Audited by PricewaterhouseCoopers - Indesit...

Merloni Elettrodomestici SpaViale Aristide Merloni, 47 - 60044 Fabriano (AN)

Tel. +39 0732 6611Italy

w w w . m e r l o n i . c o m

ANNUAL REPORT 2003 - SUMMARYAudited by PricewaterhouseCoopers

ANNUAL REVIEW

Merloni Elettrodomestici by numbers 2

2003 events 4

Letter to the shareholders 6

Andrea Guerra explains 8

Markets and regions

West Europe 11The UK market 12New Europe and the CSI 12

Business Units

Washing machines 15Dishwashers 16Cooking 17Cooling 18Consumer Care 19

R&D and technology 20

Quality 22

Supply chain 23

Marketing and corporate communication 24

Management and human resources 30

Sustainable development 32

Corporate governance 35

Behind the figures 36

Merloni Elettrodomestici on the stockmarket 38

5 year review 40

REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS

Company officers, committees and auditors 42

Board of directors’ report 43

Annexes 52

Consolidated financial statements

at December 31, 2003 59

Notes 65

Independent auditors’ report 108

Glossary 109

Subsidiaries worldwide 110

Information and contacts 112

AN

NU

AL

RE

PO

RT

20

03

Annual report2003

Merloni Elettrodomestici is one of the top three manufacturers

in the European white goods industry. Set up in 1975, it’s the

youngest of the world leaders. Having grown twenty times in

the last 20 years thanks to a relentless stream of innovations,

the company now has a 15.5% market share in Europe, with

sales of over Euro 3bn posted in 2003 and an output of 13 mil-

lion appliances. The enterprise’s mission is to improve the “qual-

ity of time” for the 50,000 families that choose its products –

fridges, washing machines, dryers, dishwashers, ovens and cook-

ers - everyday. Thanks to its two main brands, Ariston and In-

desit, the Group leads Europe in the built-in and freestanding

segments respectively. The Group’s other, more regional brands

- Hotpoint, Scholtès and Stinol – lead their markets in the UK,

France and Russia, respectively. Through its 18 production fa-

cilities and 23 subsidiaries throughout the world, Merloni Elet-

trodomestici applies a model of sustainable development that

aims to further social progress wherever it operates.

“ There is no value in the economic successof any industrial initiative if it is not also accompanied bycommitment to social progress”

Aristide Merloni (1967)

2

Key data

(Euro millions) 1999 % 2000 % 2001 % 2002 % 2003 %

Consolidated sales 1,420 100.0 1,601 100.0 1,971 100.0 2,480 100.0 3,008 100.0

Overseas sales 1,011 71.2 1,145 71.5 1,559 79.1 2,038 82.2 2,540 84.4

Ebitda 132 9.3 164 10.2 226 11.5 318 12.8 387 12.9

Ebit 71 5.0 96 6.0 139 7.1 203 8.2 246 8.2

Pre-tax result 41 2.9 63 3.9 116 5.9 166 6.7 197 6.6

Group net result 26 1.8 42 2.7 74 3.7 107 4.3 120 4.0

Total net result 26 1.8 42 2.7 74 3.7 108 4.3 126 4.3

Total assets 1,180 1,629 1,868 2,356 2,306

Tangible fixed assets 330 535 546 690 698

Net invested capital 341 528 530 703 709

Shareholders’ equity - Group 245 286 365 422 481

Shareholders’ equity - total 250 301 379 521 517

Net financial indebtedness 91 227 151 181 192

Industrial investments 95 101 102 104 142

Net self-financing (1) 87 108 161 223 268

Personnel (no.) (2) 7,289 13,672 13,386 14,100 19,343

(1) total net result + depreciation and amortization(2) in 2003, including GDA

99 00 01 02 03 99 00 01 02 03 99 00 01 02 03

3,000

2,500

2,000

1,500

1,000

500

0

Consolidated sales(Euro millions)

Ebit(Euro millions)

250

200

150

100

50

0

300

250

200

150

100

50

0

Pre-tax result(Euro millions)

MERLONI ELETTRODOMESTICI BY NUMBERS

32 0 0 3 A N N U A L R E P O R T

- SalesEuro 3,008m (+21% vs. 2002)

