 27 outlets located in the north-west of the country. The net financial borrowing decreased, dropping from 102.023 thousand Euro as of December 31, 2002, to 95.349 thousand Euro as of December 31, 2003, notwithstanding the use during the year of financial resources for investing activities, which amounted to 39.669 thousand Euro, and the distribution of dividends for 2.943 thousand Euro; this was made possible by high cash flows generation from operating activities which amounted to 47.756 thousand Euro. Moreover, during the year, Amplifon continued to put a large amount of effort into ensuring that the debt structure was consistent with the asset structure, in order to reduce the risk of being exposed to interest rates volatility and to increase the correlation of the cost of borrowings to the revenues updating mechanism based on inflation. Such objectives were achieved by way of loans linked to the Euribor index and hedging operations which are aimed at limiting the interest rate fluctuations band. Ladies and Gentlemen, the economic and financial performance of your Company and the return policy concerning the profits generated by foreign subsidiary companies implemented by the management, has put us in the position to be able to propose a dividend on the net income for the year of 0,18 Euro per share, for a total amount of 3.532 thousand Euro. We are likewise certain that the other strategic courses outlined shall prove to be the source of further satisfaction in the future. Finally, in the light of the positive results achieved which bear witness to the high level of competences acquired, the whole Board of Directors wishes to thank all staff members who work in the Amplifon Group companies. For the Board of Directors Giovanni Martino Rollier 6 CORPORATE BODIES The Board of Directors Chairman Vice Chairman Managing Director and CEO Managing Director Director Director * Director * Anna Maria Formiggini Susan Carol Holland Alessandro Baldissera Pacchetti Giovanni Martino Rollier Vanni Emanuele Treves Giuseppe Daveri Piergaetano Marchetti (*) “Independent” director in compliance with the Code of Self-Regulation for Listed Companies set up by the Corporate Governance Committee of listed companies sponsored by the Borsa Italiana S.p.A. (the Italian Stock Exchange). The Board of Auditors Chairman Auditor Auditor Alternate Auditor Alternate Auditor Gian Paolo Giannini John Alexander Stewart Cristina Seregni Emanuele Borgonovo Alessandra Cislaghi The Internal Audit Committee Chairman Member Member Giuseppe Daveri Piergaetano Marchetti Susan Carol Holland The Remunerations Committee Chairman Member Member Piergaetano Marchetti Giuseppe Daveri Anna Maria Formiggini The Auditing Company Reconta Ernst & Young S.p.A. 7 INFORMATION TO THE SHAREHOLDERS On June 4, 2001, the Borsa Italiana S.p.A., the Italian Stock Exchange, by way of order no. 1707 confirmed the admission of Amplifon S.p.A. ordinary shares to Stock Exchange listing; on June 7, 2001 CONSOB (Commissione Nazionale per la Società e la Borsa) the National Commission for Listed Companies and the Stock Exchange, with order no. 1045709 authorized the listing on the Stock Exchange. The Amplifon S.p.A. shares were listed on the MTA segment of the Italian stock exchange as of June 27, 2001. As of December 31, 2003, the Amplifon S.p.A. share capital is made up of 19.621.000 shares having a nominal value of 0,20 Euro and divided as follows: Socio Ampliter N.V. Market Total No of ordinary shares 13.685.000 5.936.000 19.621.000 % ownership 69,75% 30,25% 100,00% Pursuant to article 2497 of the Italian Civil Code, please be advised that Amplifon S.p.A. is not subject to the management and organization activities performed by Ampliter N.V.. The chart below shows the trend of Amplifon shares compared to the trend of the MiIBTEL and SXDE Healthcare indexes during the period: AMPLIFON - MIBTEL - SXDE Healthcare rebasing 150 05Gen04 Pmax € 23,52 140 130 AMPLIFON 120 27Feb04 P € 22,60 02Gen04 P € 16,54 MIBTEL 110 100 SXDE Healthcare 90 80 70 20Feb03 Pmin € 13,80 Ja nJa 03 nFe 03 bFe 03 bM 03 ar M 03 ar Ap 03 r-0 Ap 3 rM 03 ay M -03 ay Ju 03 nJu 03 n0 Ju 3 l-0 Ju 3 lAu 03 gA u 03 gS e 03 pS e 03 pO 03 ct -0 O 3 ct N 03 ov -0 N 3 ov D 03 ec Ja 03 nJa 04 nFe 04 bFe 04 b04 60 AMPLIFON MIBTEL SXDE Healthcare 8 During 2003, Amplifon shares recorded a 33,6% increase compared to the closing price as of December 31, 2002, a positive performance of 23,8% in relative terms regarding the MIBTEL index and of 33,6% regarding the SXDE Healthcare segment index. The treatment of Amplifon shares on the MTA (Mercato Telematico Azionario) segment reached an average daily counter-value of 221.738 thousand Euro, and an average daily volume of 12.397 shares and an overall exchange volume amounting to 15,9% of the total value of the shares making up the Share capital. Financial indicators (*) Net income per share: Euro 0,65 Dividend per share for 2003: Euro 0,18 Group net equity per share: Euro 6,87 Financial flow generated by operating activities per share Euro 2,43 (*) The values refer to the number of shares existing as of December 31, 2003. As of December 30, 2003 the last day of negotiations, the Stock Exchange capitalization amounted to 442,6 million Euro. COMPANY PROFILE The Amplifon Group is the world leader in the distribution and the customized fitting of hearing aids for the solution of problems related to the loss of hearing and the supply of correlated services. The key factors which have enabled the Amplifon Group to achieve market leadership are the Group’s focus on customized solutions and services, on cutting edge technological innovations, on widely recognized brand names in addition to a well-established position on international markets and an efficient, widespread distribution network. In the countries where the Amplifon Group operates, thanks to a network of retail outlets and network affiliates, the Group has acquired a market share of approximately 15%; the network includes 2.000 outlets, 3.000 authorized distribution centers and about 1800 licensed network affiliates. 9 THE DISTRIBUTION NETWORK AND MARKETS The Group currently operates in Italy, U.S.A., Canada, France, Holland, Switzerland, Spain, Portugal, Hungary and Egypt. The process of international expansion implemented by the Group focused on the strategic integration of companies that share a similar approach in terms of management values and customer service, in addition to being leaders in their markets. In this sense, the Group’s mission is to become a “hub” for all those companies that want to be part of an international development program and do away with the restrictions of a mere local presence in order to take advantage of the economies of scale and potential synergies. In 2003, the Amplifon Group continued its expansion strategy by increasing its level of penetration in established markets and acquiring a number of minor companies and company divisions. In this context, on August 28, 2003, National Hearing Center (NHC), which had been set up for that very purpose, acquired the company division National Hearing Centers Inc. with head office in Springfield (Missouri) operating in the hearing aid retail sector on the American market. The acquisition, for a consideration of 15 million US Dollars, in addition to further consolidating the Group’s position in the United States, is strategic to secure a new distribution channel based on the outlets, including 1.600 discount Stores and 1.300 super centers, located in one of the largest chain stores in the America, called WAL*MART. Currently NHC operates through a distribution network which counts 54 direct outlets. Moreover, again in the Unites States, the group acquired minor equity stakes and company divisions for a corresponding value of 550 thousand US Dollars. In France, in 2003, in order to improve territorial coverage and consolidate the Group’s position in the country, the Group acquired, a number of equity investments and company divisions for a total consideration of approximately 3.000 thousand Euro. In Spain, during 2003, the Group acquired two equity investments for a total consideration of approximately 782 thousand Euro. In Holland, as of March 1, 2003, Acousticon B.V. increased its stake in the capital of Electro Medical Instruments B.V., from 65% to 100%, against a consideration of 353 thousand Euro. Moreover, the Group acquired 100% equity stake in Pfennings Hoortoestellen B.V. for 900 thousand Euro and a number of company divisions for a corresponding value of 100 thousand Euro. In Italy, the Group acquired a company division comprising two outlets in the region of Liguria for a consideration of 250 thousand Euro. Moreover, following the acquisitions Sonus USA Inc. and Sonus Canada Ltd. which took place in 2002, on June 6, 2003, Amplifon underwrote a partnership agreement with Simest S.p.A. (Società 10 Italiana per le Imprese all’Estero, a company controlled by the Ministry of Foreign Trade) whereby, among other things, the capital of Amplifon USA Inc. was increased from 10 million US Dollars to 52,5 million US Dollars; Amplifon underwrote 50,5 million US Dollars by converting previously paid interest bearing loans and Simest underwrote 2 million US Dollars. The transaction included the majority shareholder’s commitment to buy back 3,81% of the Simest equity investment; Simest, a subsidiary company of the Ministry of Foreign Trade, (Ministero del Commercio Estero), shall pay grants-in-aid on interest account in compliance with Law 100/1990, which shall decrease the burden of financial charges. 11 NOTES TO THE ECONOMIC AND FINANCIAL RESULTS Unless otherwise indicated, the values shown in the Report on Operations are in thousand Euros. CONSOLIDATED INCOME STATEMENT (thousand Euro) Year 2003 % Year 2002 % Change Change % 443.388 95,4% 391.941 95,9% 51.447 13,1% 21.480 4,6% 16.666 4,1% 4.814 28,9% 464.868 100,0% 408.607 100,0% 56.261 13,8% Cost of raw materials, materials consumables and goods and change in inventories of raw materials, consumables and goods (150.234) (32,3%) (137.342) (33,6%) (12.892) 9,4% Costs for external services (135.960) (29,3%) (122.624) (30,0%) (13.336) 10,9% (8.770) (1,9%) (8.007) (2,0%) (763) 9,5% Revenues from sales and services Other revenues Value of operations Other operating costs Added value Labor costs Gross operating income (EBITDA) Depreciation and amortization Other adjustments 169.904 36,5% 140.634 34,4% 29.270 20,8% (109.631) (23,6%) (91.369) (22,4%) (18.262) 20,0% 60.273 12,9% 49.265 12,0% 11.008 22,3% (21.328) (4,6%) (17.030) (4,2%) (4.298) 25,2% (3.195) (0,7%) (2.796) (0,7%) (399) 14,3% Operating results (EBIT) 35.750 7,6% 29.439 7,1% 6.311 21,4% Net financial charges (5.973) (1,3%) (7.563) (1,9%) 1.590 (21,0%) - 0,0% 71 0,0% (71) (100,0%) Financial assets adjustments Income before extraordinary items and taxes 29.777 6,3% 21.947 5,2% 7.830 35,7% Net financial income (charges) (6.547) (1,4%) (48) 0,0% (6.499) n.a. Income before taxes Income taxes for the period Income before third party interests Third party (income) Group net income 23.230 4,9% 21.899 5,2% 1.331 6,1% (10.350) (2,2%) (6.584) (1,6%) (3.766) 57,2% 12.880 2,7% 15.315 3,6% (2.435) (15,9%) (213) 0,0% (182) 0,0% (31) 17,0% 12.667 2,7% 15.133 3,6% (2.466) (16,3%) The consolidated financial statements for 2003 closed with a net income of 12.667 thousand Euro after net financial charges amounting to 5.973 thousand Euro, net extraordinary charges for 6.547 thousand Euro and tax related costs for 10.350 thousand Euro. The Group net income for 2003 decreased by 2.466 thousand Euro (-16,3%), compared to the previous year; this was mainly due to the following factors: i) the increase in the gross operating income (EBITDA), which rose form 49.265 thousand Euro in 2002 to 60.273 thousand Euro in 2003; ii) the decrease in net financial charges which went from 7.563 thousand Euro in 2002 to 5.973 thousand Euro in 2003; iii) the increase in net extraordinary charges which amounted to 48 thousand Euro in 2002 and to 6.547 thousand Euro in 2003; iv) the increase in income taxes for the period which rose from 6.584 thousand Euro in 2002 to 10.350 thousand Euro in 2003. 12 REVENUES FROM SALES AND SERVICES Year 2003 % Year 2002 % Italy 145.214 32,6% 138.535 35,3% U.S.A. - Canada (thousand Euro) Change Change. % Hearing aid sector: 6.679 4,8% 129.858 29,3% 103.161 26,3% 26.697 25,9% France 59.708 13,5% 47.911 12,2% 11.797 24,6% Holland 54.466 12,3% 46.358 11,8% 8.108 17,5% Switzerland 13.568 3,1% 13.139 3,4% 429 3,3% Spain and Portugal 12.644 2,9% 11.334 2,9% 1.310 11,6% Austria 5.907 1,3% 6.248 1,6% (341) (5,5%) Hungary 2.108 0,5% 1.919 0,5% 189 9,8% 423.473 95,5% 368.605 94,0% 54.868 14,9% Italy 19.915 4,5% 23.336 6,0% (3.421) (14,7%) Total biomedical equipment 19.915 4,5% 23.336 6,0% (3.421) (14,7%) 443.388 100,0% 391.941 100,0% 51.447 13,1% Total hearing aids Biomedical equipment sector: Total The consolidated revenues from sales and services, which amounted to 443.388 thousand Euro in 2003 and to 391.941 thousand Euro in 2002, showed a 51.447 thousand Euro (+13,1 %) increase that was entirely due to Group core business activities: the revenues from the distribution and fitting of hearing aids rose from 368.605 thousand Euro in 2002 to 423.473 thousand Euro in 2003 and recorded a 54.868 thousand Euro(+14,9 %) increase even though, in terms of absolute value, revenues recorded in 2003 were negatively influenced by the appreciation of the Euro regards the US Dollar. If the fluctuations in exchange rates (16.922 thousand Euro) were excluded, the increase in revenues from sales of hearing aids would have amounted to 71.790 thousand Euro (+17,0 %), which would be correlated to the structural growth process of the Group, amounting to 24.380 thousand Euro and to the expansion of external lines linked to the acquisitions of new companies and company divisions. Finally, in the wake of the international expansion strategy implemented by the management over the last five years, the revenues from sales and services in the hearing aid sector generated abroad in 2003, which amounted to 278.259 thousand Euro, represented just under two thirds of the consolidated revenues in the same sector. 13 The pie chart below shows the distribution of Group revenues by geographical during the year 2003: 1.3% 3.1% 2.9% 0.5% 4.5% 32,6% Italy U.S.A. - Canada Holland France 13.5% Switzerland Spain and Portugal Austria Hungary 12.3% Biomedical 29.3% Hearing aid sector Italy Given the substantially stable market, revenues form sales and services, which amounted to 145.214 thousand Euro in 2003 and to 138.535 thousand Euro in 2002, showed a 6.679 thousand Euro increase (+4,8%); of this 4.325 thousand Euro was produced in the last quarter confirming the successful marketing and customer satisfaction policies implemented by the management and also increasing the level of penetration and facilitating the introduction of digital technology products on the national health market. Moreover, research activities geared towards new, exclusive fitting systems continued throughout 2003 focusing on digital technology products which are aimed at differentiating the products and services offered by the Group from those offered by competitors. U.S.A. - Canada In a virtually flat market in terms of volumes, revenues from sales and services, which amounted to 129.858 thousand Euro in 2003 and to 103.161 thousand Euro in 2002, recorded a 26.697 thousand Euro (25,9 %) increase even though the absolute value of revenues in 2003 was negatively affected by the appreciation of the Euro regards the US Dollar: if the fluctuations in exchange rates (16.922 thousand Euro) were excluded, the increase in revenues from sales in the specific market would have amounted to 43.619 thousand Euro (+42,28 %); this is entirely due to the change in the consolidation area. In fact, the Group further consolidated its leadership on the American market by way of the following major transactions: the acquisition in October 2002 of Sonus U.S.A. Inc. and Sonus Canada Ltd. followed by the acquisition in August 2003, by NHC which was set up for that very purpose, of the company division National Hearing Centers Inc. . 14 With the acquisition of the above businesses the Group, which was already active in the United States through the subsidiary company Miracle-Ear, having reached an 11% share of the market chose to apply separate marketing strategies and policies; indeed, in the United States the Group has implemented a strategy based on a triple distribution pattern, namely through company owned retail stores, franchise retail locations and licensed network affiliates. In particular, the Miracle-Ear distribution system is based on franchise retail locations sited in the SEARS chain of stores while the Sonus distribution system mainly operates through company owned retail stores, and licensed network affiliates which purchase products from Sonus at competitive prices. Finally NHC is present on the market through company owned retail stores which are mainly located in the WAL*MART chain of department stores. The increase in revenues recorded in 2003 that were determined by Sonus U.S.A. and Sonus Canada included only for two months in 2002, and by the entrance of NHC in the consolidation area, amounted to overall 43.101 thousand Euro while the revenues from sales in currency generated by Miracle-Ear during 2003 were in line with the previous period and amounted to 88.473 US Dollars in 2002 and to 87.334 US Dollars in 2003. The management believes that integration process of Sonus U.S.A. and Sonus Canada into the Group, which was accomplished in line with the forecasts, the development potential of the business acquired by the newly established NHC and the anticipated market developments, will all contribute to the progressive improvement of profitability margins. France In a growing market following the implementation of a number of amendments to current regulations, revenues form sales and services, which amounted to 59.708 thousand Euro in 2003 and to 47.911 thousand Euro in 2002, showed a 11.797 thousand Euro increase (+24,6%); this was mainly due to the expansion policy based on the acquisition of new companies or company divisions, which allowed a better coverage of the territory; to a lesser extent the increase was also due to the structural growth process of the Group which was achieved thanks to greater sales volumes. The results obtained substantiate the Amplifon Group’s absolute leadership on this market in terms of revenues; accordingly, the management deems it advisable to continue the aforementioned expansion strategy. Holland In a growing market, the revenues from sales and services, which amounted to 54.466 thousand Euro in 2003 and to 46.358 thousand Euro in 2002, showed a 8.108 thousand Euro (+17,5%) increase mainly due to effective marketing and image-enhancing strategies which lead to greater market penetration. On account of the Group’s interest in this market, in 2004 Amplifon has acquired a 100% stake in Horen Nederland for a consideration of 16.800 thousand Euro (further information is contained in the Paragraph “Significant events occurring after the closure of the year”). Following the above acquisition the Group, which was the absolute market leader with a share of 27%, consolidated its position and on reaching a market share estimated in 35% has completed the coverage of the territory. Switzerland Revenues from sales and services, which amounted to 13.568 thousand Euro in 2003 and to 13.139 thousand Euro in 2002, showed a 429 thousand Euro (3,3%) increase although a number of 15 amendments to the regulations in force were implemented in the third quarter of 2002 leading to revenues form sales being concentrated in that period. The new marketing strategies and sale procedures introduced by the current management and the excellent position on the market make it more than likely that the positive trend will continue in the future. Spain and Portugal Revenues from sales and services, which amounted to 12.644 thousand Euro in 2003 and to 11.334 thousand Euro in 2002, showed a 1.310 thousand Euro (11,6%) increase. The growth confirms the successful reorganization strategy first adopted by management in 2001, which was put into practice, on the one hand, by downsizing and updating the sales force and, on the other, by better product positioning on the market. This strategy reversed the negative trend which had been recorded in the Iberian market for the past corporate years. Currently the Group is aiming at consolidating its present position on the market. Austria The revenues from sales and services, which amounted to 5.907 thousand Euro in 2003 and to 6.248 thousand Euro in 2002, showed a 341 thousand Euro (-5,5%) decrease; the decrease was linked to the prevailing uncertainty on the Austrian market which began in late 2002 when, following a number of modifications to regulations, the sales average dropped. These circumstances lead the Group to pull out from the Austrian market, which was no longer deemed to be strategic by way of the transfer of 100% of its equity stake in the Viennatone business (further information is contained in the Paragraph “Significant events occurring after the closure of the year”). Hungary The acquisition of Viton, which was completed in April 2002, heralded the entrance of the Group into a new geographical area and into a new market. In 2003, revenues from sales and services amounted to 2.108 thousand Euro. The area will be subject to intense management scrutiny during 2004 since it is not yet fully integrated into the Group. 16 Biomedical equipment sector Italy The revenues from sales and services, which amounted to 19.915 thousand Euro in 2003 and to 23.336 thousand Euro in 2002, showed a 3.421 thousand Euro (-14,7%) decrease. Indeed, the sector has been negatively affected by the costs control policy in investments implemented by the Aziende Sanitarie Locali, the Local Health Units, which was the main market outlet and by unprofitable production lines. The continuance of negative in-house and economic trend lead the management to develop a plan for the strategic re-orientation of the business; in 2003 a radical plan aimed at restructuring the business was implemented which involved the reduction of staff and the selling off of commercial lines which were no longer deemed to be strategic: the relating economic effects are included in the extraordinary charges for the period (further information is contained in the Report on Operations in the notes pertaining to “Income before taxes”). 