20-F 1 d20f.htm FORM 20-F Form 20-F

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 20-F

 


 

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended                             

 

For the fiscal year ended: December 31, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report                             

 

Commission file number: 333-12334

 


 

Telecom Italia Media S.p.A.

(Exact name of Registrant as specified in its charter)

 


 

Italy

(Jurisdiction of incorporation or organization)

 

Via Cristoforo Colombo 142

00147 Rome, Italy

(Address of principal executive offices)

 


 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

[None]

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

[None]

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Ordinary Shares, nominal value €0.03 per share

 


 

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

Ordinary Shares, nominal value €0.03 per share    3,289,272,469     
Savings Shares, nominal value €0.03 per share         54,969,513     

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  Yes    ¨  No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.     ¨  Yes     x  No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

x  Large accelerated filer

 

  ¨  Accelerated filer   ¨  Non-accelerated filer

Indicate by check mark which financial statement item the registrant has elected to follow.    x  Item 17    ¨  Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 



TABLE OF CONTENTS

 

         Page

Presentation of Information

   1

Forward-Looking Statements

   1

Part I

   2

Item 1.

 

Identity of directors, senior management and advisers

   2

Item 2.

 

Offer statistics and expected timetable

   2

Item 3.

 

Key information

   2

Selected Consolidated Financial Information

   2

Exchange Rates

   4

Risk Factors

   5

Item 4.

 

Information on the Company

   7

Introduction

   7

History

   7

Present Organizational Structure and Developments

   10

Television

   12

Office Products and Services

   15

Internet Services

   16

Intellectual Property

   18

Property

   18

Regulation

   18

Item 5.

 

Operating and Financial Review and Prospects

   20

Item 6.

 

Directors, Senior Management and Employees

   31

Directors and Senior Management and Employees

   31

Compensation

   38

Board Practices

   40

Board of Directors

   40

Employees

   48

Share Ownership

   48

Item 7.

 

Major Shareholders and Related Party Transactions

   49

Major Shareholders

   49

Ownership of TI Media Ordinary-Shares

   49

Related Party Transactions

   50

Item 8.

 

Financial Information

   53

Consolidated Statements and Other Financial Information

   53

Financial Statements

   53

Legal Proceedings

   53

Item 9.

 

Share Price Information

   55

Securities Trading in Italy

   57

Item 10.

 

Additional Information

   58

Memorandum and Articles of Association

   58

Material Contracts

   63

Exchange Controls

   63

Taxation

   64

Documents on Display

   69

Item 11.

 

Quantitative and Qualitative Disclosures about Market Risk

   69

Item 12.

 

Description of Securities Other than Equity Securities

   69

Part II

   69

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

   69

Item 14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

   69

Item 15.

 

Controls and Procedures

   69

Item 16A.

 

     Audit Committee Financial Expert

   69

Item 16B.

 

     Code of Ethics

   70

 

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Item 16C.

 

     Principal Accountant Fees and Services

   70

Item 16D.

 

     Exemptions from the Listing Standards for Audit Committees

   71

Item 16E.

 

     Purchases of Equity Securities by the Issuer and Affiliated Purchasers

   71

Part III

       72

Item 17.

 

Financial Statements

   72

Item 18.

 

Financial Statements

   72

Item 19.

 

Exhibits

   72

Signatures

       73

 

ii


PRESENTATION OF INFORMATION

 

Telecom Italia Media S.p.A. (“TI Media”, “Telecom Italia Media” or the “Company”) publishes consolidated financial statements which are included elsewhere in this annual report (the “Consolidated Financial Statements”) for the Company and its consolidated subsidiaries (collectively, the “Telecom Italia Media Group” or the “Group”) in euro, the lawful currency of Italy and 11 other member states of the European Union (“EU”).

 

TI Media is the corporate name of the remaining part of Seat Pagine Gialle S.p.A., which resulted from the proportional spin-off of the directories and most of the directory assistance and business information business segments of SEAT into New SEAT. The spin-off became effective on August 1, 2003 and new SEAT was disposed of on August 8, 2003. Telecom Italia Media is the Telecom Italia S.p.A. Group’s (“Telecom Italia” or “Parent Company”) subsidiary operating the Internet & Media business.

 

In this annual report, references to “U.S. dollars”, “dollars” or “$” are to United States dollars; and references to “euro”, “euros”, “Euro” or “€” are to euro. For purposes of this annual report, “billion” means a thousand million.

 

This annual report contains translations of certain euro amounts into U.S. dollars at specified rates. Unless otherwise specified, the translations of euro into U.S. dollars have been made using the noon buying rate in the city of New York for cable transfers in foreign currencies as announced by the Federal Reserve Bank of New York for customs purposes (the “Noon Buying Rate”) for the euro in effect on December 31, 2005, which was €1,1842 = $1.00 (euro 1.2623 at June 16th, 2006). That rate may differ from the actual rates during the year used in the preparation of TI Media’s Consolidated Financial Statements, and dollar amounts in this annual report may differ from the actual dollar amounts that were translated into euro in the preparation of the Consolidated Financial Statements.

 

Unless otherwise indicated, the financial information contained in this Annual Report has been prepared in conformity with International Financial Reporting Standards as adopted by the European Commission for use in the European Union (“IFRS”), which, as described in “Note 36Reconciliation to Accounting Principles Generally Accepted in the United States” of the Notes to the Consolidated Financial Statements, differ in certain material respects from generally accepted accounting principles in the United States (“U.S. GAAP”). Unless otherwise indicated, any reference in this Annual Report to Consolidated Financial Statements is to the Consolidated Financial Statements of the Telecom Italia Media Group (including the notes thereto) included elsewhere herein.

 

TI Media adopted IFRS for the first time in its annual Consolidated Financial Statements for the year ended December 31, 2005, which included comparative financial statements for the year ended December 31, 2004. IFRS 1, First-time Adoption of International Financial Reporting Standards, requires that an entity develop accounting policies based on the standards and related interpretations effective at the reporting date of its first annual IFRS financial statements (i.e., for TI Media, December 31, 2005). IFRS 1 also requires that those policies be applied as of the date of transition to IFRS (i.e., for TI Media, January 1, 2004) and throughout all periods presented in the first IFRS financial statements. See “Item 5. Operating and Financial Review and Prospects —5.4 Adoption of International Financial Reporting Standards”, and “Note 35Transition to International Financial Reporting Standards (IFRS)” of the Notes to the Consolidated Financial Statements.

 

FORWARD-LOOKING STATEMENTS

 

Cautionary Statement for Purposes of the Safe Harbor Provisions of the United States Private Securities Litigation Reform Act of 1995. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This annual report contains certain forward-looking statements, including, but not limited to, the discussion of the changing dynamics of the marketplace, including liberalization of the telecommunications and Internet industry, the opening to competition of directory services, the Company’s outlook for growth in the Internet, directory and directories assistance industries both within and outside of Italy, including sources of increasing revenues to offset the impact of increasing competition. Such statements include, but are not limited to, statements under the following headings: (i) “Item 3. Key Information—Risk Factors”, (ii) “Item 4. Information on the Company—Business Overview—Recent Developments”, (iii) “Item 4. Information on the

 

1


Company—Regulation”, (iv) “Item 5. Operating and Financial Review and Prospects”, (v) “Item 8. Financial Information—Legal Proceedings” and (vi) “Item 11. Quantitative and Qualitative Disclosures About Market Risk”, including statements regarding the likely effect of matters discussed therein. Actual results may differ materially from those projected or implied in the forward-looking statements. Such forward-looking information involves risks and uncertainties, which are outside the Company’s control, that could significantly affect expected results and are based on certain key assumptions.

 

The following important factors could cause the Group’s actual results to differ materially from those projected or implied in any forward-looking statements:

 

    TI Media’s ability to successfully implement its business strategy;

 

    the impact of political and economic developments in Italy;

 

    TI Media’s ability to generate sufficient cash flow and otherwise obtain sufficient financing to support its activities;

 

    the continuing impact of increased competition, including the entry of new competitors; and

 

    the impact of regulatory decisions and changes in the regulatory environment in Italy.

 

The foregoing factors should not be construed as exhaustive. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. TI Media undertakes no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events. See the related cautionary statement under “Item 5. Operating and Financial Review and Prospects”.

 

PART I

 

Item 1. Identity of directors, senior management and advisers

 

Not applicable.

 

Item 2. Offer statistics and expected timetable

 

Not applicable.

 

Item 3. Key information

 

Selected Consolidated Financial Information

 

The company operated under the name “SEAT Pagine Gialle S.p.A” (“SEAT”), which was changed to Telecom Italia Media S.p.A. after the spin-off of TI Media’s (then SEAT) Directories business and almost all of the Directory Assistance and Business Information business segments into a newly incorporated company which assumed the name of SEAT (the “Spin-off”). Effective as of the date of the Spin-off, the corporate name of SEAT became Telecom Italia Media S.p.A.

 

In this annual report, all of the amounts are expressed in thousands of euro unless otherwise indicated.

 

     2001

    2002

    2003(1)

    2004

    2005

 
     (thousands of euro)  

U.S. GAAP

                              

Income Statement data:

                              

Revenues

   161,294     159,027     180,333     167,845     179,750  

Operating income (loss)

   (256,613 )   (129,283 )   (147,140 )   (147,221 )   (167,407 )

Net income (loss) before minority interests, discontinued operations/assets held for sale

   (294,065 )   (17,746 )   (162,385 )   (272,794 )   (113,209 )

 

2


     2001

    2002

    2003(1)

    2004

    2005

 
     (thousands of euro)  

U.S. GAAP

                              

Minority interests

   (13,826 )   (257 )   (2,854 )   1,006     2,424  

Net income (loss from discontinued operations/assets held for sale

   (307,519 )   (677,929 )   (329,613 )   (75,547 )   2,662  

Net income (loss)

   (587,758 )   (695,418 )   (489,144 )   (349,347 )   (112,971 )

Basic and diluted net income (loss) before discontinued operations

                              

Ordinary and savings

   (0.0898 )   (0.0056 )   (0.0510 )   (0.0852 )   (0.0315 )

Basic and diluted net income (loss) from discontinued operations:

                              

Ordinary

   (0.0985 )   (0.2172 )   (0.1054 )   (0.0237 )   0.0007  

Savings

   (0.0985 )   (0.2172 )   (0.1054 )   (0.0237 )   0.0014  

Basic and diluted net income (loss):

                              

Ordinary and savings

   (0.1883 )   (0.2228 )   (0.1565 )   (0.1095 )   (0.0321 )
     2001

    2002

    2003(1)

    2004

    2005

 
     (thousands of euro)  

Balance sheet data in accordance with U.S. GAAP:

                              

Total assets

   5,616,723     4,676,049     1,240,636     1,101,958     1,418,794  

Shareholders’ equity(2)

   2,773,574     2,140,769     690,783     458,636     1,030,622  

Total liabilities(3)

   2,843,149     2,535,280     546,853     643,322     388,172  

Total shareholders’ equity and liabilities

   5,616,723     4,676,049     1,240,636     1,101,958     1,418,794  

Share capital

   341,184     341,184     93,894     111,108     100,327  

(1) In 2003 the consolidation area changed significantly due to the spin-off of Seat PG, effective August 1, 2003. The business complex, composed mainly of the Directories (represented by Italian businesses for the publication of telephone directories and shareholdings in TDL Infomedia and Thomson), Directory Assistance (89.24.24 Pronto Pagine Gialle and Telegate) and Business Information (Consodata Group) areas were transferred to New SEAT (the spun-off company) and therefore, excluded from the consolidation. Other significant transactions which affected the scope of consolidation were the acquisition of additional stakes in Teleprofessional S.r.l. and a 100% stake in TM News S.p.A. Both companies were included for the first time in the scope of consolidation.
(2) Shareholders’ equity under U.S. GAAP is calculated after elimination of minority interests.
(3) Includes minority interests.

 

Until December 31, 2004, TI Media prepared its consolidated financial statements and interim financial information in accordance with Italian GAAP. From January 1, 2005, TI Media has prepared its consolidated financial statements and interim financial information in accordance with IFRS. The Consolidated Financial Statements at and for the year ended December 31, 2005 included in this Annual Report, including the comparable results at and for the year ended December 31, 2004, have been prepared in accordance with IFRS as in effect at December 31, 2005. For purposes of the Consolidated Financial Statements included elsewhere in this Annual Report, there are no differences between IFRS issued by IASB and IFRS as applied by TI Media. Pursuant to SEC Release 33-8567, “First-Time Application of International Financial Reporting Standards”, TI Media has opted to include consolidated financial statements only for at and for the years ended December 31, 2004 and 2005. The accompanying IFRS financial data has been prepared in accordance with IFRS effective at December 31, 2005.

 

Following the plan to restructure the Telecom Italia Group’s internet business unit, the sale to Telecom Italia of TI Media’s Internet operations (Tin.it and Matrix) was finalized on June 1, 2005. The former TI Media’s internet business unit income statement results for the first five months of activity of the Internet business unit were recorded as prescribed by IFRS 5 as “Discontinued Operations”. On September 26, 2005, TI Media entered into an agreement for the sale of 100% of Gruppo Buffetti S.p.A. within the framework of corporate restructuring plans. This sale was finalized on January 11, 2006. As a result, the income statement results and balance sheet data at December 31, 2005 of the former office business unit have also been classified under Discontinued Operations/Assets Held for Sale.

 

The selected income statement data for the years ended December 31, 2004 and 2005 and the selected balance sheet data at December 31, 2004 and 2005 set forth below, have been derived from the Company’s audited financial statements prepared under IFRS included in this Annual Report.

 

3


     2004

    2005

 
     (thousands of euros)  

IFRS

            

Income Statement data

            

Total operating revenues and income

   187,702     190,449  

Operating income (loss)

   (93,291 )   (129,830 )

Financial income (expense)

   (281,801 )   3,579  

Income (loss) from continuing operations

   (236,919 )   (89,169 )

Net income (loss) from discontinued operations/assets held for sale (1) 

   11,644     892,461  

Income (loss) for the period

   (225,275 )   803,292  

Basic and diluted net income/(loss) per share:

            

Ordinary

from continuing operations

   (0.0254 )   (0.0742 )

from discontinued operations/assets held for sale

   0.2539     0.0036  

Savings

from continuing operations

   (0.0254 )   (0.0742 )

from discontinued operations/assets held for sale

   0.2546     0.0042  

Dividend per share:

            

Ordinary

   0     0.1643  

Savings

   0     0.1679  

Balance sheet data:

            

Total assets

   857,181     1,331,800  

Shareholders’ equity attributable to the Group

   348,636     1,008,087  

Shareholders’ equity attributable to Minority interests

   14,978     12,735  

Total shareholders, equity

   363,614     1,020,822  

Total liabilities

   493,567     310,978  

Total shareholders’ equity and liabilities

   857,181     1,331,800  

Shares outstanding (millions of shares):

            

Ordinary

   3,643     3,289  

Savings

   61     55  

(1) Includes for the year 2005 and the comparison years the net results of discontinued operations (the Internet and Office Business Units) attributable to the financial year but limited to the period in which these operations were carried out on an ongoing basis and the income statement effects as a result of the sale of these operations, net of transaction costs expected and incurred.

 

Exchange Rates

 

The following table sets forth, for the years 2001 to 2005 and for the beginning of 2006 certain information regarding the Noon Buying Rate for Dollars expressed in euros per U.S. $1.

 

Calendar Period


   High

   Low

   Average

   At Period
End


Yearly Amounts

                   

2001

   0.9535    0.8425    0.8909    0.8901

2002

   1.0485    0.8594    0.9495    1.0485

2003

   1.2597    1.0361    1.1411    1.2597

2004

   1.3625    1.1801    1.1456    1.3568

2005

   1.3476    1.667    1.2448    1.1842

Monthly Amounts

                   

December 2005

   1.2041    1.1699    1.1861    1.1842

January 2006

   1.2287    1.1980    1.2126    1.2158

February 2006

   1.2100    1.1860    1.194    1.1925

March 2006

   1.2197    1.1886    1.2028    1.2139

April 2006

   1.2624    1.2091    1.2273    1.2624

May 2006

   1.2888    1.2607    1.2767    1.2833

June 2006 (through June 16, 2006)

   1.2953    1.2574    1.2719    1.2623

 

4


Risk Factors

 

Risks relating to the consequences of the sale of the Internet business to Telecom Italia

 

TI Media has sold its Internet business to Telecom Italia. TI Media continues to operate as a smaller company with fewer activities concentrated exclusively in television/entertainment. TI Media’s profitability after the sale of its Internet business is dependent on the continued development of TI Media’s television/entertainment business as its new core business which has incurred net losses in the past three years.

 

As part of TI Media’s restructuring plan, TI Media’s Internet business was sold to Telecom Italia. TI Media’s Internet segment accounted for 51% of TI Media’s revenues in 2004 and 22% of its assets as of December 31, 2004. After the sale of its Internet business TI Media is therefore a company with less revenues and assets and left with a significantly reduced revenue and asset base concentrated entirely in the television/entertainment. TI Media’s television/entertainment business is dependent on the acceptance of its program contents. TI Media’s advertising revenues largely depend on the acceptance of its program contents as well as on the kind of viewers reached by the television network and the program. The current audience may likely change its preference resulting in a decline of the acceptance of the program content. Any change in the acceptance of TI Media program could lead to an increase in the net losses.

 

If TI Media’s television segment continues to incur net losses, TI Media’s operating results and financial condition could be materially and adversely affected.

 

Subsequent to the sale of TI Media’s Internet business, TI Media’s television business remains as its main operating asset. Under Italian law the television business is subject to regulatory requirements that may have a material adverse effect on TI Media.

 

The success of TI Media’s business plan depends significantly on the development of the digital terrestrial television network in Italy. In March 2003, TI Media received a license to broadcast on digital technology on an experimental basis. In April 2006, TI Media received the license to broadcast on digital technology on a commercial basis for its brand MTV Flux. TI Media has transferred its “Digital Multiplex” business unit to its subsidiary Telecom Italia Media Broadcasting S.r.l. to comply with the requirement under Italian law to separate broadcast transmission network operating activities and content provider activities. TI Media will continue to broadcast on an analog basis until December 31, 2008 and there is a strong possibility that TI Media will need to continue to broadcast on an analog basis through 2012. TI Media’s ability to increase its market share in the broadcasting business on an analog basis is very limited. Digital Terrestrial Television is a new type of broadcasting technology that provides a more effective way of transmitting television services using a digital system instead of the existing analog system. The analog system is based on a network using analog technology for broadcasting television, capable of connecting all users to one terrestrial network, with radio transmitters.

 

In June 2006 the newly elected government has announced an overhaul of the current regulatory environment of the television broadcasting business. Among other aspects of the television broadcasting business the reform will have an impact on digital terrestrial television. As part of the overhaul of the regulatory regime the Minister for Telecommunication has announced that he will undertake a market analysis of the TV advertising market and the frequency allocation of digital terrestrial television.

 

Pay-per-content is increasing its importance as a revenue source and digital terrestrial television is the most promising TV pay-per-content platform in Italy today. The pay-per-view service requires customers to purchase a rechargeable card which allows access to pay-per-view events without the need for any subscription. TI Media has increased its market share in the pay-per-content business from 0% in 2004 to slightly less than 30% in 2005. In the event Italian broadcasting companies will continue to be asked to provide broadcasting on an analog basis, the market for digital terrestrial television in Italy will remain artificially constrained and the ability to gain additional advertising revenues for TI Media will be severely limited.

 

5


Any prolongation of the transition process from analog to digital technology may result in a dilution of TI Media’s investments in the digital terrestrial television technology and reduced demand of TI Media products and advertising services as well as smaller returns on investments in the digital terrestrial television technology, which could adversely affect TI Media’s operating results and financial condition.

 

There is intense competition in the television and news broadcasting market in Italy that may reduce TI Media’s market share.

 

TI Media faces competition from a broad range of companies engaged in communications and entertainment services, including cable television, digital and analog terrestrial television, telecommunications providers, and home video products companies, as well as companies developing new technologies and other suppliers of news, information and entertainment. For detailed information regarding competition within the business segments in which TI Media operates, see “Item 4. Information on the Company—Present Organizational Structure and Developments—Competition”.

 

TI Media’s ability to compete successfully will depend on TI Media’s ability to continue to invest in acquiring, commissioning and producing programming content, and attractively package and offer it to our customers at competitive prices. If TI Media cannot compete effectively, TI Media runs the risk of losing market share. If TI Media loses market share, TI Media’s ability to attract advertising and generate advertising revenues may be adversely affected.

 

TI Media cannot assure that third party program services will be available to TI Media on acceptable terms, or at all, or if so available, that such program services will be acceptable to TI Media’s subscribers. In addition, TI Media cannot assure that agreements to acquire program content will be obtained on favorable terms or at all.

 

If TI Media is not able to successfully compete in the television and news broadcasting market in Italy, TI Media’s business, results and operations as well as financial condition may be materially and adversely affected.

 

TI Media may not be successful in developing new technologies or introducing new products and services.

 

The industry in which TI Media operates is subject to rapid and significant changes in technology and is characterized by the frequent introduction of new products and services. Pursuit of necessary technological advances may require substantial investments of time and resources and TI Media may not succeed in developing marketable technologies. Furthermore, TI Media may not be able to identify and develop new product and service opportunities in a timely manner. Although TI Media has continued to develop services through technological innovation and investment in content, TI Media cannot predict with certainty the changes that may occur in the future and affect the competitiveness of TI Media’s businesses. Finally, technological advances may render TI Media’s existing products obsolete, forcing TI Media to write off investments made in those products and services and to make substantial new investments.

 

If TI Media is unsuccessful in developing new technologies or introducing new products and services, TI Media’s business, operating results and financial condition may be materially and adversely affected.

 

Identification of significant deficiencies or material weaknesses as a result of our implementation of procedures designed to comply with Section 404 of the Sarbanes-Oxley Act of 2002 relating to evaluation of our internal control over financial reporting may have an adverse impact on TI Media’s financial condition and results of operations and the trading price of TI Media’s securities.

 

Commencing with TI Media’s annual report on Form 20-F for the year ending December 31, 2006, TI Media will include a report from it’s management relating to its evaluation of our internal control over financial reporting as required under Section 404 of the U.S. Sarbanes-Oxley Act of 2002. As a consequence of systems and procedures currently being reviewed and implemented to comply with these requirements, TI Media may uncover circumstances that may be determined to be significant deficiencies or material weaknesses, or that may otherwise result in disclosable conditions. Although TI Media intends to take prompt measures to remediate any such

 

6


identified significant deficiencies or material weaknesses in its internal control structure, measures of this kind may involve significant effort and expense, and any disclosure of such significant deficiencies, material weaknesses or other disclosable conditions may result in a negative market reaction.

 

TI Media shares lack a trading market in the United States.

 

The principal trading market for TI Media’s shares is the Telematico, an electronic trading platform based in Italy. TI Media’s shares are not listed on a U.S. stock exchange and TI Media does not plan to establish an American Depositary Receipt program for TI Media shares. As a result, there may be little or no liquidity for TI Media shares in the United States.

 

Item 4. Information on the Company

 

TI Media is incorporated in Italy as a joint stock company under the name “Telecom Italia Media S.p.A.” and is registered under the Italian Civil Code with the Rome Company Register under no. 12213600153. The address of its registered office is: Via Cristoforo Colombo 142, 00147 Rome, Italy. The telephone number of the Company’s headquarters is 0039 06 515051. The duration of the Company extends until December 31, 2100.

 

Introduction

 

The TI Media Group is part of the Telecom Italia Group and currently operates as Telecom Italia Group’s Media Business Unit.

 

    Television: La7 and MTV, both in the sectors of production and broadcasting of publishing content through television transmission networks and entrusted under concession, and in the marketing of advertising space in TV programming; and

 

    News: TM News is a national press agency, operating 24/7, 365 days a year through the APCom trademark.

 

In addition to television and news, TI Media primarily operates in the internet and office product distribution business through the following two business segments which were sold in 2005.

 

    Office Products and Services: Through the distribution of products, services and solutions for the office through the Buffetti retail network; and

 

    Internet Services: Management of access services (ISP), with Tin.it, management and development of portals (Virgilio with Matrix), and web services, where it occupied a leadership position in the Italian market. As part of a restructuring of the Telecom Italia Group’s Internet assets TI Media sold its Internet Services to Telecom Italia on June 1, 2005.

 

The financial data related to these two business segments has been treated as discontinued operations in the financial statements included herein.

 

History

 

Telecom Italia Media

 

The Company was incorporated under the name “Società Elenchi Ufficiali degli Abbonati al Telefono S.p.A.” in Turin, Italy in 1925 with the purpose of publishing White Pages for northern Italy’s telephone service provider. TI Media gradually increased the geographical coverage of the White Pages until 1953 when it completed its expansion and was publishing the White Pages throughout Italy for most of the major telephone service providers. In 1966, TI Media introduced Pagine Gialle, its Yellow Pages business directory product.

 

In 1987, TI Media was merged into STET, a company that the Italian Treasury had indirectly controlled since 1933. Until 1997, STET also owned a controlling interest in Telecom Italia, TI Media’s principal supplier of telephone listing information and the main provider of fixed-line public telecommunications services in Italy. On December 31, 1996, STET reorganized TI Media as a separate corporate entity and spun-off TI Media’s shares to

 

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STET’s shareholders on a pro rata basis through a partial de-merger. As a result, 38.73% of the voting control of TI Media was held by the public and the remaining 61.27% by the Italian Treasury. On January 2, 1997, TI Media’s ordinary and savings shares began trading on the Telematico. In November 1997, the Italian Treasury sold its entire stake in TI Media, 61.27% of the ordinary shares and 0.93% of the savings shares.

 

In March 2000, Telecom Italia and SEAT (now TI Media) entered into a framework agreement for the combination of SEAT (now TI Media) and Tin.it, Telecom Italia’s Internet division, and related transactions. As a result of the merger and related transactions, Telecom Italia currently owns, either directly and indirectly, 62.5% of TI Media’s ordinary share capital. Telecom Italia, which was privatized in November 1997, is the incumbent Italian telecommunications operator.

 

In 2000, TI Media continued its expansion through various acquisitions in the office products and business services, directory publication, directory services, business information and television sectors.

 

On April 1, 2003 the Board of Directors of TI Media decided to spin-off the Directories business and almost all of Directory Assistance and Business Information into a newly incorporated company (“New SEAT”) which assumed the name of SEAT Pagine Gialle S.p.A. (Spin-off). SEAT was the principal seller in Italy of advertising in the Yellow Pages directory (“Yellow Pages” or “Pagine Gialle”) and in the White Pages directory (“White Pages” or “Elenchi Telefonici”) and the principal publisher of the Yellow Pages and White Pages directories in Italy and through its subsidiary TDL Infomedia, of the Thomson Directory in the United Kingdom. After the Spin-off TI Media assumed its new name and continued to operate the former SEAT Internet Television and office products segments.

 

The Spin-off provided for the transfer to New SEAT of the following companies within the directories, directory assistance and business information business segments of TI Media:

 

    Directories: Directory Italia Seat Pagine Gialle S.p.A. division, Annuari Italiani S.p.A., Euredit S.A., TDL Group, Euro Directory S.A.

 

    Directories Assistance: Directories Assistance Seat Pagine Gialle division, Telegate Holding GmbH, IMR S.r.l.

 

    Business Information: Consodata S.A., Consodata Group Ltd. (including Netcreations Inc., Pan Adress).

 

The other companies and business segments remained with TI Media.

 

On September 10, 2004, TI Media’s shareholders authorized TI Media’s management to increase the share capital of Telecom Italia Media S.p.A. by up to €120.1 million by issuing between 473,566,962 and 591,958,700 ordinary shares within a price range of €0.25 and 0.2 and by issuing between 7,940,702 and 9,925,875 savings shares within a price range between €0.2 and 0.17 in order to rebalance TI Media’s financial and equity situation after the settlement of the De Agostini litigation. For further details, see Item 8. Financial Information - Settlement with the De Agostini Group.

 

The new share capital of Telecom Italia Media S.p.A. therefore amounts to €111,107,893.71 and is composed by 3,642,519,221 ordinary shares and 61,077,236 savings shares with a nominal value of €0.03 each. TI Media’s Articles of Association were modified accordingly.

 

Sale of Internet Business to Telecom Italia

 

On April 4, 2005, TI Media’s Board of Directors approved a restructuring plan as part of the overall restructuring of Telecom Italia’s Internet business whereby Telecom Italia was to acquire all of TI Media’s Internet activities.

 

On June 1, 2005 Telecom Italia purchased from TI Media Virgilio by acquiring 60% of Webfin (which held 66% of Matrix) and 0.7% of Matrix, held by TI Media, for a total amount of €70 million. Upon conclusion of the transaction, Telecom Italia, which prior to the restructuring held a 40% stake in Webfin and a 33.3% stake in Matrix, acquired full ownership of Webfin and Matrix, and therefore full control over Virgilio’s operations. In addition, Telecom Italia acquired 100% of the share capital in a newly formed company (Nuova Tin.it Srl) to which TI Media transferred the Tin.it business unit. The sale price for the Tin.it business was €880 million.