17 GROSS OPERATING INCOME (EBITDA) (thousand Euro) Gross operating income (EBITDA) 2003 % 2002 % Change Change % 60.273 12,9% 49.265 12,0% 11.008 22,3% The gross operating income (EBITDA), which amounted to 60.273 thousand Euro in 2003 and to 49.265 thousand Euro in the previous year, showed an increase of 11.008 (+22,3%) and of 0,9% on the incidence on the value of operations. If the effects due the fluctuations on exchange rates were excluded, the gross operating income (EBITDA) would amount to 62.483 thousand Euro recording a 13.218 thousand Euro(+26,8%) increase. In part, the result was due to the completion of the business optimization and integration process with companies belonging to the Sonus U.S.A. Inc. and Sonus Canada Ltd. Group, and to the consolidation of improved bargaining power with major suppliers and careful cost control which, in particular, brought about the decrease in the incidence of costs for raw materials and goods on the value of operations that dropped form 33,6% in 2002 to 32,3% in 2003, and of the costs for services which fell from 30,0% in 2002 to 29,3% in 2003. The increase in the incidence of labor costs on the value of operations, which rose form 22,4% in 2002 to 23,6% in 2003, was mainly due to two factors: the increase of the importance of company owned outlets in the distribution network (following the entrance of Sonus U.S.A. into the Group) and the development in several countries (namely Italy, France and Holland) where the percentage incidence of labor costs are higher. OPERATING INCOME (EBIT) (thousand Euro) Operating income (EBIT) 2003 % 2002 % Change Change % 35.750 7,6% 29.439 7,1% 6.311 21,4% On account of the increase in the gross operating margin (EBITDA), the operating income (EBIT), which amounted to 35.750 thousand Euro in 2003 and to 29.439 in the previous year, showed an increase amounting to 6.311 thousand Euro (+21,4%) and to 0,5% on the incidence of the value of operations. Depreciation and amortization, which amounted to 21.328 thousand Euro in 2003 (4,6% on the value of operations) and to 17.030 thousand Euro in 2002 (4,2% of the value of operations), showed an increase of 4.298 thousand Euro(+25,2%) and of 0,4% on the incidence of the value of operations. The rise was mainly due to the amortization increase on the difference in consolidation concerning the acquisitions carried out during the latter part of 2002 and during 2003, in addition to the amortization of the goodwill paid for the company divisions purchased in the same periods. The operating income before amortization and difference on consolidation and goodwill devaluation (EBITDA), which amounted to 43.521 thousand Euro in 2003 (9.4% on the value of operations) and to 18 34.833 thousand Euro in 2002 (8,5% on the value of operations) showed an increase of 8.688 thousand Euro(+24,9%), and a 0,9% increase on the incidence of the value of operations. INCOME BEFORE TAXES (thousand Euro) Income before taxes 2003 % 2002 % Change Change % 23.230 4,9% 21.899 5,2% 1.331 6,1% The income before taxes, which amounted to 23.230 thousand Euro in 2003 and to 21.899 thousand Euro in 2002, showed an 1.331 thousand Euro increase (+6,1%); this was due to the combined effects of: • the decrease of net financial charges which dropped from 7.563 thousand Euro in 2002 to 5.973 thousand Euro in 2003, recording a reduction of 1.590 thousand Euro which, in addition to the positive currency translation differences, was mainly due to the decrease in interest payable following the redemption, on November 27, 2002, of the 100.000 thousand Euro bond issued by Amplux on November 27, 2000 with an annual 7% interest rate. • The increase of net extraordinary charges, which rose form 48 thousand Euro in 2002 to 6.547 thousand Euro in 2003. Indeed, in 2003, the item included extraordinary charges for 8.584 thousand Euro which were due for restructuring and reorganization costs disbursed by Amplimedical following the strategic choice implemented by the management, on account of the persisting cyclical malaise and internal crisis in the biomedical sector, which entailed radically changing the commercial and production strategy by way of company repositioning operations. The said operations, which brought about significant changes in the subsidiary company structure, concern the eradication of inefficiencies and the discarding of a number of production and marketing lines which were deemed to be anti-economic and entailed shutting down some business units and reducing the level of occupancy. The aforementioned measures involved the payment of extraordinary charges for i) incentive for staff migration, ii) devaluation and scrapping of inventories, iii) the payment of penalties on account of the early cancellation of supply, consulting and agency contracts, iv) devaluation of tangible and intangible fixed assets. (Further information is contained in the Notes in the entry “Extraordinary charges”). 19 GROUP NET INCOME (thousand Euro) Group net income 2003 % 2002 % Change Change % 12.667 2,7% 15.133 3,6% (2.466) (16,3%) The Group net income, which amounted to 12.667 thousand Euro in 2003 and to 15.133 thousand Euro in 2002, showed a 2.466 thousand Euro decrease (-16,3%), that in addition to the previously described extraordinary charges for company restructuring booked in 2003, was mainly due to the increase of the incidence of the fiscal burden on income before taxes which rose form 30,1% in 2002 to 44,6% in 2003. The increase is accounted for by the exceptionally low fiscal burden in 2002 which was linked to the outright deductible devaluations of equity investments in consolidated subsidiary companies. 20 CONSOLIDATED BALANCE SHEET 31/12/2003 31/12/2002 Change 134.556 30.693 3.030 168.279 39.109 115.182 34.224 188.515 356.794 52.480 51.068 11.659 115.207 73.308 8.657 232.930 134.868 2.713 137.581 137.362 28.680 2.019 168.061 48.544 115.745 32.444 196.733 364.794 54.708 51.809 10.400 116.917 79.816 8.503 239.374 136.477 874 137.351 (2.806) 2.013 1.011 218 (9.435) (563) 1.780 (8.218) (8.000) (2.228) (741) 1.259 (1.710) (6.508) 154 (6.444) (1.609) 1.839 230 Long / medium-term net financial borrowings 85.496 107.761 (22.265) Short-term net financial borrowings (position) Total net financial borrowings 9.853 95.349 (5.738) 102.023 15.591 (6.674) 232.930 239.374 (6.444) 5.171 3.097 2.074 (thousand Euro) Intangible fixed assets Tangible fixed assets Financial fixed assets Fixed assets Inventories Trade receivables Other receivables Short-term assets Assets Trade payables Other payables Reserves for risks and charges Short-term liabilities Net working capital Staff leaving indemnity NET INVESTED CAPITAL Group net shareholder’s equity Third party net shareholder’s equity Total net shareholder’s equity SHAREHOLDER’S EQUITY AND FINANCIAL DEBTS Commitment and memorandum The net invested capital, which amounted to 232.930 thousand Euro as of December 31, 2003, and to 239.374 thousand Euro as of December 31, 2002, showed a 6.444 thousand Euro decrease on account of the reduction in net working capital. 21 NET WORKING CAPITAL (thousand Euro) Inventories Trade receivables Other receivables Short-term assets Trade payables Other payables Reserves for risks and charges Short-term liabilities Net working capital 31/12/2003 31/12/2002 Change 39.109 115.182 34.224 188.515 52.480 51.068 11.659 115.207 48.544 115.745 32.444 196.733 54.708 51.809 10.400 116.917 (9.435) (563) 1.780 (8.218) (2.228) (741) 1.259 (1.710) 73.308 79.816 (6.508) The net working capital, which amounted to 73.308 thousand Euro as of December 31, 2003 and to 79.816 thousand Euro as of December 31, 2002, showed a 6.508 thousand Euro decrease which was mainly due to the reduction in inventories, amounting to 9.435 thousand Euro, following the improved rationalization of stock management in addition to the defeasance of a number of product lines in the Biomedical sector (for further information compare the details included in the Report on Operations with the notes concerning the item “Income before taxes”). Further information is included in the Notes to the Financial Statements. NET FINANCIAL BORROWINGS 31/12/2003 31/12/2002 Change (31.292) (42.735) 11.443 Financial assets not classified as long-term investments Financial loans towards non-consolidated subsidiary companies Short-term bank payables Short-term payables towards other financing bodies Short-term payables towards non- consolidated subsidiary companies (2.318) (476) 43.867 9 63 (205) 36.402 736 64 (2.113) (476) 7.465 (727) (1) Short-term net financial debt (position) Middle/long term bank payables Middle/long term payables towards other financing bodies 9.853 85.131 365 (5.738) 107.698 63 15.591 (22.567) 302 Middle/long term net financial debt 85.496 107.761 (22.265) Net financial debt 95.349 102.023 (6.674) (thousand Euro) Liquidity The net financial borrowings, which amounted to 95.349 thousand Euro as of December 31, 2003 and to 102.023 thousand Euro as of December 31, 2002, showed a 6.674 thousand Euro decrease notwithstanding the use of financial resources during the year in relation to the acquisitions of companies and company divisions and the distribution of dividends for 2.943 thousand Euro which was possible thanks to the generation of high cash flows deriving from assets for the period amounting to 47.756 thousand Euro. The composition of the financial debt is consistent with the structure of the credit and planned so as to reduce the risks connected to interest rates volatility and to increase the correlation of the borrowings cost to the revenues updating mechanism based on inflation. Such objectives were achieved by way 22 of Euribor linked financing, partly covered interest rates hedging (farther information in included in the Notes to the financial statements in the comment to the entry “Bank payables”). The short-term net financial position which, as of 31 December 2002, was positive for 5.738 thousand Euro and as of December 31, 2003 was negative for 9.853 thousand Euro, showed a 15.591 thousand Euro decrease mainly due to the net effect of the early redemption of a 20.000 thousand Euro loan not backed up by any guarantee, with a Euribor-linked rate amounting to 1% and to the conversion from long/medium-term to short-term of the loan quota falling due within 12 months which amounted to 35.638 and included a line of credit for initial 30.000 thousand Euro raised from the Banca Intesa BCI payable every quarter with a variable interest rate linked to the Euribor at three months + 75%, falling due on May 17, 2004. In addition, the short-term bank payables included current account overdrafts amounting to 7.898 thousand Euro. As of December 31, 2003, the middle/long-term bank payables represented 89,7% of the overall net financial borrowing and chiefly included: i) loans raised as of June 30, 2003, for initial 45.000 thousand Euro not backed up by any guarantee, falling due within 5 years; of the above loan 30.000 thousand Euro have a variable Euribor-linked rate at 6 months + 0,95% and 15.000 thousand Euro have a variable Euribor-linked rate at 3 months + 0,95% ii) a loan raised as of August 27, 2003, for initial 25.000 thousand Euro not backed up by any guarantee, falling due within 5 years; the loan can be redeemed in six monthly part-payments as of January 20, 2006, with a variable Euribor-linked rate at 6 months + 1%; iii) a loan raised as of July 21, 2003, for initial 20.000 thousand Euro not backed up by any guarantee, falling due within 5 years; the loan can be redeemed in six monthly part-payments as of January 01, 2004, with a variable Euribor-linked rate at 6 months + 1,1%. As of December 31, 2003, the leverage, which in this case means the ratio between net financial borrowings and net invested capital, amounted to 40,9% (42,6% as of December 31, 2002). 23 CASH ASH FLOW ANALYSIS (thousand Euro) Monetary flow generated by operating activities Monetary flow utilized in investing activities Monetary flow utilized in financing activities Net monetary flow for the period 2003 47.756 (39.669) (18.079) 2002 21.269 (74.159) (42.485) Change 26.487 34.490 24.406 (9.991) (95.375) 85.384 During 2003, the financial flow provided by operating activities, which amounted to 47.756 thousand Euro, fully financed the liquidity utilizations in investment activities for the period, which amounted to 39.669 thousand Euro, and was used to repay a portion of the financial borrowings. The financial flow utilized in investment activities, which amounted to 39.669 thousand Euro, was mainly accounted for by, in addition to investments in intangible and tangible fixed assets, the purchase of equity investments for 1.852 thousand Euro, and of company divisions for 21.957 thousand Euro. In this context noteworthy was the purchase carried out by NHC, which was set up for this very purpose, of the company branch National Hearing Centers Inc., which operates in the American hearing aids sales market, for a corresponding value of 15.000 US Dollars; 14.800 US Dollars were paid at the time of purchase. The financial flow for financing activities, which amounted to 18.079 thousand Euro, was mainly due to net effect of opening middle/long-term loans, which amounted to 90.000 thousand Euro, of repaying middle/long-term loans, which amounted to 75.116 thousand Euro, in addition to the decrease of short-time bank payables, which amounted to 30.084 thousand Euro. Moreover, during the year dividends amounting to 2.943 thousand Euro were distributed to Shareholders. The net effect of the aforementioned financial flows, taking into account the change in the currency translation difference caused the total liquidity to decrease from 42.735 thousand Euro as of January 1, 2003 to 31.292 thousand Euro as of December 31, 2003. INVESTMENTS The fixed assets, which amounted to 168.061 thousand Euro as of December 31, 2002, and to 168.279 thousand Euro as of December 31, 2003, notwithstanding depreciations and amortizations for the period, which amounted to 21.328 thousand Euro, and the currency translation differences connected to the appreciation of the Euro regards the US Dollar recorded in 2003 compared to 2002, were substantially in line during the periods in question on account of the Group expansion process following a number of acquisitions in equity investments and company divisions. During 2003, • the investments in intangible fixed assets, which amounted to 23.922 thousand Euro, were mainly due to goodwill paid which overall amounted to 16.375 thousand Euro, in addition to a number of minor acquisitions carried out by the French and Dutch Group subsidiary companies, relating to the acquisition by NHC of the company branch National Hearing Center Inc. for a corresponding value of 24 15 million US Dollars; of this amount, 14.089 US Dollars (12.180 thousand Euro) were paid for goodwill. • the investments in tangible fixed assets, which amounted to 12.264 thousand Euro, were mainly due to the purchase of equipment, personal computers, fittings and furnishings, as part of the structural and technological update of the administrative and sales areas. Further information on investments in tangible and intangible fixed assets is included in the relating comments in the Notes. RESEARCH AND DEVELOPMENT During 2003, the Group continued to invest in the research and development of technologies applied to hearing aids; the research focuses on activities geared to guarantee high standards of service in terms of quality and on ever more advanced, efficient and satisfying fitting systems. In particular, research in the field of fitting systems, which are increasingly effective in terms of patient management and hearing aids fitting, has lead to the completion and implementation of new proprietary software called “RealLife”. “RealLife” was developed as a tool for the United States, which have a particularly complex marketing environment with numerous distribution channels. The investment, which targets all American channels, especially benefits the Sonus network which previously did not have a specific fitting system, and is proof of the Group’s determination to invest in ever-expanding, dynamic channels. RealLife, which incorporates a new, updated release of Amplifit, allows the client’s personal, clinical and commercial data to be fully managed and constantly updated. Thanks to the most significant, new Amplifit function, which has been integrated into RealLife, the best solution for each client can be identified and presented on the basis of previously made assessments. This is the first time to the concept of a solution-based approach is introduced to Group companies: on the basis of the real loss of hearing, a solution geared to improve specific areas is offered, which includes a packet of correlated services. In relation to client data management, RealLife has made it possible to enter, file and visualize all significant personal, clinical and product data, in addition to preparing and managing marketing campaigns directed at clients. Moreover, the fitting systems can be integrated with the Amplifon client “identity card”. Always in the field of advanced fitting systems research for patient management, a software program called “Amplinet” has been developed for the medical community; it allows fitting information to be shared between Amplifon and specialists. Thanks to Amplinet, the Amplifon identity card which contains the patient’s full personal and clinical data can be read thus ensuring more effective cooperation with hearing aids fitting specialists. Finally, the joint project with the Istituto Nazionale di Fisica della Materia (the National Institute of Material Physics) is ongoing; the project concerns the mapping of the shape of the auditory canal using exceptionally sophisticated technologies which derive from aerospace applications. 25 OTHER INFORMATION CORPORATE GOVERNANCE The Amplifon company systems and activities are based on the principles of good government in order to maximize Shareholder value and guarantee the utmost transparency concerning the Company management. The Corporate Government implemented in the Company is in line with the Code of Self-Regulation for Listed Companies proposed by the Corporate Governance Committee of Listed Companies including the relating recommendations issued by Consob (Commissione Nazionale per la Società e la Borsa) the National Commission for Listed Companies and the Stock Exchange,, and the “best practices” adopted domestically and internationally. The General Meeting held on February 9, 2001, endorsed the “Code of Self-Regulation”: subsequently, in July 2002, a number of amendments and integrations were approved and the Company system was duly updated to provide for the integrations. On March 28, 2001, the Amplifon Board of Directors, giving execution to the delegation conferred by the Shareholder’s Meeting, appointed the Internal Auditong Committee and the Committee for the Remuneration of Directors, respectively including Mr. Giuseppe Daveri (Chairman), Mr. Piergaetano Marchetti and Ms. Susan Carol Holland, and Mr. Piergaetano Marchetti (Chairman), Mr. Giuseppe Daveri and Ms. Anna Maria Formiggini. Moreover, the Amplifon Board of Directors, appointed Mr. Paolo Mazza as Internal Audit Officer and Ms. Anjelika Chiltsyna as Investor Relator. The Role of the Board of Directors Pursuant to the recommendations included in Article 1 of the Code of Self-Regulation, the Board of Directors plays a crucial role in the management of the Company by carrying out strategic planning activities and, as far as the Group is concerned, the coordination of the organization. The Board of Directors acts and resolves with full knowledge of the facts and in autonomously in the interests of the Shareholders in order to maximize shareholder value, which is crucial to maintaining a fruitful relationship with the financial market. The Board of Directors is vested with the most ample powers for the ordinary and extraordinary administration and the management of the Company and has the power to perform all such acts that may be deemed necessary and useful in order to attain the corporate purpose, with the exception of those powers, which in compliance with the regulations and the Articles of Association, are reserved to the Shareholder’s meeting. In particular the Boards shall: • examine and approve the strategic, industrial and financial plans of the Company and the Group corporate structure of which it is in charge; • grant and revoke powers to the Managing Directors and therein define the limitations, the operating means and the frequency with which the delegated bodies shall report to the Board in relation to the activities performed during the exercise of the powers granted; • determine, having examined the proposals made by the Remuneration Committee and having heard the Board of Auditors, the remuneration of the Managing Directors and of those who hold 26 particular positions in addition to, unless the General Shareholder’s Meeting has already made the required provisions, the apportionment of the all-inclusive fee to be paid to each individual member of the Board; • monitor the general management performance, with special reference to conflict of interests, with reference to the information received from the Managing Directors and the Internal Audit Committee, and periodically compare the results obtained with the predicted results; • examine and approve the transactions which have special economic and financial relevance, with special reference to related party transactions; • assess the adequacy of the general organization and administrative structure of the Company and Group set up by the Managing Directors; • report to the General Shareholder’s Meeting. The Board of Directors shall meet at least once every quarter, shall be organized and act so as to ensure the effective and efficacious performance of its functions. During 2003, the Board of Directors met six times; five meetings have been scheduled for the current corporate year. The Board of Directors In compliancy with the provisions of Article 2 of the Code of Self-Regulation, the Board of Directors shall include two executive directors and five non-executive directors. The non-executive directors must ensure, on account of both their number and authority, that their opinion has considerable weight on the decision-making process which shall be in the interests of the company. The composition of the Board of Directors, the appointments held by the single Directors in the company and in other companies outside the Group is detailed below. Name Appointment held Other appointments Anna Maria Formiggini Chairman Susan Carol Holland Vice Chairman Alessandro Baldissera Pacchetti Chief Executive Officer – Managing Director Giovanni Martino Rollier Managing Director Giuseppe Daveri Independent non-executive director Piergaetano Marchetti Independent non-executive director Vanni Emanuele Treves Non-executive director Chairman of Amplifin S.p.A. Chairman of Ampliare S.r.l. Sole administrator of Amplibrick 2 S.r.l. Vice Chairman of Amplifin S.p.A. Vice Chairman of Ampliare S.r.l. Sole administrator of Amplibrick 1 S.r.l. Chairman of Amplimedical S.p.A. Chairman of Ampliclinical S.p.A. (merged with Amplifon S.p.A. on 31/12/2003) Sole administrator of Agea S.r.l. Liquidator of Telemaco S.r.l. Director of Ital TBS S.p.A. Chief executive officer of Amplimedical S.p.A. Managing director of Ampliclinical S.p.A. (merged with Amplifon S.p.A. on 31/12/2003) Managing director of Amplimedical S.p.a. Managing director of Ampliclinical S.p.A. (merged with Amplifon S.p.A. on 31/12/2003) Managing director of SO.PA.F Società di Partecipazioni Finanziarie S.p.A. Managing director of SO.PA.F Corporate Finance S.p.A. Director of Coronet S.p.A. Director of Assicurazioni Generali S.p.A. Director of RCS Editori S.p.A. Chairman of Channel 4 Television Chairman of Equitable Life Assurance Society Chairman of Intertek Group PLC Chairman of the London Business School 27 Director of Amplifin S.p.A. The mandate shall last until the approval of the financial statements for the financial year closed on December 31, 2003. Independent Directors The Board of Directors has ascertained that the non-executive Directors Mr. Giuseppe Daveri and Mr. Piergaetano Marchetti continue to fulfill the requirements concerning independence pursuant to Article 3.1 of the Code of Self-Regulation, in so far that they do not have any economic or other type of relations with the company or with any shareholders which might influence their independent status in relation to their functions and judgment. Chairman and Vice-Chairman of the Board of Directors Pursuant to the resolution passed on March 28, 2002, the Board of Directors granted the Chairman, Ms. Anna Maria Formiggini, the power to represent the company in court and to third parties. The Chairman and Vice-Chairman, Ms. Susan Carol Holland, jointly and severally, have been granted all powers of ordinary and extraordinary administration that, pursuant to the Articles of Association, are reserved to the Board of Directors, including the most ample powers to dispose of the tangible fixed assets of the Company, with the exception of those powers which by Law may not be delegated, and powers concerning the approval of strategic industrial plans, the disposal of controlling stakes in companies whose values is in excess of 10.000.000 Euro, and the determination of the powers of the Managing Director and the assumption, extension or modification of long-term loans for amounts in excess of 15.000.000 Euro. Moreover, the Chairman shall: - call the meetings of the Board of Directors by registered letter which must be sent to the domicile of each Director or Auditor at least five days prior to the day fixed for the meeting; in cases of urgencies, the meeting may be called by telex or telegram or fax or via electronic means with confirmation of reception at least one day prior to the day fixed for the meeting so as to ensure that the all documents and information reach the members of the Board of Directors with reasonable advance regards the meeting so that the members may express themselves with due knowledge about the issues on which they are called to examine and approve; - coordinate the activities of the Board of Directors and direct the progress of the meetings. Reporting to the Board of Directors With the resolution of March 28, 2002, in order to improve efficiency of the Company management, the Board of Directors delegated part of the management and executive functions to the Directors Mr. Giovanni Martino Rollier and Mr. Alessandro Baldissera Pacchetti. By way of the same resolution, the Board of Directors appointed Mr. Alessandro Baldissera Pacchetti Chief Executive Officer in place of Mr. Giovanni Martino Rollier who, on March 31, 2002, gave up his managerial office in the Company having become eligible for pension rights. Mr. Giovanni Martino Rollier continues to hold his office as Director. The Managing Directors shall report to the Board of Directors and to the Board of Auditors at regular intervals concerning the exercise of the powers with which they have been vested and provide 28 adequate information about any atypical, unusual or party related transactions that are not subject to the examination or approval of the Board of Directors. The Board of Directors, through the delegated organs, shall immediately report to the Board of Auditors the most significant transactions in economic and financial terms, carried out by the Company and by the subsidiary companies and in particular shall report those transactions which might potentially cause a conflict of interests. The information shall be provided on a regular basis at least once very quarter at the time of the Directors’ meetings by way of a written communication to the Board of Auditors. Appointment of Directors The proposals for appointment to the office of Director, which must include exhaustive information concerning the professional and personal profile of candidates, shall be filed at the head office at least ten days prior the date when the Shareholder’s Meeting has been scheduled by any member and/or group of members representing at least 5% of the share capital. For the moment the Board of Directors does not deem it necessary to set up a committee for the appointment of directors since to date no difficulty has arisen concerning appointments due to the presence of a controlling shareholder by rights. Remuneration of Directors On March 28, 2002, the Board of Directors set up the Committee for the Remuneration of the Directors made up by Mr. Piergaetano Marchetti (Chairman), Mr. Giuseppe Daveri and Ms. Anna Maria Formiggini. The Committee undertakes to make proposals regarding the remuneration policy of the Group, the Board of Directors’ fees and the remuneration of the Top Management; such proposals shall focus on criteria of internal balance, motivation and incentives and the competitiveness of the market. During 2003, the Committee for the Remuneration of the Directors held three meetings and two meetings have been scheduled for the current year. The fees of the Board of Directors The overall fees to the Board of Directors are defined by the Shareholder’s Meeting on a yearly basis. From the total figure the Board of Directors shall assign the Chairman, the Vice-Chairman and the Directors a yearly fee that shall take into account the office and the commitments that the office entails. The fees of the Top Management During the Meeting of March 17, 2003, the Board of Directors approved a strategic plan for the remuneration of the Top Management. A large portion of the retribution of the Top Management members is linked to the operating results of the entire Group and to individual function-related targets. The Top Management is involved in the Company stock-option plans. The stock-option plans include a number of practices rewarding loyalty to the Company. Internal Auditing The Board of Directors and on behalf of the Board, the Chairman and the Managing Directors, by availing themselves of support of the Internal Audit Committee set up by the Board to this end, shall assure the functionality and the suitability of the system implemented under the provisions of subparagraph 9.1 of the Code of Self-Regulation as being “the sum of processes established to monitor 29 the efficiency of company transactions, the reliability of financial information, the compliancy with the Law and regulations, and the safeguard of Company assets”. The structure of the Company organization chart shall include an Internal Audit Officer who is hierarchically independent of any/all operations managers and reports directly to the Chairman and the Managing Directors keeping them, the Internal Audit Committee and the Auditors updated regards his/her activities. Mr. Paolo Mazza has been appointed Internal Audit Officer. On March 17, 2003, following the implementation of a more efficient and effective internal audit system, the Board of Directors approved the Ethical Code that details the principles and standards which must inspire the Group’s conduct regards the different stakeholders. On September 10, 2003, in compliance with the provisions of Law Decree no. 231/2001, the Board of Directors approved the internal organization model to be implemented and the relating procedures manual is being drafted. Moreover, on March 11, 2004, the Board of Directors approved the document of the security program in compliance with article 34, letter g) of the Law Decree no. 196/2003. Internal Audit Committee On March 28, 2001, the Board of Directors set up the Internal Audit Committee and appointed the independent non-executive Directors Mr. Giuseppe Daveri (Chairman) and Mr. Piergaetano Marchetti; with resolution as of December 16, 2002, Ms. Susan Carol Holland was also appointed to the Committee. The Committee shall provide consulting and advisory functions to the Board of Directors and on its behalf to the Chairman and the Managing Directors. The Internal Audit Committee shall examine and approve the proposals put forward by the Management; the Internal Auditing Service and the Auditing Company shall identify the most suitable economic and financial communication structure necessary to monitor and represent the Company appropriately, as follows: The Committee has been assigned the following functions: - to assist the Board in assessing the adequacy and efficiency of the company's internal control system; - to evaluate the business agenda prepared by the persons in charge of internal auditing and receive periodical reports form the same; - to evaluate the findings included in the periodical reports prepared by the persons in charge of internal auditing, from the information received from Board of Auditors and from the individual members of the Board; - to report to the Board of Directors at least once every six months when the financial statements for the year and the half-year report are approved regarding the activities carried out and the adequacy of the company's internal control system; - to evaluate the adequacy of the accounting principals and their congruency for drawing up the consolidated financial statements; - to assess the work carried out by the auditing company with reference to the independence of opinion and to the agenda implemented for the audits of the results included in the report on operations and in the advisory letter; - to assess the proposals put forward by the auditing company in order to obtain the appointment; 30 - to carry out the other tasks assigned by the Board of Directors with special reference to the relations with the Auditing Company. During the year 2003, the Internal Audit Committee met five times. Six meetings have been scheduled for the current period. The Committee helped to draw up the Code of Ethics that was approved by the Board of Directors with resolution as of March 17, 2003. In 2003, KPMG was nominated to assess the system procedures for management control implemented in the Italian and Dutch corporate structures. On account of the company circumstances and the impact on the information systems, the internal auditing was executed by way of the procedures revisions so the companies could benefit, as requested by the Chief Executive Officer, from professional expertise in order to perfect the management control system. In order to optimize the monitoring of the company business performance, KPMG shall provide an analyses and a list of priorities concerning any crucial points highlighted by the management and detected with the help of the KPMG systems. The documents below, which had been previously approved by the Amplifon S.p.A. Board of Directors, were translated and sent to all subsidiary and affiliated companies with the request that the same be implemented by the management: • Ethical Code; • Procedures for communicating reserved documents and information concerning Group activities to the market; • Procedures for regulating Insider Dealing; • Procedures for the management and protection of Company owned trade marks and patents. On analyses, the insurance coverage provided for by the Group has proved to be adequate in relation to the risks. An auditing program concerning organization procedures relating to the passive cycle is underway. In concert with the CEO, the person in charge has drafted a detailed program for measures to be implemented in 2004-2005. Relations with institutional investors and other shareholders At the time of listing, the Company adopted a communications policy aimed at establishing an open channel of information with institutional investors, shareholders and the market, in order to ensure the efficient spreading of comprehensive and timely information concerning its activities, the only restrictions concerned the confidential nature of certain information. Accordingly, the information to investors, the market and the press is made available by means of press releases, periodical meetings with institutional investors and the financial community, and comprehensive documentation released on the Amplifon web site subject to constant updates. In compliance with article 12 of the Code, edition revised as of July 2002, the Board of Directors with resolution of May 30, 2001, appointed Anjelika Chiltsyna in charge of the relations with investors. Related party transactions During the Meeting held on September 10, 2003, the Board of Directors approved the “Code of Procedure for related party transactions”. The purpose of the Code is to provide interested parties with the rules of conduct regulating communications of related party status to the Company during transactions with Amplifon S.p.A. . The Code, after identifying related parties, provides that the following be subject to the prior approval of the Board of Directors: i) significant transactions, “defined as the related party transactions that, on account of the object, manner or time of implementation may affect the safeguard of the business 31 property or the comprehensiveness or accuracy of the information, including accounting information, concerning Amplifon S.p.A.; ii) transactions with companies whose financial statements are consolidated in the Amplifon S.p.A. consolidated financial statements if, on an individual basis, their overall value is in excess of 1,5 million Euro and the transaction is atypical, unusual or regulated by non-standard conditions. The transactions with intra-group atypical, which are unusual or regulated by non-standard conditions whose value is in excess of 2,5 million Euro shall, in all cases, be the object of a special notice to the Board of Directors in the next scheduled Board Meeting; iii) transactions with related parties different from “intra-group companies” whose value, on an individual basis, is in excess of 1 million Euro, or of 500 thousand Euro in the case of transactions which are atypical, unusual or regulated by non-standard conditions. The transactions with related parties including amounts in excess of 500 thousand Euro, in addition to transactions which are atypical, unusual or regulated by non-standard conditions whose overall value is, however, lower than 500 thousand Euro, shall in all cases, be the object of a special notice to the Board of Directors in the next scheduled Board Meeting. Intra-group transactions falling within the Amplifon S.p.A. core business and regulated by conditions, terms and/or means which are substantially in line with the normal market practice concerning relations with non party related transactions, are exempt from approval and communication to the Board of Directors. The Code entered into force on approval. Treatment of reserved and “price sensitive” information The Managing Directors have defined a procedure for disclosing reserved information to the market, with special reference to price sensitive information; this procedure, in compliance with article 6 of the Code, was approved by the Board of Directors on March 17, 2003. Code of Conduct in relation to Internal Dealing In conformity with the provisions issued by the Borsa Italiana, the Italian Stock Exchange, on December 16, 2002, the Board of Directors approved a Code of Conduct concerning Internal Dealing; the Code regulates the flow of information to the Company and to the market regarding transactions of listed Group securities made by so called “relevant persons”. The Code implemented by the Company is more stringent than the Regulations issued by the Italian Stock Exchange, given the breadth of the definition of “correlated persons”, the cutback of the relevancy thresholds in relation to disclosure obligations, the indication of periods when “relevant persons” may not carry out transactions on Group securities and for the rigid system of sanctions implemented. The Code came into force as of January 1, 2003. Shareholder’ Meetings The Board of Directors shall: - encourage and facilitate all Shareholders to take part in the meetings by carefully choosing the location, the date and time when the shareholder’s meeting is called so the greater number of members may take part; - advise all component members to attend the meetings, unless unavoidably detained or prevented form doing so and, in particular, those who due to the offices held are in a position to provide a valuable contribution to the meetings’ discussions; 32 - deem that the Shareholder’s Meeting are a valuable opportunity to establish a fruitful dialogue between the Directors and Shareholders in compliance with the regulations concerning “price sensitive” information and the internal procedures concerning reserved information. To date, the Board of Directors does not deem it necessary to implement a meetings regulation since it believes that the powers vested by Law and by the Articles of Association in the Chairman of the Shareholders’ Meeting are adequate to ensure that the meeting agenda is carried out with due order and method so that each shareholder may participate in the debate on the list of business. However, the Board of Directors reserves the right to introduce regulations in the future in order to better coordinate the activities of the meetings. The Board of Auditors In compliance with art. 22 of the Articles of Association, the Board of Auditors shall include three Regular Auditors and two Alternate members with prerequisites (including professional competence and trustworthiness) and functions as required by the Law. In particular, concerning professional competence, under the provisions of art. 1, sub-paragraph 3 of the Ministerial Decree n° 162 of March 30, 2000 with reference to sub-paragraph 2, letter b) and c) of the same article 1, the areas strictly connected to the activities of the Company include commercial law, corporate law, business economics and management, finance, statistics, the field of medicine and electronic engineering and other branches of learning with similar or assimilated scope; the business units strictly connected to the Company business include the production or wholesale or retail trade of instruments, equipment or products as included in articled 2 of the Company Articles of Association. The ordinary General Meeting of Shareholders shall elect the Board of Auditors and establish its remuneration. In addition to the tasks under the current regulations, the Board of Auditors has the right to express a non-binding opinion concerning the information received form the Board of Directors regarding economic and financial significant transactions carried out by the Company or by the subsidiary companies, also with reference to related party transactions. The Auditor’s domicile is fixed at the Company Head office for the entire duration of the mandate. The minority interest shall appoint one Regular Auditor and one Alternate Auditor. The election of the Board of Auditors, with the exception of the provisions pursuant to the last subparagraph of the present article, is carried out on the basis of lists submitted by the Shareholders wherein candidates are listed using progressive numbers. The number of candidates included in each list must not be greater than the number of members to be elected. Those Shareholders who with other shareholders or individually want to submit a list must, jointly or individually, represent at least 2% (two per cent) of the voting shares in the ordinary shareholders’ meeting and be able to prove ownership by producing the relevant certifications in compliance with the Law at least 10 (ten) days prior the call for the fist Meeting. Each Shareholder or Shareholders belonging to the same one group as defined above, and namely Shareholders that enter into agreements concerning the exercise of vote or the transfer of shares and, however, into agreements or pacts, independent of their validity, recognized by the current legislation in force, in order to ascertain the level of equity investment in listed companies which cannot be surpassed unless by means of a public purchase offer, may not present either directly or through a third party or a trust company, more than one list on pain of all the candidates included in any list submitted by that Shareholder being barred form election. In the context of the application of the preceding sub-paragraph, a person, also without company status, and directly or indirectly exercising control over the Shareholder in question and over all the companies directly or indirectly controlled by the aforementioned person, shall be deemed to belong 33 to the same group. The definition of “control” and “controlled