 

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Merger of La7 Televisioni S.p.A. into TI Media

 

Upon the sale of the Internet business to Telecom Italia, La7 Televisioni S.p.A. was merged into TI Media. Since all of the shares of La7 Televisioni S.p.A. were owned by TI Media, the merger did not result in a capital increase. As a result of the transaction, TI Media assumed all the rights and obligations of La7 Televisioni S.p.A., including private television broadcasting licenses on terrestrial frequencies and for experimentation in digital terrestrial technology.

 

Buy back of TI Media Shares

 

On May 24, 2005, the shareholders meeting of TI Media approved the launch of a tender offer to buy back up to 10% of TI Media’s ordinary and savings shares at a price per share of €0.40 and €0.33 respectively, corresponding to a maximum total of approximately €148 million and a reduction in share capital through the cancellation of the shares bought back. As a result of the share buy back program TI Media currently holds 364,251,922 ordinary shares and 6,107,723 savings shares, which equals 10% of TI Media’s ordinary share capital and 10% of its savings share capital.

 

The ordinary and saving shares acquired by TI Media through the buyback offer were cancelled on October 18, 2005. TI Media’s nominal share capital was reduced accordingly.

 

Sale of Gruppo Buffetti S.p.A.

 

As part of the reorganization of TI Media’s businesses and conclusion of TI Media’s plan to rationalize its business portfolio, TI Media sold the Buffetti office product distribution business, which was not considered strategic or synergistic with TI Media’s core business thereby acquiring additional resources for developing its media business. Therefore, on September 26, 2005, TI Media entered into an agreement with Dylog Italia S.p.A. and Palladio Finanziaria S.p.A. for the sale of 100% of Gruppo Buffetti S.p.A. The sale was finalized on January 11, 2006.

 

Elefante TV S.p.A. and Delta TV S.r.l. Transaction

 

On October 28, 2005 and November 4, 2005, respectively, TI Media purchased the following assets from Elefante TV S.p.A. and Delta TV:

 

    all assets and activities related to television broadcast operations, such as television channels and frequencies,

 

    the “Elefante TV” brand name,

 

    various machinery and equipment, satellite dishes, antennas, radio bridges, repeaters, and other assets used in television broadcasting, both analog and digital,

 

    contracts concerning the hosting and maintenance of television broadcasting plant and all rights, authorizations, licenses and concessions (including the concession granted by the Ministry of Communications on July 28, 1999) related to such operations.

 

Through these acquisitions, TI Media took over Elefante TV’s central government concession for private television broadcasting on terrestrial frequencies in Italy, including authorization for digital broadcasting, and increased its coverage in Italy by taking over the network assets of Delta TV, including its systems and frequencies. Delta TV operates in Central-Southern Italy. These acquisitions allow TI Media to cover with additional frequencies approximately 70% of the population of Italy, which will allow TI Media to expand both its analog and digital television product offerings, in addition to TI Media’s already existing frequencies which covered approximately 82% of the Italian population.

 

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Transfer of “Digital Multiplex” Business Unit to Telecom Italia Media Broadcasting

 

Italian law requires a separation between broadcast transmission network operations and content provider activities. TI Media therefore transferred its “Digital Multiplex” business unit to its subsidiary Telecom Italia Broadcasting S.r.l. against a capital increase and premium in the amount of approximately €27 million.

 

Present Organizational Structure and Developments

 

The TI Media Group is part of the Media business segment of the Telecom Italia Group, as shown in the following chart of the Telecom Italia Group’s organizational structure:

 

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LOGO


(1) On April 4, 2005 the Boards of Directors of Telecom Italia and Telecom Italia Media authorised the restructuring of the Telecom Italia Group's Internet business. As a result of this, on June 1, 2005, Telecom Italia acquired all of Telecom Italia Media's Internet activities (Nuova Tin.it and Matrix).

 

(2) On February 24, 2005, TIM proceeded to spin off the corporate operations relating to the domestic mobile communications business to Tim Italia S.p.A.. The merger of TIM with and into Telecom Italia took effect on June 30, 2005, while the merger of Tim Italia with and into Telecom Italia took effect on March 1, 2006.

 

(3) On October 3, 2005, the Board of Directors of Telecom Italia Media approved the merger by incorporation of La7 Televisioni S.p.A. into Telecom Italia Media S.p.A.. The merger became effective on January 1, 2006.

 

(4) On April 5, 2005, Olivetti Tecnost S.p.A. was renamed Olivetti S.p.A..

 

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As of December 31, 2005, the TI Media Group was organized as follows (the table shows the principal subsidiaries and activities):

 

Media


TV


  

News


  

Office Products


La7(1)

   TM News    Buffetti Group(2)

MTV

        SK Direkt(2)

TI Media Broadcasting(3)

         

(1) La7 Televisioni S.p.A. merged into TI Media on January 1, 2006.

 

(2) was sold on January 11, 2006.

 

(3) Telecom Italia Media Broadcasting S.r.l. is a wholly owned subsidiary of TI Media.

 

The current organizational structure of TI Media is as follows:

 

LOGO

 

Television

 

The television segment focuses on the production and broadcasting of content through two TV networks and advertising during commercial breaks in programming. TI Media provides television services through the two TV networks La7 and MTV that operate analog and digital technology and offers both satellite channels and pay-per-view services on digital terrestrial television. With the acquisition of Elefante TV and Delta TV TI Media acquired an additional license, which is currently used to provide television services through the brand MTV Flux, which was launched on April 7, 2006.

 

At December 31, 2005, TI Media covered approximately 82.2% of the Italian territory with its Terrestrial Digital Signal.

 

Telecom Italia Media Broadcasting S.r.l. currently holds the license acquired through the Elefante TV and Delta TV acquisition and the assets of TI Media’s “Digital Multiplex” business unit, which operates TI Media’s digital network.

 

La7

 

La7 Televisioni S.p.A. merged with TI Media on January 1, 2006 and is a focused television channel, providing news-oriented programming with prime time entertainment programming in the evenings targeting young professionals. La7 started broadcasting under an all news format on March 18, 2002. It currently attracts over 12 million viewers every day. During 2005, La7 continued to seek to consolidate its editorial image, its brand awareness and its programs. In 2005, La7 relaunched and introduced a new editorial project in the information and reality TV, as well as in sports, science programs and fiction. La7 in 2005 continued to improve the image of its news programs. La7 is now perceived as a high quality broadcaster and its measured audience rating was, in the month of December 2005, 2.9% (2.6% for the same period last year).

 

In the September and October 2004, as part of the Digital Terrestrial Television (“DTT”) development projects, La7 acquired the pay-per-view rights to broadcast soccer matches played by certain Serie A teams, the top soccer division in Italy. The total amount of the transactions was approximately €32 million for the three-year period 2004 through 2007. The service, launched in January 2005, requires the purchase of a rechargeable smart card and the sale of pay-per-view events without a subscription fee.

 

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As of December 31, 2005 approximately 884,000 smart cards had been distributed, of which over 500,000 had been activated by users, over 1,300,000 events had been sold (measured as of April 17, 2005), and the top production resources in the field had been used to guarantee maximum coverage and quality to the broadcast events. The network’s pay-per-view content offering contributed to the acceleration of Digital Terrestrial decoder sales which are estimated at 3.5 million pieces at the end of 2005.

 

In the period June-September 2005, the pay-per-view offer was enriched with the broadcasting of approximately 15 movies, high-level international boxing matches and music concerts, as well as many interactive applications such as “Guida TV” and “Ultima ora”.

 

During the Christmas period, in addition to football matches, TI Media also offered music concerts, some of which were exclusively on La7 Cartapiù and used in combination with a press campaign designed to increase activations.

 

Evening programming, that is to say, the network’s “showcase”, had already reached competitive audience results over the previous three years by adding new programs such as “8 e mezzo”, “L’infedele” and “Sfera” to popular shows such as “Processo di Biscardi”, “Stargate” and “Sex and the City”.

 

In August 2005, La7 Sports, the first free DTT channel entirely dedicated to sports news, began broadcasting.

 

Apart from investing in DTT, in 2004 La7 also committed itself to developing all interactive digital platforms in general, and in September, launched the new website www.La7.it (30% growth in page views on a month-on-month basis) and certain mobile telephony services (sms news, sms sport, ring tones with the signature soundtrack of its shows, such as “Sex and the City”).

 

Major corporate events for La7 in 2005 were the following:

 

    On April 29, 2005, La7 signed an agreement with Elefante TV S.p.A. to acquire the company’s national TV broadcast unit for €115,5 million. Elefante TV holds a private television broadcasting concession for terrestrial frequencies over the national territory. The company is also authorized for digital broadcasting.

 

    On the same date, La7 signed an agreement to purchase radio/television plants and frequencies from local concession holder Delta TV, which operates in Central and Southern Italy, for a total amount of €12 million.

 

    On October 28 and November 4, 2005, the Group finalized the acquisition of Elefante TV and the network of Delta TV.

 

    On January 1, 2006, La7 Televisioni S.p.A. merged into TI Media.

 

MTV Italia

 

MTV is a television channel providing music programs and programming for young people (11-35 years segment) on a 24-hour basis. The brand MTV is a well known brand in the music industry and in the television network business. MTV Italia started broadcasting its programs on Beta Television frequency on May 1, 2001. In the meantime MTV Italia has become a multi channel network distributing its content by television, internet, satellite, national events and television broadcast received on a mobile phone. MTV Italia’s strategy is to increase brand awareness and customer loyalty in the specific market segment in which it operates. The number of the terrestrial channel viewers has doubled since 2000, reaching 8.4 million per day and 15.4 million per week according to Makno & Consulting, L’osservatore sul sistema televisivo, May 2005 — an independent market research institute.

 

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Major events for MTV Italia in 2005 were the following:

 

    Pop concerts such as “A Night With”, “Brand New” and “Storytellers”, projects jointly organized by Telecom Progetto Italia and MTV; a well known pop event in Italy “TRL”, which after its moves to Rome, Naples, Genoa and Turin, has returned to Milan, celebrating its return with a concert at the Arch of Peace, featuring the Back Street Boys on stage.

 

    Other initiatives continued with success in 2005: from “Pimp My Wheels”, which attracted a large viewing audience of teenagers throughout Italy, to Very Victoria show (Teo Teocoli, Valeria Golino and Ilona Staller, among others, were interviewed by the hostess Vicky, a well known Italian video disc jockey), to School in Action (Marco and Francesco helped schoolchildren in Milan, Genoa and Catania to prepare for a 360° show).

 

    In September, the eighth MTV Day was held in Bologna: ten hours of live music in front of a crowd of young people.

 

At the same time, the multimedia development of the MTV brand is continuing. MTV is now broadcast through specific channels on all the technological platforms, particularly by satellite and the Internet, with the site www.MTV.it.

 

MTV FLUX

 

On April 7, 2006 TI Media started a new channel under the brand “FLUX” based on analog technology. FLUX consists of events, programs and videos lasting up to five minutes, on the air 24 hours a day. The programs can be accessed either through television, Internet or mobile phone. In addition a meeting place linked to FLUX is available on the web (www.yos.it), where users can exchange information, find ideas for realizing the viewers individual audiovisual projects which will receive their own airtime. The website allows users to upload personal projects to be voted on by visitors on the website: those receiving the greatest number of votes may be chosen for broadcast on the television channel. Finally, navigation by cell phone will allow for an enhanced view of FLUX through real-time information on content on the air, and it will offer the possibility of interacting with other platforms.

 

Competition

 

The market share measured by audience in Italy for La7 was according to Auditel, in the month of December 2005, 2.9% (2.6% for the same period last year). There is no reliable market share data available for the MTV Italia Music channel. According to market research conducted by AC Nielsen, the television advertising market as of November 2005 in Italy generated a total of approximately €4.6 billion in revenues compared to €4.5 billion in 2004, an increase of approximately 2.8% on December 31, 2004. In the same period La7 and MTV increased their advertising revenues respectively by 21.4% and 8.3%, respectively.

 

In recent years, the use of satellite receivers and the presence in the Italian market of pay-per-view program providers has increased. Consequently, La7 faces competition not only from RAI and Mediaset, but also from the increasing presence of new channels in SKY Television (a subsidiary of NewsCorp).

 

MTV Italia competes with established Italian and foreign music channels broadcast on both digital satellite and analog terrestrial technology, such as ReteA-All Music, but increased its presence in digital satellite with its 2 channels, Hits and Brand New, which grew in terms of viewers. The recent Eurisko Audistar indicates consistent growth in MTV Satellite Network’s audience share within the subscriber package offered by SKY, with 1.1 million viewers a week.

 

Human Resources

 

The number of employees in the Television business segment increased from 636 at December 31, 2004, to 693 at December 31, 2005. The increase was mainly due to additional television productions and new management hires for the new digital channels and pay-per-view services.

 

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News

 

Telecom Media News

 

Telecom Media News S.p.A. (“TM News”) is a news service provider. It has entered into a partnership with Associated Press through its press agency. TM News provides real time national as well as international news by adopting the original contents of APCom and Associated Press for the Italian market. The news agency provides coverage of main events in politics, business, finance, local news, sports, cultural events and technology tailoring its contents to the need of the Italian market. Through “Flash News” TM News provides updates or breaking news coverage for important events. The agency has offices in Rome, Milan, Brussels, Frankfurt and New York, with correspondents in most of the places of world news.

 

Main Corporate Events

 

The agency’s portfolio of services has been extended, with the launch of the News Bulletin (“Nuova Europa”) covering Central and Eastern European countries. In addition, the Group has developed technological solutions for the delivery of the agency’s services through multimedia platforms. The average daily production of news in 2005 rose significantly compared to the previous year (+23%) measured by the number of news items written per journalists.

 

Other Activities

 

Databank

 

TI Media provided business information services through the Databank subsidiaries, until the sale of Databank in March 2005. Databank was an Italian company which specialized in customer asset improvement and industry forecasts by providing information, surveys, research and analyses related to 350 economic sectors, 1,500 markets and 10,000 companies and their clients. It was also involved in competitive intelligence, analyzing and evaluating the services on markets and distribution channels. Similarly to Consodata for the French market, Databank provided intelligence and data in relation to the Italian Internet market (especially Internet sites, rankings).

 

On March 14, 2005, TI Media completed the sale of its 100% stake in Databank, to Centrale dei Bilanci Srl and Cerved Business Information S.p.A., each of which acquired 50% of the share capital.

 

Televoice

 

Televoice was an Italian company which operated in the “call center” market and provided a complete service platform which included services such as telemarketing, teleselling, credit collection, statistic panels and back-office telecommunication activities such as e-mailing, fax and ordinary mailing.

 

On January 3, 2005, TI Media sold its 100% stake in Televoice S.p.A.

 

Office Products and Services

 

Through Gruppo Buffetti S.p.A. during 2005 TI Media was a leading distributor of office products and business solutions in Italy. On January 11, 2006 TI Media sold office products and services business.

 

Buffetti Group

 

Gruppo Buffetti was a distributor of office products and services in Italy. The primary target groups were professionals, retailers, small offices/home offices (“SOHO”) and small and medium-sized enterprises (“SME”). The Buffetti brand name had been present in the Italian market for over 150 years and enjoyed a 93% brand awareness. A large portion of the products and services offered were designed and sold under Gruppo Buffetti’s own brands, while their actual production was mostly outsourced to third parties. Products were distributed mostly through Gruppo Buffetti’s nationwide franchise network and its new direct-to-business agency network, independent retailers and through the Internet.

 

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Gruppo Buffetti acted as a key distribution platform for products and services for both TI Media and the Telecom Italia Group. Pursuant to this strategy, Buffetti’s management made efforts to develop Buffetti as a one-stop shop for its customers. This was made possible as Buffetti focused on higher margin services, such as software, print-on-demand services, promotional items and digital signature software packages. Buffetti increased its interaction with other business segments of Telecom Italia and thus offered, communication and business solutions such as mobile telephone connections, provided by and marketed under the brand name of Telecom Italia Mobile and Internet services (through Tin.it) and professional software. In 2005, Gruppo Buffetti undertook special efforts to develop sales in the office automation and telephone products and accessories sectors.

 

In 2005, Gruppo Buffetti operated a network of approximately 1,000 franchise shops in Italy and with a direct network (SK Direct) focused to the business customers. Gruppo Buffetti’s main products were:

 

    Traditional Products. Gruppo Buffetti’s traditional products included historical products like printed business forms, filing and organizing products, presentation materials, stationery, writing instruments, gifts and leather accessories “Pieffe” and “Full Time” brands. Gruppo Buffetti published a large variety of books and magazines covering a wide range of business topics under the Gruppo Buffetti Editore brand. In order to satisfy all business topics and their needs, these products were supported by databases on CD-ROM and Internet pages.

 

    Innovative Products. This category included new products and services such as software products, IT products, telecommunication products and print on demand. Gruppo Buffetti’s specialized software products included professional packages with features for tax planning, accounting, inventory, sales and personnel. Gruppo Buffetti offered a wide range of standard consumer and professional information technology products such as software, personal computers, printers, fax machines and various computer accessories; and distributed TIM mobile telecommunications products, including handsets, accessories, subscriptions and rechargeable SIM cards. Gruppo Buffetti also distributed Telecom Italia fixed telecommunications products, such as voice and data services, Internet connections and e-commerce solutions for small businesses. Print on demand is a print on line service for personalizing printed forms and gadgets.

 

Gruppo Buffetti had developed in web technology to provide customers online custom catalogues and information services through the three sales channels: the nationwide franchise network, independent retailers and the Internet.

 

Competition

 

During 2005, the products and office services market faced strong competition due to the growing presence of large national and multinational operators. Gruppo Buffetti’s main competitors were Corporate Express, Karnak, Errebian, Mondoffice and Office Depot. In particular, Office Depot operated in the Italian market through Viking Office products. All of these competitors sold directly to corporate customers. Gruppo Buffetti, which included approximately 1000 outlets, was the largest franchise structure operating in Italy in 2005 and was the only multi channel player with a wide and complete range of office products and services.

 

Human Resources

 

The number of employees in the Office Products and Services business segment decreased from 195 at December 31, 2004 to 184 at December 31, 2005.

 

Internet Services

 

Through the Internet services business segment, TI Media offered a full range of Internet services until its sale to Telecom Italia on June 1, 2005, consisting of:

 

    Internet access services;

 

    portal services;

 

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    on-line advertising services; and

 

    web services.

 

TI Media’s Internet services were provided through Tin.it and Matrix.

 

LOGO

 

Internet Access Services

 

    Through Tin.it, TI Media provided Internet access services to predominantly residential users and business customers.

 

Tin.it offered two principal access subscription plans:

 

    free dial-up access (Tin.it Free); and

 

    premium access (dial-up, ISDN and ADSL access).

 

The most important products of Tin.it were the following:

 

Free Access (Tin.it Free). This product did not require the payment of a subscription fee but does require the payment of a local telephone call for the duration of the connection.

 

Premium Dial-up Access (Tin.it Special and Tin.it Pro). Premium access was provided to both residential and business users. These products required the payment of a subscription fee and provided a wide range of value-added services, depending on the Premium plan selected. Premium plans offered different combinations of on-line time and value-added services, such as multiple e-mail addresses and 24-hour customer support. In addition, it was possible to package a number of value-added services with Premium plans, including services allowing customers to listen to and send e-mail messages by phone, receive faxes and voice messages by e-mail and to subscribe to news services by e-mail.

 

ADSL Access. Access was provided to both residential (ADSL Economy, ADSL a Forfait, ADSL a Forfait Pro) and business users (ADSL Lan). Products required the payment of a subscription fee and provide a wide range of value-added services, depending on the different offer selected such as multiple e-mail, web space, 24-hour customer support or virus protection.

 

Services to Alice ADSL. Based on a commercial agreement, TI Media provided Telecom Italia Alice users with services such as authentication, second level customer care for technical matters and services (e-mail, web space, video call, virus protection and exclusive contents). For this service Telecom Italia paid an activation fee and an annual subscription fee for each Alice user to TI Media.

 

Portal Services

 

TI Media provided portal services through Matrix, which operated the Virgilio portal.

 

Virgilio is a leading Italian portal that catered to the Italian-speaking community on the Internet. Virgilio, which was on-line since July 1996, contained a search engine and a website index, and it centralized services in various interest areas such as stock quotes, weather forecasts, TV guides, games, chats, advertisements and shopping. In

 

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order to simplify the use of information, Virgilio offered personalized, interactive services that corresponded to the requirements of individual customers. Virgilio derived its revenues principally from advertising, which consisted of both displaying advertising banners in its web pages and directing Internet traffic to websites designed, maintained or promoted on its network.

 

Furthermore Matrix provided a wide range of web services, including communication consultancy, website construction and maintenance, and technical assistance. The Rosso-Alice portal, a premium content provider, was developed in mid-March 2004.

 

Competition

 

With the growth of the broadband market and premium content, the Internet business was increasingly marked by high capital intensity and models based on the integrated management of telecommunications and Internet product offerings. This was confirmed by the fact that all of the main European operators felt it necessary to integrate their Internet operations into their fixed telephony operations to better compete in the market. This is one of the main reasons why Telecom Italia and TI Media approved a plan for the reorganization of the Group’s Internet operations. Under the plan, Internet activities was to be grouped within Telecom Italia, thereby allowing TI Media to focus its efforts on the media segment and giving it adequate financial resources to develop its business.

 

Intellectual Property

 

TI Media television business uses the trademarks La7 Televisioni and MTV. Upon the merger of La7 Televisioni S.p.A. into TI Media, TI Media holds the license for the production and distribution of editorial contents through the television network La7. MTV Networks granted to MTV Italia the exclusive right to use the trademark MTV Music Television.

 

TI Media operates in the information industry through a news agency named Telecom Media News. Telecom Media News entered into a commercial and strategic agreement with the international news agency named Associated Press (AP). Based on such agreement, AP granted Telecom Media News an exclusive license for Italy and Switzerland to translate AP editorial contents into Italian.

 

Property

 

TI Media does not own any real estate property.

 

Regulation

 

Television

 

In February 2003, MTV Italia and La7 requested and obtained from the Italian Ministry of Communications the authorization for the first commercial tests of DTT.

 

The former regulatory framework regulating broadcasting was implemented in mid 2003, which provided for the switch-off of the analog broadcasting network and the full roll-out of DTT broadcasting by 2006, which has subsequently been postponed to December 31, 2008. The deadlines of March 15, 2006 and July 31, 2006 have been fixed for the total phasing out of analog broadcasting in regional capitals and throughout the two Regions of Sardegna and Valle d’Aosta. The simulcast hybrid system of analog and digital techniques will be used through the final termination of analog broadcasting. TI Media’s analog concession will run until the switch off date.

 

Television broadcasting is now regulated by the Broadcasting Consolidation Act (Legislative Decree No. 177 of July 31, 2005).

 

In compliance with national law, TI Media is currently completing the role out of the Digital Terrestrial network, especially through the acquisition of new plant/bandwidth. As of December 31, 2005, the pilot MUX digital signal reached over 82.2% of the population. Through the acquisition of the Elefante TV project, TI Media

 

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obtained an additional concession for analog broadcasting, which allows TI Media to set up an additional digital multiplex. Rate A, however, has challenged the decision by the competent authority and the proceeding is currently pending with the Regional Administrative Court of Latium.

 

On March 31, 2006 the Board of Directors of TI Media passed a resolution to transfer the “Digital Multiplex” line of business to Telecom Italia Media Broadcasting S.r.l. (fully held by Telecom Italia Media S.p.A.) against a capital increase of Euro 27 million. The transaction is a result of the legal requirement to separate the activities as a radio and television broadcast network operator and those as a content provider (Law No. 177/2005, Consolidation Act for radio and television). Telecom Italia Media Broadcasting S.r.l. obtained the license as television broadcast network operator on May 9, 2006.

 

La7 Televisioni has commenced Digital Terrestrial broadcasting services through La7 Sport and has obtained a 12-year permit from the Communications Ministry to operate as a content supplier.

 

La7 Televisioni has also obtained a no-objection certificate for its pilot DVB-H television broadcasting service within the city of Cagliari.

 

The following outlines other regulatory issues of interests to TI Media:

 

    The Communications Regulator AGCOM has launched a consultation of the draft regulation for Market 18 (wholesale market for broadcasting services delivering content to end users). The draft regulation identified RAI and RTI operators enjoying a joint dominant position on the analog terrestrial network market. The draft contains no remedies.

 

    The European Commission has requested information regarding the failure to implement the National Plan for the Allotment of Bandwidth for Analog Television Broadcasting (PNAF) and the absence of deadlines for the implementation of the PNAF for digital broadcasting. This has given rise to the issue of the allotment of the so-called Digital Dividend involving new uses of the bandwidth made available following the switch off of analog television broadcasting.

 

    Mobile TV Broadcasting (broadcasting to mobile receivers) is one of the most promising of these alternative uses of bandwidth. While waiting for bandwidth to be assigned, initiatives are already underway for the immediate launching of these services using bandwidth currently assigned to television broadcasters. These initiatives include the TIM-Mediaset and TIM/La7-MTV agreements, respectively for the marketing and experimentation of DVB-H services using the DVB-T bandwidth assigned to the television broadcasters involved. On this issue, the Communications Ministry and the sector regulator AGCOM has launched two separate public consultations focusing on, among other things, how the new service is to be governed under the current regulatory framework.

 

    The European Commission has approved a proposed Directive amending the TVSF (Television without Frontiers) Directive currently tabled before the European Parliament.

 

    On April 19, 2006, TI Media received a license to provide television services through its brand MTV Flux.

 

Italian law (Law 249/1997) provides that a purchaser of an Italian television company must be controlled by either an entity organized under the laws of the Republic of Italy or another European Union member state. In case of an entity organized under the law of another country, the country is required to enter into a bilateral agreement with Italy in order for one of its citizens to invest in an Italian television company. The foreign investor will be entitled to invest on the same basis that is granted to an Italian investor within the ambit of the bilateral agreement.

 

In connection with the antitrust approval of the Stream and Tele+ merger, the European Commission required that SKY Italia, which at that time was providing predominantly satellite television services, not engage in any activity as a DTT operator. SKY Italia at the time was also required to divest itself of all its terrestrial broadcasting activities. This limitation is not applicable to any other satellite broadcasting activity in Italy. As a result SKY Italia may not invest in any terrestrial broadcasting activities.

 

19


News

 

The TM News press agency, purchased from the e.Biscom Group in 2003, operates with the APCom logo.

 

The agency’s characteristic feature is the strategic partnership that it enjoys on an exclusive basis for Italy and Switzerland with the Associated Press, allowing it to deliver its own APCom news bulletin through multiple transmission techniques (Internet, satellite, dedicated data network). TM New distributes its APCom news bulletin to the major national broadcasters and to a wide range of daily publications as befits a nationwide press agency.

 

Internet

 

The following description of the regulatory environment applied to TI Media insofar, as TI Media was active in Internet services, which is no longer the case. TI Media-Tin.it was present in the residential and SME (Small and Medium Enterprises) retail market for both dial-up and ADSL Internet access. Seat-Tin.it acquired from Telecom Italia all network services for the realization of such offers: access (mainly, call origination for dial up calls, ADSL wholesale access, IP transport, national and international bandwidth).

 

Retail market—dial-up

 

After the first quarter 2002, TI Media-Tin.it activated new numbers for dial-up calls: (i) 7020001033 for premium and (ii) 7020001099 for free dial-up calls. The old geographic numbers were still in operation at the time of the sales of the Internet services. The financial relationship with Telecom Italia was based on revenue sharing both for the old (geographic) and new (70X) numbering.

 

On October 7, 2002, the Ministry of Communications assigned the right of use of 70X numbering to TI Media-Tin.it. As a consequence, TI Media-Tin.it negotiated and signed with Telecom Italia a contract related to 70X dial-up calls which provided: from January 1, 2003, TI Media was entitled to (i) all the revenues of 70X calls and (ii) TI Media-Tin.it paid the correspondent call origination and IP transport to Telecom Italia. The publication of Law 59/02 and subsequent implementation of the relevant resolution by AGCom (9/02/CIR) required Telecom Italia to grant Internet Service Providers on the same economical conditions for network services that it did to other licensed telecommunication operators.

 

For the remaining TI Media-Tin.it regular traffic, TI Media-Tin.it shared its revenue with Telecom Italia only for geographic numbering.

 

ADSL/ATM Broadband

 

The applicable regulatory provisions (AGCom decision 407/99, 217/00/CONS, 15/00/CIR, 06/03/CIR) required Telecom Italia to make a wholesale offer to access broadband ADSL Internet services available to competing operators, before providing services to its own customers. This wholesale offer formed the basis upon which TI Media-Tin.it defines its offer conditions for broadband ADSL Internet access for its customers.

 

As an ISP, TI Media priced its services to its customers based on the wholesale offering. With the 06/03/CIR resolution, the AGCom had reviewed the economic conditions of the wholesale offer by Telecom Italia in order to guarantee suitable financial spaces for competition and required Telecom Italia to decrease its prices. Like other operators, also TI Media had benefited from this price reduction.