companies” is included in art. 93 of the Legislative Decree no. 58/1998. The lists of candidates underwritten by the submitting person/s must be filed at the Head Office at least ten days prior the date fixed for the first call of the Meeting. A description of the professional curriculum of each candidates and the declaration wherein the candidate accepts the candidature and attests under his/her own responsibility that no grounds exist for ineligibility or incompatibility, and that he/she possess the prerequisites in compliance with the Law or with the Article of Association for the office, shall be attached to the lists. The lists that do not comply with the above provisions will be deemed not to have been submitted. Each candidate may be included in one list only on pain of ineligibility. The candidates who do not possess the prerequisites in complacence with the applicable regulations, or who already act as Regular Auditors in more than five companies listed in regulated Italian markets, may not be elected as Auditors and if elected will fall from office. All those entitled to vote may vote for one list only. By the same token, the Shareholders who, in compliance with sub-paragraphs five and six of the present article have submitted or been party to the submission of a list, may only vote for one list. The members of the Board of Auditors must be elected in compliance with the following procedure: - following the progressive number order, two Regular members and one Alternate member shall be taken form the list that has received the greatest number of votes. - following the progressive number order, the remaining Regular member and Alternate member shall be taken from the list that has received the second highest number of votes from the General Meeting. - in the case that more than one list has obtained the same number of votes, a second ballot between the lists shall be held by all shareholders attending the meeting: the candidates who obtain a simple voting majority shall be duly elected. The chairmanship of the Board of Auditors shall go to the Regular Auditor who appears first on the list that has obtained the highest number of votes. The most senior candidate shall be elected Chairman in case the number of votes is the same. In case of decease, resignation or forfeiture of an Auditor, an Alternate member from the former Auditor’s list shall fill the vacated place. In the case the Chairman of the Board of Auditors must be replaced, the chairmanship shall be filled by the other Regular Auditor form the former Chairman’s list; if, due to prior or concurrent terminations of office, it is not possible to fill the vacated place in compliance with the procedure outlined, a General Meeting shall be called to integrate the Board of Auditors. When the General Meeting, under the above sub-paragraph and in conformity with the Law, elects Regular and/or Alternate Auditors to integrate the Board of Auditors, the following procedure shall be adopted: in the case an Auditor form the majority list must be replaced, the election shall take place by voting with a relative majority a candidate form the list of the outgoing Auditor, if possible. If only one list had been submitted, the General Meeting shall vote for the candidates on that list; if the list obtains a relative majority, the first three candidates following the progressive numbering shall be elected Regular Auditors and the fourth and fifth candidates shall be elected Alternate Auditors; the Chairmanship of the Board shall go to the first candidate on the list. In case of decease, resignation or forfeiture of an Auditor, or if the chairmanship of the Board is vacated, the Alternate Auditor and the Regular Auditor selected following the progressive number order shown in the list shall fill the respective offices. If the lists are not available, the General Meeting shall elect Board of Auditors and the Chairman of the Board with the legal majorities. Outgoing auditors may be re-elected. 34 STOCK OPTION PLANS With reference to the Consob (Commissione Nazionale per la Società e la Borsa) the National Commission for Listed Companies and the Stock Exchange, recommendation n.11508 as of February 15, 2000, the information concerning the Stock Option Plan approved by the Amplifon S.p.A. Board of Directors as of March 28, 2001 is reported below. i) the purpose of the issue, and therefore of the assignment of the Rights of Option, is to offer the possibility to participate in the share capital of Amplfon to 34 Beneficiaries (the number of Beneficiaries has decreased from 38 to 34 pursuant to the resignation of the original participants), who occupy particularly important positions within the Group, in order to align their interests with those of the Shareholders and to cultivate their loyalty, given the significant strategic objectives to be achieved within the 2001/2003 three year period; ii) the recipients of the plan are the employees named by the meeting of the Board of Directors of Amplifon S.p.A. as of March 28, 2001 who, as of April 2, 2001 to the time the shares were underwritten, had continuously been in the employment of one of the Group companies and that, at that time, had not given a period of notice for dismissal or discharge, or however for the termination of employment; iii) the assignment of the rights of option is unconditional. The price of the shares is deemed to encompass the information concerning the company performance; iv) the regulations of the Stock Option Plan exclude loans or other facilities in order to underwrite of the shares in compliance with article 2358 of the Italian Civil Code sub-paragraph 3; v) the plan approved by the Board of Directors of Amplifon S.p.A. as of March 28, 2001 is based on the increase of the Amplifon S.p.A. share capital by no. 750.000 shares with nominal value of 0,20 Euro approved by the Shareholder’s Meeting of Amplfon S.p.A. as of February 19, 2001. The price over par amounts to 19,80 Euro and was fixed by subtracting the nominal value of 0,20 Euro from the placing price of 20,00 Euro following the Public Offer for Subscription and Sale (Offerta Pubblica di Sottoscrizione e Vendita) and the admission to Stock Exchange listing of ordinary shares (Ammissione a Quotazione di Azioni Ordinarie); vi) the type of shares issued are ordinary, in compliance with article 2441 of the Italian Italian Civil Code, sub-paragraphs 5 and 8, in favor of a Stock Option Plan. The exercise of the rights shall be in compliance with the Regulations which have been filed at the Borsa Italiana S.p.a. (the Italian Stock Exchange) and Consob; further information can be obtained from the aforementioned Borsa Italiana S.p.a. and Consob. Please note that the Board of Directors on March 11, 2004, modified the manner of exercise of the rights of option pertaining to the Stock Option Plan which had been approved on March 28, 2001; vii) the Board of Directors is entitled to draft regulations, choose the beneficiaries and establish the quantity and values regards the execution of the Stock Option Plans. Moreover, Amplifon S.p.A 35 reserves the indisputable right to modify the Plan and the Regulations when so ever it is deemed necessary or merely opportune, following any modification to the provisions of the laws in force, or for any other objective reason that might make a modification advisable. RELATED PARTY TRANSACTIONS Amplifon S.p.A. is controlled by Amplifin S.p.A.. The transactions carried out by Amplifon S.p.A. and by its subsidiary companies with related parties mainly concern the performance of services. All transactions come within the ordinary management and are regulated by market conditions, that is to say, by the conditions that would apply between two independent parties. The table below details the trade and financial relations existing between related parties. 31/12/2003 Receivables Payables Trade Financial 2003 Revenues Costs Trade Financial 8.746 - 132 - 125 92 2 1 30 - 75 - 2 1 68 268 97 3.037 2 100 330 45 - 3 15 62 - 6 - 3 390 - - 10 - - 10 Controlling companies: Ampliter N.V. (direct) Amplifin S.p.A. (indirect) Amplifin Sp.A. subsidiary companies: Amplibrick 1 Amplibrick 2 Ampliare S.p.A. Non consolidated subsidiary companies: Audioson Audition Lillo Espace Conseil de l’Audition Acousoft Informatisering BV Orium B.V. Non consolidated affiliated companies: Amplifon Hearing Middle East The trade receivables towards the indirect controlling company, Amplifin S.p.A., amounted to 8.746 thousand Euro and refer for 8.660 thousand Euro to the transfer of VAT credits in compliance with art. 73 of the Presidential Decree no. 633/72 and the Minister’s Decree DM of 1312/79, whereby VAT credits and debits can be transferred to the controlling company so a joint Group VAT returns statement and the relating interests can be filed. The trade payables towards the indirect controlling company Amplifin S.p.A. amounted to 132 thousand Euro and were mainly due to the transfer to Amplifin S.p.A. of Amplimedical VAT payables amounting to 95 thousand Euro. The costs charged to the Group by Amplibrick 1 and Amplibrick 2, which respectively amounted to 268 thousand Euro and 97 thousand Euro, are entirely referred to a number of lease contracts underwritten with Amplifon S.p.A concerning premises used as sale outlets. 36 The Ampliare S.p.A., costs charged to the Group, which amounted to 3.037 thousand Euro, mainly refer to: • the rental for the lease contract drawn up for the building located in Milan (Italy) in Via Ripamonti n° 133 which is the registered office and administrative headquarters of Amplifon S.p.A.. The contractually agreed rental amounts to approximately 1,186 thousand Euro per year. The supply of accessory services, including the ordinary maintenance of the building, the canteen, the cleaning services, concierge and surveillance, is regulated by a separate agreement between the parties. • the rental for the lease contract underwritten by Amplimedical for the building located in Assago which is used as offices and as a warehouse. The contractually agreed yearly rental amounts to approximately 328 thousand Euro. • the rentals for a number of lease contracts for retail outlets used for trade purposes. The contractually agreed yearly rental amounts to approximately 546 thousand Euro. • The recharging to Amplifon S.p.A. of costs for general services, for the canteen services and the technical office which amounted to 977 thousand Euro. SIGNIFICANT EVENTS OCCURRING AFTER THE CLOSURE OF THE FINANCIAL YEAR In January 2004, the Group completed the acquisition of 100% equity stake in Horen Nederland, a Dutch company operating in the retail of hearing aids, for a corresponding value of 16.000 thousand Euro, paid at the time of purchase. When the company was acquired the net financial borrowing amounted to 1 million Euro. With this acquisition the Group, which was already the undisputed market leader in Holland with a 27% market share, has further consolidated its position and completed the coverage of the territory with a quota estimated at 35%. In fact, the annual revenues of Horen Nederland amounted to 15,5 million Euro, with a 9% share of the market; the company operates in Holland by way of a trade network counting 27 outlets located in the north west of the country. Finally, during the first months of 2004, the Group continued its expansion strategy by increasing the level of penetration in markets where it already operateed by way of the acquisition of three companies and one company division counting nine retail stores in France, for a corresponding value of approximately 2.000 thousand Euro and three companies counting seven retail stores in the United States for a corresponding value of approximately 1.450 thousand US Dollars. The management decided to exit from the unprofitable and, for the Group, no longer strategic Austrian market by way of the disposal of 100% equity stake in Viennatone to Phonak for 4 million Euro. The transaction further strengthens Phonak’s strategic position of the Austrian market where it already operates through Hansanton, since it will be able to enhance the potential synergies between the two companies. Finally, in relation to the transition to the international accounting standards (IFRS), the Group has implemented a plan in order to comply with new IFRS regulations. The plan is based on four key points: i) training staff to draw up the consolidated financial statements and the single annual accounts, ii) appraisal of the new accounting information iii) drafting the Group accounting manual, iv) adoption of a new consolidated software package which implements the IFRS logic. 37 EXPECTED EVOLUTION OF OPERATIONS In the light of the significant growth potential of the Group business, which has been shaped by a number of factors including a longer average life expectancy, cultural changes influencing the life-style of people over 60, growing acoustic pollution, the successful completion of the integration process of the newly acquired companies, in addition to the current strategy of international expansion, which is aimed at increasing the market share in the countries where the Group has traditionally been present, with special reference to the French and American markets, the management expects a steady increase in revenues from sales and in profitability margins, thereby continuing the positive trend that has been recorded over the past five years. The Group intends to further focus on its core business and to implement containment programs relating to operating costs in order to increase profitability margins, cash generation and, by the same token, the level of Stockholder satisfaction. OWN SHARES During the financial year and up to the reference date of the present Report, Amplifon S.p.A., has not held own shares or controlling company shares, even through a trust company. 38 CONSOLIDATED FINANCIAL STATEMENTS 2003 39 BALANCE SHEET 31/12/2003 (Euro) 31/12/2002 Change ASSETS Receivables form shareholders for payments due Fixed assets Intangible fixed assets Note 1 Set-up and expansion costs 127.623 51.940 75.683 137.283 291.895 1.087.289 30.444.572 88.982.409 312.269 13.173.016 207.373 317.096 982.319 18.752.064 102.577.865 583.140 13.890.545 (70.090) (25.201) 104.970 11.692.508 (13.595.456) (270.871) (717.529) 134.556.356 137.362.342 (2.805.986) 3.540.219 3.577.500 (37.281) 1.530.340 7.280.493 17.908.043 433.582 1.585.582 7.523.060 15.873.318 120.412 (55.242) (242.567) 2.034.725 313.170 30.692.677 28.679.872 2.012.805 1.382.289 44.645 16.294 752.706 44.645 132.164 629.583 (115.870) 1.443.228 929.515 513.713 Receivables From others Within twelve months Beyond twelve months 121.538 1.433.913 6.843 1.066.902 114.695 367.011 Other securities 1.555.451 152.901 1.073.745 22.560 481.706 130.341 3.151.580 2.025.820 1.125.760 168.400.613 168.068.034 332.579 331.267 635.337 38.140.552 1.394 606.949 289.035 47.578.479 69.405 (275.682) 346.302 (9.437.927) (68.011) 39.108.550 48.543.868 (9.435.318) Cost for research, development and advertising Industrial patents and intellectual property rights Concessions, licenses, trademarks and similar rights Goodwill Differences on consolidation Fixed assets in progress and advance payments Other intangible fixed assets Tangible fixed assets Note 2 Land and buildings Plant and machinery Production and commercial equipment Other tangible fixed assets Fixed assets in progress and advance payments Financial fixed assets Note 3 Equity investments in Subsidiary companies Affiliated companies Other companies Total fixed assets Current assets Inventories Note 4 Raw materials, other materials and consumables Work-in-progress and semi-finished products Finished products and goods Advances 40 Receivables Note 5 From clients Within twelve months Beyond twelve months From subsidiary companies Within twelve months From controlling companies Within twelve months From other companies Within twelve months Beyond twelve months Total receivables Financial assets not classified as long term investments (939.623) 291.281 115.091.188 115.739.530 (648.342) 478.889 5.275 473.614 478.889 5.275 473.614 8.746.071 8.187.674 558.397 8.746.071 8.187.674 558.397 10.882.875 11.565.967 12.079.179 7.986.001 (1.196.304) 3.579.966 22.448.842 20.065.180 2.383.662 146.764.990 143.997.659 2.767.331 2.318.101 204.956 2.113.145 2.318.101 204.956 2.113.145 30.952.291 38.019.741 (7.067.450) 5.735 334.005 1.464 4.714.180 4.271 (4.380.175) Note 7 Bank and post office deposits Checks Cash and cash equivalents Total currents assets Accrued income and prepaid expenses 115.689.218 50.312 Note 6 Other securities Liquidity 114.749.595 341.593 Note 8 TOTAL ASSETS 41 31.292.031 42.735.385 (11.443.354) 219.483.672 235.481.868 (15.998.196) 2.994.910 4.184.911 (1.190.001) 390.879.195 407.734.813 (16.855.618) (Euro) 31/12/2003 31/12/2002 Change Share capital Reserve from share price over par Legal reserve Other reserves: Extraordinary reserve 3.924.200 105.163.259 593.760 3.924.200 106.734.600 593.760 0 (1.571.341) 0 2.766.528 2.575.924 190.604 Merger surplus Accelerated depreciation reserve Profits (losses) brought forward Translation differences Profits (losses) for the year 2.621.312 21.970.961 (14.839.642) 12.667.248 2.120.991 2.811.916 6.735.790 (4.153.177) 15.133.405 (2.120.991) (190.604) 15.235.171 (10.686.465) (2.466.157) Group net shareholder’s equity LIABILITIES AND SHAREHOLDER’S EQUITY: Net shareholder’s equity Note 9 134.867.626 136.477.409 (1.609.783) Third party capital and reserves Third party income 2.500.111 212.907 692.332 181.837 1.807.779 31.070 Third party net shareholder’s equity 2.713.018 874.169 1.838.849 137.580.644 137.351.578 229.066 Third party and Group shareholder’s equity Reserves for risks and charges Note 10 For social security and similar obligations For taxes Other reserves Staff leaving indemnity Note 11 Payables Note 12 Bank payables Within twelve months Beyond twelve months Payables towards other financing bodies Within twelve months Beyond twelve months Advances Within twelve months Payables to suppliers Within twelve months Beyond twelve months Payables to subsidiary companies Within twelve months 42 709.682 642.549 67.133 1.361.848 9.587.230 9.757.660 1.361.848 (170.430) 11.658.760 10.400.209 1.258.551 8.656.698 8.502.823 153.875 43.867.075 85.130.741 36.402.324 107.697.664 7.464.751 (22.566.923) 128.997.816 144.099.988 (15.102.172) 9.193 365.602 736.025 63.382 (726.832) 302.220 374.795 799.407 (424.612) 2.773.380 2.570.922 202.458 2.773.380 2.570.922 202.458 49.547.274 51.744.224 3.764 (2.196.950) (3.764) 49.547.274 51.747.988 (2.200.714) 79.699 64.000 15.699 79.699 64.000 15.699 Payables to affiliated companies Within twelve months Payables towards controlling companies Within twelve months Tax payables Within twelve months Payables towards providential and social security institutes Within twelve months Other payables Within twelve months Beyond twelve months Accrued expenses and deferred income Note 13 TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY Commitments and memorandum accounts 10.000 - 10.000 10.000 - 10.000 132.102 389.154 (257.052) 132.102 389.154 (257.052) 15.170.678 13.214.765 1.955.913 15.170.678 13.214.765 1.955.913 5.878.903 4.922.707 956.196 5.878.903 4.922.707 956.196 21.500.862 489.419 21.111.942 983.037 388.920 (493.618) 21.990.281 22.094.979 (104.698) 224.954.928 239.903.910 (14.948.982) 8.028.165 11.576.293 (3.548.128) 390.879.195 407.734.813 (16.855.618) 4.822.218 2.801.639 2.020.579 349.000 295.000 54.000 5.171.218 3.096.639 2.074.579 Note 14 Personal guarantees given Third party surety ship given Collateral guarantees given Third party collateral guarantees Total 43 INCOME STATEMENT (Euro) Value of operations Revenues from sales and services Change in inventories of work-in-progress, semi-finished and finished products Increase in fixed assets for internal work Other revenues - miscellaneous Costs of operations Year 2003 Year 2002 Change 443.388.322 391.941.264 51.447.058 330.365 (95.185) 425.550 1.024.840 965.076 59.764 20.125.035 15.795.959 4.329.076 Note 15 20.125.035 15.795.959 4.329.076 464.868.562 408.607.114 56.261.448 144.729.253 113.386.896 22.574.122 142.440.761 102.773.118 19.850.972 2.288.492 10.613.778 2.723.150 85.293.828 18.179.226 69.338.158 16.296.939 15.955.670 1.882.287 1.626.086 127.581 4.403.839 2.337.521 550.899 2.845.796 (711.435) (423.318) 1.558.043 Note 16 For raw materials, other materials and consumables For services For rentals and leases For labor: Wages and salaries Social security contributions Staff leaving indemnities For social security and similar costs Other costs 109.630.560 91.369.313 18.261.247 Depreciation and amortization: Amortization of intangible fixed assets 13.013.227 9.238.393 3.774.834 Depreciation of tangible fixed assets Other fixed assets depreciation 8.315.261 357.336 7.791.841 906.532 523.420 (549.196) Write down of receivables included in current assets and of liquidity 2.052.842 1.722.751 330.091 23.738.666 19.659.517 4.079.149 5.504.606 468.215 317.033 8.769.580 (5.098.877) 118.048 48.817 8.006.782 10.603.483 350.167 268.216 762.798 429.118.931 379.168.451 49.950.480 35.749.631 29.438.663 6.310.968 Change in inventories of work-in-progress, semi-finished and finished products Provisions for risks Other provisions Other operating expenses Difference between the value and costs of operations (A-B) 44 Financial income and charges Note 17 Other financial income: From receivables booked in fixed assets - subsidiary companies - third parties From securities booked in fixed assets not classified as equity investments From securities booked in current assets not classified as equity investments Income different from previous: 92.191 8.919 14.467 2.637 100.037 34.488 537 (2.637) (7.846) (25.569) 13.930 38.170 4.070.034 76.295 7.843.995 (38.125) (3.773.961) 4.223.781 8.057.989 (3.834.208) 2.991 - 2.991 10.193.819 15.620.859 (5.427.040) 10.196.810 15.620.859 (5.424.049) (5.973.029) (7.562.870) 1.589.841 - 79.644 (79.644) - 79.644 (79.644) - 8.491 (8.491) from subsidiary companies from affiliated companies - from controlling companies - others Interests and other financial charges: - from subsidiary companies from affiliated companies - others Total financial income and charges Financial assets adjustments Note 18 Revaluations: of equity investments Devaluations: of equity investments Total