 

WIFI Services

 

TI Media has obtained the authorization to offer the public Radio-LAN, access to public electronic communications networks, and services in the 2.4 GHz band (WIFI service) as of August 3, 2003.

 

Item 5. Operating and Financial Review and Prospects

 

The following discussion should be read in conjunction with the Consolidated Financial Statements included elsewhere in this Annual Report. Such financial statements have been prepared in accordance with IFRS, which differ in certain material respects from U.S. GAAP. For a discussion of the principal differences between IFRS and U.S. GAAP as they relate to TI Media, see “Note 36 —Reconciliation to Accounting Principles Generally Accepted in the United States” of the Notes to the Consolidated Financial Statements included elsewhere herein.

 

20


Results of Operations

 

The following table sets forth TI Media’s statement of operations for the years ended December 31, 2004 and 2005, prepared in accordance to IFRS. These amounts have been derived from, and should be read in conjunction with TI Media’s IFRS Financial Statements included elsewhere in this annual report.

 

The following table shows the consolidated statement of operations data to facilitate comparison of the results for the periods presented on a consistent basis, historical data of the periods are presented for comparison with the statement of operations data for 2005 have been restated to reflect the classification of the Internet business unit (sold on June 1, 2005) and the office service distribution business which was in the process of being sold in December 31, 2005 as discontinued operations/assets held for sale. This data was also adjusted and reclassified due to the adoption of IFRS.

 

     Year ended December 31,

 
     2004

    2005

 
     (thousands of euros)  

IFRS

            

Revenues

   167,845     179,750  

Other income

   19,857     10,699  
    

 

Total operating revenues and income

   187,702     190,449  
    

 

Purchase of materials and external services

   (160,551 )   (199,891 )

Personnel costs

   (69,430 )   (75,354 )

Other operating expenses

   (27,150 )   (11,593 )

Changes in inventories

   1,123     3,121  

Capitalized internal constructions costs

   4,059     1,914  
    

 

Operating loss before depreciation and amortization

   (64,247 )   (91,354 )
    

 

Depreciation and amortization

   (28,412 )   (37,337 )

Gains/losses on disposals of non-current assets

   1,080     (1,139 )

Impairment losses/reversals of non-current assets

   (1,712 )   —    
    

 

Operating loss

   (93,291 )   (129,830 )
    

 

Share of earnings of equity investments accounted for using the equity method

            

Financial income

   4,063     7,945  

Financial expenses

   (285,864 )   (4,366 )
    

 

Loss from continuing operations before taxes

   (375,092 )   (126,251 )
    

 

Income tax benefit

   138,173     37,082  
    

 

Loss from continuing operations

   (236,919 )   (89,169 )
    

 

Net income from discontinued operations/assets held for sale

   11,644     892,461  
    

 

Net income (loss)

   (225,275 )   803,292  
    

 

Attributable to:

            

—Net income (loss) attributable to the Group

   (226,281 )   800,868  

—Net income (loss) attributable to Minority Interests

   1,006     2,424  

 

21


Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Presentation of Results

 

TI Media’s scope of the consolidation includes the Italian and foreign companies that are majority owned or are otherwise directly or indirectly controlled by TI Media. As discussed in more detail in the Notes to the IFRS Consolidated Financial Statements, the scope of consolidation changed materially in 2005 compared to 2004.

 

Following the plan to restructure the Telecom Italia Group’s internet business unit, the sale to Telecom Italia of TI Media’s Internet operations (Tin.it and Matrix) was finalized on June 1, 2005. The former TI Media’s internet business unit income statement results for the first five months of activity of the Internet business unit were recorded as prescribed by IFRS 5 as “Discontinued Operations”. On September 26, 2005, TI Media entered into an agreement for the sale of 100% of Gruppo Buffetti S.p.A. within the framework of corporate restructuring plans. This sale was finalized on January 11, 2006. As a result, the statements of operation results and balance sheet data at December 31, 2005 of the former office business unit have also been classified under Discontinued Operations/Assets Held for Sale.

 

Operating Revenues and Other Income

 

The following table presents the operating revenues of TI Media broken down by its segments:

 

     Year ended December 31,

 
     2004

    2005

 
     (thousands of euro)  

TI Media

            

Television

   152,554     178,782  

News

   4,968     6,945  

Others

   47,642     5,992  

Adjustments

   (17,462 )   (1,270 )
    

 

Revenues and Other Income from TI Media

   187,702     190,449  
    

 

 

    €178,782 from the Television segment consisting of revenues from its La7 and MTV Italia television channels, compared to €152,554 in 2004, an increase of 17.2% primarily due to an increase in net revenues of 16.1% of the MTV Italia channel due to the increase in gross advertising sales of 8.3% in 2005 compared to 2004 and a 39.6% increase in net revenues in the La7 channel due to an increased audience from 2.7% in 2005 compared to 2.3% in 2004 throughout all time segments of the day. The increased audience resulted in a 21.4% increase in advertising revenues in 2005 compared to 2004 in the La7 channel.

 

    €6,945 from the new segment consisting of revenues from its national press agency operating 24/7, 365 days a year through the APCom trademark, compared to €4,968 in 2004, an increase of 39.8% primarily due to the increase in the customer base.

 

    €5,992 from “others” consisting of revenues primarily from TI Media in the amount of €3,927, Databank in the amount of €1,078, SCS in the amount of €939, and various other minor items accounting for the difference.

 

    €(1,270) in adjustments caused by the elimination of the inside group revenues, the main differences compared to 2004 is €15,128 paid in 2004 by Televoice for its call center services provided to Tin.it. Televoice was sold in January 2005.

 

Production Costs

 

The following table shows the production costs for TI Media on a consolidated basis:

 

     Year ended December 31,

 
     2004

    2005

 
     (thousands of euro)  

Production costs

            

Purchase of materials and external services

   (160,551 )   (199,891 )

Personnel costs

   (69,430 )   (75,354 )

Other operating expenses

   (27,150 )   (11,593 )

Changes in inventories

   1,123     3,121  

Capitalized internal construction costs

   4,059     1,914  
    

 

Total Production Costs

   (251,949 )   (281,803 )
    

 

 

22


Purchase materials and external services increased by 24.5% from €160,551 in 2004 to €199,891 in 2005 primarily due to the television segment, which, due to the costs for Digital Terrestrial experimentation recorded a 40.0% increase in procurement costs. Higher costs in “content” were incurred to increase the analog television audience and to enhance the programming of new digital channels such as the La7 Sport. The costs incurred for Digital Terrestrial Television, including pay-per-view services, amounted to €47,698 compared to €15,595 in 2004.

 

Personnel costs increased by 8.5% from €69,430 in 2004 to €75,354 in 2005 primarily due to the allocation of stock options to employees, recognized pursuant to IFRS which amounted to €4,015. Excluding this effect personnel costs increased by 2.7% to €71,339 primarily due to an increase in employees on a comparable basis, mainly due to television productions needs and the management of the new digital channels and the pay-per-view services.

 

Other operating expenses decreased by 57.3% from €27,150 in 2004 to €11,593 in 2005 primarily due to higher charges in 2004 incurred in connection with the De Agostini settlement and the resolution of the Telenorba dispute and to a lesser extent due to lower provisions and miscellaneous operating expenses in 2005.

 

Depreciation and amortization

 

Depreciation and amortization increased by 31.4% from €28,412 in 2004 to €37,337 in 2005 primarily due to the higher investment in Digital Terrestrial Television in 2005.

 

Operating loss

 

Operating losses increased from €93,291 in 2004 to €129,930 in 2005 primarily due to increased costs and investments in content incurred to support audience growth and by start-up operations of La7 Digital Terrestrial Television.

 

Financial income

 

Financial income increased by 95.5% from €4,063 in 2004 to €7,945 primarily due to the interest paid by Telecom Italia to TI Media on the cash deposit made in the second half of the year with Telecom Italia, representing a portion of the cash from the sale of the Internet business.

 

Financial expenses

 

Financial expenses decreased from €285,864 in 2004 to €4,366 in 2005 primarily due to the write downs to the equity investment in Finanziaria Web, acquired as part of the “De Agostini settlement” which was included in 2004.

 

Operating loss on continuing operations before taxes

 

The operating losses on continuing operations before taxes decreased by 66.3% from €375,092 in 2004 to €126,251 in 2005 primarily due to the fact that 2004 included the settlement related to the De Agostini litigation.

 

Income taxes

 

Income taxes decreased from a tax credit in the amount of €138,173 in 2004 to a tax credit in the amount of €37,082 in 2005 as a result of TI Media’s participation in Telecom Italia’s National Tax Consolidation, the year 2005 benefitted from deferred tax assets on tax losses for the period amounting to €47,622 compared to €126,137 in 2004.

 

23


Net loss from continuing operations

 

Net loss from continuing operations decreased by 62.4% from €236,919 in 2004 to €89,169 in 2005 primarily due to the reasons mentioned above.

 

Net income from discontinued operations/assets held for sale

 

Net income from discontinued operations/assets held for sale increased from €11,644 in 2004 to €892,461 in 2005.

 

Net income from discontinued operations/assets held for sale includes the revenues and expenses generated by the Internet operations (sold on June 1, 2005) for the period from January 1 through May 31, 2005 and those generated by the Office Products (held for sale at December 31, 2005) for 2005. The amount also includes the capital gain on the sale of these business units and the incidental expenses relating to the transaction. For additional information see Note 12 to the IFRS Consolidated Financial statements.

 

The table below reports the key financial operating data of the discontinued operations/assets held for sale:

 

     Year ended December 31,

 
     2005

    2004

 
     Internet

    Buffetti
Group


    Total

    Internet

    Buffetti
Group


    Total

 
     (thousands of euro)  

IFRS

                                    

Revenues

   130,415     126,007     256,422     300,632     126,750     427,382  

Operating expenses

   (114,051 )   (121,763 )   (235,814 )   (276,844 )   (123,714 )   (400,558 )

Income (loss) before taxes

   16,364     4,244     20,608     23,788     3,036     26,824  

Income taxes

   (6,097 )   (3,445 )   (9,542 )   (12,997 )   (2,183 )   (15,180 )

Income (loss) from discontinued operations/assets held for sale

   10,267     799     11,066     10,791     853     11,644  

Gains/losses on disposal of discontinued operations and ancillary charges

   889,946     (8,551 )   881,395                    

Net income (loss) from discontinued operations/assets held for sale

   900,213     (7,752 )   892,461     10,791     853     11,644  

 

Net income

 

TI Media had a net loss in 2004 in the amount of €226,281 compared to a net income in the amount of €800,868 in 2005 mainly due to the sale of TI Media’s internet activities to Telecom Italia.

 

24


Liquidity

 

The table below summarizes for 2004 and 2005 TI Media’s statement of cash flows:

 

     2004

    2005

 
     (thousands of euros)  

IFRS

            

Cash flow generated by (used by) operating activities

   (340,757 )   (37,454 )

Cash flow generated by (used in) investing activities

   (19,377 )   767,093  

Cash flow generated by (used in) financing activities

   229,281     (264,531 )

Cash flow generated by (used in) discontinued operations

   9,175     16,934  
    

 

Total Cash flow

   (121,678 )   482,042  
    

 

Cash and cash equivalents:

            

Beginning of year

   74,052     (47,626 )

End of year

   (47,626 )   434,416  
    

 

 

Comparison between Year Ended December 31, 2005 and December 31, 2004

 

Cash flow used for Operating Activities

 

Cash flows used by operating activities in 2005 were €37,459 compared to €340.757 in 2004. In 2004 the cash flows used by operating activities was primarily affected by the payment made in connection with the settlement of the De Agostini litigation. In 2005 the cash flows used by operating activities was mainly affected by the net loss incurred in its operations. The Group has included, in cash and cash equivalents under IFRS approximately €450 million on deposit with Telecom Italia. Although this amount is not “cash” in the sense that it is an asset that TI Media controls or is on demand at depository institution, it is regulated by a contractual agreement between TI Media and its Parent Company, which requires, among other things, that Telecom Italia honors any funding requests that TI Media makes with cash transfers. As the cash balance with Telecom Italia is on demand, it is therefore classified in the IFRS based financial statements as “cash and cash equivalent”.

 

Cash flow generated by (used in) Investing Activities

 

Cash flows generated by investing activities in 2005 were €767,093 compared to cash flows used in investing activities in 2004 in the amount of €19,377. Cash flows used in investing activities in 2004 was primarily influenced by the investments in fixed and intangible assets. Cash flows generated by investing activities in 2005 were primarily affected by the sale of the Internet business to Telecom Italia, which was partially offset by the investments in the period.

 

Cash flow generated by (used in) Financing Activities

 

Cash flows used in financing activities in 2005 was €264,531 compared to cash flow generated by financing activities in 2004 in the amount of €229,281 mainly due to the capital increase in 2004 (see Item 4. History—Telecom Italia Media) and the funds used in connection with the share buy back program (See Item 4. History—Buy back of TI Media Shares), as well as the repayment of debt to Telecom Italia.

 

Capital Resources

 

At December 31, 2005, TI Media had unsecured short-term lines of credit with Telecom Italia, providing borrowings of €430,420 at December 31, 2005, €400,000 of which were made up of short-term deposits and the balance made up of a current account with Telecom Italia. The lines of credit bear various interest rates including both fixed and variable interest rates. Amounts outstanding under these lines of credit are payable upon demand.

 

25


The following table shows changes in net financial debt for the period presented:

 

     As of December 31,

 
     2004

   2005

 
     (thousands of euros)  

IFRS(1)

           

Gross financial debt

           

Non-current financial liabilities

           

Financial debts

   98    5,019  

Liabilities for leased assets

   31    20  

Other financial liabilities

   40    48  

Current financial liabilities

           

Financial debts

   173,453    12  

Liabilities for leased assets

   23    16  

Other financial liabilities

   11    12  

Financial liabilities related to discontinued operations/assets held for sale

   41,707    19,443  

Gross financial debt (A)

   215,363    24,570  

Financial assets

           

Non-current assets

           

Securities other than equity investments

   244       

Financial receivables and other non-current financial assets

   1,012    6,632  

Current financial assets

           

Securities other than equity investments

   48       

Financial receivables and other current financial assets

   293    198  

Cash and cash equivalents

   40,718    450,215  

Financial assets related to discontinued operations/assets held for sale

   2,380    3,616  

Total financial assets (B)

   44,695    460,661  

Net financial debt/(liquidity) (A-B)

   170,668    (436,091 )
    
  


(1) Net debt is non-GAAP measure in that neither IFRS nor US GAAP define or consider “net financial debt” as financial measure. The Group considers net financial debt an important measure of overall capitalization and leverage, and it is a widely used metric within the Italian financial community. A significant drawback of net financial debt is that cash is essentially considered to reduce outstanding indebtedness. From an operating standpoint, cash is required to pay suppliers, employees, taxes, etc., therefore it is not generally anticipated that all of the cash resources would ever be used to pay off or reduce outstanding indebtedness.

 

TI Media funds its operations principally from cash generated by operating activities and available credit facilities. In the two years ended December 31, 2005, operating cash flow was negative, requiring asset disposals and other borrowings to finance ongoing operations. Short term borrowings towards Telecom Italia/Accounts receivable from Telecom Italia involve short-term deposit/debt established with the Group treasury managed by Telecom Italia S.p.A.. These deposits/debts are earning interest at market rates. In 2004, TI Media’s cash position decreased mainly due to the settlement of the “De Agostini” dispute, capital expenditures, investments in intangible assets and financial investments. In 2005, TI Media’s cash position increased primarily due to the cash received from the sale of the Internet operations to Telecom Italia. The cash is deposited with Telecom Italia Group centralized treasury program on which interest is paid at market rates. Although this cash is not with a depository institution, it is classified as cash in the accompanying financial statements due to the fact that, as part of the overall treasury program of the Parent Company Telecom Italia, they are required to fund TI Media’s cash requests immediately.

 

In the opinion of TI Media’s management, TI Media’s working capital is sufficient for the company’s present requirements and its requirements for the next twelve months.

 

26


The tables below show TI Media’s contractual obligations and commercial commitments as of December 31, 2005.

 

     Total

   Less than
1 year


   1-3 years

   4-5 years

   After 5 years

     (millions of euros)

Contractual Obligations:

                        

Long-term debt

   0    0    0    0    0

Capital lease obligations

   0    0    0    0    0

Operating lease

   20.0    6.5    6.8    2.6    4.1

Cross border lease

   0    0    0    0    0
    
  
  
  
  

Total obligations

   20.0    6.5    6.8    2.6    4.1
    
  
  
  
  

 

Off-balance sheet arrangements

 

As of June 10, 2006, neither TI Media nor any company within the TI Media Group is a party of any off-balance sheet arrangements, that have or are reasonably likely to have a current or future effect on TI Media’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. In addition the Group has no outstanding derivative contracts.

 

Investments

 

The following table provides an overview of the investments long-lived assets made in the time periods indicated:

 

     2004

   2005

     (thousands of euros)

Investments in intangible assets

   22,883    37,643

Investments in fixed assets

   16,662    26,939
    
  

Total industrial investments

   39,545    64,582

Acquired businesses

   7,211    130,237
    
  

Total

   46,756    194,819
    
  

 

Of the €64,582 in industrial investments relating to the Group’s operations, a total of €63,256 was attributable to the Television segment and mainly involved the purchase of frequencies and infrastructure for DTT testing in the amount of €33,767 and the purchase of television rights in the amount of €19,421.

 

Long-term investments amounted to €130,237, including €128,526 for the acquisition of Elefante TV and Delta TV.

 

Critical Accounting Policies

 

TI Media’s discussion and analysis of its financial condition and results of operations are based upon TI Media’s consolidated financial statements, which have been prepared in accordance with IFRS and which, as described in “- Reconciliation to Accounting Principles Generally Accepted in the United States” of the Notes to the Consolidated Financial Statements included elsewhere herein, differ in certain material respects from U.S. GAAP. TI Media reported financial condition and results of operations as reported under IFRS and in the reconciled U.S. GAAP financial information are based on the application of the accounting methods which involve the use of assumptions and estimates that underlie the preparation of the financial statements. TI Media bases its estimates on historical experience and on various other assumptions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

27


The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing TI Media’s financial statements. TI Media believes the following critical accounting policies involve the most significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Revenue Recognition

 

TI Media’s primary revenue streams consist of advertising services.

 

Revenues are recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenues can be reliably measured. Revenues are stated net of discounts, allowances, and returns.

 

Advertising revenue from television is recorded on the date at which the advertisement is shown. Payments received for advertising services to be rendered in future periods are deferred and recognized at the time the advertising is provided. Revenues generated from the sale of pay-per-view smart cards to distributors, without return rights, are recognized at the time of sale in the amount received for the card itself. The amount of credit available to the end user for viewing events and the related direct costs are deferred and recognized as revenues and expenses when the event is broadcast.

 

Provisions for returns and other adjustments related to sales are provided in the same period the related sales are recorded.

 

Acquisition Accounting, Goodwill and Purchase price Allocation

 

TI Media entered into certain acquisitions and in the future may make additional acquisitions. The calculation of the purchase price, and the subsequent allocation of that purchase price to the fair value of the assets acquired and liabilities assumed, is critical due to the long term impact on the statement of operations.

 

Under IFRS and U.S. GAAP, TI Media is required to perform a purchase price allocation and, consequently, as part of that allocation, all consideration, including the fair value of exchanged shares, shall be valued. When equity instruments are issued as part of the consideration, under IFRS these are measured at their fair value as of the date of exchange whereas under U.S. GAAP the instruments are measured by taking into account the market price for a reasonable period before and after the date the terms of the acquisition are agreed to and announced.

 

The purchase price is then allocated to the fair value of the assets acquired and liabilities assumed.

 

The purchase price allocation requires that all assets, liabilities and contingent liabilities be valued and that significant estimates be made. A change in any of these estimates or judgments could change the amount to be allocated to a particular intangible or tangible asset. The resulting change in the purchase price allocation to non-goodwill assets or liabilities has a direct impact on the final amount of the purchase price that cannot be allocated to a particular asset (i.e., goodwill).

 

If actual results differ from these estimates, or the estimated useful economic lives are adjusted in future periods, operating results could be significantly affected by these estimates and judgments which involve:

 

    the definition of the purchase price;

 

    the identification of the assets acquired and liabilities assumed in the acquisition;

 

    the valuation of these assets and liabilities in the purchase price allocation; and

 

    the assessment of whether selected assets have a finite or indefinite life.

 

These could have a significant impact on both the level of total goodwill and ultimately on the statement of operations.

 

Furthermore, when the Group acquires additional stock held by minority shareholders, under IFRS, in the absence of a specific Standard or Interpretation, the excess of the acquisition cost over the carrying value of net

 

28


assets acquired is recognized as goodwill (“Parent entity extension method”). Under U.S. GAAP, such acquisitions are accounted for under the purchase method and, consequently, goodwill is calculated as the difference between the consideration paid and the proportionate share of the fair value of net assets acquired at the date of acquisition.

 

Impairment of assets

 

The determination of impairments of tangible and intangible assets involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment.

 

Assets with a definite life. For IFRS purposes, during the year, the Group assesses whether there are any indicators that tangible and intangible assets with a finite life may have been impaired. If such indicators exists, the Group estimates if the carrying amount of an asset, a group of assets or a cash-generating unit exceeds the recoverable amount. Both internal and external sources of information are used to determine if indicators of impairment exist. Internal sources considered include obsolescence or physical damage, any significant changes in the use of the asset and the economic performance of the asset compared to estimated performance. External sources considered include market value of the asset, negative changes in technology, markets or laws, increases in market interest rates and the cost of capital used to evaluate investments, and the comparison of the carrying amount of net assets of the Group to market capitalization.

 

Intangible assets with an indefinite life. Intangible assets with an indefinite life, including goodwill, are tested for impairment at least annually to assess the recoverable amount of the asset. The test is conducted in conjunction with the planning process of the Group, near the end of every year. Goodwill acquired and allocated during the year is tested for impairment before the end of the year in which the acquisition and allocation took place. To test for impairment, goodwill is allocated, at the date of acquisition, to each of the cash-generating units or groups of cash-generating units that is expected to benefit from the acquisition. Allocation is made to the lowest level at which goodwill is monitored for management purposes and that lowest level is not larger than the business segment determined in accordance with IAS 14 (Segment Reporting).

 

Under IFRS, the recoverable amount of an asset is the higher of fair value less costs to sell and its value in use. In assessing the value in use, the pre-tax estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

The identification of impairment indicators, the estimation of future cash flows and the determination of fair values of assets, groups of assets (or cash-generating units) requires management to make significant judgments concerning the identification and validation of impairment indicators, expected cash flows, applicable discount rates, useful lives and residual values. These estimates can have a material impact on fair value and the amount of any write-downs.

 

If the carrying amount of a cash-generating unit (or group of units) exceeds the recoverable amount, an impairment loss is recognized in the statement of operations. The impairment loss is first recognized as a deduction of the carrying amount of goodwill allocated to the cash-generating unit (or group of cash-generating units) and only then to the carrying amount of the other assets of the cash-generating unit in proportion to their carrying amount up to the recoverable amount of the assets.

 

The determination of the recoverable amount of a cash-generating unit involves the use of estimates by management.

 

When the conditions which led to the recognition of an impairment loss on assets cease to exist or have been mitigated, the carrying amount of the asset other than goodwill, or cash-generating unit, is increased to the revised estimate of its recoverable amount, but not in excess of the carrying amount that would have been recorded had no impairment loss been recognized and such reversal is recognized as income immediately. The same measurement uncertainties and assumptions that were involved in assessing fair value at the time of impairment are also involved when an asset value is reinstated.

 

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Under U.S. GAAP, in order to assess impairment of property, plant and equipment and amortizing intangible assets, TI Media applies the guidance outlined in SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. If, based on the preceding discussion, management has concluded that impairment indicators exist, TI Media will initially review for possible impairment by assessing the undiscounted cash flows expected to be derived from the asset or group of assets, comparing the lowest level of total expected undiscounted cash flow to the carrying value. If the carrying value of the asset or the group of assets exceeds the sum of the undiscounted cash flows, impairment is considered to exist. An impairment charge is assessed by comparing the assets fair value to the carrying value. Fair value can be calculated by a number of different approaches, including discounted cash flow, comparables, market valuations or quoted market prices. The process and steps required to assess the possible impairments of assets, including the identification of possible impairment indicators, assessing undiscounted cash flows, selecting the appropriate discount rate, the calculation of the weighted average cost of capital and the discounts or premiums inherent in market prices requires a substantial amount of management discretion and judgment. If actual results differ from these estimates, or if the TI Media adjusts these estimates in future periods, operating results could be significantly affected.

 

Furthermore, for purposes of U.S. GAAP reporting, in order to assess impairment of intangible assets with an indefinite life, TI Media uses the requirements of SFAS 142, Goodwill and Other Intangible Assets, and as a result goodwill and indefinite lived intangible assets are not amortized (likewise under IFRS). SFAS 142 requires that goodwill be tested for impairment at least annually (and between annual tests when certain triggering events occur) using a two-step methodology. The first step screens for triggering events indicating potential impairment at the reporting unit level, while the second step measures the impairment, if any. Under U.S. GAAP, the quoted market price of an asset or other valuation techniques, including discounted cash flow, comparables, etc., are acceptable valuation methodologies to assess fair value. The selection of the various assumptions that are necessary to arrive at the fair value of a reporting unit, including the assumptions used in the underlying business plans or targets, requires substantial management judgment and discretion.

 

Subsequent reversals of recognized impairment losses on goodwill and other indefinite lived intangible assets are not permitted by SFAS 142.

 

Deferred Taxes

 

TI Media is required to perform an estimation of actual current tax exposure and the assessment of the temporary differences resulting from differing treatment of items, such as accruals and amortization, among others, for tax and financial reporting purposes. Temporary differences result in the recognition of deferred tax assets or liabilities in the consolidated financial statements. Deferred tax assets are recognized to the extent that their realization is probable. The realization of deferred tax assets depends, among other things, on the company’s ability to generate sufficient taxable income in future years and the reversal of temporary liabilities, taking into account any restrictions on the carryforward of tax losses. Various factors are used to assess the probability of the future realization of deferred tax assets, including future reversals of existing taxable temporary differences, past operating results, operational plans, loss-carryforward periods, and tax planning strategies. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the financial position, or if changes in tax legislation change the realizeability of tax assets, the results of operations and cash flows may be affected. In the event of a change in the assessment of future utilization of deferred tax assets, the recognized deferred tax assets must be increased or decreased, as the case may be, and the consequent effects recognized in the statement of operations.

 

Accrued Liabilities

 

TI Media exercises considerable judgment in recording accrued liabilities and the exposure to contingent liabilities related to pending litigation or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation as well as other contingent liabilities.

 

Judgment is necessary in assessing the likelihood that a pending claim will succeed or a liability will arise and to quantify the possible range of the final settlement. Reserves are recorded for liabilities when losses are considered probable and can be reasonably estimated. Because of the inherent uncertainties in making such judgments, actual losses may be different from the originally estimated provision. Significant estimates are involved in the

 

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determination of reserves related to taxes, workforce reduction initiative and litigation risks. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists or outside consultants, such as actuaries or legal counsel. Adjustments to loss reserves may significantly affect future operating results.

 

Adoption of International Accounting Standards

 

TI Media adopted IFRS for the first time in its annual Consolidated Financial Statements for the year ended December 31, 2005, which included comparative financial statements for the year ended December 31, 2004. IFRS 1, First-time Adoption of International Financial Reporting Standards, requires that an entity develop accounting policies based on the standards and related interpretations effective at the reporting date of its first annual IFRS financial statements (i.e., for TI Media, December 31, 2005). IFRS 1 also requires that those policies be applied as of the date of transition to IFRS (i.e., for TI Media, January 1, 2004) and throughout all periods presented in the first IFRS financial statements.

 

For the purposes of these Financial Statements there are no differences between IFRS issued by IASB and IFRS adopted by the EU.

 

The differences arising from the application of IFRS compared to Italian GAAP as well as the choices made by TI Media among the accounting options provided by IFRS are described in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.

 

Item 6. Directors, Senior Management and Employees

 

Directors and Senior Management and Employees

 

The management of TI Media is entrusted to a Board of Directors, which is vested with all the powers for the ordinary and extraordinary management of TI Media, with the sole exception of those which Italian law mandatorily reserves to the shareholders. The day-to-day management of TI Media is entrusted to the Deputy Chairman, the Managing Director and certain other key officers.

 

Under TI Media’s bylaws, the Board of Directors is made up of 7 to 21 members, as from time to time established by a shareholders’ resolution appointing the Board of Directors. The Board of Directors remains in office for the terms established by the shareholders’ resolution appointing it; no term, however, can be longer than three years. The directors may be re-elected.

 

The General Shareholders’ Meeting held on May 5, 2004 elected the Board of Directors for the duration until the General Shareholders Meeting to be held to approve the financial statements for the fiscal year ending December 31, 2004. The Board of Directors was composed of Riccardo Perissich (Chairman), Giuseppe Parrello (Deputy Chairman), Enrico Parazzini (Managing Director), Carlo Bertazzo, Adriano De Maio, Candido Fois, Giulia Ligresti, Romano Marniga, Gianni Mion, Gianfranco Negri Clementi, Alessandro Ovi, Giovanni Sabbatucci and Mario Zanone Poma.

 

Successively the General Shareholders’ Meeting held on April 4, 2005 elected the current Board of Directors. The current Board of Directors is composed of Riccardo Perissich (Chairman), Enrico Parazzini (Managing Director), Carlo Bertazzo, Adriano De Maio, Candido Fois, Giulia Ligresti, Gianfranco Negri Clementi, Alessandro Ovi, Paolo Roverato, Sergio Ristuccia, Giovanni Sabbatucci and Mario Zanone Poma. Romano Marniga who served as a director on the Board resigned on January 23, 2006. The Shareholders’ Meeting held on April 10, 2006, appointed Pier Francesco Saviotti to the Board of Directors to replace the outgoing Romano Marniga.

 

Nomination and Election Rights pursuant to Shareholders Agreements

 

The information contained herein regarding the Olimpia shareholders’ agreements has been derived from publicly available information filed by the parties involved with regulatory authorities. So far as TI Media is aware, no facts have been omitted herein which would render the information misleading. No further or other responsibility in respect of such information is accepted by TI Media.

 

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Various shareholders of TI Media entered into shareholder agreements which affect the management of TI Media. As noted in the Information on the Company item above, effective August 4, 2003, Telecom Italia merged into Olivetti, which also became the parent company of TI Media. The largest shareholder in Telecom Italia after the merger is Olimpia S.p.A. with a stake of about 18% at December 31, 2005. Olimpia’s shareholders at December 31, 2005 are: Pirelli & C S.p.A. (“Pirelli”), Edizione Finance International (“Edizione Finance”), Hopa S.p.A. (“Hopa”), Unicredito Italiano S.p.A. (“Unicredito”) and Banca Intesa S.p.A. (“Banca Intesa”). As a result of these various shareholders’ agreements among the former Olimpia Shareholders, the following arrangements apply to TI Media.

 

In particular shareholders’ agreements were entered into between Pirelli and Edizione Holding S.p.A. (Edizione Holding) (whose obligations and rights were subsequently assigned to Edizione Finance International S.A.) dated August 7, 2001 (as amended on September 14, 2001 and on February 13, 2002) (hereinafter the “Agreements”), and an agreement among Pirelli, IntesaBci and UniCredito Italiano dated September 14, 2001 and subsequently amended on September 26, 2001, October 24, 2001 and December 16, 2003 (collectively, the “Agreements with the Banks”) Edizione Finance, a company 100% owned by Edizione Holding, which was subrogated to Edizione Holding’s rights and obligations, may designate one-fifth of the members of the Board of Directors available for nomination (not including the members of the Board appointed by minority shareholders and government agencies) and the Deputy Chairman, who will be the legal representative of the Company. As per June 8, 2005, 7.88% of Olimpia shares were transferred from Edizione Finance to Edizione Holding who assumed the related rights and obligation under the Agreement. One member of the Board is appointed at the request and designation of IntesaBci and one member of the Board is appointed at the request and designation of Unicredito. The same designation rights apply in case TI Media establishes an Executive Committee.

 

Hopa is a former bondholder of Olimpia. On December 19, 2002, Hopa and two of its affiliates accepted an offer by Olimpia to retire its bonds in exchange for a 16% interest in Olimpia. In connection with the acceptance of the retirement of the bonds by Hopa, Hopa entered into an agreement with the other Olimpia shareholders on February 21, 2003 as amended on January 23, 2004 and January 28, 2005 which sets forth certain rights and obligations of the shareholders of Olimpia that effect among other interests the governance and further increase of their interest in TI Media (the “Hopa Agreement”). Under the Hopa Agreement, Hopa has the right to appoint one Olimpia director and the other Olimpia shareholders will seek to elect one director of TI Media nominated by Hopa (with a corresponding reduction in the number of Pirelli nominees). In this regard, on February 14, 2006, Pirelli, Banca Intesa, Unicredito Italiano, Edizione Holding, Edizione Finance, and Olimpia published a specific notice of rescission of the above mentioned agreement sent to Hopa, effective as of May 8, 2006.

 

The Shareholder’s Meeting of April 4, 2005 nominated the new Board of Directors, setting their number at 13. The term of the current Board of Directors will expire at the annual general meeting held to approve the financial statements of TI Media for the financial year ending December 31, 2007. The members of the Board of Directors of TI Media are currently as follows:

 

Name


 

Position


 

Joined TI Media


Riccardo Perissich

  Executive Chairman   2002

Enrico Parazzini

  Managing Director   2001

Carlo Bertazzo

  Director   2002

Adriano De Maio

  Director   2003

Candido Fois

  Director   2001

Giulia Ligresti

  Director   2001

Gianfranco Negri Clementi

  Director   2001

Alessandro Ovi

  Director   2001

Pier Francesco Saviotti

  Director   2006

Giovanni Sabbatucci

  Director   2004

Mario Zanone Poma

  Director   2001

Paolo Roverato

  Director   2005

Sergio Ristuccia

  Director   2005

 

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The management of TI Media is currently as follows:

 

Name


 

Position


 

Joined TI Media


Riccardo Perissich

  Executive Chairman   2002

Enrico Parazzini

  Managing Director   2001

Antonio Campo Dall’Orto

  General Manager Television   2005

Paolo Serra

  Chief Financial Officer   2003

Paolo Ferrari

  Vice President, Business News   2003

Marco Ghigliani

  Vice President, Human Resources   2003

Paolo Ballerani

  General Manager of TI Media Broadcasting   2006

Vincenzo Covelli

  General Counsel   2002

 

Members of the Board of Directors

 

Riccardo Perissich, born in Milan in 1942. Mr. Perissich was appointed Chairman of TI Media (then SEAT Pagine Gialle) in September 2002. Mr. Perissich began his career with Italconsult S.p.A. in 1962. In 1964, he left to become head of research on the European Communities at the Institute for International in Rome, where he would eventually be promoted to Deputy Director. In 1970 he joined the Commission of the European Communities. He was Head of Cabinet until 1986. In that year, Riccardo Perissich was appointed Deputy Director General at the Directorate-General for Internal Market and Industrial Affairs. In that capacity, he coordinated on behalf of the European Commission the program to complete the single market. Between 1990 and 1994 he was Director General of the Directorate-General for Industry, a position he left to join Pirelli. Between 1994 and 2001, Mr. Perissich was Director of Public Affairs and a member of the Board of Directors of Pirelli S.p.A.. From 2001 he has coordinated Public Affairs for the Pirelli Group. On October 1, 2001 he became the Head of Public and Economic Affairs of the Telecom Italia Group. On September 4, 2002 he was appointed Chairman of Seat Pagine Gialle (now Telecom Italia Media). Riccardo Perissich is a member of the Executive Board of Confindustria, Director responsible for Research of Assolombarda, Deputy Chairman of the Industrialist Union of Rome and Assonime, member of the Board of Directors of Enciclopedia Treccani, member of the Board of Directors and member of the Executive Committee of ISPI, member of the International Institute for Strategic Studies (London), the Institute for International Affairs (Rome) and the Aspen Institute Italia (Rome).

 

Enrico Parazzini, born in Milan, Italy, in 1944. Since August 1, 2003 he has been Managing Director of Telecom Italia Media, maintaining also his position as Chief Financial Officer of the Telecom Italia Group. Since October 1, 2001 he has been CFO of the Telecom Italia Group. After graduating in Economy and Commerce at Milan’s “Luigi Bocconi” University, he commenced his professional career in 1968 as Junior Auditor at Arthur Andersen and in 1969 changed to General Electric, where he worked in the Finance Department. In 1970 he passed to Honeywell Information Systems Italia, a company where in the course of the next twenty years he held positions of growing responsibility: Financial Planning Director from 1975 to 1980; Director of Administration and Control from 1981 to 1986 and Chief Financial Officer from 1987 to 1990. A year later, following the disposal of Honeywell’s activities to Bull, Mr. Parazzini was appointed General Manager of Administration, Control, Information Technology Systems and Logistics. In May 1992 he joined Pirelli as Director of Planning and Control (Group Controller), and participated to the turnaround of the Group and, more particularly, to the reorganization of the planning and control system. Between 1996 and 1999 he was in charge of Planning and Control, Administration, Group Purchases and Risk Management. In 2000 he was appointed Chief Financial Officer of Pirelli’s Cable and Systems Sector. From 1994 to 2000 he was visiting lecturer at the “Luigi Bocconi” University for the course on Planning and Control in Multinational Groups; since 2002 he has been acting as Professor for the Master in Corporate Finance at the “Luigi Bocconi” University’s Management School ( Scuola di Direzione Aziendale—SDA).

 

Carlo Bertazzo, born in Monselice in 1965. Mr. Bertazzo was appointed as Director in 2002. Mr. Bertazzo started his professional career in 1990 with Banca Commerciale Italiana. In 1991, he joined IFI – Instituto Finanziaria Industriale S.p.A., where he filled several positions in such areas as Control, Financial Planning and Portfolio Company management. He became Chief Financial officer of Edizione Holding S.p.A in 1995. He is also a director of Autostrade per l’Italia S.p.A. and TI Media.

 

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Adriano De Maio, born in Biella in 1941 and became Director in 2003. In 1964, Adriano De Maio began a teaching and research career at Politecnico di Milano. Until 1994 he was a member of the Board of Directors of the Faculty of Politecnico di Milano and head of the Technological Innovation and Project Management Area. He was the Rector of Politecnico between 1994 and 2002. In June 2003, De Maio was appointed Commissioner of the National Research Center by the Ministry of Education, University and Research, to manage the reorganization of that agency. Currently, he is Professor of Economics and Corporate Innovation Management at the School of Economics of “LUISS Guido Carli” University and Science and Technology Advisor to the Governor of Lombardia Region. Adriano De Maio is the Chairman of IRER - Istituto di Ricerca della Lombardia – as well as Honorary Chairman of TIME, an association made up of 40 technical universities of excellence, which he chaired between 2000 and 2002. Since 2002, he has been Chairman of the Excellence Centers Evaluation Group set up by the Ministry of Education, as well as Coordinator of the Advisory Commission of the Minister of Education, University and Research on university reform. Since 2003, he has been Chairman of Dike Aedifica S.p.A., a subsidiary of Patrimonio dello Stato S.p.A. intended to build correctional and judicial facilities for the Ministry of Justice. Adriano De Maio qualifies as an independent director, as he fulfills the relevant requirements of TI Media’s code of conduct.

 

Candido Fois, born in Nulvi near Sassari, in 1941. Mr. Fois was appointed as Director in May 2001. Mr. Fois is a practicing lawyer. Since 1993 he is a Professor of commercial law at the University of Padua. He was a member of the Board of Directors and Deputy Chairman of both Banca Cattolica del Veneto and Mediocredito delle Tre Venezie; member of the Board of Directors of Banco Ambrosiano Veneto; member of the Board of Directors and member of the Executive committee of Mediocredito Lombardo S.p.A.; member of the Board of Directors of Unicredito S.p.A.. Currently, he is Deputy Chairman of Unicredit Private Banking S.p.A. and also a member of the Board of Directors of Telecom Italia Media. He qualifies as an independent director, as he fulfills the relevant requirements of TI Media’s code of conduct.

 

Giulia Ligresti, born in 1968. Ms. Ligresti was appointed as Director in 2001. She is the President and Chief Executive Officer of Premafin Finanziaria Holding di Partecipazioni and President of Fonsai MB&A S.p.A. and Gilli S.r.L as well as Vice President of Fondiaria SAI S.p.A.. Ms. Ligresti is also Chief Executive Officer of Sailux S.A., SAI Holding Italia S.p.A. and SAIFIN S.p.A. and a member of the Board of Directors and a member of the Executive Committee of Milano Assicurazioni S.p.A.. She is a member of the Board of Directors of Finadin S.p.A., Iena Presbourg SA, Pirelli e C.S.p.A. and Sainternational SA.. Ms. Ligresti is a Director and a member of the Executive Committee of Milano Assicurazioni S.p.A. and TI Media. Ms. Ligresti qualifies as an independent director, as she fulfills the relevant requirements of Telecom Italia Media’s code of conduct.

 

Gianfranco Negri Clementi, born in 1931 in Rome. Mr. Negri Clementi was appointed as Director in May 2001. After graduation from law school, Gianfranco Negri Clementi cooperated with the International Law Institute of the University of Milan. In the meantime, he started practicing law by establishing his own law firm, which would gradually specialize in business law, corporate law, banking, insurance and securities law, acting as a counsel in these areas and representing clients in court and in arbitration proceedings. As the number and importance of the clientele increased, so did the size of the law firm which, in the 1980s became a Partnership, with four offices (Milan, Rome, Verona and Vicenza) and over one hundred professionals. The firm (which currently operates as a part of an international network of independent law firms) is particularly active in M&A and provides legal advisory services on financial markets, assisting brokerage houses, mutual funds, asset management companies, open-end mutual funds, fiduciary companies as well as companies seeking stock exchange listing. Mr. Negri Clementi is a member of the Board of Directors of Unicredito Italiano S.p.A., Unicredit Audit S.p.A., Rasbank S.p.A. e Perfetti S.p.A. as well as TI Media and is Chairman of the Board of Directors of the Investitori SGR S.p.A. (Gruppo Allianz RAS). Furthermore, he chairs, or participates in the activities of Associations and charitable Foundations. Gianfranco Negri Clementi qualifies as an independent director, as he fulfills the relevant requirements of TI Media’s code of conduct.

 

Alessandro Ovi, born in 1944 in Carpineti, near Reggio Emilia. Mr. Ovi was appointed as Director in December 2001. He is a member of the Boards of the Euro Pacific Fund, New World Fund and New Perspective Fund, all three part of The Capital Fund, Assicurazioni Generali S.p.A., Finsiel S.p.A., Guala Closures S.p.A., Enìa S.p.A.. Mr. Ovi is a Director as well as a member of the Audit Committee of STMicroelectronics. He is the publisher and editor of the journal “Technology Review Italy” (The MIT Journal of Innovation) and was a Special

 

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Advisor to the President of the European Commission on industrial matters. Mr. Ovi is also a member of the Life Trustee and Investment Committee of Carnegie Mellon University (Pittsburgh) and of the Corporation Development Committee of MIT. Mr. Ovi was appointed senior Vice President between 1993 and 1994 for International and Institutional Affairs of IRI S.p.A. and Chief Executive Officer of Tecnitel (Telecom Italia Group) between 1994 and 2000. Mr. Ovi is a member of the IAI (International Affairs Institute), the Aspen Institute, the United States — Italy Council, and the Italy-Japan Business Group. Mr. Ovi is also a member of the Life Trustee and Investment Committee of Carnegie Mellon University (Pittsburgh) and of the Corporation Development Committee of MIT.

 

Pier Francesco Saviotti, born in Alessandria in 1942, was appointed as Director of TI Media in 2006. Mr. Saviotti has a degree in Economics and started his career in Pavia’s branch of Banca Commerciale Italiana in 1962, where he received his training in general, administrative and branch management functions. In 1973 he was transferred to headquarters and from April 1974 to August 1976, after a promotion to officer, he worked in the Managing Director’s office and eventually in the foreign department. Between 1976 and March 1979 Mr. Saviotti managed the account relationships at Bergamo’s branch; between April 1979 and August 1980 he was promoted to manager of Treviglio’s branch; between 1980 and November 1983 he worked as co-manager of Prato’s branch; from December 1983 to August 1988 he worked as manager of Ravenna’s branch, from 1986 to August 1988 as senior co-manager of Milan’s branch and from September 1988 to November 1989 as senior manager of Milan’s branch. From December 1988 to November 1989 Mr. Saviotti was Director of the Italian branch network at headquarters. From December 1989 to August 1991 he was Central Co-director of the Italian credit department and between September 1991 and December 1996 Central Director. In April 1997 he was promoted to General Manager and between March 1998 and June 1999 served as Managing Director. Between July 2002 and December 2005 he was General Manager of Banca Intesa S.p.A. – Milan, responsible for the credit area. Currently he is, among others, a member of the Board of Directors of Stefanel S.p.A., TOD’s S.p.A., Linificio e Canapificio Nazionale S.p.A., Internazionale F.C. Milano, Value Partners S.p.A..

 

Giovanni Sabbatucci, born in Sellano, near Perugia, in 1944, and was appointed as Director in 2004. Between 1975 and 1997, Giovanni Sabbatucci taught contemporary history at the University of Macerata, first as an adjunct Professor and received tenure in 1980. He is a Professor of contemporary history at the School of Literature and Philosophy of La Sapienza University in Rome, where he is the head of the Department of Modern and Contemporary History. Sabbatucci has authored numerous publications mainly on united Italy’s political history. He was a contributor for “L’Espresso”, “Corriere della Sera” and “Liberal”. He has been a columnist of “Il Messaggero” since 1994. He is a consultant and co-author of TV history programs for RAI (RAI 3 and RAI Educational). He is an advisor to Lux Film and Rizzoli Audiovisivi, also on television fictions.

 

Mario Zanone Poma, born in 1939 in Zumaglia, near Biella. Mr. Poma was appointed as Director in May 2001. Currently, Mr. Poma is Chairman of Intesa Mediocredito S.p.A., Commissioner of the Cariplo Foundation, Chairman of the Italy-China Chamber of Commerce, Chairman of Governance Consulting, Chairman of the Monza e Brianza Foundation, as well as member of the Board of Directors of Telecom Italia Media. Mr. Poma started his career with Olivetti in 1960, working in its sales department until 1964. Between 1964 and 1973, he was the marketing manager of Rank Xerox. Eventually, he joined Hoechst, where he helped to set up Kalle Infortec in Italy, becoming its General Manager. In 1989-1990, he worked with Fininvest, where he designed and implemented the initial stages of a pay-TV project. He held the office of chief executive and deputy chairman of Telepiu (the first Italian pay-TV) between 1990 and 1997. Mario Zanone Poma qualifies as an independent director, as he fulfills the relevant requirements of TI Media’s code of conduct.

 

Paolo Roverato, born in Padua in 1963 and became Director in 2005. Mr. Roverato graduated in Economics from Ca’ Foscari University in Venice in 1989. Paolo Roverato is a public accountant and auditor. In 1989 he began his career with Arthur Andersen S.p.A., where he became a manager, a position he held until he left in 2002. He has been an executive of Edizione Holding S.p.A. since 2002. Mr. Roverato is, among others, Chief Executive Officer of Aeroporti Holding S.p.A., member of the Boards of Directors of Aeroporto di Firenze S.p.A. Edizione property S.p.A. (a company managing the property and hotel portfolio of the Edizione Group), Sagat S.p.A., Schemaventotto S.p.A. (parent company of Autostrade S.p.A.).

 

Sergio Ristuccia, born in Rome on December 5, 1933 and was appointed Director in 2005. Between 1976 and 1987 Sergio Ristuccia was Secretary General of the Adriano Olivetti Foundation, after he had joined its Executive Committee in 1970. Between 1980 and 1982 he was Head of Cabinet of the Minister of the Treasury. In this period

 

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he chaired, among others, the “working group for regional finance” at the Presidency of the Council and the Commission responsible for setting up the new Directorate General for the peripheral services of the Treasury, contributing to design the reform of the Deposits and Loans Fund (Cassa Depositi e Prestiti – law no. 197/1983). Between October 1986 and May 1990 Ristuccia was Secretary General of the Court of Accounts. Between 1990 and 1992 he was the magistrate appointed to control ENI. In 1992, after he resigned from the Court of Accounts, he started his own consulting practice. He has chaired the Italian Council for Social Sciences since 1991. He is a member of the Association for the Economy and Culture since 1992. Between 1993 and 1997 he was chairman of Ernst & Young amministrazioni pubbliche e organizzazioni non profit S.r.l. Between 1995 and 2000, Sergio Ristuccia was a member of the Board of Directors of Risorse per Roma S.p.A.. Between November 1996 and February 1999 he was a member of the Board of Directors of the Italian Space Agency. He was a member of the Executive Committee of the European Cultural Foundation based in Amsterdam. He is a member of the Advisory Committee of the Workshop on Political Theory and Policy Analysis of the University of Bloomington (Indiana). He is the Chairman of QUES.IRE S.r.l. / Ristuccia Advisors, a research and consulting firm specializing in legal, strategic, organizational, economic and financial matters in the public-private partnership area. He is a lawyer in Rome, enrolled in the special register of Higher Jurisdictions. Sergio Ristuccia qualifies as an independent director, as he fulfills the relevant requirements of TI Media’s code of conduct.

 

Management

 

Antonio Campo Dall’Orto, born in Conegliano in 1964, was appointed General Manager, Television, of TI Media in 2005. Mr. Campo Dall’Orto received a degree in Economics from Cà Foscari University in Venice in 1988 and a Master in Marketing and Corporate Communication from Publitalia, Milan in 1992. He started his career in 1989 where he was working for IMS Europe as Head of Industry Analysis until 1991. In 1992 he joined Plasmon, working in product marketing, where he was responsible for competitive analysis and actions from repositioning Plasmon brands in the market for dietetic and therapeutic foods. In the same year he started working for Mediaset in Milan as Deputy Director of Canale 5 where he held this position until 1996. From 1992 to 1996 Mr. Campo Dall’Orto was appointed Professor at the Communication’s Academy in Milan where he taught Competitive Analysis and Marketing. From 1997 to 1999, he worked as General Manager of MTV Italia and in 1999 was promoted to Managing Director for MTV Southern Europe (Italy, France, Spain, Portugal, Greece) for MTV Europe. In 2001 Mr. Dall’Orto joined TI Media as Managing Director of MTV Italia and MTV Pubblicità and as program and contents manager of TV channel La7. Since 2005 he is the General Manager, Television, of TI Media and is responsible for the television business, based on both analogical and digital terrestrial technology, overseeing selection and purchase of contents, management and optimization of production processes as well as commercial development.

 

Paolo Serra, born in Rome in 1954. Mr. Serra graduated in Economics. He has been Chief Financial Officer of Telecom Italia Media S.p.A. since August 2003. He is a director of HMC, La7 Televisioni, Telecom Italia Media Broadcasting, TM News and Gruppo Buffetti. Prior to that, Paolo Serra was an Assistant Controller with Wabco–Westinghouse Compagnia Italiana Segnali S.p.A. (1980-1983) and head of the Operations Control department (1983-1987) in Digital Electronic Automatic S.p.A.. In July 1987, he joined the operations control department of STET- Società Finanziaria Telefonica, where he became an executive in October 1989. He was promoted to Central Deputy Manager in April 1993. In March 1994, he took over the Group Processes and Control function in the Strategy Planning Control and Development area of the Planning and Control Department. In July 1997, following the merger between STET and Telecom Italia, he was given responsibility over the Planning and Control function over the portfolio companies in the Control and Budget area of the Administration and Control department of the newly-named Telecom Italia. Between April 2000 and June 2002, he was Chief Financial Officer of Telespazio S.p.A. (Telecom Italia Group). Between June 2002 and July 2003, he was head of the Administration and Control function of IT Telecom (Information Technology S.p.A.).

 

Paolo Ferrari, born in Turin in 1970. Mr. Ferrari graduated in Business Management, major in Marketing, from Luigi Bocconi University, Milan. Master of Business Administration, major in Management and Finance, New York University, Leonard N. Stern School of Business. In December 2003, he became Vice President of TI Media’s “Office Products and other Activities” Business Unit. He was appointed as Chairman of the Board of Directors of Gruppo Buffetti S.p.A., with full executive responsibilities over the company. He was also Chairman of Databank S.p.A. and Televoice S.p.A.. In 2002, Mr. Ferrari was an executive of the “Italian Directories” division of SEAT

 

36


Pagine Gialle (now Telecom Italia Media S.p.A.) as well as Operations Director of Thomson Ltd., a company of the SEAT group engaged in the directory market in Great Britain. Between 2000 and 2002, he was Head of Sales and Business Development at Kataweb S.p.A., the Internet company of publishing group Gruppo Editoriale L’Espresso. Between 1999 and 2000, Paolo Ferrari was an Associate – Mergers & Acquisitions Europe –at Credit Suisse First Boston. In 1998, he oversaw the restructuring of the apparel division of the Marzotto Group in his capacity as a consultant of Bain & Company.

 

Marco Ghigliani, born in 1965, he was appointed as Vice President Human Resource in 2003. Before joining TI Media he was Vice President Human Resources in SEAT Pagine Gialle from 2002 to 2003. In 2001 he worked in Telecom Italia – Wireline as Regional HR Manager in Milan. After graduating from university with a major in Sociology, Mr. Ghigliani worked for FIAT AUTO as Plant HR Manager in different sites.

 

Paolo Ballerani, born in Perugia in 1961, was appointed as Managing Director of Telecom Italia Media Broadcasting S.r.l. in 2004. Mr. Ballerani started his career with Istituto Bancario Italiano S.p.A in 1987. Between 1987 and 1989 he worked as Operations Control at Buitoni S.p.A. (CIR Group); from 1989 to 1994 he worked as Operation Control and Head of Internal Auditing for Nestle Italiana S.p.A. (Nestle Group); from 1994 to 1996 he worked as Chief Financial Officer at Perrier Vittel S.A. (Nestle Group); from 1996 to 1998 he worked as Head of Administration, Finance and Control at Acqua Vera S.p.A. (Nestle Group); from 1998 to 2000 he worked as Head of Administration and Control at Sanpellegrino S.p.A. (Nestle Group). In 2000 he worked as Head of Administration and Control at Enel Produzione S.p.A. and in 2002 started working for La7 Televisioni S.p.A. (Telecom Italia Media Group) as General Manager.

 

Vincenzo Covelli, born in Rome in 1947, was appointed as the Secretary of the Board of Directors of TI Media in 2002. He is also overseeing Telecom Italia’s legal issues of its domestic and foreign subsidiaries since 2002. Mr. Covelli began his career in private practice in 1974. In 1977 he was appointed General Counsel of Aeroporti di Roma, in 1982 he became the head of the Corporate Affairs Department of Italstat S.p.A.. Finanziaria, a member of the IRI Group. In 1987 he became the Secretary of the Board of Directors of Iritecna S.p.A.. In 1993 he became General Counsel of Italcable S.p.A.. Following the merger of Italcable into Telecom SIP (renamed into Telecom Italia), he was appointed as head of Corporate Affairs of Telecom Italia, with specific responsibilities related to the Board of Directors and consolidated subsidiaries.

 

Board of Statutory Auditors

 

Under Italian law, in addition to electing the Board of Directors, TI Media’s shareholders elect a Board of Statutory Auditors (Collegio Sindacale) at an ordinary shareholders’ meeting. The statutory auditors are elected for a term of three years, may be re-elected for successive terms and may be removed only for cause and with the approval of a competent court. Each member of the Board of Statutory Auditors must provide certain evidence that he is in good standing and meets certain professional standards. (See Item 6. Board Practices—Corporate Governance—Board of Auditors)

 

The Board of Statutory Auditors is currently comprised of three statutory members (sindaci effettivi) and two alternates (sindaci supplenti) as follows:

 

Name   


 

    Position    


Giovanni Fiori

  Chairman

Tiziano Onesti

  Auditor

Salvatore Spiniello

  Auditor

Antonio Mastrapasqua

  Alternate

Stefano Morri

  Alternate

 

In 2005, the Board convened for ten meetings. These were supplemented by other meetings held, in particular with Company management and with representatives of the Independent Auditors, as well as meetings with the Internal Control Committee.

 

The term of the current Board of Statutory Auditors will expire at the annual general meeting held to approve the financial statements of TI Media for the financial year ending December 2006.

 

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Compensation

 

The following table shows the compensation, benefits and fees paid by TI Media to members of the Board of Directors and members of the Board of Statutory Auditors in 2005.