financial assets adjustments Extraordinary income and charges - 8.491 (8.491) - 71.153 (71.153) 28.938 4.329.131 304.020 28.938 4.025.111 Note 19 Income: - gains from alienations - miscellaneous 4.358.069 304.020 4.054.049 Charges: - capital loss from alienations - prior years income taxes - miscellaneous 12.725 10.892.113 2.622 8.244 341.170 (2.622) 4.481 10.550.943 10.904.838 352.036 10.552.802 Total extraordinary income and charges (6.546.769) (48.016) (6.498.753) 23.229.833 21.898.930 1.330.903 12.338.256 (1.988.578) 8.629.990 (2.046.302) 3.708.266 57.724 10.349.678 6.583.688 3.765.990 12.880.155 15.315.242 (2.435.087) (212.907) (181.837) (31.070) 12.667.248 15.133.405 (2.466.157) Income before taxes (A- B ± C ± D ± E) Income taxes Note 20 Current taxes Deferred taxes (pre-paid) Group and third party economic result Third party (profit) loss Group (profit) loss 45 46 NOTES TO THE FINANCIAL STATEMENTS CONTENT AND STRUCTURE OF THE CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements as of December 31, 2003, were drafted in compliance with provisions of the Law Decree of April 9,1991, no. 127, and with the applicable accounting standards outlined by the Consiglio Nazionale dei Dottori Commercialisti e dei Ragionieri (C.N.D.C.R.) (collectively, “Italian GAAP”). The true and accurate representation of the financial position and financial status and of the consolidated profit and loss result did not require any derogation pursuant to subparagraph 4, article 29 of the Law Decree 127/1991. The reference date of the consolidated financial statements coincides with the closing of the Amplifon S.p.A. financial year. The consolidated financial statements were drafted on the basis of the financial statements as of December 31, 2003 drawn up by the Board of Directors or, if available, by the Shareholders’ Meetings of the companies belonging to the Group, duly adjusted where necessary so as to ensure uniformity with the Group classification criteria and accounting standards. The income statements of the companies which were acquired or disposed of during the period are assumed on the basis of the period when they were owned by the Group. In order to provide more detailed information, the following have been prepared: the statement relating to movements in net shareholder’s equity, the statement connecting the net shareholders’ equity and the operating profit or loss of Amplifon S.p.A. to the consolidated balance sheet results, in addition to the consolidated cash flow statement included in Attachment A to the present Notes. Given the significance of the same, all values shown in the Notes are in thousand Euro unless expressly indicated. CONSOLIDATION AREA The following have been included in the consolidation area and consolidated with the global integration method: all companies operating in Italy and abroad in which the Parent Company holds the direct or indirect majority of shares or share capital, with the exception of a number of minor subsidiary companies. The equity investments in subsidiary and affiliated companies not included in the consolidation area, if significant, have been valued with the net equity method. The subsidiary and affiliated companies which are not deemed significant have been excluded form the consolidation area and valued at cost. The most important changes which occurred in the consolidation area compared to the previous financial year were due to: 47 • • • • the entrance of Instituto Espanol Auditivo (I.E.A.), acquired by Amplifon Iberica; the entrance of Nogent Surditee, acquired by CCA IDF; the entrance of Pfennings Hoortoestellen BV, acquired by Audire Holding; the consolidation, for the first time in 2003, of 100% of Caducée Acoustique, acquired during 2002. CONSOLIDATION PRINCIPLES All the subsidiary companies included in the consolidation area have been consolidated in accordance with the global integration method, which is summarized as follows: • the assumption of the total assets, liabilities, costs and revenues irrespective of the amount of net shareholders’ equity owned; in the appropriate entries the minority Shareholders, if any, are assigned their portion of net shareholder’s equity and operating result; • the difference, at the time of purchase resulting from the elision of the balance-sheet value of the equity investment in a company included in the consolidation area, against the corresponding net shareholder’s equity is recorded where possible in the assets and liabilities of the said company. The residual amount, if any, is treated as follows: - if positive, it is booked in the item difference on consolidation in intangible fixed assets and is directly adjusted via depreciation, calculated on a straight-line basis over its useful live, taking also into account the residual possibility of utilization. - if negative, it is booked in a net assets item under consolidation reserve or, when an unfavorable end-year result is expected, under consolidation reserve for future risks and charges. • the elimination of receivables and payables, as well as of costs and revenues between the consolidated companies; • the elimination of: a) capital gains resulting from transfers of fixed assets between the consolidated companies; b) profits, if substantial, resulting from operations between consolidated companies and concerning the transfer of goods classified as inventories by the purchasing company; c) value depreciations and reinstatements of fixed equity investments in consolidated companies; d) profits, if substantial, resulting from operations between consolidated companies and intercompany dividends. The allocations and adjustments of values made by each individual consolidated company with the sole purpose of obtaining any tax benefits as provided for by the laws in force have been eliminated from the consolidated financial statements. In addition, the accounting principles adopted by the companies belonging to the Group have been standardized. The main adjustments to the Financial Statements concern: 48 • the inventories that have been assessed according to criteria of the weighted average cost, which is deemed the most appropriate to represent the value of the final Group inventories; • the financial leases, if significant, are recorded using the financial method which sets the capitalization of the original value of the asset against the relating financial debt; depreciation is charged to the income statement and calculated on the predicted economic-technical life of the asset. The relating charges are recorded as follows: the portion of capital to the reduction of the debt and the portion of interest to the income statement. • the inclusion of the amortization of goodwill pertaining to the Financial Statements of the French and American subsidiary companies which, pursuant the regulations in force in those countries are non subject to systematic amortization. In the case of changes to the consolidation area, the economic items of the companies involved are recorded by date of acquisition. In order to provide a true and accurate representation of the financial position and financial status of the Group, the financial statements of affiliated companies held with a 50% stake, if significant, are consolidated with the proportional integration method. Pursuant to this method, all budget items are booked in the consolidated financial statements for the amount corresponding to the stake percentage held by the Group, without recording third party profits and share capital. The Financial Statements drafted in foreign currencies that do not belong to the Euro area, are translated into Euro using the current exchange rate method; on this basis the items of the Income Statement are translated using the average exchange rate for the period, while the items of the Balance Sheet are translated using the year-end exchange rates, except for the items relating to the net shareholder’s equity, which are translated at historical exchange rates. The differences resulting from the translation of the initial net shareholder’s equity and the operating results to the year-end exchange rate are recorded in an appropriate entry under consolidated net shareholder’s equity. 49 The exchange rates applied are listed below: Amplifon U.S.A. Inc. – Miracle-Ear Inc. Balance sheet Income statement Sonus U.S.A. Inc. Balance sheet Income statement NHC Balance sheet Income statement Sonus Canada Ltd. Balance sheet Income statement Horen e controllate Balance sheet Income statement Viton Balance sheet Income statement 31/12/2003 US$ 1,26300 1,13088 31/12/2002 US$ 1,04870 0,94491 31/12/2003 US$ 1,26300 1,13088 31/12/2002 US$ 1,04870 1,00981 31/12/2003 US$ 1,26300 1,15686 31/12/2002 US$ - 31/12/2003 Can$ 1,62340 1,58204 31/12/2002 Can$ 1,6550 1,5803 31/12/2003 CHF 1,55790 1,52074 31/12/2002 CHF 1,4524 1,4671 31/12/2003 HUF 262,50000 253,52325 31/12/2002 HUF 236,2900 242,8938 EVALUATION CRITERIA AND ACCOUNTING PRINCIPLES The accounting principles and evaluation criteria are based on the general principles of prudence, accrual and on the prospect of continuing the business. The evaluation criteria for the individual entries are compliant with the formal and substantial contents of Law Decree of the 9th April 1991, no. 127 and with the Accounting Standards approved by the Consigli Nazionali dei Dottori Commercialisti e Ragionieri (collectively, “Italian GAAP”). The most significant standards and criteria are described below: Use of estimates in the preparation of the Financial Statements In order to draft the Financial Statements in compliance with the generally accepted accounting principles, the management must make estimates and assumptions, which affect assets and liabilities and potential assets and liabilities, and impact the costs and revenues for the year. The actual results might differ from the estimated ones. Foreign exchange transactions The short-term receivables and payables in foreign currency, with falling due date within twelve months, including the current portions of long/middle-term receivables and payables and liquidity in 50 foreign currency existing at the end of the year, are recorded in the Financial Statements at the year end exchange rate. The gains and losses from translation (translation differences) on individual short-term receivables and payables at the year end exchange rate are respectively credited or debited to the income statement as financial income. In terms of income, the aforementioned treatment allows the booking of gains or losses in the period of occurrence in compliance with the postulates of economic competence. Intangible fixed assets The intangible fixed assets are recorded at their purchase or production cost; their value is systematically amortized taking into account the residual possibility of utilization. The appropriate depreciation is carried out if a full recovery of the investment is not foreseen. The fixed assets are stated net of depreciation, directly adjusted in relation to the residual possibility of utilization. The goodwill recorded in the assets of the individual consolidated companies, resulting from the acquisitions of company divisions or retail outlets, is amortized over a period of ten to twenty years on the basis of the anticipated future income flows against which the goodwill was paid. The entry brand name is recorded at purchase price and amortized in fixed amounts over ten years. The entry difference on consolidation is recorded in the Financial Statements and amortized in fixed amounts over twenty years on the following basis: the anticipated future income flows from subsidiary companies, the analysis of the economic sector in which the Group operates, and by taking into account the market position of the Amplifon Group and the acquired companies. Tangible fixed assets Tangible fixed assets are recorded at their purchase or production cost, including direct accessory charges, and are systematically amortized taking into account the residual possibility of utilization. In some cases, this cost is adjusted in compliance with national laws allowing for revaluation. The appropriate devaluations have been made for assets whose value is lastingly lower than the historical cost and have already been fully amortized. The lower value is not recorded in the subsequent financial statements if the causes that lead to the adjustment cease to exist. Routine maintenance costs are integrally booked in the Income Statement. Incremental maintenance costs are booked in the corresponding assets and amortized taking into account the residual possibility of utilization. The depreciation rates per annum are listed in the following table: Description Depreciation rate 3% 10%-15% 12,5% - 25% Buildings Plant and machinery Production and commercial equipment Other assets: 51 Electromechanical equipment Electronic equipment Furniture and office equipment Vehicles 15% 18% - 20% 12% 20%-25% In the year the assets become operational, the depreciation is computed by calculating 50% of the above rates on the assumption that the purchase is distributed evenly throughout the financial year. Equity investments The equity investments, if enduring, are recorded as financial fixed assets or, if acquired for subsequent resale, as current financial assets. The equity investments in non-consolidated subsidiary companies shown under financial fixed assets are valued with the net equity method. The positive differences occurring at the time of purchase between the balance sheet value of the said equity investments in the subsidiary companies and the corresponding current share of net shareholder’s equity are assimilated at the value of the same net shareholder’s equity and amortized in fixed amounts taking into account the residual possibility of utilization. The above amortization amounts are entered in the Income Statement as “financial assets value adjustments”. Other equity investments shown under financial fixed assets are recorded at purchase and subscription cost devaluated for enduring loss of value. If the said companies show a deficit trend, the recorded value is adjusted by means of appropriate devaluation to the corresponding fraction of net shareholder’s equity, if lower, resulting from the subsidiary companies’ most recent Financial Statements. The losses in value exceeding the corresponding balance-sheet values are recorded under provisions for risks and charges. The lower value is not included in future Financial Statements if the reasons for the adjustments made cease to exist. Other securities [different from equity investments] Securities are recorded as fixed financial assets if intended to stay in the portfolio for a long time or as current financial assets if intended for negotiation. Long-term securities are recorded at purchase cost, and written-down in case of a lasting reduction in value. Securities booked in current assets are recorded at the lower of the purchase cost and the assumed return value depending on market trends. The lower value is not included in future Financial Statements if the reasons for the write-down cease to exist. Inventories 52 Inventories are recorded at the lower between the purchase or manufacturing cost and the return value, depending on the market trends. The cost is calculated according to the principle of the weighted average cost. Inventories of raw material, finished products and goods exceeding the expected manufacturing requirements, subject to slow handling or obsolescence, are appropriately depreciated on the basis of their assumed return value. Receivables Receivables are recorded at their assumed return value, obtained by reducing the nominal value of the provisions for bad debts, depending whether they are deemed uncollectible. Accrued, prepaid and deferred income and expenses The share of costs and income common to two or more years is recorded under the above item on a time accrual basis. Provisions for risks and charges The provisions for risks and charges are allocated to cover definite or probable losses and charges, the exact amount or date of occurrence of which had not been determined at the end of the year. The allocations reflect the best possible estimate made on the basis of the obligations incurred and the information available. In particular, • The provision for supplementary customer indemnity include potential liabilities for supplementary customer indemnity due to agents, on the basis of the total accrued indemnities in compliance with the laws in force and on the basis of the historical data concerning the payments made in the previous years; • The provision for guarantees and repairs include charges connected with the risk for guarantee works on sold products and is estimated on the basis of the historical data and the period of guarantee; • The provision for sales returns include the anticipated charges connected with the risk of sales returns estimated on the basis of the historical data recorded in the current and previous years; • The provision for contractual controversies includes reserves different from severance indemnity, such as pension reserves over and above social security contributions for the employees provided for by the Law, additional pension reserves for employees resulting from corporate agreements, inter-company or collective agreements, and severance reserves for the termination of agency relationships; • The provision for taxation includes deferred taxes and amounts prudentially set aside against presumed fiscal charges, including possible additional taxes and interest on arrears and on pending or disputed positions. 53 Staff leaving indemnity The fund includes the indemnity to be paid to employees at the time of leaving, accrued up to the balance-sheet date in compliance with the laws in force and with collective labor contracts, net of any advances paid to employees. Payables Payables are recorded at their nominal value. Taxation Current taxes Current taxes are calculated on the basis of a reasonable estimate of the taxable income of each consolidated company in accordance with the local laws in force. Deferred and advance taxes Deferred and advance taxes are recorded on the amount of all the temporary differences between the value assigned to assets and liabilities according to the Italian Civil Code, and the value assigned to the same assets and liabilities for fiscal purposes, including any probable fiscal losses brought forward. In calculating the deferred and advance taxes we have taken into account the tax rate in force during the year affected by the temporary difference, as well as any possible tax relief and benefits provided for by the tax laws in force. Whenever the temporary differences result in tax advances, these are recorded only if there is a reasonable certainty that the “credit” will be recovered on the basis of the future taxable income. If the temporary differences result in deferred taxes, these are not recorded only if the probability that the “debit” will arise is low. Whenever possible, advance taxes and deferred taxes are compensated. Advance taxes are recorded as receivables from others in current assets. Deferred taxation on reserves and provisions of consolidated companies in suspension of taxation or valued with the net equity method are recorded when these reserves are expected to be distributed, or in any event utilized, and that the distribution or the utilization will result in a fiscal charge. Recognition of revenues Revenues from sales on products are recognized at the moment of passage of ownership which usually coincides with the dispatch or delivery of the product, or at the end of the trial period; the revenues from services are recognized when these services are provided, based on the accrual and timing principle. Interests receivable and payable, other costs and revenues These are shown in the Financial Statements following the accrual and timing principle. 54 Assets held under financial leases The financial leases, if significant, are recorded using the financial method which sets the capitalization of the original value of the asset against the relating financial debt; depreciation is charged to the income statement and calculated on the predicted economic-technical life of the asset. The relating charges are recorded as follows: the portion of capital to the reduction of the debt and the portion of interest to the income statement. Forward contracts Forward contracts to cover risks on exchange and interest rates are valued consistently with the assets and liabilities covered; the paid or collected interest and exchange differentials are charged to the Income Statement on an accrual basis for the duration of the contract. The interest and exchange differentials accrued and not liquidated at the closure of the financial year or in advance regards economic competence are recorded in “accrued income and prepaid expenses”, and” deferred income and accrued expenses”. Commitments and memorandum accounts The memorandum accounts record the commitments assumed and the guarantees granted by the Group companies to third parties. 55 NOTES TO THE BALANCE SHEET AND OTHER INFORMATION Unless otherwise indicated, all values are in Euros. 1 Intangible fixed assets The breakdown of the changes during the year are included in the table below: Balance as ofl 31/12/02 (thousand Euro) Translat; Change in differences the and other net Balance as consolidation Investim. area Alienations Amortizat.Devaluation Reclassif. changes of 31/12/03 Set-up and expansion costs Costs for research, development and advertising 52 105 1 - (43) - 13 - 128 207 98 - - (1) (167) - - 137 Industrial patents and intellectual property rights 317 6 - - (36) - 5 - 292 982 18.752 543 16.375 - (5) (278) (447) (2.084) (2.171) 24 1.228 (10) (1.377) 1.087 30.445 102.578 2.013 - - (5.498) (1.190) (1.952) (6.969) 88.982 Concessions, licenses, marks and similar rights Goodwill trade Difference on consolidation Fixed assets in progress and advance payments 583 238 - - - - (509) - 312 Other 13.891 4.544 47 (23) (4.896) (391) 242 (241) 13.173 Total 137.362 23.922 48 (306) (13.005) (3.919) (949) (8.597) 134.556 The increase in goodwill, which amounted to 16.375 thousand Euro, in addition to a number of minor acquisitions of company divisions mainly carried out by the French and Dutch companies belonging to the Group, is connected to the purchase of the company division National Hearing Center Inc for a corresponding value of 15 million by NHC, which was established for this very purpose; goodwill amounted to 14.089 thousand US Dollars (12.180 thousand Euro). The devaluation for the period, which amounted to 2.171 thousand Euro, was mainly due to the devaluation, carried out by the subsidiary company Amplimedical, of the residual value for goodwill paid for the Cast Imaging S.r.l. company division for 2.079 thousand Euro, since it pertained to business lines which the management deems to be no longer strategic following the reorientation implemented during the company restructuring and reorganization process in the biomedical sector. 