 

    Person    


   Description of office

  

Fees


    Fringe benefits

  

Bonuses and
other incentives


  

Other
remuneration


    Name    


   Office held

  Duration of
office


          

PERISSICH Riccardo

   Executive   01/01/05-12/31/05    60,000 (1)   =    =    =
   Chairman                         

ANGELO PARRELLO

Giuseppe(5)

   Deputy   01/01/05-04/03/05    15,287.67                
   Chairman                         

PARAZZINI Enrico

   Managing   01/01/05-12/31/05    60,000 (1)   =    =    227.61(4)
   Director        150,000 (2)              

BERTAZZO Carlo

   Director   01/01/05-12/31/05    60,000 (3)              

BRAIDOTTI Stefano(5)

   Supervisory
Body
  01/01/05-04/03/05    2,547.95                

DE MAIO Adriano

   Director   01/01/05-12/31/05    60,000 (1)              
     Compensation
Committee
  01/01/05-12/31/05    26,000                

FOIS Candido

   Director   01/01/05-12/31/05    60,000                
     Compensation
Committee
  01/01/05-12/31/05    26,000                

LIGRESTI Giulia

   Director   01/01/05-12/31/05    60,000     =    =    =

MAGNABOSCO Enrico

   Supervisory
Body
  04/04/05-12/31/05    7,452.05                

MARNIGA Romano(7)

   Director   01/01/05-12/31/05    60,000     =    =    =

MION Gianni(5)

   Director   01/01/05-04/03/05    15,287.67 (3)   =    =    =

NEGRI CLEMENTI Gianfranco

   Director   01/01/05-12/31/05    60,000     =    =    =
     Internal
Control
Committee
  01/01/05-12/31/05    33,000                

OVI Alessandro

   Director   01/01/05-12/31/05    60,000     =    =    =
     Internal
Control
Committee
  01/01/05-12/31/05    33,000                

PASTERIS Carlo

   Representative
of Savings
Shareholders
  01/01/05-12/31/05    12,500                

RISTUCCIA Sergio

   Director   04/04/05-12/31/05    44,712.33                

ROVERATO Paolo

   Director   04/04/05-12/31/05    44,712.33 (3)              

SABBATUCCI Giovanni

   Director   01/01/05-12/31/05    60,000     =    =    =

ZANONE POMA Mario

   Director   01/01/05-12/31/05    60,000     =    =    =
     Internal
Control
Committee
  01/01/05-12/31/05    33,000                
     Compensation
Committee
  01/01/05-12/31/05    26,000                
     Supervisory
Board
  01/01/05-12/31/05    10,000                

CAMPO DALL’ORTO Antonio

   General
Manager
Television
  10/19/05-12/31/05          1,682.80         118,829.59

GRASSI Fabrizio(8)

   General
Manager
  10/19/05-12/31/05          1,196.99         117,009.78

FIORI Giovanni

   Chairman of
the Board of
Statutory
Auditors
(6)
  01/01/05-12/31/05    43,000     =    =   

56,603.43(6)

     Supervisory
Board
  01/01/05-12/31/05    10,000                

ONESTI Tiziano

   Statutory
Auditor
  01/01/05-12/31/05    32,000     =    =    =

SPINIELLO Salvatore

   Statutory
Auditor
  01/01/05-12/31/05    32,000     =    =    =

(1) The amount was not collected but entirely paid to Telecom Italia.

 

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(2) Emoluments received pursuant to Art. 2389 Paragraph 3 of the Italian Civil Code.
(3) The amount was entirely paid to Edizioni Holding.
(4) The amount was entirely paid to Telecom Italia and refers to remuneration paid by subsidiaries.
(5) Ended due to mandate expiry.
(6) The amount refers to emoluments paid by subsidiaries.
(7) Resigned January 23, 2006
(8) Resigned December 31, 2005

 

Stock Option Plan 2000-2002 and Stock Option Plan Key People

 

On November 20, 2000 TI Media’s extraordinary shareholder’s meeting approved a share capital increase for a maximum of 127,000,000 ordinary shares reserved for employees and directly or indirectly-controlled subsidiaries. The “2000-2002 Plan” provided for the allocation of options in three annual installments following attainment of Corporate and personal objectives according to the guidelines as defined in the plan. The options vest annually, beginning in May 2001, the 2000-2002 plans terminate respectively in April 2004, 2005 and 2006. The exercise price of stock options granted under this Plan approximated the fair market value on the grant date. As a result of the spin-off of certain SEAT businesses during 2003, most options were forfeited. At December 31, 2004, 940,313 options were outstanding. At December 31, 2005 no options were left outstanding under the 2000-2002 Plan.

 

TI Media Top Plan and Key People Stock Option Plans - The Board of Directors of TI Media on May 17, 2002, approved the implementation of two new stock option plans, offered to directors and employees who hold “key” positions in the group due to their particular responsibility and/or skills. The Top Plan and the Key People Plan provide for the allocation of options in three annual installments. The exercise price of stock options granted under the new plans approximated the fair market value on the grant date. Both plans expire on May 31, 2008. The Key People Plan led to the allocation of 46,400,000 options, of which 2,500,000 reserved for “B” Beneficiaries and 43,900,000 reserved for “C” Beneficiaries. The Top Plan led to the allocation of 1,500,000 options. No compensation expense was recognized for options granted under the Key People Plan or Top Plan, as the stock price was below the exercise price at the date of grant and the awards were deemed to be fixed under APB 25. At December 31, 2004, 14,900,000 options were outstanding under the Key People Plan and none under the Top Plan. Total options outstanding under the Key Plan at the end of 2005 were 2,250,000.

 

The following table summarizes the TI Media “2000-2002”, Top and Key People stock option plans activity:

 

     Number of Options

    Weighted Average
Price per Option


           (euro)

Outstanding at December 31, 2002

   103,334,943     0.93

Exercised

   (10,725,132 )   0.03

Forfeited

   (20,794,835 )   0.86

Cancelled

   (51,695,677 )   1.15
    

 

Outstanding at December 31, 2003

   20,119,299     0.91

Expired and Forfeited

   (4,278,986 )   1.00
    

 

Outstanding at December 31, 2004

   15,840,313     0.87

Assigned

   39,725,000     0.38

 

39


     Number of Options

    Weighted Average
Price per Option


           (euro)

Exercised

   (11,005,170 )   0.38

Expired and not exercised

   (234,073 )   1.22

Cancelled

   (16,821,240 )   0.77
    

 

Outstanding at December 31, 2005

   27,504,830     0.42
    

 

 

The following table summarizes certain information for the stock options granted under the stock options plans, which are outstanding at December 31, 2005:

 

     Options Outstanding

    Options Exercisable

 
     Options

   Weighted Average
Remaining Life


   Weighted Average
Grant


    Options

   Weighted Average
Grant


 

Range of Grant Prices  


        (years)

   Price

         Price

 

(euro)

             (euro )        (euro )

0.38

   25,254,830    3.00    0.38     4,044,830    0.38  

1.85

   2,250,000    2.42    0.85     2,250,000    0.85  
    
             
      
     27,504,830               6,394,830       
    
             
      

 

Stock Option Plan 2005

 

On February 23, 2005, the Board of Directors approved a new stock option plan (“2005 Stock Option Plan”), which will replace the 2000 – 2002 Plan and the 2002 Key People Plan due to its obsolescence after the Spin-off of Seat PG. Pursuant to the 2005 Stock Option Plan, 1,750,000 options will be issued to the top management and 1,050,000 will be issued to the executives and 350,000 to middle managers who are significant to TI Media. The allocation of new options will require unconditional surrender of the options allocated under the 2000-2002 Plan and the 2002 Key People Plan.

 

Each option with an option expiration date on December 31, 2008 entitles the holder to purchase one share of TI Media at a strike price €0.3826. The 2005 Stock Option Plan resulted in the allotment of 39,725,000 options that are divided into three lots: 40% of the options that are exercisable since July 2005; 30% are exercisable since January 2006 and 30% will be exercisable in January 2007. The total cost of the 2005 Stock Option Plan is projected to amount to about €5 million.

 

Board Practices

 

Corporate Governance

 

In General, the Company’s corporate governance system is based on the central role of the Board of Directors, transparency in operational decisions, effective internal controls and rigorous rules governing conflicts of interest. This system, designed and constructed bearing in mind the principles formulated by the Committee for Corporate Governance of Borsa Italiana (known as the Preda Code), has been implemented with the adoption of codes, rules and procedures covering the activity of all the organizational and operational components of the Company.

 

Board of Directors

 

Severance Provisions

 

None of the Board of Directors service contracts with the company contains any benefits upon severance of employment.

 

40


Meetings

 

The Board of Directors shall meet periodically, at least once every quarter, in line with the provisions of the Self-Regulatory Code, and whenever the Chairman deems it necessary in the interest of the Company; it may also meet at the request of the Directors and the Auditors, pursuant to statutory law and the Bylaws.

 

Documents pertaining to the items placed on the agenda of Board meetings must be sent in a timely manner to all Board members so as to allow the same to be fully informed about the said items when participating in the Board meeting.

 

In 2005, fifteen meetings of the Board of Directors were held, with the participation of about 80% of the Board members, as a rule, and a significant presence of Independent Directors (85%).

 

In November 2005, the Company informed the market of its calendar of corporate events for the year 2006, indicating the dates of Board meetings to approve the economic and financial information and to examine the preliminary results as of December 31, 2005 and as of June 20, 2006, and of the general Shareholders’ Meeting.

 

Board meetings may be attended by other Company officers or even outside parties, whenever such attendance may be necessary or useful in providing the Board specialist or expert advice with regard to the items on the agenda.

 

Appointment

 

As already illustrated, the Board is usually appointed on the basis of a voting by competing lists. This means that the list of candidates must be deposited at the Company’s registered office no later than ten days before the date scheduled for the Shareholders’ Meeting. Those shareholders who, alone or with other shareholders, own the percentage of voting shares specified by the current Bylaws are entitled to submit a list.

 

Before the Directors’ appointment, those who proposed the lists provided the profiles of each candidate to the shareholders, for the shareholders to know their personal and professional characteristics and exercise their right of vote knowledgeably. This principle is stipulated by the Bylaws of Telecom Italia. The candidates’ curricula vitae, presented at the time the lists were deposited and providing information on their personal and professional characteristics, are available on the Company’s website www.telecomitaliamedia.it, in the Investor Relations section.

 

Composition

 

The composition of the Board of Directors conforms to the related recommendations contained in the Preda Code, and is aimed at ensuring, in terms of both number and authoritativeness, the presence of non-executive directors whose opinions carry significant weight in the decision-making process at the Board level, as well as a sufficient number of independent directors.

 

The Board of Directors is composed of a minimum of 7 and a maximum of 21 directors. The General Shareholders’ Meeting determines the number of Members of the Board of Directors (Art. 13 of the Bylaws).

 

Independent Directors

 

Pursuant to article 5 of the Self-Regulatory Code, independent directors shall be deemed to be those who:

 

    do not directly, indirectly nor on behalf of third parties maintain, nor have recently maintained, financial relationships of sufficient importance to affect their independence of judgment, with the Company, with their subsidiaries, with the Executive Directors and with the shareholder or group of shareholders who control the Company;

 

    are not holders, either directly or indirectly or on behalf of third parties, of shareholdings of an amount such as to allow them to exercise control or significant influence over the Company, nor take part in shareholders’ agreements for the control of the Company itself, nor contain any clauses that refer to the composition or resolutions of the Board of Directors;

 

41


    are not parties to shareholders’ agreements for the control the Company, or in any event, shareholders’ agreements featuring clauses focusing on the composition and resolutions of the Board of Directors. This requirement is interpreted in an extensive manner, i.e. focusing on the “substantial” independence that characterizes an independent director. In this sense, “participation in shareholders’ agreements” excludes the requirement of independence not only when it is an individual, such as a company director who signs the agreement directly, but also when the individual maintains significant relationships with the parties (individuals or legal entities) to the shareholders’ agreements, in the case where such relationships may be deemed as the expression (of some) of the parties to the agreements;

 

    are not close family members of Executive Directors of the Company or of parties who are in the situations indicated above.

 

In light of the list and CVs of candidates proposed by the shareholder Telecom Italia for approval by the General Meeting of Shareholders and the absence of any change whatsoever in the definition of “independent directors”, the Directors Gianfranco Negri Clementi, Adriano De Maio, Candido Fois, Giulia Ligresti, Alessandro Ovi, Giovanni Sabbatucci, Mario Zanone Poma and Sergio Ristuccia are deemed to be independent directors within the meaning of Article 5 of the Company’s Self- Regulatory Code as well as from the standpoint of international best practices.

 

Executive Directors

 

Pursuant to the Company’s Self-regulatory Code, the power to approve and revoke the assignment of specific tasks to individual board members lies solely with the Board of Directors that must also determine the limits and procedures for the exercise of the related delegated powers, as well as the intervals (in general, at least once a quarter) at which the individual board members concerned are required to report to the Board itself as well as to the Board of Auditors in respect of the activities undertaken in performance of their assigned tasks.

 

The Bylaws do not provide for the setting up of an Executive Committee within the Board of Directors.

 

The Board of Directors is made up of two executive directors and eleven non-executive directors, eight of whom are independent, as previously mentioned.

 

The overall system of powers given to the Company’s executive directors (Chairman, Deputy Chairman and Managing Director), in accordance with the resolutions passed by the Board of Directors on April 4, 2005 is as follows:

 

    Chairman Riccardo Perissich has been granted all the powers necessary for concluding all the acts pertaining to Company business in its various applications, with the sole exception of investments, purchases, sales and decisions about controlling or associated equity investments, companies or company business units of a value above €100 million for each transaction. Furthermore, the Chairman’s signature must be coupled to that of the Managing Director for issuing guarantees against bonds of TI Media or its subsidiaries for a unit amount above €100 million, as well as third-party bonds for a unit amount above €40 million. Likewise, the Chairman has also been granted emergency powers in all matters of competence of the Board of Directors, the power to handle disclosure of confidential information and the power to ensure the effectiveness and adequacy of the internal control system, including the power to appoint one or more members.

 

    Managing Director, Enrico Parazzini, has been granted all the powers necessary for executing all the acts pertaining to Company business in its various applications, with the sole exception of investments, purchases, sales and decisions about controlling or associated equity investments, companies or company business units of a value above €100 million for each transaction. Furthermore, the Managing Director’s signature must be coupled to that of the Chairman for issuing guarantees against bonds of Telecom Italia Media or its subsidiaries for a unit amount above €100 million, as well as third-party bonds for a unit amount above €40 million.

 

42


For the purposes of respecting the value limits of operations delegated to executive directors, the set of transactions which, though individually of a lower value than the indicated value thresholds, are connected within the same strategic or executive structure and thus, in their entirety exceed these thresholds of importance, are considered as a single transaction.

 

The powers are exerted in compliance with the applicable legal restrictions as well as instructions – and especially the powers reserved for the Board of Directors – deriving from the Company’s Code of Conduct and from the behavior principles for the execution of operations with related parties.

 

It is important to highlight that the Board of Directors is in any case vested with powers relating to operations of particular “importance”, even though their execution is abstractly included within the powers granted to the executive Directors.

 

On January 11, 2006, the Board of Directors redefined the delegation of top-level management powers, in light of and compliance with the new corporate regulations pursuant to Italian Legislative Decree No. 6/2003. The former limits have been requalified as internal limits on the relationship between the company board delegating powers and the parties receiving them. In this context, the Chairman and the Managing Director have been identically recognized as the Company’s legal representatives, each authorized to execute acts related to corporate operations in their various elements.

 

As required under the Code of Conduct, the Company has adopted a procedure formalizing the rules pertaining to the collection and reporting to the Board of Auditors and the Board of Directors, of detailed information and data pertaining to the Company’s business, with special emphasis on transactions that could have a significant impact on the Company’s net worth or economic and financial situation, transactions with related parties (including intercompany transactions) and atypical or unusual transactions. This procedure gives rise to those information flows, recommended in the Preda Code, through which Board members invested with specific powers periodically report to the Board on the activities they undertake in exercise of their specific powers.

 

Internal Committees

 

The Board may set up committees from among its members charged with giving advice and making proposals and shall establish their powers and duties. Currently, the Board has established two committees: the Internal Control and Corporate Governance Committee and the Compensation Committee.

 

Directors’ Remuneration (Compensation Committee)

 

It is up to the Board of Directors to determine the remuneration of the Directors with powers, after examining the proposals of the Board’s Compensation Committee and consulting the Board of Auditors. The Board is also responsible for allocating the total compensation to be paid to the individual members of the Board and its Committees if the Shareholders’ Meeting has not already done so.

 

The Compensation Committee set up within the Board of Directors is charged with fact-finding and advisory functions and is composed of independent non-executive directors Adriano De Maio (Chairman), Candido Fois and Mario Zanone Poma.

 

In 2005, the Compensation Committee assembled only once in a meeting attended by all its members.

 

In accordance with the provisions of the Company’s Self-regulatory Code, the Committee makes recommendations to the Board in respect of the remuneration of Managing Directors and Board members entrusted with specific tasks, generally ensuring that a part of the overall remuneration of the same are linked to Company’s or Group’s economic results as well as, if need be, to the attainment of specific pre-set targets. Based on the indications of the Director delegated for this purpose, the Committee also draws up proposals to determine the criteria for remunerating the Company’s top management and establishes any stock option plans or the allotment of shares.

 

The remuneration of all the Board members are published in a specific table in the Notes on the Financial Statements for the year ended December 31, 2005.

 

43


Internal Control and Corporate Governance Committee

 

The Board includes an Internal Control and Corporate Governance Committee, made up solely of independent directors, and more specifically Mario Zanone Poma (Committee Chairman), Alessandro Ovi and Gianfranco Negri Clementi, appointed in the Board meeting of April 4, 2005 and invested with an advisory and propositional role.

 

The current composition complies with the Preda Code (from which TI Media is Self-regulatory Code is derived) which stipulates that for exchange-listed companies held by another exchange-listed company, the Committee must be composed exclusively of independent directors. The Preda Code is a voluntary corporate governance code drawn up by the Italian Committee for the Corporate Governance Committee of Listed Companies.

 

Meetings are attended by the entire Board of Auditors, the Internal Control Manager as well as a representative from the External Auditing Firm. The Internal Control Committee met six times in 2005. All the committee members were present at all the aforesaid meetings.

 

Apart from assisting the Board of Directors in drawing up guidelines for the internal control system and evaluating it with reference to corporate risk management, the Committee:

 

(i) assesses the adequacy of the internal control system;

 

(ii) assesses the operating plan prepared by the persons responsible for internal control and receive their periodic reports;

 

(iii) assesses, together with the Administrative Officers of the Company and the Independent Auditors, the correct use of the accounting principles and the uniformity of the same in preparing the consolidated financial statements;

 

(iv) assesses the proposals put forward by the independent auditors to obtain the audit assignment, the operating plan for carrying out the audit and the results thereof as laid down in the independent auditors’ letter of recommendations;

 

(v) reports to the Board of Directors, at least on a half-year basis in respect of its operations and the adequacy of the internal control system;

 

(vi) perform the other duties entrusted to it by the Board of Directors, particularly as regards relations with the Independent Auditors;

 

(vii) monitors observance and periodical updating of the rules of Corporate Governance.

 

Internal Control System, Internal Auditing and Organizational Model

 

In 2003, the Board established a Self-Regulatory Code.

 

TI Media internal control system is characterized by the following general principles:

 

    Separation of roles in undertaking the main activities pertaining to individual operating processes;

 

    Traceability and constant visibility of decisions, so as to allow for the identification of precise “points” of responsibility and the reasons underlying the decisions themselves;

 

    Objectivity of the decision-making processes so that decisions are not based on purely subjective assessments, but rather on pre-defined and identifiable criteria.

 

The Board of Directors is responsible for the internal control system, it lays down the guidelines for the internal control system and checks the adequacy and proper functioning of the same with reference to corporate risk identification and management. In order to assess the proper functioning of the internal control system, the Board of Directors is seconded by the Internal Control and Corporate Governance Committee as well as by an independent party equipped with the resources necessary to undertake the required tasks.

 

44


TI Media has opted to entrust internal auditing tasks to a consortium specifically set up for such purpose (Telecom Italia Audit and Compliance Services S.c.a.r.l.) in which Telecom Italia and TI Media hold participating interests. The organizational solution allows the party placed in charge of internal control to operate absolutely independently of the Company’s organizational structures, of which it is totally autonomous, reporting to the director entrusted with such task, the Internal Control and Corporate Governance Committee and the Board of Statutory Auditors.

 

The task of overseeing the functioning, observance and updating of the models has been entrusted – in compliance with the regulatory provisions – to the Oversight Body, a panel made up of the independent board member Mario Zanone Poma (Chairman of the Internal Control Committee), the head of internal control Enrico Magnabosco (Board member of TI Audit and Compliance Services S.c.a.r.l) and the Chairman of the Board of Statutory Auditors Giovanni Fiori, who was appointed Chairman of the Supervisory Body.

 

This composition ensures that this body will include all the different professional skills that contribute to controlling corporate management, also fully affirming the autonomy required by law.

 

The Body is seconded by a specific structure set up within Telecom Italia Audit, known as “Support Group 231”, that supports the Body in the performance of its tasks and more specifically, periodically reports to the Supervisory Body on the results of the procedures carried out to monitor compliance with the organizational model adopted by the Company.

 

The Supervisory Body shall remain in office until the expiry of the term of the Board of Directors (up to the approval of the financial statements at December 31, 2007). The Board of Directors has given the Supervisory Body the broadest powers required to ensure prompt and efficient supervision over the operation and observation of the organizational and management model adopted by the Company, based on the provisions of Art. 6 of Legislative Decree 231/01.

 

The Supervisory Body met four times in 2005 and reports to the Board of Directors, the Committee for Internal Control and Corporate Governance as well as the Board of Auditors.

 

Code of Ethics and Code of Behavior on Insider Dealing

 

In July 2004, the Board approved and adopted a new Code of Ethics and Conduct (“Code of Ethics”) for TI Media. The new Code of Ethics is closely coordinated with the other aspects of corporate governance of the Company and, in particular, emphasizes the central importance of the system of internal control to the proper, effective performance of the Company’s business, and includes the issue of transactions with related parties. The Code of Ethics is the underlying concept for the entire system of Corporate Governance, and as such it plays a vital role in terms of planning, as it represents the body of principles for the ethically oriented conduct of business. The document in which the Code of Ethics is embedded sets out the objectives and information values of business practices, with reference to the main shareholders with which the TI Media Group of companies interact on a daily basis: shareholders, the financial market, customers, the community and personnel.

 

In December 2002, the Board of Directors adopted a Code of Conduct on insider dealing, disciplining mandatory conduct and reports concerning transactions involving group-issued financial instruments executed by persons who, by virtue of the positions they hold, have access to inside information.

 

Effective from April 1, 2006, according to article 114, prf. 7, of legislative decree n. 58/1998, as amended by law n. 262/2005, and pursuant to ad hoc rules by CONSOB, persons performing administrative, supervisory and management functions in a listed issuer (including directors and auditors) and managers who have regular access to inside information (so called “privileged information”, in accordance with the definition of law n. 262/2005) and the power to make managerial decisions affecting the future development and prospects of the issuer, persons who hold shares amounting to at least 10 per cent of the share capital, and any other persons who control the issuer must inform CONSOB and the public of transactions involving the issuer’s shares (or the shares issued by the issuer’s listed subsidiaries, and unlisted shares issued by subsidiaries of the listed issuer when the book value of the holding in the subsidiary represents more than fifty per cent of the listed issuer’s assets) or other financial instruments linked to them that they have carried out directly or through nominees, for an amount equal to or above €5,000. Such

 

45


disclosures must be performed within a five-trading day time limit and have also to be made when the transactions are carried out by the spouse, unless legally separated, dependent children, including those of the spouse, cohabitant parents and relatives by blood or affinity of the persons referred to above.

 

The aforementioned requirement applies to TI Media’s Directors, Auditors and Executive Officers.

 

As a result, as of April 1, 2006, TI Media’s Code of Conduct for Insider Dealing is to be considered superseded and cancelled. The aforementioned Code of Conduct was a self regulatory set of rules with a contractual value that set out the disclosure requirements and rules applicable to transactions, involving financial instruments issued by the Company and its subsidiaries, carried out by persons who, as a consequence of their position in the Company, used to have access to material information (that is information on matters capable of producing significant changes in the outlook for the profitability, financial position and/or balance sheet of the Company and the TI Media Group and likely, if made public, to have a significant effect on the price of the listed securities in question). To this end the relevant persons included—among others—Directors, executive officers and Statutory Auditors.

 

The Code required immediate disclosure to the market of transactions whose amount, aggregated with the amounts of other transactions carried out in the three preceding months and not yet declared to the Company, exceeded €80,000, and quarterly disclosure of transactions whose cumulative amount was more than €35,000 and less than €80,000.

 

In addition, the Code provided for black-out periods during which, in general, persons subject to the disclosure obligations were not allowed to carry out transactions.

 

In the event of non-compliance, the Code provides for severe penalties; where the offender is a Director or a member of the Board of Auditors, the Board of Directors may propose the revocation of his or her appointment at the next shareholders’ meeting. If the offender (including an executive officer) is an employee, penalties set forth by applicable laws and collective agreements will apply.

 

Principles Governing Transactions with Related Parties

 

The Company has adopted rules of conduct laying down the procedures to be followed in undertaking transactions with related parties, including other Group companies. These rules of conduct are directed towards guaranteeing effective correctness and transparency both procedural and substantive, ensuring at the same time full co-responsibility of the Board of Directors in the relative resolutions. Based on these principles, the Board of Directors gives its prior approval of operations with related parties, including intragroup transactions, with the exception of typical or usual transactions or those to be conducted under standard conditions. The Board of Directors receives appropriate information on the nature of the relationship, how the transaction will be executed, the conditions – economic or otherwise – for conducting it, the evaluation procedure adopted, the interest and underlying motivations and any risks for the Company. Moreover, if the relationship is with a Director or with a related party through a Director, the Director involved simply provides clarification and then leaves the Board meeting during deliberations. Depending on the nature, value or other features of the transaction, the Board of Directors is assisted by one or more experts who express an opinion, as the case may be, on the economic conditions and/or lawfulness and/or technical aspects of the transaction, in order to ensure that the transaction is effected at congruous terms.

 

In light of amendments to legislation recently introduced by the so-called Vietti Reform with Italian Legislative Decree No. 310/2004, the Company updated its Rules of Conduct for Executing Transactions with Related Parties, introducing an explicit reference to a captive concept of normality applicable to transactions within the Company and/or Group.

 

To allow for a better and more secure application of the Rules of Conduct, the Group is also implementing a procedure for the purpose that is designed to ensure objective treatment of real operating situations, with the help of a databank specifically for related parties of the Group companies that have adopted the Rules of Conduct. Before carrying out a transaction, the parties will have to consult an “expert system” designed to automatically provide indications – based on the information gathered using a check list for the purpose – concerning decision-making powers, internal information flows for reporting, and any need for support opinions for the purposes of evaluating the consistency of the transaction. The transactions are listed in the relevant section of the Directors’ Report on Operations.

 

46


The transactions are listed in the relevant section of the Directors’ Report on Operations.

 

Board of Auditors

 

Tasks and Role

 

The Board of Auditors verifies the observance of the law and the bylaws and verifies the observance of the best administration principles, the adequacy and reliability of corporate structures, internal audit procedures and accounting system, and the adequacy of instructions given by the Company to its subsidiaries. The Board of Auditors must receive timely disclosures, at least on a quarterly basis, from the Board of Directors about the company’s business and significant transactions performed by the company and its subsidiaries, including potential conflict of interest issues. Auditors must inform the CONSOB of any irregularity they detect in the course of their duties. Auditors are required to attend Shareholders’ Meetings and the Board of Directors meetings.

 

In order to make available the broad range of information needed by the Board of Auditors to perform its control function effectively, the Procedure for Compliance with the Requirements of Article 150.1 of Italian Legislative Decree No.58/1998 has been put in place, as described above.

 

In case an auditor chosen from the majority list or one of the minority lists ceases for any reason to serve in such capacity, the alternate chosen respectively from the majority list or the slate that obtained the second largest number of votes shall take his/her place, until the next Shareholders’ Meeting, at which a replacement will be appointed by the shareholders.

 

The Board of Auditors appoints among its members a Chairman.

 

The Company’s auditors cannot be members of more than three Boards of Auditors of companies listed on the Italian Stock Exchange (excluding Telecom Italia and its subsidiaries). They serve for a three-year term, may be reappointed and may be removed from their office for just cause and upon a resolution approved by the competent court.

 

Audit Committee

 

As described above, the Board of Auditors plays a key role in the Company’s system of corporate governance. This is confirmed by the number of meetings in 2005, (six meetings, of which some, as mentioned earlier, were held jointly with the Committee for Internal Control and Corporate Governance).

 

More specifically, according to Rule 10A-3 under the 1934 Act the Board of Auditors has been identified to act as TI Media’s Audit Committee. The Board of Auditors meets the following requirements of the general exemption contained in Rule 10A-3(c)(3):

 

    the Board of Auditors is established pursuant to applicable Italian law and TI Media’s Bylaws;

 

    under Italian legal requirements, the Board of Auditors is separate from the Board of Directors;

 

    the Board of Auditors is not elected by the management of the Company and no executive officer is a member of the Board of Auditors;

 

    all of the members of the Board of Auditors meet specific independence requirements from TI Media, the management and the auditing firm, as set forth by Italian legal provisions;

 

    the Board of Auditors, in accordance with and to the extent permitted by Italian law, is responsible for the appointment, retention and oversight of the work of the Company’s external auditors engaged for the purpose of issuing the audit report on the annual financial statements; and

 

47


    the Board of Auditors is authorized to engage independent counsel and other advisers, as it deems appropriate.

 

Our reliance on Rule 10A–3(c)(3) does not, in our opinion, materially adversely affect the ability of the Board of Auditors to act independently and to satisfy the other requirements of Rule 10A-3.

 

According to Section 202 of the Sarbanes-Oxley Act, with specific reference to the pre-approval requirement of all audit and permitted non-audit services to be rendered by the auditing firm (and associated persons) to the Company and its subsidiaries, TI Media is subject to Telecom Italia’s Procedure for the Appointment of Auditors adopted in October 2003. The procedure (which is posted on Telecom Italia’s website) regulates the engagement of auditing firms and persons (consulting firms, law firms, etc.) associated with the auditing firm on a continuous basis and significantly limits the power of the Board of Directors (and the management). Telecom Italia has adopted the principle of appointing a single firm of external auditors for all Group companies; accordingly, the appointment of other auditors must receive prior approval from the Parent Company.

 

Employees

 

At December 31, 2005 TI Media had 1,021 employees. In average the number of employees in 2005 was 1024.7 and 980.7 in 2004 (excluding employees of discontinued operations), broken down into the following categories:

 

     2005

   2004

No. of employees  


   Average

Executives

   56.3    58.8

Middle managers

   129.0    113.7

Journalists

   172.3    149.2

White collars

   660.1    652.8

Blue collar

   7.0    6.2
    
  

Total

   1,024.7    980.7
    
  

 

The increase was primarily due to additional television productions and management hires for the new digital channels and the pay-per-view services.

 

All of TI Media’s employees are covered by national collective bargaining agreements and company specific collective bargaining agreements. The executives and middle managers at TI Media benefit from the Staff Incentive Program, which includes:

 

    Managerial Incentive Program aimed at executives and middle managers with high levels of responsibility within their respective structures; and

 

    Performance Bonus Program aimed at the other executives and middle managers with job descriptions of a more professional nature.

 

Additionally, TI Media has three stock option plans in place. See “Compensation – Stock Option Plan 2000-2002 and Stock Option Plan Key People” and “Compensation – Stock Option Plan 2005”. TI Media believes that it has a good relationship with its employees.

 

TI Media’s future success will depend, in part, on its ability to continue to attract, retain, manage and motivate highly qualified employees.

 

Share Ownership

 

The following table shows the number of TI Media ordinary shares (actual) owned by Directors and Members of the Board of Statutory Auditors of TI Media as of December 31, 2005.

 

48


Name  


   Company

   No. of Shares
held at the
end of 2004


   No. of Shares
purchased


   No. of shares
sold


   No. of shares
held at the
end of 2005


   No. of shares
held as of
April 30, 2006


Board of Directors

                             

PERISSICH Riccardo

   =    =    =    =    =    =

PARRELLO Giuseppe

   =    =    =    =    =    =

PARAZZINI Enrico

   =    =    =    =    =    =

BERTAZZO Carlo

   =    =    =    =    =    =

DE MAIO Adriano

   =    =    =    =    =    =

FOIS Candido

   TI Media    2,360    =    =    2,360    2,360

LIGRESTI Giulia

   =    =    =    =    =    =

MION Gianni

   =    =    =    =    =    =

NEGRI CLEMENTI Gianfranco

   =    =    =    =    =    =

OVI Alessandro

   TI Media    186    =    =    186    186

SABBATUCCI Giovanni

   =    =    =    =    =    =

ZANONE POMA Mario

   =    =    =    =    =    =

Name  


   Company

   No. of Shares
held at the
end of 2004


   No. of Shares
purchased


   No. of shares
sold


   No. of shares
held at the
end of 2005


   No. of shares
held as of
April 30, 2006


Board of Statutory Auditors

                             

FIORI Giovanni

   =    =    =    =    =    =

ONESTI Tiziano

   =    =    =    =    =    =

SPINIELLO Salvatore

   =    =    =    =    =    =

 

As of April 30, 2006, the total ownership of TI Media shares by senior managers of TI Media had not changed compared to December 31, 2005. As of April 30, 2006, TI Media’s directors and senior managers did not own any savings shares. As of the same date, the members of TI Media’s Board of Statutory Auditors did not own any TI Media Shares.

 

Item 7. Major Shareholders and Related Party Transactions

 

Major Shareholders

 

Ownership of TI Media Ordinary-Shares

 

Telecom Italia, TI Media’s parent company, owns (directly and indirectly) 69.21% of TI Media’s ordinary shares. The shares held directly amount to 66.92%. Through Telecom Italia Finance S.A. Telecom Italia owns indirectly 2.29%. Telecom Italia is the largest fixed-line telecommunications operator in Italy. It has interests in fixed-line and mobile telecommunications operations in a number of European and Latin American markets.

 

The following table sets forth TI Media’s shareholders who own more than 2% of TI Media ordinary shares as of December 31, 2005.

 

Title of Class  


  

Identify of Person of Group


   Amount

   Percent of Class

 

Ordinary Shares

   Telecom Italia S.p.A    2,201,183,545    66.92 %

Ordinary Shares

   Telecom Italia Finance S.A.    75,286,857    2.29 %

 

There is no person known to TI Media who owns more than 2% of TI Media’s ordinary shares other than as set forth above. TI Media’s major shareholders have the same voting rights as other shareholders.

 

49


Ownership of Ordinary Shares

 

As of December 31, 2005, there were 3,289,272,469 outstanding TI Media ordinary shares. As of the same date, a total of 47,330,841 TI Media ordinary shares were registered in TI Media shareholders’ register in the name of 284 holders resident in the United States. These shares represented 1.44% of the total outstanding TI Media ordinary shares. Not all shareholders may be reflected on TI Media’s shareholder register at any given time. The actual numbers of holders of TI Media ordinary shares, therefore, may be less or more than these numbers indicate.

 

Ownership of Savings Shares

 

Because most TI Media savings shares are in bearer form, TI Media has not determined the number of holders of savings shares, including holders resident in the United States.

 

As of December 31, 2005, there were 54,969,513 outstanding TI Media savings shares. As of the same date a total of 984,411 TI Media savings shares were registered in TI Media shareholders’ register in the name of 7 holders resident in the United States. Not all shareholders may be reflected on TI Media’s shareholder register at any given time. The actual numbers of holders of TI Media savings shares, therefore, may be more or less than these numbers indicate.

 

Related Party Transactions

 

All the transactions entered into with related parties, including intragroup transactions, are part of ordinary operations and were entered into at market conditions or based on specific regulatory provisions. In addition, there are no atypical and/or unusual transactions or transactions that may represent a conflict of interest.

 

     Parent
Company


   Subsidiaries
and affiliates
of Parent
Company


  

Type of operations


     (thousands of euro)     

Revenues

   1,694    2,322    This item mainly includes revenues from the sale of goods and services.

Other operating income

   256    165    This item refers to extraordinary income and non existent liabilities.

Purchase materials and external services

   1,512    251    This item includes costs for raw materials, services, and professional services.

Other operating expenses

   130    301    This item refers to non-existent assets and liabilities and extraordinary expense.

Net financial income (expense)

   4,556    679    This item refers to interest received from Telecom Italia S.p.A. pertaining to financial receivables.

Financial receivables and other non-current financial assets

   0    173    This item refers to Telecom Italia Media S.p.A. accounts receivable from Aree Urbane for Euro 171 thousand.

Miscellaneous receivables and other non-current assets

   48,154    0    This item amounting to Euro 48,154 thousand refers to amounts due from Telecom Italia S.p.A. in connection with the participation in the National Tax Consolidation of the following companies: HMC S.p.A. for Euro 3,258 thousand, La7 Televisioni for Euro 35,383 thousand, Telecom Italia Media for Euro 7,282 thousand and TM News for Euro 2,231 thousand.

Trade receivables (due within and after 12 months)

   1,908    2,106    This item includes mainly accounts receivable from the Parent Company and TIM Italia S.p.A.

 

50


     Parent
Company


   Subsidiaries
and affiliates
of Parent
Company


  

Type of operations


     (thousands of euro)     

Miscellaneous receivables, and other current assets

   130,659    93    This item includes Euro 126,851 thousand from Telecom Italia for the participation in the National Tax Consolidation posted in the 2004 financial year. The collection of this amount is scheduled in June 2006. It refers to the following companies: HMC S.p.A. for Euro 4,964 thousand, La7 Televisioni for Euro 20,071 thousand, Telecom Italia Media for Euro 99,533 thousand and TM News for Euro 2,283 thousand. It also includes other miscellaneous operating receivables from Telecom Italia S.p.A.

Cash and cash equivalents

   430,447    19,403    This item includes financial receivables due to correspondent current account relations from Parent Company Telecom Italia S.p.A. for Euro 30,420 thousands and for Euro 400,000 thousands at short-term deposit, for the management of liquid assets and with an accrued income amounting to Euro 27 thousand. The amount relating to other Group companies includes financial receivables from the Buffetti Group.

Liabilities for financial leases owed after 12 months

   0    20    Financial leasing with Olivetti S.p.A. for office equipment.

Liabilities for financial leases owed within 12 months

   0    16    Financial leasing with Olivetti S.p.A. for office equipment.

Financial liabilities owed within 12 months

   5    0     

Trade payables

   14,231    5,396    This item includes accounts payable to Telecom Italia S.p.A. relative to services and telephone use systems performed by Telecom Italia S.p.A. for Group companies.

Debts incurred for acquiring fixed assets

   0    21    Accounts payable to Nuova Tin.it for acquiring fixed assets.

Miscellaneous payables and other current liabilities

   2,800    427    This item includes operating miscellaneous payables to Telecom Italia S.p.A. and the debt for adhering to the National Fiscal Consolidation of Telecom Italia Media Broadcasting for Euro 525 thousand.

 

The effects of the Internet segment (discontinued as of June 1, 2005) on Telecom Italia Group’s income statement for the period from January 1, 2005 to May 31, 2005 are also shown below:

 

     Parent
Company


   Subsidiaries
and affiliates
of Parent
Company


  

Type of operations


     (thousands of euro)     

Revenues

   70,955    2,304    This item refers to traffic recognized by Telecom Italia S.p.A. to Telecom Italia Media S.p.A. (Tin.it Division) based on telephone traffic generated by Internet users and revenues from Telecom Italia for DSL Internet access services supplies to end users by Telecom Italia, such as customer care and technical support.

 

51


     Parent
Company


  Subsidiaries
and affiliates
of Parent
Company


 

Type of operations


     (thousands of euro)    

Other operating income

   24   99   This item includes mainly recovery of personnel costs and services to Group companies.

Purchase of materials and external services

   59,889   2,233  

This item refers to amounts paid by Telecom Italia Media (Tin.it Division) to Telecom Italia S.p.A.

for the use of network infrastructures for Internet services.

Other operating expenses

   253   7   This item includes extraordinary expenses and charges mainly to Group companies.

Net financial income (expense)

   (1)   (163)   This item refers to interest paid to Telecom Italia Media S.p.A. pertaining to financial debt.

 

Below we report the income statement and balance sheet contributions of Gruppo Buffetti to Telecom Italia Group for the period from January 1 to December 31, 2005.

 

     Parent
Company


   Subsidiaries
and affiliates
of Parent
Company


 

Type of operations


     (thousands of euro)    

Revenues

   3,144    466   This item mainly includes revenues from the sale of goods to Group’s companies.

Other operating income

   184    741   This item refers to costs for services rendered.

Purchase of materials and external services

   876    2,630   This item refers to the purchase of products and costs related to services, telephone, data transmission and postal services.

Other operating costs

   0    (525)   This item refers to interest paid to Telecom Italia Media S.p.A. pertaining to financial debt.

Trade receivables (due within and after 12 months)

   1,060    744   This item includes accounts receivable from the Buffetti Group for the sale of products to Group companies.

Miscellaneous receivables, and other current assets

   1         

Financial debts owed within 12 months

   19,403    0   Accounts payable to Telecom Italia Media S.p.A.

Trade payables

   1,537    318   Including accounts payable to Telecom Italia S.p.A. and trade accounts payable to other Group companies.

 

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Item 8. Financial Information

 

Consolidated Statements and Other Financial Information

 

Financial Statements

 

See “Item 17. Financial Statements”.

 

Legal Proceedings

 

General

 

TI Media, like other companies, is frequently named as a defendant in routine litigation relating to technical and pricing mistakes occurring in TI Media’s products. The following is a summary of a litigation matter outside the ordinary course of TI Media’s business.

 

Settlement with the De Agostini Group

 

On June 28, 2004, TI Media settled the dispute under arbitration with the De Agostini Group concerning the agreement entered into on September 20, 2000 regarding, among other things, the purchase of a 40% stake in Finanziaria Web (which held a 66% stake in Matrix, the owner of the Virgilio portal). Under the settlement, which supersedes the agreement dated September 20, 2000, De Agostini Invest transferred its entire stake in Finanziaria Web to TI Media (which already held a 60% stake in the company). Instead of the initially agreed price of €700 million, TI Media paid €287 million, in addition to €38 million that had already been paid to De Agostini Invest as from July 2001 to cover losses and to recapitalize Finanziaria Web.

 

On July 9, 2004, TI Media transferred the stake in Finanziaria Web acquired from De Agostini Invest to Vertico S.p.A. (a wholly-owned subsidiary of Telecom Italia that held a 33.3% stake in Matrix). The sale was concluded at the price of €42.6 million, based on a valuation made by external consultants. TI Media thus reduced its financial exposure while maintaining unchanged control over Matrix, and consolidated the existing commercial collaboration between Telecom Italia and Matrix/Virgilio in the Internet sector. The Group recorded a loss of Euro 130 million on the settlement.

 

Acquisition of Cecchi Gori Communications

 

Following the sale of TeleMonteCarlo television network, or La7 and MTV, through a sale and purchase agreement among TI Media (then SEAT), Cecchi Gori Group Media Holding S.r.l. (“Cecchi Media”) and Cecchi Gori Group Fin.Ma.Vi. (“Finmavi”) several litigation proceedings ensued, as described below.

 

In connection with the complex legal dispute initiated by the Cecchi Gori Group against TI Media, the following cases remain pending in the ordinary courts:

 

  Before the Rome Court of Appeal:

 

    Appeal by Finmavi and Cecchi Media against the decision which rejected its request to find the August 11, 2000 resolution of the extraordinary shareholders’ meeting of Cecchi Gori Communications (now Holding Media Communications, which controls the television broadcaster La7) null and void. The resolution regards certain financial statements and related amendments to the Company’s Bylaws. The parties submitted their conclusions at a hearing in April, 2006. Following the submission of conclusions, and the filing of final written pleadings and answering submissions in June and July, the Court is expected to hand down its judgment.

 

  Before the Milan Court:

 

    Claims for damages caused to Finmavi, Cecchi Media and Vittorio Cecchi Gori as a result of the alleged illegal conduct by TI Media and the Directors which it appointed to the board of Cecchi Gori Communications. Such conduct was allegedly aimed at removing the majority shareholder, Cecchi Media. At the last hearing on December 13, 2005, the parties submitted their respective conclusions and are now waiting for the Milan Court to hand down its judgment.

 

53


    Appeal against the decision issued by the Milan Court on January 7, 2004 rejecting, on grounds of merit, the request for annulment or cancellation of the deed under which the Cecchi Gori Communications shares belonging to Cecchi Media were pledged to TI Media. The hearing for the filing of conclusions was held on October 4, 2005. On March 30, 2006 the court of appeal cancelled the deed under which the Cecchi Gori Communication shares belonging to Cecchi Gori Media Holding were pledged as security.

 

All decisions of the ordinary courts and the courts of appeal, both in preliminary and in trial proceedings, have been favorable to TI Media. Similarly, the arbitration proceeding, which originated from the arbitration clause of the agreements between TI Media and the Cecchi Gori Group and considered all the material aspects of the case and, in particular, the facts introduced for the new trial pending before the Milan Court for breach of contract, rejected all the requests formulated by the parties and, not having been appealed, has become final.

 

By judgment of November 8, 2005, the Court of Appeal of Rome upheld the decision by the ordinary court with regard to the request for annulment of the resolutions approving the financial statements and related balance sheet of Cecchi Gori Communications for the year ended December 31, 2000 and ordered Finmavi and Cecchi Media to pay costs to the respondents. The total amount of the claim by Cecchi Gori is approximately €885 million.

 

Dividends

 

TI Media does not have a policy of declaring a regular dividend. Rather, TI Media declares a dividend from time to time in light of prevailing circumstances and its future capital requirements. Any determination to pay dividends in the future will be at the discretion of TI Media, subject to limitations imposed by Italian law.

 

Consistent with Italian law, the payment of annual dividends by TI Media is made out of the distributable profits and reserves of TI Media on an unconsolidated basis for each relevant year and upon the recommendation of the Board of Directors. Any recommendation is subject to approval by the ordinary shareholders of TI Media at the annual shareholders’ meeting, which must be convened for the approval of the annual financial statements of TI Media within four months after the end of the financial year to which the financial statements relate.

 

The payment and amounts of future dividends, if any, will depend upon the following factors:

 

    the amount of distributable profits and reserves on an unconsolidated basis;

 

    TI Media’s capital expenditure and investment plans;

 

    earnings and level of profitability;

 

    the ratio of debt to equity;

 

    applicable restrictions on the payment of dividends under Italian law;

 

    the level of dividends paid by other comparable listed companies in Italy and elsewhere; and

 

    other factors as the Board of Directors may deem relevant.

 

Before TI Media may pay dividends with respect to any financial year, TI Media must allocate to its legal reserve (Riserva Legale) an amount equal to 5% of its net profit on an unconsolidated basis for that year, until the reserve, including amounts set aside during prior years, is equal to at least 20% of the aggregate nominal value of TI Media’s share capital. The amount of dividends payable is based on the Italian statutory financial statements, which may be materially different from the Group’s consolidated financial reporting to shareholders.

 

In addition to paying dividends from unconsolidated distributable profits, TI Media may also distribute dividends by charging reserves, some of which may only be charged for such distributions, provided that, prior to the distribution, the legal reserve is at or above the legally required 20% minimum referred to above.

 

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In addition to annual dividends, TI Media’s bylaws give the Board of Directors the power to approve the distribution of “interim dividends”. Pursuant to Italian law, after the approval of the preceding financial year’s financial statements and provided that the financial statements do not reflect current and/or accumulated losses, interim dividends may be distributed provided that they do not exceed the lower of:

 

    the profit of the current financial year, net of the amount to be attributed to legal and other reserves; and

 

    distributable reserves.

 

The shareholders’ meeting which approves financial statements with a net loss or insufficient net profits to use the available reserves to meet the financial rights of those holding savings shares.

 

Once dividends have been paid in compliance with applicable laws, shareholders cannot be required to repay interim dividends, or annual dividends paid on the basis of duly approved financial statements, to TI Media if the shareholders collected such dividends in good faith.

 

As a result of the sale of TI Media’s Internet business to Telecom Italia, TI Media’s management made a proposal to a dividend payment in the amount of €550.1 million on April 27, 2006. The proposal was approved by the shareholders meeting on April 10, 2006.

 

Item 9. Share Price Information

 

TI Media’s ordinary and savings shares are traded in euro on the Italian stock exchange’s Mercato Telematico. TI Media’s shares commenced trading on the Telematico on January 2, 1997. The shares are traded on the Telematico in minimum lots of 500 shares. Smaller lots of shares are traded on the Telematico in the opening tender.

 

TI Media’s shares are not listed on any U.S. securities exchange.

 

Following the acquisition of Consodata and as agreed with the French financial authority (Conseil des Marchés Fiduciaries), TI Media’s ordinary shares have been trading on the Premier Marché of Euronext in Paris between August 7, 2001 and December 31, 2004.

 

The following tables show the high and low official price, which represents the weighted average of the trading prices for all trades effected on a trading day, for TI Media’s ordinary shares and savings shares as reported through Telematico.

 

     Official Price per
Ordinary Share


   Official Price per
Savings Share


Fiscal year ended December 31,  


   High

   Low

   High

   Low

     (euro)

2002

   0.3565    0.3412    0.2328    0.2211

2003(1)

   0.3152    0.2999    0.2301    0.2182

2004

   0.3157    0.3047    0.2462    0.2462

2005

   0.4279    0.4111    0.3565    0.3565

2006 (through June 16, 2006)

   0.4368    0.4147    0.4374    0.4374

January

   0.4556    0.4443    0.4327    0.4327

February

   0.4307    0.4185    0.4206    0.4206

March

   0.4485    0.4379    0.4457    0.4457

April

   0.4750    0.4435    0.4677    0.4677

May(2)

   0.3801    0.3625    0.3748    0.3748

June (through June 16, 2006)

   0.3491    0.3365    0.3387    0.3387

Notes:

 

(1) The official prices of the ordinary shares and saving shares for the period prior to and including August 4, 2003 are not comparable to the official prices of these shares in the following periods due to the effect of the Spin-off of the Directories, and almost all of the directory assistance and business information of TI Media. (See Item 4. Information on the Company–History–SEAT Spin-off and Sale)

 

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(2) Dividends on income for FY 2005 were distributed on April 27, 2004. As of this date, there were 3,295,372,469 ordinary shares and 54,969,513 savings shares issued, for which a unit dividend of €0.1643 and €0.1679, respectively, was paid, for an aggregate total of €550,659 thousand.

 

     Official Price per
Ordinary Share (1)


   Official Price per
Savings Share (1)


Fiscal year ended December 31,  


   High

   Low

   High

   Low

     (euro)

2003

                   

First quarter

   0.2924    0.2808    0.2047    0.1963

Second quarter

   0.2797    0.2708    0.2072    0.1993

Third quarter (1)

   0.3104    0.2890    0.2644    0.2414

Fourth quarter

   0.3946    0.3753    0.3222    0.3222

2004

                   

First quarter

   0.3816    0.3719    0.2991    0.2991

Second quarter

   0.3418    0.3322    0.2656    0.2656

Third quarter

   0.2762    0.2641    0.2213    0.2213

Fourth quarter

   0.2971    0.2855    0.2322    0.2322

2005

                   

First quarter

   0.3899    0.3735    0.3195    0.3195

Second quarter

   0.3996    0.3879    0.3369    0.3369

Third quarter

   0.4958    0.4715    0.4025    0.4025

Fourth quarter

   0.4932    0.4750    0.4464    0.4464

2006

                   

First quarter

   0.4447    0.4334    0.4369    0.4369

Second quarter (through June 16, 2006

   0.4343    0.4088    0.4376    0.4376

Notes:

 

(1) The official prices of the ordinary shares and saving shares for the period prior to and including August 4, 2003 are not comparable to the official prices of these shares in the following periods due to the effect of the Spin-off of the Directories, and almost all of the directory assistance and business information of TI Media. (See Item 4. Information on the Company–History–SEAT Spin-off and Sale).

 

The following table shows the high and low official price, which represents the weighted average of the trading prices for all trades effected on a trading day, for TI Media’s ordinary shares as reported through Premier Marché. TI Media’s ordinary shares stopped trading on the Premier Marché as of December 31, 2004.

 

     Official Price Per
Ordinary Share


     High

   Low

     (euro)

2003

         

Second quarter

   0.5507    0.5322

Third quarter

   0.3362    0.3055

Fourth quarter

   0.3895    0.3720

2004

         

First quarter

   0.3787    0.3673

Second quarter

   0.3376    0.3261

Third quarter

   0.2980    0.2795

Fourth quarter

   0.2909    0.2761

 

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Securities Trading in Italy

 

Since July 1994, all Italian equity securities have been traded on Telematico except for equity securities of (i) certain smaller companies and cooperative banks traded on Mercato Ristretto under certain specific rules concerning trading hours and procedures and (ii) high growth companies traded on Nuovo Mercato.

 

Telematico operates under the control of CONSOB, the public authority responsible, among other things, with regulating securities markets and all public offerings of securities in Italy, and is managed by Borsa Italiana a joint stock company previously owned by the Treasury, sold through a tender offer to authorized intermediaries.

 

Securities transactions on Telematico are settled on a cash basis. Cash transactions are settled on the third business day following the trading date. Borsa Italiana issues a daily official list with certain information on transactions in each listed security, including the volume traded and the high and low prices of the day. No “closing price” is reported, but an “official price” calculated as a weighted average price of all trades effected during the trading day and a “reference price” calculated as a weighted average of the last 10% of tender effected during such day are reported daily. The Bank of Italy, in accordance with CONSOB, regulates the governing of the clearing system; with a provision dated September 8, 2000, the Bank of Italy specifies that the clearing system be performed by Monte Titoli (a centralized securities clearing system owned by certain major Italian banks and financial institutions).

 

Residents of Italy and non-residents through their authorized agents may purchase or sell shares on Telematico, subject to satisfying (i) in case of sales, either the margin or the deposit, and (ii) in case of purchases, the margin. “Margin” means a deposit equal to 100% of the agreed price, and “deposit” means a deposit of an equal number of the same shares as those sold. If in the course of a trading day the maximum price variation between two consecutive contracts is ±5%, or maximum price variation of the contracts with respect to the control price(iii) is ±10% an automatic five-minute suspension is declared. In the event of such a suspension, effect is not given to trades agreed but not confirmed before the suspension. In addition, Borsa Italiana has the authority to suspend trading in any security in response to extreme price fluctuations or for other reasons.

 

Starting May 15, 2000, the most liquid shares traded on Telematico, including the ordinary shares and the TIM ordinary shares, have been traded on “Mercato After Hours”, an automated screen trading system managed by Borsa Italiana. “Mercato After Hours” operates, from 6.00 p.m. to 8.30 p.m. on every trading day, substantially under the same rules as Telematico except that the price of any security may not fluctuate by more than 3.5% from the reference price of said securities on Telematico on the same day.

 

The S&P/MIB currently measures the performance of 40 equities listed on the markets organized and managed by Borsa Italiana. The index is derived from the universe of stocks trading on the Italian Exchange, including Borsa (MTA) and Nuovo Mercato. In September 2004, the S&P/MIB index substituted the MIB30 index which is calculated as an informative index. The S&P/MIB Index provides diversity over 10 economic sectors by adhering to the Global Industry Classification Standard, or CICS. The 10 CIGS sectors that underlie the S&P/MIB are: Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities. All stocks are classified using the CIGS methodology, therefore S&P/MIB Index reflect the Italian Markets in its entirety. Each constituent is weighted by its free float capital, considering the effective number of shares tradable in the market. Index Constituents are reviewed twice a year (March and September), whereas the rebalancing weights are re-calculated four times a year (March, June, September and December). The weighting structure can also be changed following extraordinary events (if the capital of a stock increases or other events).

 

American style call and put options are traded on the derivative market managed by Borsa Italiana which currently include the ordinary shares and the savings shares.

 

Effective July 1, 1998, the Italian financial markets have been regulated by the Draghi Law. With the Draghi Law, the Italian Government has introduced new laws and regulations governing some aspects of the financial sector and, in particular: (i) brokers and firms managing financial instruments; (ii) the Italian regulated Stock Exchanges; (iii) the offering to the public of financial instruments; (iv) public tender offers; (v) some aspects of corporate governance of listed companies; and (vi) insider trading. The Draghi Law contains framework provisions which have been implemented by specific regulations.

 

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Clearance and Settlement of TI Media Shares

 

Legislative Decree No. 213 of June 24, 1998 (“Dematerialization Decree”) provided for the dematerialization of financial instruments publicly traded on regulated markets including treasury bonds. From July 9, 1998, all companies that issue financial instruments that are publicly traded on regulated markets must inform Monte Titoli, which will open an account in the name of each company in its register.

 

Beneficial owners of ordinary shares and savings shares must hold their interests through specific deposit accounts with any participant having an account with Monte Titoli. The beneficial owners of ordinary shares and savings shares held with Monte Titoli may transfer their shares, collect dividends, create liens and exercise other rights with respect to those ordinary shares and savings shares through such accounts and may no longer obtain physical delivery of share certificates in respect of their ordinary shares and savings shares. All new issues of ordinary shares and savings shares and all other transactions involving ordinary shares and savings shares must settle electronically in book-entry form.

 

Ordinary shares and savings shares are accepted for clearance through Euroclear and Clearstream. Holders of ordinary shares may elect to hold such ordinary shares and savings shares through Euroclear or Clearstream (outside the United States).

 

Item 10. Additional Information

 

Memorandum and Articles of Association

 

General

 

Telecom Italia Media S.p.A. is a public company (societá per azioni) incorporated and regulated under the Italian Civil Code.

 

The extraordinary shareholders’ meeting on May 5, 2004 approved certain amendments to the Bylaws, designed specifically to ensure compliance with the new mandatory and elective statutory provisions introduced under the so-called Vietti Reforms of the Italian company laws. The amendments aimed also to set up mechanisms that, although not compulsory, are expected to reinforce and improve TI Media’s corporate governance system. Most significantly, the minimum threshold of share ownership necessary for the shareholders to present lists of candidates for the office of Directors or Statutory Auditors was reduced from 3% to 0.5%. (Article 13 “Composition of the Board of Directors” and Article 22 “Board of Statutory Auditors”). In order to render the new measures contained in the Bylaws applicable as soon as possible, the duration in office of the Board of Directors was set as being only one year (until the Shareholders’ Meeting approval of the financial statements for the period ended December 31, 2004). Other most significant changes involved the delegation of extended powers to the Board of Directors to increase TI Media’s share capital, to approve the acquisition of stakes of more than 90% in other undertakings, to reduce the share capital in case of withdrawal of shareholders and to adjust the Bylaws in order to ensure their compliance with regulatory requirements (Article 5 “Amount” and Article 18 “Powers of the Board – Delegated Powers”).