56 The breakdown of the difference on consolidation, which amounted to 88.982 thousand Euro, is included in the table below: Translat; Amortiz. for the differences and Devaluat.. period other changes. Historical cost Accumulated amortization Acquisitions Sonus U.S.A. Sonus Canada Miracle Ear CCA Groupe 38.943 1.927 1.414 18.254 (325) (16) (249) (3.727) - - (1.806) (89) (66) (913) (6.714) (315) (191) - 30.098 1.507 908 13.614 Acquisite da CCA Groupe Gruppo Acoudire Gruppo Horen Viennatone Gruppo Amplifon Iberica Viton 10.996 26.396 6.057 4.999 557 1.497 (1.081) (2.095) (554) (500) (36) (19) 505 1.184 274 - (1.000) - (511) (1.447) (299) (250) (42) (75) (1.243) (94) (359) (5) 8.666 24.038 5.110 2.890 753 1.398 146 (7) 51 (190) - - - 111.186 (8.609) 2.014 (1.190) (5.498) (8.921) 88.982 (thousand Euro) MA.GE. Total Balance as ol 31/12/03 The increase in the consolidation difference on the companies acquired by CCA Groupe, which amounted to 505 thousand Euro, was mainly due to the difference between the purchase cost of the equity investments in and Caducée Acoustique (first consolidated in 2003) and Nogent Surditè (acquired in 2003) and the corresponding quota of current value in net asserts acquired. The increase in the consolidation difference of the Acoudire Group, which amounted to 1.184 thousand Euro, in addition to the increase in the Group equity stake in Electro Medical Instruments B.V. from 65% to 100%, was mainly due to the to the difference, which amounted to 832 thousand Euro, between the acquisition cost of the Pfennings Hoortoestellen BV equity stake and the corresponding quota of current value in net assets acquired. The increase in the consolidation difference in the companies acquired by the Amplifon Iberica Group, which amounted to 274 thousand Euro, was mainly due to the difference, amounting to 241 thousand Euro, between 100% of the equity investment in Instituto Espanol Auditivo (I.E.A.) and the corresponding quota of current value in net assets acquired. The devaluation of the consolidation difference in Viennatone was linked to the departure form the Austrian market which the Group deemed to be unprofitable and no longer strategic; the pull out took place in 2004 following the transfer of the equity stake in Phonak (further information in included in the paragraph “Significant event occurring after the closure of the financial year” in the Report on Operations”). The currency translation differences and other net changes, which amounted to 8.921 thousand Euro, were due to the differences on exchange rate translation following the appreciation of the Euro regards the US Dollar recorded in 2003 compared to the previous financial year. The investments in other intangible fixed assets amounted to 4.544 thousand Euro; 2.741 thousand Euro were referred to the Parent Company for the renovation costs on retail outlets and leased premises, amounting to 908 thousand Euro, and to expenses for the development of new programs amounting to 1.833 thousand Euro. 57 2 Tangible fixed assets The breakdown of tangible fixed assets and the relating accumulated depreciation as of December 31, 2003, is detailed in the table below: (thousand Euro) Changes in Balance as of the consoled. 31/12/02 Investments area Alienations. Reclassif. Amortization Other net Balance as of 31/12/03 changes Land and building 3.578 515 140 (453) 71 (309) (2) 3.540 Plant and machinery 1.586 407 15 (33) (5) (424) (15) 1.531 Production and commercial equipment 7.523 2.248 - (108) 32 (2.105) (310) 7.280 Other tangible fixed assets 15.873 8.692 103 (505) 141 (5.490) (906) 17.908 120 402 - (21) (41) - (26) 434 28.680 12.264 258 (1.120) 198 (8.328) (1.259) 30.693 Fixed assets in progress and advance payments Total The investments for the period in other tangible fixed assets, which amounted to 8.692 thousand Euro, were mainly referred to Group expansion for external lines following the acquisition of company divisions as well as to the purchase of equipment and personal computers, furniture and fittings; the purchases were part of the technological and structural update of the sales and administration areas. The revaluations at the closure of the period effected by the Parent Company in compliance with Law 72/83 (the so-called Visentini bis) amounted to 255 thousand Euro. The amounts divided by categories of fixed asset are detailed in the table below: Revaluation pursuant to Law 72/83 (thousand Euro) Plant and machinery Production and commercial equipment 73 Other tangible fixed assets: Furniture and office equipment Electronic office equipment 179 3 Total 255 58 3 Financial fixed assets The breakdown of the item is as follows: (thousand Euro) Balance as 31/12/03 Balance as of 31/12/02 Equity investments in: subsidiary companies affiliated companies Other companies 1.382 45 16 Receivables form others Other securities Total Change 753 45 132 629 0 (116) 1.443 930 513 1.556 1.073 483 153 23 130 3.152 2.026 1.126 Equity investments Subsidiary companies The entry, which amounted to 1.382 thousand Euro, included the equity investments in Audioson, totaling 325 thousand Euro, Audition Lillo, totaling 757 thousand Euro, and Espace Conseil de l’Audition, totaling 300 thousand Euro; the investments were not consolidated and booked at cost since they were not deemed significant. Affiliated companies The entry, which amounted to 45 thousand Euro, referred to the equity investment in Amplifon Hearing Middle East with head office in the Egypt booked at cost since it was not deemed significant. Other The entry, which amounted to 16 thousand Euro, mainly referred to minor equity investments held by the French subsidiaries belonging to the Group. Receivables Receivables from others, for the portion falling due beyond the next financial year, which amounted to 1.434 thousand Euro, referred to cautional deposits which amounted to 1.234 thousand Euro. Other securities Other securities; which amounted to 153 thousand Euro, increased compared to the previous year by 130 thousand Euro. 4 Inventories The breakdown of the item is as follows: 59 (thousand Euro) Raw materials, other materials and consumables Balance as of 31/12/03 Balance as of 31/12/02 Change 392 607 (215) Work-in-progress Finished products and goods Advances Inventories bad debt fund Total 685 289 396 44.662 52.335 (7.673) 1 69 (68) (6.631) (4.756) (1.875) 39.109 48.544 (9.435) The breakdown of the change in the inventories bad debt fund during the year is the following: Balance as of 31/12/02 Provisions 4.756 2.414 Utilizations (521) Currency translation differences (20) Change in the consolidation area 2 Balance as of 31/12/03 6.631 5 Receivables The breakdown of the item is as follows: (thousand Euro) Receivables from customers Receivables from subsidiary companies Balance as of 31/12/03 Balance as of 31/12/02 Receivables from controlling companies Receivables from others Total Change 115.091 479 8.746 115.740 5 8.188 (649) 474 558 22.449 20.065 2.384 146.765 143.998 2.767 The division of receivables by type and falling due date is the following: (thousand Euro) Receivables from customers Receivables from subsidiary companies Receivables from controlling companies Receivables from others Total Within 12 months Beyond 12 months Beyond 5 years Total 114.749 479 8.746 342 - - 115.091 10.883 11.566 - 22.449 134.857 11.908 - 146.765 60 479 8.746 Receivables from customers The breakdown of the item is as follows: (thousand Euro) Receivables from clients Receivables bad debt fund Balance as of 31/12/03 Balance as of 31/12/02 Change 121.664 124.813 (3.149) (6.573) (9.073) 2.500 115.091 115.740 (649) Total The receivables form clients are substantially in line with the previous periods reported. The change in the receivables bad debt fund during the financial year is the following: Balance as of 31/12/02 Provisions Utilizations Change in consolidation area 9.073 2.053 (3.821) - Translation differences and other changes (732) Saldo al 31/12/03 6.573 Receivables from subsidiary companies The item, which amounted to 479 thousand Euro, referred to receivables of mostly financial nature from the non consolidated subsidiary companies Audioson, Audition Lillo and Espace Conseil de l’Audition, in addition to Orium B.V.that was consolidated with the proportional method. Receivables from controlling companies The receivables form controlling companies amounted to 8.746 thousand Euro; 8.660 thousand Euro was referred to the transfer of VAT credits and the relating interest, in compliance with article 73 of the Presidential Decree no. 633/72 and of the Minister’s Decree 1312/79, which allows VAT payables and receivables to be transferred to the controlling company and to file a joint Group VAT return statement; the residual 86 thousand Euro referred to other trade receivables. 61 Other receivables The breakdown of the item is as follows: (thousand Euro) Tax credits to Public Treasury Credits to employees Balance as of 31/12/03 Balance as of 31/12/02 Change 4.460 412 507 1.123 13.744 3.808 665 916 1.379 10.102 652 (253) (409) (256) 3.642 2.203 3.195 (992) 22.449 20.065 2.384 Advances to agents Advances to suppliers other than goods Credits for tax advances Other receivables Total The item credits for tax advances includes assets on tax advances net of liabilities for deferred taxation where the same can be off set for the single consolidated companies in addition to assets for tax advances net of liabilities referring to deferred taxation which originated from consolidation adjustments. The breakdown of the item is as follows: (thousand Euro) Balance as of 31/12/03 Balance as of 31/12/02 Amplifon S.p.A. Amplimedical S.p.A. Acoudire B.V. CCA Groupe Amplitrade Amplifon USA Sonus U.S.A. Miracle-Ear (U.S.A.) Assets on tax advances – single consolidated companies Assets on tax advances– consolidation adjustments Total Change 6.822 19 166 829 3.224 2.164 3.779 19 52 (92) 3.813 1.750 3.043 (52) 166 92 829 (589) 414 13.224 9.321 3.903 520 781 (261) 13.744 10.102 3.642 The receivables for tax advances amounted to 13.744 of Euro 10.214 thousand Euro fall due beyond the following financial year. As of December 31, 2003, the Parent Company receivables for tax advances amounted to 6.822 thousand Euro; 6.642 thousand Euro (3.699 thousand Euro of which falls due beyond the following financial year) referred to IRPEG (Imposta sul Reddito delle Persone Giuridiche), the Corporate Income Tax, and were posted net of deferred taxes which amounted to 473 thousand Euro. The receivables for advance taxation referring to Sonus U.S.A. relate to temporary differences and repayment is scheduled beyond the next financial year. The receivables for advance taxation pertaining to Miracle-Ear, which all fall due beyond the next financial year, were computed on deductible temporary differences relating to the risk fund. 62 The receivables for advance taxation from the consolidation statements, which amounted to 520 thousand Euro, referred to the elimination effect of inter-Group transactions concerning the disposal of assets included in inventories at the purchasing company at the date of closure of the Financial Statements. 6 Financial assets not classified as long term investments Other securities The item, which amounted to 2.318 thousand Euro as of December 31, 2003, increased by 2.113 thousand Euro compared to the previous period and included short-term investments in investment funds listed in France. 7 Liquidity The breakdown of the item is the following: (thousand Euro) Bank and Post Office deposits Checks Balance as of 31/12/03 Balance as of 31/12/02 Cash and cash equivalent on hand Total Change 30.952 6 38.020 1 (7.068) 5 334 4.714 (4.380) 31.292 42.735 (11.443) At the closure of every financial year, as a rule liquidity is employed on the short-term forward market with primary bank dealers; interest rates are in line with prevalent market conditions. 63 8 Accrued income and deferred payments The breakdown is as follows: (thousand Euro) Rentals paid Business rentals Balance as of 31/12/03 Balance as of 31/12/02 Change 491 120 669 152 214 522 95 1.860 27 143 (31) 25 (1.191) 125 71 Other 1.349 1.538 (189) Totale 2.995 4.185 (1.190) Advertising Rentals on leasing, hiring and servicing Insurance LIABILITIES AND SHAREHOLDER’S EQUITY 9 SHAREHOLDER’S EQUITY The changes to the shareholder’s equity accounts during the period are shown in the following table: (thousand Euro) Total third party and Reserve Profit Group Reserve for Group Third party from share (loss) of Difference Profit (loss) for the shareholder’s shareholder’s shareholder’s Share price over Legal Extraordinary accelerated Merger the prev. on currency equity equity par reserve equity year. transl. period. reserve depreciation. surplus capital Saldo 31/12/02 3.924 106.735 594 Allocation of results for 2002 - - - Distribution of dividends - - - Entrance of third parties - - - 2.576 2.812 2.121 6.736 (4.153) 15.133 136.478 874 137.352 - (2.121) 17.254 - (15.133) - - - - - - (2.943) - - (2.943) - (2.943) - - - (647) - - (647) 647 - Currency translation difference - - - - - - (10.687) - (10.687) (661) (11.348) Other changes - (1.571) - 191 (191) - 1.571 - - - 1.640 1.640 Profits for 2003 - - - - - - - - 12.667 12.667 213 12.880 3.924 105.164 594 2.767 2.621 - 21.971 (14.840) 12.667 134.868 2.713 137.581 Balance 31/12/03 as of Share capital As of December 31, 2003, the fully subscribed and paid up share capital was made up of no. 19.621.000 ordinary shares with a nominal value of 0,20 Euro each. 64 Reserves In order to provide accurate information it must be noted that in compliance with article 2431 of the Italian Civil Code, the reserve for share price over par may not be distributed until the legal reserve amounts to one fifth of the share capital. Statement relating the net shareholder’s equity and the net operating result for the year of the Parent Company Amplifon S.p.A. to the consolidated net shareholder’s equity and the net operating result for the year as of December 31, 2003. 2003 Net shareholder’s equity 2002 Net shareholder’s Income equity Income Net shareholder’s equity and income for the period as reported in the controlling company financial statements for the year 122.942 Elimination of the balance sheet value of consolidated equity investments: Difference between the balance sheet value and the pro-quota value of the booked net shareholder’s equity of the subsidiary companies Pro-quota income realized by subsidiary companies Difference on consolidation Write down of devaluation in equity investments Charge off of provisions for risks in equity investments Elimination of the effect of transactions between consolidated companies: Intra-group profits included in the final value of inventories Intra-group dividends Other transactions: Fiscal effect from French consolidation Exchange differences and other changes 6.783 119.102 (3.692) (77.279) - (88.008) - - 10.062 - (2.433) 88.403 (6.611) 102.578 (4.467) - 17.533 - 27.235 167 167 1.530 1.530 (2.082) (786) (1.296) (400) - (14.209) - (2.811) 2.314 (112) 2.426 754 403 (160) 146 (583) Group net shareholder’s equity and operating result for the period 134.868 12.667 136.478 15.133 Third party net shareholder’s equity and operating result for the period 2.713 213 874 182 137.581 12.880 137.352 15.315 Net shareholder’s equity and operating result for the period as reported in the financial statements 10 Reserves for risks and charges As of December 31, 2003, the reserves for risks and charges amounted to 11.659 thousand Euro recording a 1.259 thousand Euro decrease compared to the previous period. 65 The breakdown of the item is as follows: For social security provisions and similar The entry, which amounts to 710 thousand Euro, includes additional pension provisions for the employees of Miracle-Ear, which amount to 200 thousand Euro, and for the employees of the French Group, which amount to 483 thousand Euro. For tax The entry, which amounts to 1.362 thousand Euro, mainly refers to deferred taxation for 1.140 thousand Euro, which was computed on the difference occurring in the Dutch subsidiary companies on account of the different taxable value of accrued expenses and deferred income relating to the services in guarantee and after sales guarantees compared to the statutory value. Other The breakdown of the change which occurred in the entry other reserves for risks and charges is detailed in the table below: (thousand Euro) Provisions for supplementary customer indemnity Provisions for guarantees and repairs Provisions for sales returns Provisions for contractual controversies Provisions for company renovation Other provisions Total Acquisitions of company Utilization divisions Other net Balance as of 31/12/03 changes Balance as of 31/12/02 Allocations. 3.797 32 (386) - (358) 3.085 881 137 (4) - - 1.014 1.049 375 (259) - 269 1.434 771 1.276 (52) - 2 1.997 2.956 - (1.821) 402 (716) 821 303 1.192 (264) - 5 1.236 9.757 3.012 (2.786) 402 (798) 9.587 The amounts were estimated by carrying out a realistic estimate of the potential charge. The provisions for supplementary customer indemnity include potential liabilities for supplementary customer indemnity due, with a reasonable degree of probability, to agents on the basis of a prudential estimate. The provisions for guarantees and repairs, which amounted to 1.014 thousand Euro, referred to the controlling company and is deemed to be adequate to defray the anticipated charges connected with the risk for guarantee works on sold products. To better evaluate the information, the opening value was adjusted - compared to the financial statements as of December 31, 2002 – by applying different accounting criteria in line with Group standards, regards booking on an accrual basis the services in guarantee on products sold and after sales services performed by the Dutch subsidiary companies. The different accounting criteria had entailed booking, as of December 31, 2002, 6.974 thousand Euro as pre-paid expenses instead of provisions for guarantees and repairs. The provisions for sales returns, determined on the income for the periods up to 2003, appears adequate to defray the anticipated charges connected with the risk on sales returns. 66 The provision for contractual controversies implemented to defray the anticipated charges connected to contractual controversies with employees and agents, in addition to risks resulting from the supply of services, was determined following a prudential estimate of the charges involved. The provisions for company renovation include the charges anticipated for implementing the company renovation and reorganization plan for Sonus USA and Sonus Canada. 