 

The objects and purpose of TI Media are set out in Article 4 of the Bylaws, which are attached as Annex B to the Articles of Association.

 

TI Media’s objectives include:

 

    to operate in the industry and trade of publishing, printing and graphics in general, in any form and by any means, including on-line;

 

    to gather and engage in advertising in any form and for any means of communication, even in exchange for goods or services or on the account of third parties;

 

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    to manage activities, including promotional activities, in the field of advertising communications and public relations initiatives;

 

    to engage, to prepare and to sell, with all technological means and any other transmission support, including on-line and via the Internet, all types of documentation services, including but not limited to databases and support services for trading goods or services;

 

    to manage all activities related to information processing and use of any type and of any manner, including the use and sale of communications services of any type, by any instruments and means and to manage all related, complementary or instrumental production and sales activities in the these areas;

 

    to engage in all commercial, industrial and financial operations and transactions involving real or personal property that are considered appropriate for the carrying out of TI Media’s objectives; and

 

    to acquire, directly or indirectly, interests and holdings in other corporations or companies as long as it is not TI Media’s primary activity and so long as no activities inherent to bringing in public funds or not permitted by law are carried out.

 

Directors

 

TI Media’s Board of Directors consists of not fewer than seven and not more than 21 directors. Directors and deputy directors are elected annually at the annual general meeting for a term expiring at the end of the next annual general shareholders meeting. Under the voting list system contained in TI Media’s Bylaws, TI Media’s directors are to be elected on the basis of candidate lists presented by either (i) the existing Board of Directors; or (ii) one or more shareholders representing at least 0.5% of the share capital of TI Media having the right to vote at the annual general meeting of shareholders. The candidate list submitted by the existing Board of Directors must be deposited at the registered office of TI Media and published in at least one nationally circulated daily newspaper at least 20 days prior to the date scheduled for the general shareholders’ meeting. If the list is submitted by the shareholders, the requisite period is ten days. Each shareholder may present or participate in the presentation of, and may vote for, only one candidate list. Together with each list, within the term indicated above, each candidate must submit a statement accepting the nomination and a resume reporting his or her personal and professional characteristics and any indications of eligibility as independent director.

 

The Board of Directors must convene at least quarterly and whenever considered necessary or when a written request is submitted to the Chairman by at least one fifth of the Directors or by the auditors. A director of TI Media may not vote in respect of any proposal in which such director, or any person connected with the director, has any material interest other than by virtue of his interests in securities of, or otherwise in or through, TI Media.

 

The compensation of TI Media’s directors is resolved by the meeting of TI Media’s shareholders. The directors may authorize the issuance of bonds or other indebtedness only if empowered by a shareholders’ resolution.

 

There is no mandatory retirement age for directors of TI Media, and directors may be reelected to successive boards. Directors are not required to hold any shares of TI Media to be qualified for membership on the board.

 

Rights and Restrictions Attaching to TI Media Shares

 

As of June 10, 2006, the issued and outstanding share capital of TI Media amounted to €327,202 thousand divided into 3,295,372,469 ordinary shares and 54,969,513 savings shares with a nominal value of €0.03 each. All of the ordinary shares and savings shares are validly issued and fully paid. The ordinary shares are in registered form, while the savings shares may be either in registered or bearer form.

 

Dividend Rights

 

The payment by TI Media of any annual dividend is proposed by the Board of Directors and is subject to the approval of the shareholders at the annual shareholders’ meeting, which must be convened within 120 days, or, under special circumstances, 180 days after the end of each financial year. Before dividends may be paid out of TI Media’s unconsolidated net income in any year, an amount equal to 5% of net income must be allocated to TI

 

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Media’s legal reserve until the reserve is at least equal to 20% of the par value of TI Media’s issued share capital. The Board of Directors may authorize the distribution of interim dividends, subject to certain statutory and legal limitations. Holders of savings shares have preferential rights on the distribution of dividends.

 

Dividends are payable to those persons who hold the shares through an intermediary on the dividend payment date declared by the shareholders’ meeting. Payments in respect of dividends are distributed through Monte Titoli on behalf of each shareholder by the intermediary with which the shareholder has deposited its shares. See “Item 8. Financial Information — Financial Statements — Dividends”.

 

Meetings of Shareholders and Voting Rights

 

Holders of ordinary shares are entitled to attend and vote at ordinary and extraordinary shareholders’ meetings. Votes may be cast personally or by proxy. Shareholders’ meetings may be called by TI Media’s Board of Directors (or the Board of Statutory Auditors or at least two statutory auditors) and must be called if requested by holders of at least 20% of the issued and outstanding ordinary shares. Shareholders’ meetings may also be called if requested by holders of at least 10% of the issued and outstanding ordinary shares. In this latter case, however, the Board of Directors may refuse to call the meeting if calling it conflicts with TI Media’s interest; any dispute arising from a refusal to call a meeting must be resolved by the competent court. Shareholders are informed of all shareholders’ meetings to be held by publication of a notice in the Italian Official Gazette (Gazzetta Ufficiale) at least 30 days before the date fixed for the meeting. The period is reduced to, respectively, 20 days with respect to meetings convened at the request of minority shareholders and meetings convened to resolve upon TI Media’s dissolution, and 15 days for meetings convened pending a public tender offer launched on TI Media’s shares. The notice is also published in at least one national daily newspaper, as recommended by CONSOB.

 

Shareholders’ meetings must be convened at least once a year. The annual unconsolidated financial statements of TI Media are submitted for approval to the ordinary shareholders’ meeting which must be convened within 120 days or, in the event of exceptional circumstances, within 180 days after the end of the financial year to which the financial statements relate. At ordinary shareholders’ meetings, shareholders also approve the distribution of dividends, appoint the Board of Directors and statutory auditors, determine their remuneration and vote on any business matter submitted by the directors. Extraordinary shareholders’ meetings may be called to pass upon proposed amendments to the bylaws, capital increases, mergers, de-mergers, dissolutions, issuance of debentures, appointment of receivers and similar extraordinary actions. The notice of a shareholders’ meeting may specify up to two or three meeting dates, respectively, for an ordinary or extraordinary shareholders’ meeting; these meeting dates are generally referred to as “calls”.

 

The quorum required for shareholder action at an ordinary shareholders’ meeting on first call is at least 50% of the total number of issued and outstanding ordinary shares, while on second call there is no quorum requirement. In either case, resolutions may be approved by holders of the majority of the ordinary shares present or represented at the meeting. The quorum required at an extraordinary shareholders’ meeting on first, second and third call is determined by statutory law. Resolutions of any extraordinary shareholders’ meeting require the approval of a majority set forth by statutory law. In addition, a meeting will be deemed duly convened if shareholders representing 100% of TI Media’s share capital, together with all members of the Board of Directors and the Board of Statutory Auditors, are present at the meeting.

 

To attend any shareholders’ meeting, shareholders must be in possession of an appropriate certificate. This certificate may be obtained by owners of ordinary shares through the intermediary associated with Monte Titoli, the company authorized by CONSOB to operate a centralized clearing system, or the centralized security custody and administration system with which their accounts are held. Shareholders must deposit their shares with the authorized intermediary for the certificate to be issued.

 

Shareholders may attend the shareholders’ meeting by proxy. A proxy may be given only for a single shareholders’ meeting (including, however, the first, second and third calls of such meetings) and may be exercised only by the person expressly named in the applicable form. The person exercising the proxy cannot be a subsidiary of TI Media, a director, statutory auditor, or employee of TI Media or of any of its subsidiaries.

 

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Proxies may be solicited by an intermediary (banks or investment companies, asset management companies and companies having proxy solicitation as their sole purpose) on behalf of a qualified soliciting shareholder or group of shareholders (who individually or as a group own and have owned at least 0.5% of TI Media’s voting capital for at least six months and who have been registered with TI Media as holder or holders of the shares for the same period of time). Proxies may also be collected by a shareholders’ association from among its members provided that the association has been formed by notarized private agreement, does not carry out business activities other than those relevant to the purpose of the association and is made up of at least 50 individuals each of whom owns not more than 0.1% of TI Media’s voting capital. Members of the shareholders’ association may, but are not obliged to, grant proxies to the legal representative of the association and proxies may also be granted in respect of only some of the matters to be discussed at the relevant shareholders’ meeting. The association votes in different manners in compliance with the instructions given by each member who has guaranteed a proxy to the association. CONSOB has established provisions which govern the transparency and proper performance of the solicitation and collection of proxies.

 

Savings Shares

 

Italian companies which have their shares listed on the Mercato Telematico can issue savings shares (azioni di risparmio) which carry preferential rights in the payment of dividends and no voting rights. TI Media, in accordance with Italian law and its bylaws, has issued savings shares which have the following characteristics:

 

    they have a right to the distribution of net income of up to 5% of their nominal value;

 

    thereafter they must be allocated dividends in an amount at least 2% higher than the par value in comparison to dividends allocated to ordinary shares;

 

    if dividends cannot be distributed as above in any financial year, the unpaid amount accrues to the following two financial years;

 

    they have the same rights as other shares in the distribution of reserves;

 

    should a capital reduction become necessary due to losses, the nominal value of the savings shares is reduced by an amount equal to the amount of the loss exceeding the nominal value of all the other shares; and

 

    in the liquidation of assets they rank prior to other categories of shares for the full nominal value.

 

Saving shares now represent 1.7% of TI Media’s share capital.

 

On May 9, 2003, the extraordinary meeting of TI Media’s shareholders approved an amendment of the article 6 of TI Media’s Bylaws concerning the procedures to pay the preferred dividend of the savings shares; in particular, the new clause enables the shareholders’ meeting which approves the financial statements in the case that the net profit shown in the financial statement is non-existing or insufficient, to use the available reserves to meet the financial rights of those holding savings shares. Subsequent amendment of the applicable Bylaws on May 5, 2004 clarified that such payment from reserves would preclude the accrual of the same amount to the following two financial years, which happens when there is no sufficient amount of income in the current year to satisfy the dividend rights of the holders of the savings shares.

 

In accordance with TI Media’s Bylaws, in the case of delisting of the ordinary shares or savings shares, the savings shares will keep their rights and characteristics unless the holders of savings shares wish to exercise the right to convert their shares into:

 

    listed preferential shares, which would have the same features as savings shares, in accordance with the Italian law in force at the time of conversion, and would be entitled to vote at the extraordinary general meeting; or

 

    ordinary shares.

 

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The right to convert would be exercised by the holders of savings shares in accordance with the terms and conditions set out in the resolution of the extraordinary meetings and where necessary with the approval of the holders of savings shares.

 

Italian Legislative Decree No. 58 of 1988, dated February 24, 1998 (“Decree No. 58”) provides for a special meeting of holders of savings shares for the approval of resolutions regarding the following matters:

 

    appointment and removal of the savings shareholders’ common representative and the commencement of legal action for liability against such person;

 

    approval of any resolution taken by the ordinary or extraordinary meetings of the company that may prejudice rights of savings shareholders;

 

    creation of a fund for the expenses necessary to protect common interests and the approval of the related statement of account;

 

    settlement of disputes with the company; and

 

    any other matter of common interest.

 

Liquidation Rights

 

Pursuant to Italian law and subject to the satisfaction of the claims of all other creditors, shareholders are entitled to a distribution of all the remaining liquidated assets of TI Media proportional to the nominal value of their shares. Holders of savings and preferred shares are entitled to a priority right to any distribution of liquidated assets up to their par value. Thereafter, all shareholders would rank equally in their claims to the distribution of surplus assets, if any. Ordinary shares rank equally among themselves in liquidation.

 

Reporting Requirements and Restrictions on Acquisitions of Shares

 

Pursuant to Italian securities regulations any acquisition or sale of an interest in excess of 2%, 5%, 7.5%, 10% and all higher multiples of five, in the voting shares of a listed company, must be notified to the listed company and to CONSOB within five trading days (defined as days on which Borsa Italiana is open) following the acquisition or sale. CONSOB must make such information public within three trading days from the notification.

 

For purposes of the disclosure requirements referred above: (i) a person’s holding must include both the shares owned by such person, even if the voting rights belong or are assigned to third parties, and the shares whose voting rights belong or are assigned to such person; (ii) a person’s holding shall also include both the shares owned by nominees, trustees or subsidiary companies and the shares of which the voting rights belong or are assigned to such persons; (iii) shares registered in the names of or endorsed to trustees and those whose voting rights are assigned to an intermediary in connection with collective or individual portfolio management services are not to be attributed to the persons controlling the trustee or the intermediary.

 

For the purposes of the disclosure requirements for 5%, 10%, 25% 50% and 75% thresholds, the calculation of holdings shall also include issued and subscribed shares that a person may buy or sell on his own initiative, either directly or through nominees, trustees or subsidiary companies. Shares that may be acquired by exercising conversion rights or warrants shall be included in the calculation only if the acquisition can be made within sixty days.

 

Shareholder agreements concerning the voting shares of a listed company must be notified to CONSOB and to the company if they include agreements on the exercise of voting rights and/or duties of consultation before voting. The same rule applies when the shareholder agreements concern the shares issued by a non-listed company that controls a listed company. The notification must include the share ownership of all parties filing it. When listed companies change their share capital, they must notify CONSOB and Borsa Italiana of the amount of the share capital and the number and classes of shares into which it is divided. CONSOB and Borsa Italiana must make the information available to the public no later than the day following the notification. The notification shall be made no later than the day following the event causing such modification or the day following the filing of the amended bylaws.

 

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Any holdings by a listed company of an interest in excess of 10% in the voting shares of an unlisted company must be notified to CONSOB and to the company. The reduction of the participation within the 10% threshold must be notified to the company only. Notifications to CONSOB must be made within 30 days from the approval by the Board of Directors of the half-year and the annual reports; notifications to the company whose shares are being acquired or sold must be made within seven days from the transaction which results in exceeding or going within the 10% threshold. Such information must be made public when the half-year and the annual reports are deposited. For purposes of calculating the interest threshold above, the following unlisted companies shares must be taken into account: (i) shares owned by a listed company even if the voting rights belong to a third party; and (ii) shares attributing voting rights to a listed company if such voting rights grant the listed company dominant or significant voting powers.

 

In accordance with Italian antitrust laws and regulations, the Antitrust Authority is required to prohibit acquisitions of sole or joint control over a company that would create or strengthen a dominant position in the domestic market or a significant part thereof. However, if the acquiring party and the company to be acquired operate in more than one Member State of the EU and exceed certain revenue thresholds, the antitrust approval of the acquisition falls within the exclusive jurisdiction of the European Commission. See “Item 4. Information on the Telecom Italia Group—Regulation—Competition Law”.

 

Limitations on Voting and Shareholdings

 

There are no limitations imposed by Italian law or by the Bylaws of TI Media on the rights of non-residents of Italy or foreign persons to hold or vote the Shares other than those limitations resulting from the special powers of the State, which apply equally to all owners of Shares, Italian and foreign alike.

 

Material Contracts

 

TI Media is not party to any material contracts other than contracts entered into in the ordinary course of business.

 

Exchange Controls

 

Foreign Investment and Exchange Control Regulations in Italy

 

There are no exchange controls in Italy. Residents of Italy may hold foreign currency and foreign securities of any kind, within and outside Italy. Non-residents may invest in Italian securities and may export cash, instruments of credit and securities, in both foreign currency and euro, representing interest, dividends, other asset distributions and the proceeds of dispositions without restriction other than those outlined below. There are no limitations on the right of non-resident or foreign beneficial owners to vote their Shares except as provided for all TI Media shareholders by law. See “—Description of Capital Stock—Limitations on Voting and Shareholdings”.

 

Updated reporting and record-keeping requirements are contained in recent Italian legislation which implements an EU Directive regarding the free movement of capital. Such legislation requires that transfers of cash or bearer bank or postal passbooks or bearer instruments in euro or in foreign currency, effected for whatsoever reason between different parties, shall be carried out by means of authorized intermediaries when the total amount of the value to be transferred is more than €12,500.00. The threshold referred to above also applies when there is reason to believe that several transactions, effected at different times within a certain period of time, constitute part of a single transaction, even if individually below the threshold amount specified. Whenever the execution of such transactions leads to believe that there be irregularities in their performance, such transactions shall be reported in writing to the Ufficio Italiano Cambi (the Italian Exchange Office) who shall carry out necessary checks. Credit institutions and other intermediaries effecting such transactions on behalf of residents or non-residents of Italy are required to maintain records of such transactions for ten years, which may be inspected at any time by Italian tax and judicial authorities. Non-compliance with the above may result in administrative fines or, criminal penalties, if the

 

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transactions fall within a case ruled by the criminal code. The Ufficio Italiano Cambi will maintain records relating to either persons notified of infringements or persons in whose regard a definitive sanction has been issued in its information system for a period which varies depending on the case.

 

Certain additional procedural requirements are imposed for tax reasons. Non-corporate residents of Italy effecting transfers to and from Italy in excess of €12,500.00 in one year must disclose them in their annual tax declarations. Non-corporate residents must also give details in their tax declarations of financial assets held outside Italy at the end of the fiscal year and of transfers in excess of €12,500.00 to, from, within and between foreign countries in connection with such assets during the fiscal year. No declaration is required in respect of foreign investments and foreign income-earning assets that are exempt from income tax or subject to withholding tax in Italy. Such disclosure requirements do not apply (i) if the total value of the investments and assets at the end of the taxable period or the total amount of the transfers effected during the year is not greater than €12,500.00 or (ii) in respect of foreign investments, foreign assets or transfers within the EU (except for transfer from or to Italy). For corporate residents there is no requirement for such a declaration because their financial statements (on the basis of which their tax returns are prepared) already contain the information.

 

There can be no assurance that the present regulatory environment in or outside Italy will endure or that particular policies presently in effect will be maintained, although Italy is required to maintain certain regulations and policies by virtue of its membership in the EU and other international organizations and its adherence to various bilateral and multilateral international agreements.

 

Taxation

 

Unless otherwise indicated, for purposes of the following discussion regarding taxation, the ordinary shares and the savings shares are collectively referred to as the “TI Media Shares.”

 

Italian Taxation

 

The following is a summary of certain Italian tax consequences of the purchase, ownership and disposition of TI Media Shares as at the date hereof. It does not purport to be a complete analysis of all potential tax matters relevant to a decision to purchase, hold or dispose of TI Media Shares.

 

Income Tax

 

Under Italian law, dividends paid to beneficial owners of savings shares who are not Italian residents and do not have a permanent establishment in Italy to which dividends are connected are subject to a 12.5% withholding tax.

 

Under Italian law, dividends paid to holders of ordinary shares who are not Italian residents and do not have permanent establishment in Italy to which dividends are connected are subject to a 27% withholding tax.

 

Under Italian law, all shares of Italian listed companies have to be registered in a centralized deposit system. With respect to dividends paid in connection with shares held in the centralized deposit system managed by Monte Titoli, such as TI Media Shares, instead of the 27% or 12.5% withholding taxes mentioned above, a substitute tax will apply at the same tax rates as the above-mentioned withholding taxes. This substitute tax is collected by the Italian authorized intermediaries participating in the Monte Titoli system and with whom the securities are deposited and also by non-Italian authorized intermediaries participating, directly or through a non-Italian centralized deposit system, in the Monte Titoli system.

 

Non-resident holders of ordinary shares have the right to recover within 48 months form the date of payment of the Italian substitute income tax, up to four-ninths of the 27% substitute tax on their dividend income, upon providing adequate evidence, certified by the tax authorities in their home country, that they have paid a corresponding amount of income tax in their home country on the same dividend income. U.S. resident owners of ordinary shares should consult their own tax advisors concerning the possible availability of this refund, which traditionally has only been payable after extensive delays. In addition, this refund is an alternative to seeking any relief from double taxation under the Italian-U.S. income tax convention (the “Treaty”).

 

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U.S. resident owners of ordinary shares may be entitled to a reduced rate of tax on their dividends under the Treaty. Where a U.S. resident owner qualifies for the benefits of the Treaty, is the actual beneficiary of the dividends and the dividends paid are not connected with a permanent establishment in Italy through which the U.S. resident owner carries on a business or with a fixed base in Italy through which the U.S. resident owner performs independent personal services, the Treaty generally provides that Italian taxes cannot exceed 15% of the gross amount of the dividend.

 

To obtain the reduced tax rate afforded by the Treaty, a U.S. beneficial owner of ordinary shares must provide, before the dividend is paid (usually, according to the intermediary instructions), the intermediary with which the shares are deposited and which participates in the Monte Titoli system with the following:

 

(i) a declaration by the beneficial owner containing all the data identifying the person as the beneficial owner and establishing the existence of all the conditions necessary for the application of the Treaty; and

 

(ii) a certification (Form 6166) issued by the U.S. Internal Revenue Service that states that the beneficial owner is a U.S. resident for tax purposes. The certification is valid until March 31 of the year following the submission.

 

IRS Form 6166 may be obtained by filing IRS Form 8802 with the Internal Revenue Service, Philadelphia Service Center, U.S. Residency Certification Request, P.O. Box 16347, Philadelphia, PA 19114-0447. IRS Form 8802 must include, among other things, the holder’s name, mailing address, social security number or employer identification number, tax return form number, and tax period for which the certification is requested. In addition, each certification request for Italy must include a statement declaring, under penalties of perjury, the following:

 

    that the holder is a U.S. resident;

 

    that the holder does not have a permanent establishment in Italy;

 

    the holder’s permanent street address; and

 

    if a corporation, the holder’s state of incorporation.

 

If a U.S. resident owner of ordinary shares fails to obtain the reduced rate provided by the Treaty, a refund equal to the difference between the Treaty rate and the Italian rate of 27% must be claimed directly from the Italian tax authorities. Extensive delays have been encountered by U.S. residents seeking refunds directly from the Italian authorities pursuant to the Treaty.

 

In the case of dividends received by a U.S. partnership, the reduction of the tax rate under the Treaty is only available to the extent such dividends are subject to U.S. tax in the hands of the partners.

 

Transfer Tax

 

No transfer tax is payable upon the transfer of TI Media Shares through Telematico or any other regulated financial market. Transfers of TI Media Shares which occur outside a regulated financial market are exempted from the payment of transfer tax provided that the parties entering into the agreement pursuant to which the transfer takes place are all non-residents of Italy and the relevant TI Media Shares are not deposited at an Italian intermediary. Other types of transfers of TI Media Shares listed on Telematico or any other regulated financial market which occur outside a regulated financial market are also exempted from the payment of transfer tax provided that the parties entering into the agreement pursuant to which the transfer takes place are (i) banks, Italian securities dealing firms (“SIMs”) or exchange agents or (ii) banks, SIMs or exchange agents on the one hand, and non-residents of Italy on the other hand or (iii) banks, SIMs or resident or non-resident exchange agents, on the one hand, and investment funds on the other hand. In any other case, transfer tax is currently payable at the following rates:

 

    €0.072 per €51.65 (or any fraction) of the price at which the TI Media Shares are transferred when the transfer is made between private individuals directly or through an intermediary that is not a bank, SIM or broker;

 

65


    €0.0258 per €51.65 (or any fraction) of the price at which the TI Media Shares are transferred when the transfer is made either (i) between a bank, SIM or broker and a private individual or (ii) between private individuals through a bank, SIM or broker; and

 

The mere change of the depositary (e.g., Euroclear, Clearstream, Monte Titoli, DTC or the Depositary) not involving a transfer of the ownership of the transferred TI Media Shares will not trigger the Italian transfer tax.

 

In general, with respect to U.S. holders, the transfer tax will not be applicable on transfers of TI Media Shares through regulated financial markets. However, in the case of transfers which are not executed on a regulated financial market and are entered into with an Italian counterparty other than a bank or authorized financial intermediary or an investment fund, it is advisable that U.S. holders consult their own tax advisors concerning the applicability of this transfer tax.

 

Capital Gains Tax

 

Under Italian law, capital gains tax (“CGT”) is generally levied on capital gains realized by non-residents of Italy from the disposal of shares in companies resident in Italy for tax purposes, such as the TI Media Shares, even if those shares are held outside of Italy. For the purposes of CGT, the exchange of shares under a merger or de-merger of Italian companies does not constitute a disposal of shares. In such transactions, the tax value and the holding period of the exchanged shares is carried over to the shares received in the exchange. Capital gains realized by non-resident holders on the sale of non-qualified shareholdings (as defined below) in companies listed on a stock exchange and resident in Italy for tax purposes are not subject to CGT.

 

In order for a non-resident holder to benefit from the exemption for non-qualified shareholdings, TI Media may require the shareholder to provide a declaration that they are not Italian residents for tax purposes.

 

A “qualified shareholding” consists of securities that (i) entitle the holder to exercise more than 2% of the voting rights of a company whose shares are listed on a stock exchange (as in TI Media’s case) in the ordinary meeting of the shareholders or (ii) represent more than 5% of the share capital of a company whose shares are listed on a stock exchange (as in TI Media’s case). A “non-qualified shareholding” is any shareholding that does not meet the above mentioned interest rights to be qualified as a “qualified shareholding.”

 

The relevant percentage is calculated taking into account the holdings sold during a 12-month period. Where losses exceed gains, they can be carried forward for up to the fourth taxable period.

 

Pursuant to the Treaty, a U.S. resident owner of TI Media Shares will not be subject to CGT on a sale of qualified shareholdings unless such shares form part of the business property of a permanent establishment of the owner in Italy or pertain to a fixed base available to the owner in Italy for the purpose of performing independent personal services. A U.S. resident owner of TI Media Shares who sells such shares may be required to produce appropriate documentation establishing that the above-mentioned conditions of non-taxability pursuant to the Treaty have been satisfied if CGT would otherwise be applicable.

 

Inheritance and Gift Tax

 

According to Law No. 383 of October 18, 2001 (“Law No. 383”), Italian inheritance and gift tax, previously payable on transfer of securities on death or by gift, has been abolished starting from October 25, 2001.

 

However, for grantees other than spouses, direct descendants or ancestors and other relatives within the fourth degree, if and to the extent that the value of the gift to any such grantee exceeds €180.759,91, the gift of shares may be subject to the ordinary transfer taxes that would apply if the shares had been transferred for consideration (i.e., registration tax at the flat rate of €168,00).

 

Moreover, an anti-avoidance rule is provided by Law No. 383 for any gift or assets (such as shares) which, if sold for consideration, would give rise to capital gains subject to CGT. In particular, if the grantee sells shares received as a gift for consideration within 5 years from their receipt, the grantee will be required to pay the relevant CGT, where applicable, as if the gift had never taken place.

 

66


There is currently no gift tax convention between Italy and the United States.

 

United States Federal Income Taxation

 

The following summary describes the material U.S. federal income tax consequences of the acquisition, ownership and sale of TI Media Shares that are generally applicable to U.S. holders who own TI Media Shares as capital assets for U.S. federal income tax purposes, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a particular person’s decision to acquire such securities. For these purposes, you are a U.S. holder if you are a beneficial owner of TI Media Shares and are, for U.S. federal income tax purposes:

 

    a citizen or resident of the United States;

 

    a corporation, or other entity taxable as a corporation, created or organized under the laws of the United States or of any political subdivision of the United States; or

 

    an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

 

This discussion is based on the tax laws of the United States currently in effect, including the Internal Revenue Code of 1986, as amended, Treasury regulations, administrative announcements and judicial decisions, as well as the Treaty. These laws may change, possibly with retroactive effect. This discussion does not address U.S. state, local or non-U.S. tax consequences.

 

Please note that this discussion does not address all of the tax consequences that may be relevant in light of your particular circumstances. In particular, it does not address holders subject to special rules, including:

 

    partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

 

    persons subject to the alternative minimum tax;

 

    tax-exempt entities;

 

    dealers and certain traders in securities or foreign currencies;

 

    insurance companies;

 

    certain financial institutions;

 

    persons who own the TI Media Shares as part of an integrated investment, including a straddle, hedging or conversion transaction, comprised of the TI Media Shares and one or more other positions for tax purposes;

 

    persons who acquired TI Media Shares pursuant to the exercise of any employee stock option or otherwise as compensation;

 

    persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; or

 

    persons who actually or constructively own 10% or more of the Company’s voting stock.

 

Please consult your own tax advisor with regard to the application of the U.S. federal income tax laws to the TI Media Shares, and any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdictions.

 

This discussion assumes that the Company is not, and will not become, a passive foreign investment company (as discussed below).