11 Staff leaving indemnity The provision includes the allocations for staff leaving indemnity on the basis of the current laws in force in each individual country and of the national and additional labor contracts, net of accounts distributed and any sums that might have already been paid to the employees. The changes in staff leaving indemnity during the period are the following: Balance as of 31/12/02 8.503 Provisions 1.626 Utilizations (1.469) Currency translation differences (3) Change in the area of consolidation - Balance as of 31/12/03 12 8.657 PAYABLES The breakdown of the item is as follows: (thousand Euro) Balance as of 31/12/03 Balance as of 31/12/02 Bank payables Payables towards other financing bodies Advances Payables towards suppliers Payables towards subsidiary companies Payables towards affiliated companies Payables towards controlling companies Tax payables Payables towards providential and social security institutes 128.998 375 2.773 49.547 80 10 132 15.171 5.879 Other payables Total Change 144.100 799 2.571 51.748 64 389 13.215 4.923 (15.102) (424) 202 (2.201) 16 10 (257) 1.956 956 21.990 22.095 (105) 224.955 239.904 (14.949) The division of the payables by type and falling due date is the following: (thousand Euro) Bank payables Payables towards other financing bodies Within 12 months Beyond 12 months Beyond 5 years Total 43.867 9 85.131 366 - 128.998 375 67 Advances Payables towards suppliers Payables towards subsidiary companies Payables towards affiliated companies Payables towards controlling companies Tax payables Payables towards providential and social security institutes Other payables Total 2.773 49.547 80 10 132 15.171 - - 2.773 49.547 80 10 132 15.171 5.879 - - 5.879 21.501 489 - 21.990 138.969 85.986 - 224.955 Bank payables The breakdown of the entry is as follows: (thousand Euro) Within 12 months Beyond 12 months Beyond 5 years 7.898 331 14.844 21.550 (6.946) (21.219) 35.630 Current accounts Financial transactions Medium/long term loans (quota falling due within 12 months) 35.638 8 Bank payables falling due within 12 months 43.867 36.402 7.465 Medium/long term loans (quota falling due beyond 12 months) 85.131 107.698 (22.567) 128.998 144.100 (15.102) Total As of December 31, 2003, short-term bank payables, which amounted to 43.867 thousand Euro, in addition to current account overdrafts, included the opening of credit lines for a maximum of 30.000 thousand Euro; the credit line was granted by Banca Intesa BCI, and regulated on a quarterly basis with a variable rate amounting to the Euribor at three months + 0,75% falling due on May 17, 2004. As of December 31, 2003, the middle/long term financial borrowings mainly included the portion of the the following loans falling due beyond the next period: i) loans raised on June 30, 2003, initially of 45.000 thousand Euro, not backed by any guarantee and falling due within five years; of this 30.000 thousand Euro at a variable rate amounting to the Euribor at six months + 0,95% and 15.000 thousand Euro at a variable rate amounting to the Euribor at three months + 0,95%; ii) loans raised on August 27, 2003, initially of 25.000 thousand Euro, not backed by any guarantee and falling due within five years; repayment in six semester installments falling due as of January 20, 2006, with a variable rate amounting to the Euribor at six months + 1,0%; iii) loans raised on July 21, 2003, initially of 20.000 thousand Euro, not backed by any guarantee and falling due within five years; repayment in ten semester installments falling due as of January 1, 2004, with a variable rate amounting to the Euribor at six months + 1,1%; in relation to the said loan, Simest paid a 2,16% contribution to the interest account. In order to cover the interest-related risks the parent company arranged the following contracts: • a Collar contract on 15.000 thousand Euro falling due in May 2004 with the reference rate fluctuation band at Euroribor three months: floor 3,00% – cap 3,68%; 68 • a Collar contract on 30,000 thousand Euro falling due in June 2008 with the reference rate fluctuation band Euroribor three months: floor 2,55% – cap 4,75%; • IRS (Interest Swap Rate) contract on 20,000 thousand Euro falling due in June 2004 with a fixed interest rate of 3.25%; As of December 31, 2003 the Group credit lines amounted to approximately 216,000 million Euro; 129 million Euro have been utilized. Payables towards other financing bodies As of December 31, 2003, the entry, which amounted to 375 thousand Euro, was mainly due to the residual debt of the subsidiary company Sonus U.S.A. for the purchase of lease-purchase assets. Advances As of December 31, 2003, the item, which amounted to 2.773 thousand Euro, includes advances received from customers. Payables towards suppliers As of December 31, 2003, payables towards suppliers amounted to 49.547 thousand Euro decreased by 2.201 thousand Euro compared to the previous financial year and included the payables to suppliers for goods and services. Payables towards subsidiary companies As of December 31, 2003, the item, which amounted to 80 thousand Euro, referred to trade payables for 18 thousand Euro, towards Orium B.V. ed Acousoft Informatisering B.V. - consolidated using the proportional method - in addition to financial debt towards the above Acousoft Informatisering B.V. which amounted to 62 thousand Euro. Payables towards controlling companies The payables towards controlling companies, which amounted to 132 thousand Euro, included trade payables in addition to the transfer of the Amplimedical VAT debt to Amplifin S.p.A.. Tax payables The breakdown is as follows: (thousand Euro) Within 12 months Beyond 12 months Beyond 5 years 2.448 6.841 5.376 1.099 4.871 6.532 1.349 1.970 (1.156) 506 713 (207) Payables for deduction at source Income tax payables Payables for indirect taxation Other payables 69 Total 15.171 13.215 1.956 The income tax payables represent the actual debt due computed on the basis of the current legislation in force in the countries where the consolidated companies operate. The payables for indirect taxation mainly include deferred VAT payments pertaining to Amplifon and Amplimedical. Payables towards providential and social security institutes The payables towards providential and social security institutes, which amount to 5.879 thousand Euro, mainly include payables towards the social security institute INPS (the Istituto Nazionale della Previdenza Sociale) and the national insurance for industrial accidents INAIL (the Istituto Nazionale per l’Assicurazione contro gli Infortuni sul Lavoro). Other payables The breakdown is as follows: (thousand Euro) Within 12 months Beyond 12 months Beyond 5 years Payables towards employees Payables towards agents Payables for acquisitions 8.929 9.625 1.118 7.195 8.983 2.821 1.734 642 (1.703) Other payables 2.318 3.096 (778) 21.990 22.095 (105) Balance as of 31/12/03 Balance as of 31/12/02 Change Total 13 Accrued expenses and deferred income The breakdown of the entry is as follows (thousand Euro) Revenues from guarantees Interest payable 6.106 387 8.234 619 (2.128) (232) Other 1.535 2.723 (1.188) Total 8.028 11.576 (3.548) As of December 31, 2003, the revenues form guarantees, which amounted to 6.106 thousand Euro, referred to consecutive periods and concerned multi-year guarantee maintenance contracts on products sold by Sonus U.S.A. and by the Dutch subsidiary companies. In order to compare the information, in relation to the financial statements as of December 31, 2002, the opening value was adjusted pursuant to the application of different accounting criteria in line with the standards adopted by the Group for booking guarantee services on products sold and after sales services on an accrual basis performed by the Dutch subsidiaries. As of December 31, 2002, the different accounting criteria entailed booking 6.974 thousand Euro in accrued expenses and deferred income instead of in provisions for guarantees and repairs. The item decrease recorded in that the period pertains to recharging to the income statement under the entry “Extraordinary income” the excess, which 70 amounted to 2.953 thousand Euro, of provisions made in the previous financial years in relation to the value of revenues from guarantees and after sales services referring to consecutive periods of the Dutch subsidiary companies. 14 Commitment and memorandum accounts The breakdown is as follows: (thousand Euro) Balance as of 31/12/03 Balance as of 31/12/02 Guaranties given: Personal surety given Collateral guarantees given Total Change 4.822 2.802 2.020 349 295 54 5.171 3.097 2.074 As of December 31, 2003 the personal surety, which amounted to 4.822 thousand Euro, included surety ship given mainly referred to: • surety ship given by the parent company to guarantee the commitment or contractual obligations for overall 2.614; 1.915 thousand Euro refer to the surety ship given against the obligation to repurchase from SIMEST the 3,81% of the equity investment in Amplifon USA (details are included in the Report on Operations at the paragraph “The trade network and markets”); • surety ship given to Public Bodies in order to take part in bids to tender for the supply of services amounting to 523 thousand Euro; • surety ship given to guarantee the payment in installments of the purchase price for the company division Casti Imaging S.r.l. which amounted to 880 thousand Euro; • surety ship for fiscal litigation issued to the financial administration and amounting to Euro 678 thousand. 71 INCOME STATEMENT 15 Value of operations The breakdown of the item is the following: (thousand Euro) Income from sales and services Change in inventories of work-in-progress, semi-finished and finished products Increase in fixed assets from internal work Other revenue and income Total 2003 2002 Change 443.388 391.941 51.447 331 1.025 (95) 965 426 60 20.125 15.796 4.329 464.869 408.607 56.262 Revenues from sales and services The table shows the breakdown of revenues from sales and services divided by geographical areas and type of business: 2003 % 2002 % Italy 145.214 32,6% 138.535 35,3% 6.679 4,8% U.S.A. - Canada 129.858 29,3% 103.161 26,3% 26.697 25,9% France 59.708 13,5% 47.911 12,2% 11.797 24,6% Holland 54.466 12,3% 46.358 11,8% 8.108 17,5% Switzerland 13.568 3,1% 13.139 3,4% 429 3,3% Spain and Portugal 12.644 2,9% 11.334 2,9% 1.310 11,6% Austria 5.907 1,3% 6.248 1,6% (341) (5,5%) Hungary 2.108 0,5% 1.919 0,5% 189 9,8% 423.473 95,5% 368.605 94,0% 54.868 14,9% Italy 19.915 4,5% 23.336 6,0% (3.421) (14,7%) Total biomedical equipment 19.915 4,5% 23.336 6,0% (3.421) (14,7%) 443.388 100,0% 391.941 100,0% 51.447 13,1% (thousand Euro) Change Change % Hearing aid sector: Total hearing aids Biomedical equipment sector: Total The revenues form consolidated sales and services showed a 51.447 thousand Euro increase which was entirely generated by the Group core business: the revenues from the distribution and fitting of hearing aids increased form 368.605 thousand Euro in 2002 to 423.473 thousand Euro in 2003 recording a 54.868 thousand Euro increase although, in terms of absolute value, the revenues in 2003 were negatively affected by the appreciation of the Euro regards the US Dollar. Further information regarding the trend of revenues by sector and geographical area is included in the Report on Operations in the Notes to the entry “Revenues from sales and services”. Increase in fixed assets for internal work 72 The item, which amounted to 1.025 thousand Euro, mainly referred to withdrawals from inventories of electro medical equipment for diagnostic purposes (usually due to sale) and given to the commercial staff and distribution centers as instrumental assets for the exercise of business activities in addition to coclear hearing aids utilized for replacement services instead of service. Other revenues and income The other revenues and income, which amounted to 20.125 thousand Euro, mainly included revenues from commissions amounting to 14.213 thousand Euro, the Parent Company recharge of the costs pertaining to outlet rentals that were sustained on behalf of one-firm agents with business leases amounting to 1.719 thousand Euro, contingent assets from management activities, which amounted to 1.114 thousand Euro, and revenues from the collection of down payments which amounted to 528 thousand Euro. 16 Costs of operations The breakdown of the item is as follows: (thousand Euro) Costs for raw materials, other materials, consumables and goods Costs for external services For lease expenses Labor costs Depreciation and amortization Change in raw materials, other materials, consumables and goods Provisions for risks Other provisions Other operating costs Total 2003 2002 Change 144.729 113.387 22.574 109.631 23.739 142.441 102.773 19.851 91.369 19.660 2.288 10.614 2.723 18.262 4.079 5.505 468 317 (5.099) 118 49 10.604 350 268 8.769 8.007 762 429.119 379.169 49.950 For raw materials, other materials, consumables and goods The costs for purchasing raw material, other material, consumables and goods, which amounted to 144.729, increased by 2.288 thousand Euro compared to the previous period. The increase in the entry is less than proportional to the revenues form sales following the improved contractual bargaining power in relation to major suppliers. 73 For services The breakdown of the entry is the following: (thousand Euro) 2003 2002 Change 42.454 23.520 7.460 996 3.783 5.536 6.088 1.806 8.284 7.422 1.333 782 39.419 19.738 6.717 2.493 3.277 5.211 5.571 1.527 5.664 9.516 1.516 710 3.035 3.782 743 (1.497) 506 325 517 279 2.620 (2.094) (183) 72 Other 3.923 1.414 2.509 Total 113.387 102.773 10.614 Agents’ commissions Advertising Consultancy and professional services Outsourcing Transport Travel and business trips Telephone and electricity Insurance and surveillance Cleaning and maintenance Sales and distribution services Meetings, conferences and courses Director and Auditor remuneration The costs for agents’ commissions for the year, which amounted to 42.454 thousand Euro, recorded a 3.035 thousand Euro increase compared to the previous period; the increase was correlated to the increase in revenues from sales. The costs for consultancy and professional services mainly refer to legal and administration consulting, consulting for auditing the financial statements and fiscal, commercial, marketing and scientific services. The costs for travel and business trips include costs for work-related travel and accommodation and the costs for running the company canteen. For lease expenses The costs for lease expenses, which amounted to 22.574 thousand Euro, were mainly referred to rentals of company offices and outlets. Labor costs During the first half 2003, labor costs, which amounted to 109.631 thousand Euro, showed a 18.262 thousand Euro increase compared to the same period in the previous year; the increase was due to Group-related growth for external lines following the acquisition of companies and company divisions. 74 Amortization and depreciation The entry breakdown is as follows: (thousand Euro) Amortization of intangible fixed assets Depreciation of tangible fixed assets Other fixed assets depreciation Devaluation of receivables included in current assets Total 2003 2002 Change 13.013 8.315 358 9.238 7.792 907 3.775 523 (549) 2.053 1.723 330 23.739 19.660 4.079 The devaluation of fixed assets, which amounted to 358 thousand Euro, included the devaluation for 190 thousand Euro of the difference on consolidation for Ma.Ge. S.r.l.. The devaluation of receivables included in current assets, which amounted to 2.053 thousand Euro, represent the actual risk connected to uncollectible receivables from clients for the period. Other operating charges The breakdown of the entry is as follows: (thousand Euro) 2003 2002 Change Membership fees Entertainment expenses and gifts Tax and duties Non-operating loss Loss on credits Capital loss 538 1.124 2.195 1.444 125 271 357 964 1.479 3.137 131 86 181 160 716 (1.693) (6) 185 Other 3.072 1.853 1.219 Total 8.769 8.007 762 The non–operating losses mainly refer to the sales adjustments pertaining to previous financial years. 75 17 Financial income and charges Other financial income The breakdown of the item is as follows (thousand Euro) 2003 2002 Change Credit interests on receivables booked in fixed assets 92 103 (11) Credit interests from securities booked in fixed assets 9 34 (25) Credit interests from securities booked in current assets 15 1 14 38 317 3.637 115 76 283 1.653 5.159 (38) 34 1.984 (5.044) Other 1 749 (748) Total 4.224 8.058 (3.834) Credit interest form the controlling company Amplifin S.p.A. Credit interests form customers Credit on currency translation differences Bank credit interests The credit interest posted by the controlling company Amplifin, which amounted to 38 thousand Euro, was mainly due to the interest accrued on VAT receivables (transferred to the controlling company pursuant to article 73 of the Presidential Decree 633 of 26/10/72 and Minister’s Decree 13/12/79). The interest rate applied is the rate prescribed by Law. Interest and other financial charges The breakdown of the item is as follows: (thousand Euro) 2003 2002 Change Interest on bank current accounts and short-term loans Interest on bank current accounts and medium/long-term loans Interest on bond issues Allowed discounts and expenses Currency translation differences Interest on loans from non consolidated subsidiary companies 1.288 3.798 35 1.742 3.286 3 4.661 780 6.614 1.124 2.351 - (3.373) 3.018 (6.579) 618 935 3 Other 45 91 (46) Total 10.197 15.621 (5.424) The decrease in the entry was mainly due to the reduction in interest payable following the repayment on November 27, 2002, of the 100 million Euro bond issued by Amplux on November 27, 2002 with a 7% yearly interest rate. Further information on the structure of the Group financial borrowing is included in the notes to the entry “Bank payables”. 76 18 Extraordinary income and charges Income The breakdown of the entry is the following: (thousand Euro) 2003 2002 Change Capital gains form alienations Income for product guarantees expired Previous years taxation 29 2.953 1.331 - 2.953 1.331 Other 45 304 (259) Total 4.358 304 4.025 The income for product guarantees expired, which amounted to 2.953 thousand Euro, in compliance with the new accounting criteria adopted so as to ensure alignment with the Group standards, were mainly due to recharging the excess provisions from the previous years to the income statement in relation to the value of revenues from after sales guarantees and services which the Dutch subsidiary companies had postponed to subsequent years. The extraordinary income for previous years taxation amounted to 1.331 thousand Euro; 1.225 thousand Euro related to the Parent Company recharging of the excess provisions for taxation from the previous years to the income statement, pursuant to a trend in jurisprudence adopted by the Supreme Court which occurred after the date of approval of the Financial Statements for 2002. Charges The breakdown of the item is as follows: (thousand Euro) 2003 2002 Change Charges for restructuring and reorganizing Amplimedical Devaluation on Viennatone consolidation differences Charges for legal litigation 8.584 1.000 641 - 8.584 1.000 641 680 352 328 10.905 352 10.553 Other Total The charges for restructuring and reorganizing Amplimedical, which amounted to 8.584 thousand Euro, include the extraordinary charges paid by the subsidiary company on account of the management’s strategic choice, which was taken in consequence of the cyclical malaise and internal difficulties of the biomedical sector - not a Group core business - to bring about a radical change in the marketing and production strategy by way of company restructuring operations. The said operations, which significantly altered the structure of the subsidiary company, concern the abolition of inefficiencies and discarding a number of marketing and production lines which are believed to be unprofitable; this entailed closing some business units and reducing occupancy. The aforementioned measures lead to the payment of extraordinary charges for: i) incentives for staff migration, which overall amounted to 861 thousand Euro; ii) devaluation and scrapping of inventories, for 3.802 thousand Euro; iii) the payment of penalties on account of the early cancellation of supply, consulting 77 and agency contracts, which amounted to 496 thousand Euro; iv) devaluation of goodwill paid for business lines no longer deemed to be strategic, which overall amounted to 2.171 thousand Euro; The devaluation of Viennatone consolidation differences, which amounted to 1.000 thousand Euro, was connected to the departure from the Austrian market, the Group deemed to be unprofitable and no longer strategic. The Group pulled out of Austria in 2004 after having transferred 100% of its equity investment in Phonak (further information is available in the paragraph “Significant events occurring after the closure of the financial year” in the Report on Operations). The devaluation represents the realignment of the difference on consolidation pertaining to the Austrian subsidiary company and booked at transfer value that was determined on the basis of the transfer contract. The charges for legal litigation, which amounted to 641 thousand Euro, were mainly due to the costs for the settlement of a dispute concerning the sale of a company which occurred in the previous years. 20 Income tax for the year The breakdown of the item is as follows (thousand Euro) 2003 2002 Change Income before taxes Current taxes Deferred taxes (advance) 23.230 12.338 (1.988) 21.899 8.630 (2.046) 1.331 3.708 58 Total 10.350 6.584 3.766 Tax rate 44,6% 30,1% The taxes for the year represent the actual tax burden of the Group and were determined in compliance with the tax laws in force in the countries where the consolidated companies operate. The increase in the incidence of the fiscal burden on income before taxes, which increased form 30,1% in 2002 to 44,6% in 2003, was mainly due to the extremely low fiscal burden in the 2002 financial year, connected to the final equity investments devaluations in consolidated subsidiary companies. 78 Fiscal position Last period closed It must be pointed out that Amplifon S.p.A. and the Italian subsidiary companies Amplimedical S.p.A. and Ampliclinical S.r.l. (now merged with Amplifon S.p.A.) and MA.GE S.r.l. decided to make use of the provisions pursuant to articles 8 and 9 of the Law no. 289 of December 27, 2002, and subsequent modifications, concerning the adjustment of taxable income and the automatic definition of adjustments relating to past years. In particular, the automatic definition will apply only to the sector relating to income tax and assimilated taxes in compliance with the provisions of art. 9 subparagraph 1 of the Law in question. In relation to Valued Added Tax, integrations to the tax returns have been filed for all the years subject to the settlement (from 1998 to 2001). In 2004 the said companies decided to make use of the institutions in the same manner also for 2002. The definition of the automatic adjustments entails, only for the years and taxes subject to the tax amnesty, the preclusion of any tax assessment, the wiping-out of administrative and tax sanctions as well as the preclusion of punishment for any tax-related or non tax-related infringement that might have been committed (art. 9 sub-paragraph 10, Law n° 289/2002). By adopting the automatic definition, companies as a result have defined all open tax periods regarding the income tax and assimilated taxes (from 1997 to 2002). Conversely, regarding Value Added Tax, the filing of an additional statement for all open tax periods (from 1998 to 2002) entailed, for each year subject to the tax amnesty, the above mentioned preclusions only, however, for the further additional tax increased by a 100% franchise. As a result, in case of a Value Added Tax assessment pertaining to those years, the tax due will be limited to the amount in excess of the adjusted tax, increased by the aforementioned franchise. Fiscal litigation There are no fiscal disputes in progress relating to the Italian companies of the Amplifon Group with the exception of the subsidiary company Amplimedical S.p.A.. The most significant disputes currently pending are described below. The Direct Tax Office of Milan served Amplimedical S.p.A. with four notices of assessment relating to the period from 1986 to 1989; moreover, each notice taxation was raised on the amortization of the goodwill reported in the Financial Statements following the merger through incorporation of Intermedical S.p.A.. In the notices relating to the years 1986, 1989 and 1990, the Direct Tax Office assessed a further increase in taxation and imposed fines for the total amount of 999 thousand Euro. In 1994 the Tax Commission of first instance admitted the Company’s cumulative appeal ruling the extinction of the judgment for the year 1986, since the increased taxation was subject to an amnesty. The dispute 79 concerning that year can consequently be deemed closed. The Direct Tax Office appealed against this judgment only disputing the deducibility of the amortization for the years 1989 and 1990. In 1998, the Regional Tax Commission of Milan admitted the appeal of the Tax Office. The Company appealed against the ruling to the Court of Cassation but the Solicitor General resisted the company’s appeal and filed a counter-appeal. In the notification concerning the corporate year 1987 the Direct Tax Office assessed a further increase in taxation and imposed fines for the total of 185 thousand Euro. In 1996, the Regional Tax Commission of first instance admitted the Company’s appeal ruling the legitimacy of a number of recoveries of negligible entity. The Direct Tax Office appealed against this judgment only contesting the recognized deducibility of the quotas of amortization, but not deducting anything regards the other recoveries. In turn, the Company appealed incidentally against the ruling. In 1998, the Regional Tax Commission of Milan admitted the appeal of the Direct Tax Office and threw out the Company incidental appeal. The Company has appealed against the ruling to the Court of Cassation. The notification pertaining to the financial year 1988 has been cancelled by the Regional Tax Commission of Milan with a judgment that was not contested by the Tax Office, and became res judicata. The controversy is therefore over. In the year 2000, the Tax Office served Amplimedical S.p.A. with three separate tax assessment notices; the Tax Office requested the payment for increased taxation and fines (including interest) assessed for the years 1986, 1989 and 1990, for a total amount of 1,315 thousand Euro (327 thousand Euro 1986, 492 thousand Euro for 1989 and 497 thousand Euro for 1990).The Company decided to file a cumulative appeal disputing the tax assessment notices. During the proceedings the Office provided for the integral reduction of the tax assessment notice for 1986 and for the partial reduction of the tax assessment notices for 1989 and 1990. The Company requested and was granted to pay in installments (55 installments) the residual amounts still entered for trial for a total of 579 thousand Euro. The Regional Tax Commission of Milan with ruling no. 163/34/02 filed on October 29, 2002, annulled the tax notices. The Company has already paid, on a provisional basis, 172 thousand Euro for taxation and pecuniary penalties (in addition to the relating interests). The payment of the residual amounts has been postponed. In 2001 the Regional Tax Commission served the Company with a notice for assessment in which the same required the company to paid additional taxation and pecuniary penalties (in addition to interest) amounting to 62 thousand Euro due pursuant to the ruling of the Regional Tax Commission of Milan and pertaining to the 1987. The Company settled all amounts filed in the assessment roll. In the case that the judgment relating to the assessment notices (referring to the years 1987, 1989 and 1990) currently pending before the Court oft Cassation should have a favorable outcome for the Company, the same shall be entitled to the repayment of the sum disbursed on a provisional basis on the strength of the tax-assessment notice. 