 

Taxation of Dividends

 

Distributions received by you with respect to the TI Media shares, other than certain pro rata distributions of TI Media shares, will constitute foreign-source dividend income for U.S. federal income tax purposes to the extent paid

 

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out of the Company’s current or accumulated earnings and profits, as determined in accordance with U.S. federal income tax principles. The amount of the dividend you will be required to include in income will equal the U.S. dollar value of the euros, calculated by reference to the exchange rate in effect on the date the payment is received by you, regardless of whether the payment is converted into U.S. dollars on the date of receipt. If the dividend is converted into U.S. dollars on the date or receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss, if you do not convert the amount of such dividend into U.S. dollars on the date of its receipt. If you realize gain or loss on a sale or other disposition of euros, it will be U.S.-source ordinary income or loss. Corporate U.S. holders will not be entitled to claim the dividends-received deduction with respect to dividends paid by the Company. Subject to applicable limitations, dividends received by certain non-corporate U.S. holders in taxable years beginning before January 1, 2011 will be taxable preferential rates, up to a maximum rate of 15.0%. If the preferential rates apply and a dividend on ordinary shares exceeds 10.0% of a U.S. Holder’s adjusted basis in its ordinary shares or a dividend on savings shares exceeds 5.0% of a U.S. Holder’s adjusted basis in its savings shares (or if the preferential rates apply and a dividend an any other dividend with ex-dividend dates during the same period of 365 consecutive days n the aggregate exceed 20.0% of such basis), any loss on the sale or exchange of such TI Media Shares would be treated as long-term capital loss to the extent of such dividend(s). Non-corporate U.S. holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at this favorable rate. The amount of the dividend will include any amounts withheld by us or the paying agent in respect of Italian taxes.

 

Subject to certain limitations and restrictions, Italian taxes withheld from distributions up to an amount not exceeding the rate provided in the Treaty will be eligible for credit against your U.S. federal income tax liability. Italian taxes withheld in excess of the rate provided in the Treaty will generally not be eligible for credit against your U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules governing foreign tax credits are complex. Instead of claiming a credit you may, at your election, deduct such otherwise creditable Italian taxes in computing your taxable income, subject to generally applicable limitations under U.S. law. You should consult your tax advisor regarding the availability of foreign tax credits in your particular circumstances.

 

Taxation of Capital Gains

 

You will recognize capital gain or loss for U.S. federal income tax purposes on the sale or exchange of TI Media Shares in the same manner as you would on the sale or exchange of any other shares of stock held as capital assets. As a result, you will generally recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized and your adjusted tax basis in the TI Media Shares, determined in US dollars. The gain or loss will generally be U.S. source and will be long-term if the TI Media Shares were held for more than one year. You should consult your own tax advisor about the treatment of capital gains, which may be taxed at lower rates than ordinary income for non-corporate U.S. holders, and capital losses, the deductibility of which may be limited.

 

Passive Foreign Investment Company Rules

 

The Company believes that it was not a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for the year ended December 31, 2005. However, since PFIC status depends on the composition of the Company’s income and assets and the market value of the Company’s assets (including, among others, less than 25 percent-owned equity investments) from time to time, there can be no assurance that the Company will not be considered a PFIC for any taxable year. If the Company were treated as a PFIC for any taxable year during which you held a TI Media Share, certain adverse tax consequences could apply to you.

 

Information Reporting and Backup Withholding

 

Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless the U.S. holder is a corporation or other exempt recipient or, in the case of backup withholding, such holder provides a correct taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the Internal Revenue Service.

 

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Documents on Display

 

It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. TI Media filed their reports electronically until February 2004. Beginning February 2004, TI Media was exempted from filing pursuant to Rule 12g 3-2(b) under the Securities Exchange Act of 1934. On June 30, 2005, TI Media filed the first annual report with the SEC since that date. The SEC maintains an Internet site (http: //www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

Item 11. Quantitative and Qualitative Disclosures about Market Risk

 

TI Media is not subject to any interest rate and foreign exchange rate risks since all of TI Media’s cash needs are funded by Telecom Italia’s central treasury function. As a result TI Media cash earned during any day is transferred to Telecom Italia at the end of each business day.

 

Item 12. Description of Securities Other than Equity Securities

 

Not applicable.

 

PART II

 

Item 13. Defaults, Dividend Arrearages and Delinquencies

 

None.

 

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

 

None.

 

Item 15. Controls and Procedures

 

Within 90 days prior to the date of this report, Telecom Italia Media S.p.A., under the supervision and with the participation of our management, including the Managing Director and the Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chairman of the Managing Board and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. Our management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. There have been no significant changes in our internal controls or other factors that could significantly negatively affect internal controls subsequent to the date of their evaluation.

 

Item 16A. Audit Committee Financial Expert

 

The Board of Auditors has determined that each of its members is an “audit committee financial expert” as defined in Item 16A. of Form 20-F. For the names of the members of the Board of Auditors, see Item 6. “Board of Auditors.”

 

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Item 16B. Code of Ethics

 

In July 2004, the Board of Directors approved and adopted a new Code of Ethics and Conduct for TI Media. See Item 6, “Board Practices—Code of Ethics and Code of Behavior on Insider Dealing.” The Code of Ethics and Conduct is available on TI Media’s corporate website at www.telecomitaliamedia.it in the Investor Relations section.

 

Item 16C. Principal Accountant Fees and Services

 

Ernst & Young served as TI Media’s primary independent auditors since the year ended December 31, 2002.

 

“Ernst & Young” means Reconta Ernst & Young S.p.A., the auditor of the Company, as well as all the Italian and foreign entities belonging to the Ernst & Young Global Network.

 

The following table sets forth the aggregate fees for professional services and other services rendered by Ernst & Young in 2004 and 2005.

 

     For fiscal year ended December 31,

     2004

   2005

Type of Fees

         

Audit Fees

   362    618

Audit – Related Fees

   —      —  

Tax Fees

   —      —  

All Other Fees

   —      —  
    
  

Total

   362    618
    
  

 

Audit Committee Pre-Approved Policies

 

The Board of Auditors (also in its role as Telecom Italia’s Audit Committee), in accordance with and to the extent permitted by applicable Italian law, is responsible for the appointment, retention and oversight of the work of the Company’s external auditors engaged for the purpose of issuing the audit report on the annual financial statements. To this effect, the Board of Auditors makes a recommendation to the Shareholders’ Meeting which appoints the external auditors and determines their compensation. On April 4, 2005, the TI Media Shareholders’ Meeting appointed Reconta Ernst & Young S.p.A. (“E&Y”) as external auditors for the three-year period 2005, 2006 and 2007.

 

In October 2003, Telecom Italia, together with the Board of Auditors, adopted the Group Procedure for the Appointment of Auditors (the “Group Procedure”). The Group Procedure requires that E&Y be appointed throughout the Group with any exceptions subject to prior approval by the Director with delegated authority and the Board of Auditors. The Group Procedure pre-approved certain audit and permissible non-audit services to be provided by the external auditors (and associated persons) and prohibited certain services. According to the Group Procedure, the Board of Auditors pre-approved (subject to annual review) the following audit and permitted non-audit services:

 

Audit Services:

 

  1. Audit of annual and interim financial statements on the basis of applicable laws and regulations (including the audit of SEC registered companies’ annual report).

 

  2. Audit of annual and interim financial consolidated reporting packages.

 

  3. Audit conformity of the Telecom Italia Group’s sustainability reports or social reports.

 

  4. Reports or opinions required by law for specific transactions from the auditor appointed to audit the annual financial statements, to the extent permitted.

 

  5. Audits governed by the principles of national and international auditing such as:

 

    procedures performed in relation to the issuance of a comfort letter (including for pro forma accounts and/or balance sheets) in relation to the carrying out of extraordinary financial operations;

 

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    audits agreed with management covering specific areas or accounts or accounting situations, to support the audit of periodic statements;

 

    auditing of subsidiaries and associated companies (including review of the working papers of other auditors) made necessary for the purpose of auditing the periodic statements of the company being audited.

 

  6. Audit of annual accounts and/or balance sheets to be published in prospectuses, information documents, offering memoranda and similar documents.

 

  7. Services required by regulatory authorities and control agencies (such as, for example, those connected with so-called “regulatory accounting”).

 

  8. Audit of statements required by national or supranational administrations (e.g. the EU) for the concession of grants or loans for specific actions or projects.

 

  9. Audits aimed at issuance of an attestation of the system of internal control under Section 404 of the Sarbanes-Oxley Act.

 

Permitted Non-Audit Services:

 

  1. Audits in the following areas:

 

    procedures for auditing associated companies provided for by agreements between shareholders (in relation to so-called “audit rights”);

 

    financial due diligence procedures on companies to be bought or sold;

 

    procedures performed in the area of regulatory accounting;

 

    procedures performed on areas related to internal control in support of the internal auditor.

 

  2. Opinions on accounting and reporting including those regarding (i) application of new accounting principles and new regulations on accounting and regulatory reporting, (ii) implementation of accounting principles current in other countries, (iii) implementation of rules and regulations issued by the SEC, CONSOB and similar bodies.

 

  3. Assistance to the internal audit department within the limits imposed by SEC regulations.

 

The pre-approved services listed above are in all cases subject to scrutiny by the Director with delegated powers for internal controls by the Board of Directors who may (by his own initiative or on request by the Committee for Internal Control and Corporate Governance or by the Board of Auditors) request supplementary documentation to verify the independent status of the auditor and take appropriate action if necessary.

 

Services that are not included in one of the categories listed above require specific pre-approval of the Director with delegated powers for internal controls by the Board of Directors (currently the chairman of the Board of Directors) and the Board of Auditors. An approval may not be granted if the service falls within a category of services not permitted by current law or if it is inconsistent with maintaining auditor independence.

 

Item 16D. Exemptions from the Listing Standards for Audit Committees

 

Please see “Item 6. Board Practices—Board of Auditors”

 

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

In 2005 TI Media purchased treasury shares for approximately €148 million, corresponding to 364,251,922 ordinary shares and 6,107,723 savings shares.

 

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PART III

 

Item 17. Financial Statements

 

The following consolidated financial statements and related schedule, together with the report thereon of Ernst & Young, are filed as part of this annual report:

 

          Page

1.

   Report of Independent Registered Public Accounting Firm    F-1

2.

   Financial Statements     
     - Consolidated Balance Sheets    F-2
     - Consolidated Statements of Operations    F-4
     - Consolidated Statements of Changes in Shareholders’ Equity    F-5
     - Consolidated Statements of Cash Flows    F-7
     - Notes to the Consolidated Financial Statements    F-8

 

Item 18. Financial Statements

 

Not applicable.

 

Item 19. Exhibits

 

The following exhibits are filed as part of this annual report:

 

Exhibit 1    English translation of the Articles of Association and Bylaws of Telecom Italia Media S.p.A., as amended.

 

Exhibit 8    Please refer to page 12 of the annual report for a chart showing TI Media’s significant subsidiaries.

 

Exhibit 12.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 12.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 13.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 13.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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Signatures

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

Telecom Italia Media S.p.A.

By:

 

/s/ Enrico Parazzini


Name:

 

Enrico Parazzini

Title:

 

Managing Director

 

Date: June 30, 2006

 

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TABLE OF CONTENTS

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   F-1

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004—ASSETS

   F-2

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004—SHAREHOLDERS’ EQUITY AND LIABILITIES

   F-3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

   F-4

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED DECEMBER 31, 2005

   F-5

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED DECEMBER 31, 2004

   F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

   F-7

NOTE 1—FORM AND CONTENT AND OTHER GENERAL INFORMATION

   F-8

NOTE 2—ACCOUNTING POLICIES

   F-10

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

   F-21

NOTE 4—INTANGIBLE ASSETS WITH A FINITE LIFE

   F-22

NOTE 5—TANGIBLE ASSETS

   F-22

NOTE 6—OTHER NON CURRENT ASSETS

   F-23

NOTE 7—DEFERRED TAX ASSETS AND RESERVE FOR DEFERRED TAXES

   F-25

NOTE 8—INVENTORIES

   F-26

NOTE 9—TRADE AND MISCELLANEOUS RECEIVABLES AND OTHER CURRENT ASSETS

   F-26

NOTE 10—FINANCIAL RECEIVABLES AND OTHER CURRENT FINANCIAL ASSETS

   F-27

NOTE 11—CASH AND CASH EQUIVALENTS

   F-27

NOTE 12—DISCONTINUED OPERATIONS

   F-28

NOTE 13—SHAREHOLDERS’ EQUITY

   F-30

NOTE 14—FINANCIAL LIABILITIES (CURRENT AND NON-CURRENT)

   F-30

NOTE 15—EMPLOYEE SEVERANCE INDEMNITIES AND OTHER EMPLOYEE-RELATED RESERVES

   F-31

NOTE 16—RESERVES FOR RISKS AND ACCRUALS

   F-32

NOTE 17—MISCELLANEOUS PAYABLES AND OTHER NON-CURRENT LIABILITIES

   F-33

NOTE 18—TRADE PAYABLES, TAX PAYABLES, MISCELLANEOUS PAYABLES AND OTHER CURRENT LIABILITIES

   F-33

NOTE 19—COMMITMENTS AND OTHER CONTINGENT LIABILITIES

   F-35

NOTE 20—LITIGATION

   F-35

NOTE 21—OPERATING REVENUES AND OTHER INCOME

   F-37

NOTE 22—REVENUES

   F-37

NOTE 23—OTHER INCOME

   F-38


NOTE 24—PURCHASES OF MATERIALS AND EXTERNAL SERVICES

   F-39

NOTE 25—PERSONNEL COSTS

   F-40

NOTE 26—OTHER OPERATING EXPENSES

   F-41

NOTE 27—DEPRECIATION AND AMORTIZATION

   F-41

NOTE 28—GAINS FROM THE DISPOSAL OF NON-CURRENT ASSETS

   F-42

NOTE 29—LOSSES FROM THE DISPOSAL OF NON-CURRENT ASSETS

   F-42

NOTE 30—FINANCIAL INCOME

   F-42

NOTE 31—FINANCIAL EXPENSES

   F-43

NOTE 32—INCOME TAXES

   F-43

NOTE 33—STOCK OPTIONS

   F-44

NOTE 34—TRANSACTIONS WITH RELATED PARTIES

   F-47

NOTE 35—OTHER INFORMATION

   F-51

NOTE 36—RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES

   F-67

NOTE 37—ADDITIONAL U.S. GAAP DISCLOSURES

   F-71


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders of Telecom Italia Media S.p.A.

 

We have audited the accompanying consolidated balance sheets of Telecom Italia Media S.p.A. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, cash flows and changes in shareholders’ equity for each of the two years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Telecom Italia Media S.p.A. and subsidiaries as at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2005, in conformity with International Financial Reporting Standards as adopted by the European Union.

 

International Financial Reporting Standards as adopted by the European Union vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in notes 36 and 37 to the consolidated financial statements.

 

/s/ Reconta Ernst & Young S.p.A.

Turin, Italy

March 21, 2006

except for notes 36 and 37 as to which the date is

June 29, 2006

 

F-1


CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2004—ASSETS

 

          December 31,
2005


   December 31,
2004


     Notes    (in Euro thousands)

Non-current assets

              

Intangible assets

              

Goodwill and other intangible assets with an indefinite life

   3    185,532    215,365

Intangible assets with a finite life

   4    192,436    101,489
         
  
          377,968    316,854
         
  

Tangible assets

   5          

Property, plant and equipment owned

        52,939    60,457

Assets held under finance leases

        —      10
         
  
          52,939    60,467
         
  

Other non-current assets

   6          

Equity investments

        7,442    9,619

Securities and financial receivables

        6,632    1,595

Miscellaneous receivables and other non-current assets

        48,344    127,225
         
  
          62,418    138,439
         
  

Deferred tax assets

   7    30,266    52,970
         
  

Total non-current assets (A)

        523,591    568,730
         
  

Current assets, excluding discontinued operations

              

Inventories

   8    4,169    16,802

Trade and miscellaneous receivables and other current assets

   9    237,251    266,609

Securities other than equity investments

        —      48

Financial receivables and other current financial assets

   10    198    303

Cash and cash equivalents

   11    450,215    4,689
         
  
          691,833    288,451
         
  

Discontinued operations

   12          

—of a financial nature

        3,616    —  

—of a non-financial nature

        112,760    —  
         
  
          116,376    —  
         
  

Total current assets (B)

        808,209    288,451
         
  

Total assets (A + B)

        1,331,800    857,181
         
  

 

F-2


CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2004—SHAREHOLDERS’ EQUITY AND LIABILITIES

 

          December 31,
2005


   December 31,
2004


 
     Notes    (in Euro thousands)  

Shareholders’ equity

   13            

Share capital

        100,327    111,108  

Reserves

        189,665    341,669  

Retained earnings (accumulated losses), including net income (loss) for the year

        718,095    (104,141 )
         
  

Shareholders’ equity attributable to the Parent

        1,008,087    348,636  

Shareholders’ equity attributable to Minority interests

        12,735    14,978  
         
  

Total shareholders’ equity (A)

        1,020,822    363,614  
         
  

Non-current liabilities

                

Non-current financial liabilities

   14    5,087    251  

Employee severance indemnities and other employee-related reserves

   15    13,023    23,758  

Reserve for deferred taxes

   7    40,823    69  

Reserves for risks and future charges

   16    1,410    17,226  

Miscellaneous payables and other non-current liabilities

   17    550    45  
         
  

Total non-current liabilities (B)

        60,893    41,349  
         
  

Current liabilities, excluding liabilities relating to discontinued operations

                

Current financial liabilities

   14    40    177,052  

Trade payables, tax payables, miscellaneous payables and other current liabilities

   18    190,169    275,166  
         
  

          190,209    452,218  
         
  

Liabilities relating to discontinued operations

   12            

—of a financial nature

        19,443    —    

—of a non-financial nature

        40,433    —    
         
  

          59,876    —    
         
  

Total current liabilities (C)

        250,085    452,218  
         
  

Total liabilities (D = B + C)

        310,978    493,567  
         
  

Total shareholders’ equity and liabilities (A + D)

        1,331,800    857,181  
         
  

 

F-3


CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

 

            Year 2005

     Year 2004

 
     Notes      (in Euro thousands)  

Revenues

   22      179,750      167,845  

Other income

   23      10,699      19,857  
           

  

Total operating revenues and other income

   21      190,449      187,702  
           

  

Purchases of materials and external services

   24      (199,891 )    (160,551 )

Personnel costs

   25      (75,354 )    (69,430 )

Other operating expenses

   26      (11,593 )    (27,150 )

Changes in inventories

          3,121      1,123  

Capitalized internal construction costs

          1,914      4,059  

Depreciation and amortization

   27      (37,337 )    (28,412 )

Gains (losses) on disposals of non-current assets

   28/29      (1,139 )    1,080  

Impairment losses on non-current assets

          —        (1,712 )
           

  

Total operating expenses

          (320,279 )    (280,993 )
           

  

Operating loss

          (129,830 )    (93,291 )
           

  

Financial income

   30      7,945      4,063  

Financial expenses

   31      (4,366 )    (285,864 )
           

  

Loss from continuing operations before taxes

          (126,251 )    (375,092 )

Income tax benefit

   32      37,082      138,173  
           

  

Loss from continuing operations

          (89,169 )    (236,919 )
           

  

Net income from discontinued operations

   12      892,461      11,644  
           

  

Net income (loss )

          803,292      (225,275 )
           

  

of which:

                    

—Net income/(loss) attributable to the Parent

          800,868      (226,281 )

—Net income (loss) attributable to Minority interests

          2,424      1,006  

 

     Year 2005

    Year 2004

 
     (Euro)  

Basic and Diluted Earnings (losses) Per Share:

            

Ordinary shares

            

—from continuing operations

   (0.0254 )   (0.0742 )

—from discontinued operations

   0.2539     0.0036  
    

 

Basic and diluted earnings (losses) per ordinary share

   0.2286     (0.0706 )
    

 

Savings shares

            

—from continuing operations

   (0.0254 )   (0.0742 )

—from discontinued operations

   0.2546     0.0042  
    

 

Basic and diluted earnings (losses) per saving share

   0.2292     (0.0706 )
    

 


* Basic EPS is the same as diluted EPS as the inclusion of additional common stock equivalents would be anti-dilutive.

 

F-4


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2005

 

     Share
capital


    Additional
paid-in
capital


    Other
reserves


   Retained
earnings
(accumulated
losses) including
net income (loss)
for the year


    Total

    Minority
interests


    Total
shareholders’
equity


 
     (in Euro thousands)  

Balance at December 31, 2004 in accordance with Italian GAAP

   111,108     323,991     21,626    (142,282 )   314,443     12,759     327,202  

Adoption of IFRS

   —       (3,948 )   —      38,141     34,193     2,219     36,412  
    

 

 
  

 

 

 

Balance at December 31, 2004 in accordance with IFRS

   111,108     320,043     21,626    (104,141 )   348,636     14,978     363,614  

Net income (loss)

   —       —       —      800,868     800,868     2,424     803,292  
    

 

 
  

 

 

 

Total comprehensive income

   —       —       —      800,868     800,868     2,424     803,292  

Effect of annulment of treasury stock

   (11,111 )   (147,716 )   8,739    —       (150,088 )   —       (150,088 )

Capital increases

   330     3,880     —      —       4,210     —       4,210  

Other changes

   —       (34,907 )   18,000    21,368     4,461     (4,667 )   (206 )
    

 

 
  

 

 

 

Balance at December 31, 2005

   100,327     141,300     48,365    718,095     1,008,087     12,735     1,020,822  
    

 

 
  

 

 

 

 

F-5


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2004

 

     Share
capital


   Additional
paid-in
capital


   

Other

reserves


   Retained
earnings
(accumulated
losses) including
net income (loss)
for the year


    Total

    Minority
interests


    Total
shareholders’
equity


 
     (in Euro thousands)  

Balance at December 31, 2003 in accordance with Italian GAAP

   93,894    292,345     21,626    51,687     459,552     14,598     474,150  

Adoption of IFRS

   —            —      (2,020 )   (2,020 )   588     (1,432 )
    
  

 
  

 

 

 

Balance at December 31, 2003 in accordance with IFRS

   93,894    292,345     21,626    49,667     457,532     15,186     472,718  

Change in shareholders’ equity during 2004

                                        

Net income/(loss) recognized directly in equity—other comprehensive income/(loss)

   —      —       —      —       —       —       —    

Net income (loss)

   —      —       —      (226,281 )   (226,281 )   1,006     (225,275 )
    
  

 
  

 

 

 

Total comprehensive income

   —      —       —      (226,281 )   (226,281 )   1,006     (225,275 )

Dividends paid

   —      —       —      —       —       —       —    

Capital increases

   17,214    100,277     —      —       117,491     —       117,491  

Other changes

   —      (72,579 )   —      72,473     (106 )   (1,214 )   (1,320 )
    
  

 
  

 

 

 

Balance at December 31, 2004

   111,108    320,043     21,626    (104,141 )   348,636     14,978     363,614  
    
  

 
  

 

 

 

 

F-6


CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

 

          Year 2005 (1)

    Year 2004 (1)

 
     Notes    (in Euro thousands)  

Cash flows from operating activities

                 

Net loss from continuing operations

        (89,169 )   (236,919 )

Adjustments to reconcile net loss from continuing operations to cash flows generated (used) by operating activities:

                 

Depreciation and amortization

        37,337     28,412  

Impairment losses/reversals on non-current assets (including equity investments)

        1,560     59  

Net change in deferred tax assets and liabilities

        9,833     (7,351 )

Net realized (gains)/losses on disposal of non-current assets (including equity investments)

        1,139     (935 )

Change in employee severance indemnities and other employee-related reserves

        1,278     1,252  

Change in other operating assets and liabilities

        568     (125,275 )

Change in inventories (I)

        (2,647 )   (1,122 )

Change in trade receivables (I)

        (25,027 )   (1,906 )

Change in trade payables (I)

        48,935     (5,490 )

Net change in other assets/liabilities (I)

        (20,693 )   (116,757 )
         

 

Cash flows used by operating activities (A)

        (37,454 )   (340,757 )
         

 

Cash flows from investing activities

                 

Acquisition of tangible assets (II)

   5    (26,939 )   (16,662 )

Acquisition of intangible assets (II)

   4    (37,643 )   (22,883 )

Acquisition of other non-current assets (II)

   6    (1,711 )   (7,211 )

Acquisition of businesses, net of cash acquired (II)

        (128,526 )   —    

Change in financial receivables and other financial assets (I)

        2,799     15,068  

Consideration received on the disposal of subsidiaries, net of cash disposed of (III)

        957,149     4,528  

Consideration received on the sale of tangible assets, intangible assets and other non-current assets and capital reimbursement (III)

        1,964     7,783  
         

 

Cash flows generated by/(used in) investing activities (B)

        767,093     (19,377 )
         

 

Cash flows from financing activities

                 

Net change in current financial liabilities (I)

        (121,079 )   107,918  

Proceeds from debt issuance and non-current financial liabilities (including current portion)

        (11 )   —    

Other changes in non-current financial liabilities

        33     (76 )

Consideration received from stock option exercises

        4,210     —    

Capital grants

        32     —    

Share capital increases/repayments, net of the related costs

        (147,716 )   121,439  

Repurchase of treasury stock

                 

Cash flows generated by (used in) financing activities (C)

        (264,531 )   229,281  
         

 

Cash flows generated by (used in) discontinued operations (D)

        16,934     9,175  
         

 

Total cash flows (E = A + B + C + D)

        482,042     (121,678 )
         

 

Net cash and cash equivalents at the beginning of the year (F)

        (47,626 )   74,052  
         

 

Net cash and cash equivalents at the end of the year (E + F)

        434,416     (47,626 )
         

 

Additional cash flow information

                 

Income taxes paid

        (7,206 )   (12,990 )

Details of net cash and cash equivalents

                 

At the beginning of the year:

                 

Cash and cash equivalents (from continuing operations)

        40,718     106,810  

Discontinued operations

        (36,029 )   (24,181 )
         

 

Cash and cash equivalents

        4,689     82,629  

Bank overdrafts

        (52,315 )   (8,577 )
         

 

          (47,626 )   74,052  
         

 

At the end of the year:

                 

Cash and cash equivalents (from continuing operations)

        450,215     40,718  

Discontinued operations

        (15,787 )   (36,029 )
         

 

Cash and cash equivalents

              4,689  

Bank overdrafts

        (12 )   (52,315 )
         

 

          434,416     (47,626 )
         

 


(I) Net of the effects of the purchase/sale of equity investments in consolidated subsidiaries.

 

(II) Net of the change in accounts payable for the relevant acquisition.

 

(III) Net of the change in accounts receivable for the relevant sale.

 

(1) 2004 and 2005 Discontinued Operations were the Internet and Office BU

 

F-7


NOTE 1—FORM AND CONTENT AND OTHER GENERAL INFORMATION

 

FORM AND CONTENT

 

Telecom Italia Media S.p.A. is a corporation organized under the laws of the Republic of Italy. Telecom Italia Media S.p.A. and its subsidiaries (the “Group”) operate mainly in Italy.

 

The Group is engaged principally in the communications sector, and in particular on the production and broadcasting of content through two TV networks managed under federal government concession, as well as the marketing of advertising time during commercial breaks in programming. The Group operates as both an analog and digital television broadcaster and manages both satellite channels and pay-per-view services.

 

The Group’s registered office is in Rome, Italy.

 

The consolidated financial statements of the Telecom Italia Media Group are presented in Euro (rounded to thousands), which is also the currency of the country in which the Group mainly operates.

 

The consolidated financial statements as of and for the year ended December 31, 2005 have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (IFRS). IFRS also include all effective International Accounting Standards (IAS) and all related interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), comprising those previously issued by the Standing Interpretations Committee (SIC). For comparative purposes, the consolidated financial statements as of and for the year ended December 31, 2004 have also been prepared in accordance with IFRS, as required by IFRS 1 (First-time Adoption of International Financial Reporting Standards).

 

The Group did not opt for the early adoption of any IFRS in 2005.

 

The consolidated financial statements at December 31, 2005 and 2004 have been prepared as follows:

 

    at December 31, 2004, no amounts have been reclassified or re-presented for the assets and liabilities of disposal groups classified as held for sale in the balance sheet at December 31, 2005, as required by IFRS 5;

 

    the statements of operations and cash flows for the year 2004 have been prepared on a basis consistent with that of 2005. The results of discontinued operations have been reclassified to “Net income (loss) from discontinued operations” in the statement of operations and “Cash flows generated by (used in) discontinued operations” in the statement of cash flows.

 

As a result, the amounts described in the explanatory notes to the balance sheet for comparative purposes do not agree with the information in the statements of operations and cash flows (for example, depreciation and amortization, impairments, disposals, etc.).

 

SCOPE OF CONSOLIDATION

 

The significant changes to scope of consolidation can be summarized as follows:

 

Disposals—Year 2005

 

DATABANK S.p.A.

 

On March 14, 2005, the Group finalized the sale of Databank S.p.A., a market and industry research company and wholly-owned subsidiary of the Company, to Centrale dei Bilanci Srl and its subsidiary Cerved Business Information S.p.A., each acquiring 50% of the share capital. The sell price was Euro 5 million. The transaction generated a loss of Euro 1.2 million.

 

F-8


INTERNET (sale of Matrix, Nuova Tin.it, and Finanziaria Web)—considered discontinued operations

 

On April 4, 2005, the Boards of Directors of Telecom Italia and Telecom Italia Media approved the reorganization plan for the Group’s Internet operations, aimed at streamlining the business under Telecom Italia, which acquired the