80 The Directors believe that no significant charges for the Company can emerge from the aforementioned disputes and, consequently, they have not deemed it necessary to make any provisions to cover the risk. This decision was based on the following: (i) the jurisprudence relating to merit and legitimacy, which now accepts the established trend and views as legitimate to report a merger loss and the relating amortization under the entry goodwill in the Financial Statements (ii) the Circular n. 49 of 30th May 2001 from the Revenue Agency (Agenzia delle Entrate) that requests the periphery offices to take the said trend into account and abandon any pending disputes, (iii) the ruling regarding the corporate year 1988. OTHER INFORMATION EARNINGS PER SHARE The earnings per share for the 2003 financial year, determined by dividing the net Group income for the period by the number of Amplifon S.p.A. shares in circulation at the closure of the year, amounted to 0,65 Euro. EMPLOYEES The table below shows how the average number of employees and of staff employed, divided by category, developed during the years in question: 2003 2002 31/12 average 31/12 average 429 419 349 319 White collar workers / blue collar workers 1.972 1.887 1.941 1.687 Total 2.401 2.306 2.290 2.006 Management / middle management The table below shows the average number of employees as of December 31, 2003 divided by geographical area: Italy Management / middle management USA Holland Spain and France Portugal Switzerland Austria Hungary Total 75 58 176 100 9 6 3 2 429 White collar workers / blue collar workers 484 681 207 320 92 106 60 22 1.972 Total 559 739 383 420 101 112 63 24 2.401 The table below shows the average number of employees during the 2003 financial year divided by geographical area: Italy Management / middle management USA Holland Spain and France Portugal Switzerland Austria Hungary Total 84 52 167 96 9 7 3 1 419 White collar workers / blue collar workers 494 643 198 279 88 102 63 21 1.887 Total 578 695 365 375 97 109 66 22 2.306 81 REMUNERATION OF DIRECTORS AND AUDITORS The information concerning the remuneration of Directors and Auditors is included in the Notes to the Financial Statements of the Parent Company in the section “Other information”. EVENTS FOLLOWING THE CLOSING OF THE YEAR AND THE EXPECTED EVOLUTION OF OPERATIONS The events following the closure of the 2003 financial year and the expected evolutions of operations are described in the relating section in the Report on Operations. RELATIONS WITH CONTROLLING, SUBSIDIARY AND AFFILIATED COMPANIES The relations with the controlling, subsidiary and affiliated companies are described in the relevant section in the Report on Operations. for the Board of Directors Giovanni Martino Rollier 82 Attachment 1) CASH FLOW STATEMENT (thousand Euro) OPERATING ACTIVITIES Group income Third party income 2003 2002 12.667 213 12.880 15.133 182 15.315 Depreciation and amortization - of intangible fixed assets - of tangible fixed assets - of differences on consolidation - of goodwill Allocations: - to staff leaving indemnity - to reserve for risks and charges - to devaluation of fixed assets - to inventory obsolescence provisions - to bad debt reserve Capital (gains) losses from fixed assets Sub-total Staff leaving indemnity liquidated Utilization other reserves (Increase) decrease in inventories Increase in current receivables net of financial receivables Decrease in financial activities not classified as long term investments (Increase) decrease in accrued income and pre-paid expenses Increase in payables towards suppliers Decrease in other non financial debts Increase of accrued expenses and deferred income Change in current assets 5.432 8.315 5.498 2.084 4.751 7.792 3.670 818 1.626 5.394 3.718 1.891 2.053 213 49.103 (1.470) (1.435) 7.447 (7.460) (2.052) 1.002 299 5.445 (3.123) (1.346) 2.338 1.180 907 626 1.723 17 39.136 (2.122) (8.817) (2.605) (12.659) 509 (789) (922) 2.073 7.465 (17.867) Cash flow generated by assets 47.756 21.269 (continued) 83 (thousand Euro) INVESTING ACTIVITIES: Purchase of intangible fixed assets Purchase of tangible fixed assets Proceeds from the disposal of fixed assets Purchase of equity investments in subsidiary companies (net of subsidiary company liquidity): Corresponding to investments in: - intangible fixed assets - tangible fixed assets - financial fixed assets -current assets - accrued income and pre-paid expenses -provisions for risks and charges -staff leaving indemnity -payables - deferred income and accrued expenses -difference on consolidation Purchase of company divisions : - goodwill - tangible fixed assets Increase (decrease) in debt for acquisitions Increase (decrease) in restructuring fund (Purchase) disposal of other equity investments and securities Total Cash flow employed in investments FINANCING ACTIVITIES: (Increase) decrease in financial receivables (Increase) decrease in financial receivables booked in fixed assets Repayment of bond issue Opening medium/long-term bank loans Repayment of medium/long-term bank loans Increase (decrease) of short-term bank payables Decrease in other financial debts Distribution of dividends Other changes in net shareholder’s equity Other changes in third party net shareholder’s equity Cash flow employed in financing activities Cash flow for the period Cash at the beginning of the period Effect of currency rate changes on liquidity Effect on the liquidity generated by currency rate changes during the period Net cash flow during the period Cash at the end of the period 84 2003 2002 (5.429) (11.337) 906 (6.578) (7.807) 685 (48) (257) 748 (966) (29) 696 17 (2.013) (1.497) (3.252) (10) (11.780) (1.251) 686 21 15.461 2.673 (55.902) (15.751) (1.114) (2.259) (1.418) (1.415) (23.810) (39.669) (9.388) (648) 1.949 2.956 (476) (60.459) (74.159) (476) (487) 90.000 (75.116) (30.084) (304) (2.943) 1.174 158 38 1.664 (100.000) 105.203 (214) (47.976) (115) (981) (118) 14 (18.079) (42.485) (9.991) 42.735 (940) (512) (9.991) 31.292 (95.376) 138.609 29 (527) (95.376) 42.735 Attachment 2) Area of consolidation In compliancy with the provisions of articles 38 and 39 of the Law Decree 127/91 and of article 126 of Consob (Commissione Nazionale per le Società a la Borsa), the National Commission for Listed Companies and the Stock Exchange, resolution no. 11971 of May 14, 1999, amended pursuant to resolution no. 12475 of April 6, 2000, as of December 31, 2003, the list of companies controlled by Amplifon S.p.A. is detailed below in compliance with article 2359 of the Italian Civil Code. The companies included in the area of consolidation with the global integration method are the following: Parent Company: Name Amplifon S.p.A. Head office Milan (Italy) Currency EURO Share capital 3.924.200 Subsidiary companies The subsidiary companies included in the area of consolidation with the global integration method are the following: Share % stake as of capital 31/12/2003 Direct/Indirect investment Currency Barcelona (Spain) D EURO 5.160.159 Amplaid Iberica S.L. Barcelona (Spain) I EURO 42.071 99,9 Decibel LTD Porto (Portugal) I EURO 50.000 100,0 Otaustica LTD Lisbon (Portugal) I EURO 80.000 100,0 I.E.A. (Instituto Español Auditivo) Madrid (Spain) I EURO 12.621 100,0 CCA Groupe SA Paris (France) D EURO 209.618 100,0 CCA IDF SA Paris (France) I EURO 175.317 99,9 Name Head office Amplifon Iberica S.A. 100,0 C.C.A Troyes Sarl Troyes (France) I EURO 7.622 99,6 CCA Paris SA Paris (France) I EURO 312.521 99,9 C.C.A. Nimes SA Langlade (France) I EURO 111.136 98,7 O.T.A.A. SA Lyon (France) I EURO 40.960 99,9 Amplifon Cote d'Azur Sas St Raphael (France) I EURO 37.000 100,0 Espace de l'Audition SAS Limoges (France) I EURO 80.000 100,0 Lyon Surditè SA Lyon (France) I EURO 40.000 99,8 SCI Eliot Leslie Lyon (France) I EURO 610 99,8 Surditè Sanguy SA Marseille (France) I EURO 38.875 98,4 Acoustique Médicale SA Toulouse (France) I EURO 38.112 99,9 SCAM SARL Mulhouse (France) I EURO 40.000 100,0 29 Audition SARL Concarneau (France) I EURO 9.147 100,0 Centre Regional Audition Sas Orange (France) I EURO 37.500 98,4 Laboratoire d'Audiologie SA Toulon (France) I EURO 39.637 98,4 85 Direct/Indirect investment Currency Share % stake as of capital 31/12/2003 Name Head office Laboratoire Nantes SAS Nantes (France) I EURO 40.000 100,0 CCA Auvergne SAS Clemont Ferrand (France) I EURO 37.500 100,0 Drome Audition SA Romans (France) I EURO 37.000 99,8 Caducee Acoustique Toulon (France) I EURO 38.000 98,4 Nogent Surdité Nogent sur Marne (France) I EURO Viton KFT Budapest (Hungary) I HUF 7.622 99,9 3.000.000 100,0 Ampliholl NV Amsterdam (Netherlands) D Amplux SA Luxembourg (Luxembourg) D EURO 50.000 100,0 EURO 100.000 100,0 Amplinsure Re Corporation Baar (Switzerland) I EURO 641.231 100,0 Hearing Supplies SA Lugano (Switzerland) D CHF 100.000 100,0 Hoeren SA Lugano (Switzerland) D CHF 5.800.000 99,9 Amplifon AG Baar (Switzerland) I CHF 2.950.000 99,9 Amplibus AG Baar (Switzerland) I CHF 50.000 99,9 Amplimedical Spa Assago (Italy) I EURO 3.111.967 100,0 Actimed S.r.l. Pioltello (Italy) I EURO 14.589 100,0 Clonital S.r.l. Assago (Italy) I EURO 51.130 100,0 MA.GE.Srl Genova (Italy) D EURO 200.000 100,0 Edizioni Tecniche Srl Milano (Italy) D EURO 11.000 100,0 Viennatone Gmbh Vienna (Austria) D EURO 6.552.858 100,0 Miracle Ear Inc. St. Paul (USA) I USD 5 96,2 Miracle-Ear of Texas, Inc. St. Paul (USA) I USD 1 96,2 Amplifon USA Inc. Dover (USA) D USD 52.500.010 96,2 Sonus USA Tumwater (USA) I USDS 10 96,2 Sonus-Texas, Inc. St. Paul (USA) I USDS 10 96,2 Hear PO, Inc. St. Paul (USA) I USDS 10 96,2 Sonus Canada Vancouver (Canada) I CAD 200 96,2 National Hearing INC. Dover (USA) I USDN 10 96,2 National Hearing Centers of Texas INC. Dover (USA) I USDN 10 96,2 Acoudire B.V. Doesburg (Holland) D EURO 2.287.052 100,0 Acousticon B.V. Doesburg (Holland) I EURO 31.765 100,0 Acousticon Detailhandel B.V. Doesburg (Holland) I EURO 38.572 100,0 Arcomvio B.V. Doesburg (Holland) I EURO 18.151 100,0 Audire B.V. Doesburg (Holland) I EURO 113.446 100,0 Audire Holding B.V. Doesburg (Holland) I EURO 54.454 100,0 Auditech B.V. Geldermalsen (Holland) I EURO 22.689 75,0 Acousticon Groothandel GH B.V. Doesburg (Holland) I EURO 18.000 100,0 Emid B.V. Doesburg (Holland) I EURO 15.882 100,0 Voets Hoortoestellen BV Gravenhage (Holland) I EURO 18.151 100,0 Meinesz & Voets BV Gravenhage (Holland) I EURO 20.420 100,0 Pfennings hoortoestellen BV Doesburg (Holland) I EURO 18.151 100,0 86 The affiliated companies included the area of consolidation with the proportional method are the following: Direct/Indirect investment Currency Share % stake as of capital 31/12/2003 Name Head office Orium B.V. Doesburg (Holland) I EURO 18.151 50,0 Acousoft Informatisering B.V. Doesburg (Holland) I EURO 18.197 50,0 The subsidiary companies excluded form the area of consolidation and booked at cost are the following: Direct/Indirect investment Currency Share % stake as of capital 31/12/2003 Name Head office Audioson Eaubonne (France) I EURO 23.000 100,0 Audition Lillo Merignac (France) I EURO 320.000 100,0 Espace Conseil de l'Audition Mont de Marsan (France) I EURO 34.650 100,0 The affiliated companies excluded form the area of consolidation and booked at cost are the following: Name Head office Amplifon Hearing Middle East Heliopolis-Cairo (Egypt) Direct/Indirect investment Currency D 87 EGP Share % stake as of 31/12/2003 capital 1.000.000 20,0 THE BOARD OF AUDITORS’ REPORT TO THE SHAREHOLDERS’ MEETING PURSUANT TO ART. 153 OF THE LEGISLATIVE DECREE N° 58/98 AND ART. 2429, SUB-PARAGRAPH 3 OF THE ITALIAN CIVIL CODE, CONCERNING THE AUDITING ACTIVITY CARRIED OUT DURING THE YEAR CLOSED AS OF 31.12.2003 Dear Shareholders, in compliance with the current legislation in force for joint-stock companies with shares listed on the regulated markets and pursuant to the statutory provisions, during the year closed as of 31.12.2003 we duly carried out the supervision duties pertaining to us in compliance with the principles of conduct for the Board of Auditors recommended by the Consiglio Nazionale dei Dottori Commercialisti e dei Ragionieri (collectively, “Italian GAAP”). In particular, with reference to the supervision duties concerning compliancy to the Law and the Articles of Association, we took part in the meetings of the Board of Directors and, on a quarterly basis, obtained information from the Directors concerning the activities performed and the most significant economic and financial transactions carried out by the Company and by the subsidiary Companies. Moreover, we ascertained that the resolutions passed and the actions undertaken were in accordance with the principles of good management, in compliance with the Law and the Articles of Association also concerning the exclusion of potential conflicts of interest or contrast with resolutions passed by the Board Meeting. We hereby acknowledge that the Board of Directors, which duly convened whenever necessary to discharge business administration requirements, was advised and updated concerning the transactions undertaken or completed by the Directors during the exercise of the powers granted. 88 As stated in the Directors’ Report, the Company continued its policy of international expansion and, among others, in line with the Group’s development strategy agenda completed the acquisition of the company division National Hearing Center Inc. for 15 million US Dollars. Moreover, the Company also paid 14 million Euro to the subsidiary company Acoudire NV to future capital increase account. In addition, during 2003 the capital of Amplifon USA was increased for overall 52,2 million US Dollars. Amplifon S.p.A. subscribed to the capital increase for 96,2% corresponding to 50,5 million US Dollars which had already been paid up during 2002. The residual quota of 3,8%, corresponding to 2 million US Dollars, was subscribed and paid up by SIMEST S.p.A., an Italian company for foreign enterprise, in order to access state contributions on interest account pursuant to Law 100/90. At the end of the financial year the Amplifon S.p.A. raised a number of medium/long-term and shortterm bank loans, as clearly explained in the Directors’ Report, amounting to overall 120 million Euro, while the net financial borrowings amounted to 74 million Euro. For the period of our supervision duties, we did not come across any atypical or unusual transactions undertaken by your Company and third parties, related party transactions or intra-group transactions. Regards the related party and intra-group transactions, the Directors’ Report includes comprehensive information concerning the types of transactions carried out and the economic impact of the same. The analysis did not reveal any criticalities regards adequacy or compliancy with Company interests. In addition, on September 10, 2003, the Board of Directors approved the “Code of Procedure for related party transactions”. The purpose of the Code is to provide interested parties with the rules of conduct regulating related party communications during transactions with Amplifon S.p.A. . Regards the organization structure of the company, during the year we proceeded, within the limits of our mandate, to check the suitability and the functionality of the information and control systems in relation to the ever increasing size of the Group. 89 To this end, we had frequent meetings with the officers in charge of the different functions, paying special attention to the internal audit service, and with the officers in charge of the Auditing Company Reconta Ernst & Young; no noteworthy elements came to light following these exchanges of information. Moreover, we actively took part in the Internal Auditing Committee meetings; in 2003, KPMG was nominated to assess the corporate management control systems in Italy and Holland with the aim, among others, to implement procedures for determining company priorities. Moreover, the following were approved and circulated: the “Ethical Code”, and the “Procedures for communicating reserved documents and information concerning Group activities to the market”. Furthermore, we checked, also by way of the information collected by the Auditing Company, that the drawing up and the set up of the financial statements and consolidated accounts in addition to the report on operations, were compliant with the provisions of the law. The Board of Auditors carefully examined the evaluation criteria adopted to assess the equity investments in subsidiary companies and we hereby acknowledge that it was necessary to book the reduced value of equity investments, which had a heavy impact on the income statement, in order to take into account the lasting loss in value of the subsidiary companies. In particular, the devaluation for 13.796 thousand Euro of the equity investment in Amplimedical S.p.A. was effeted on account of the losses, mainly extraordinary losses, which occurred in 2003 also following the restructuring process described in the Director’s Report. The Board of Auditors has not received any complaints under article 2408 of the Italian Civil Code or reports from third parties. The Board adopted the provisions of the Code of Self-Regulation implemented by the Committee of corporate governance for listed companies. During the year, no opinion has been given pursuant to the Law. 90 We hereby advise you that your Company must confer the mandate for auditing the financial statements for the years 2004, 2005 and 2006 in compliance with article 150 of Law Decree 58/98 to an auditing company enrolled in the special roll pursuant to article 161 of Law Decree 58/98 and that the auditing company Reconta Ernst & Young SpA, has submitted a proposal. Moreover, the following duties have been conferred on bodies “bound by ongoing relations” to the auditing company: fiscal, legal, administrative consulting for approximately overall 315.000 thousand Euro. The aforementioned duties concern both your company and Italian subsidiary companies. In 2003, the supervision activities described previously were performed in the course of five meetings of the Auditor’s Board and by taking part in six Board of Directors’ meetings. As a result of our inspections and scrutiny of the areas pertaining to our supervision, we hereby advise you that no significant events have emerged that might require to be mentioned in the present report or be reported to the Supervisory bodies. On April 7, 2004, the Auditing Company Reconta Ernst & Young SpA published its report in compliance with article 156 of the Legislative Decree 58/98 attesting that the annual accounts and the consolidated financial statements as of December 31, 2003, provide a true and accurate representation of the financial situation and the economic results of the Company and the Group. The financial statements of your Company as of December 31, 2002, closed with a 6.783.168 Euro profit and the Board of Directors has proposed to allocate the profits as follows: - a quota amounting to 340.000 thousand Euro to the legal reserve, - a quota amounting to 47.511 thousand Euro to the accelerated amortization fund, - and 3.531.780 thousand Euro for the distribution of dividends at 0.15 Euro per share. On the basis of what has been stated above we hereby endorse, within the limits of our mandate, the financial statements for the year closed as of December 31, 2003, the Report on Operations as drafted by the Board of Directors and the Board’s proposal to distribute dividends. 91 The Board of Auditors Gian Paolo Giannini (Chairman) John Alexander Stewart (Auditor) Cristina Seregni (Auditor) 92