- EbitdaEuro 387m (+22% vs. 2002)

- EbitEuro 246m (+21% vs. 2002)

- Net resultEuro 126m (+16% vs. 2002)

M E R L O N I E L E T T R O D O M E S T I C I I N N U M B E R S

99 00 01 02 03 99 00 01 02 03

120

100

80

60

40

20

0

Group net result(Euro millions)

1.2

1.0

0.8

0.6

0.4

0.2

0

Net earnings per share (*)

(Euro)

Dividend per share (*)

(Euro)

Sales by geographical area(2003)

67%33%

� West Europe

� East Europe and Overseas

(*) ordinary share, net of portion due

on treasury shares

(1) Ebitda/net financial charges (excluding income

from shareholdings)

(*) ordinary share, net of portion due

on treasury shares

99 00 01 02 03

0.35

0.3

0.25

0.2

0.15

0.1

0.05

0

Main ratios2000 2001 2002 2003

ROE (%) 15 20 25 25

ROI (%) 19 26 29 35

ROS (%) 6 7 8 8

Gearing (%) 79 41 43 40

Investment ratio (%) 6 5 4 5

Working capital over sales (%) 4 4 1 (1)

Financial charges over sales (%) 1.2 1.2 0.9 1.0

Interest coverage(1) 8.0 7.8 12.1 13.4

4

2003 EVENTS

JANUARYMeeting the territoryMerloni Elettrodomestici opened 2003 with“Meeting the territory”, a public debate stagedin a theatre in Ancona (Teatro delle Muse) andchaired by Vittorio Merloni and Andrea Guer-ra, on themes such as infrastructure, trainingand social issues.

FEBRUARYSodalitas Social Award For the Code of Conduct it stipulated with theunions to safeguard workers’ rights, MerloniElettrodomestici won the first edition of the So-dalitas Social Award, in the “Internal businessprocesses for social responsibility” category. Theawards ceremony was held in Milan on Febru-ary 10, during the Italian leg of the EuropeanMarathon for Corporate Social Responsibility.

In Madrid, the new headquarters of the Spanishassociate were opened. The building coversaround 1,000 sqm and has a show room ofover 200 sqm.

MARCHVittorio Merloni a Commander of the British EmpireVittorio Merloni was made a Commander of theBritish Empire. The prestigious honour wasgranted for his commitment to “favouring freemarket policies and links with the United King-dom. In 2002 he acquired GDA, the UK’s biggesthousehold appliance manufacturer, and is plan-ning major investment in the company”.

APRILVenice: Ariston launches its new brand identityA grand international event took place in Venice(April 3 - 4) to present the new Ariston brandidentity to clients. It also included a world preview of the compa-ny’s newly developed smart tag technology, us-ing miniaturized radio antennas linked to mi-crochips on various articles, so that appliancescan select the right programme for the itemsthey’re given.

MAYLet’s excite consumersOver a thousand points of sale updated theirdisplay of Group products with “islands” whereconsumers can enjoy hands-on experience ofthe appliances’ performance and style.

JUNEAriston Russian campaignThe company marked its 10th year of businessin the Russian market by organizing a conven-tion in Moscow’s new opera theatre. During thecelebration, the new Ariston brand identity andthree new lines of appliances were presented.

Hotpoint: the first applianceswith BrailleHotpoint launched a new line of absolutelyrevolutionary products – the very first house-hold appliances for the blind, with Braille con-trol displays and an audio instruction booklet.

During the launch of the newIndesit products at the

Alexandra Palace in London

52 0 0 3 A N N U A L R E P O R T

2 0 0 3 E V E N T S

JULYEver Fresh, the vacuum fridgeAriston launched the first fridge to implementa vacuum food preservation system - Ever Fresh.At the same time it patented an integrated sys-tem for extending the vacuum function to thewhole of the fridge compartment – to belaunched onto the market in 2004.

SEPTEMBERRoad show in Eastern EuropeAriston’s new brand identity was presented in East-ern Europe by a road show calling at major cities.

OCTOBERMerloni UK inaugurationOctober 29 saw the first ever meeting of thecompany’s Board of Directors in Peterborough,UK, a fitting emblem of the successful integra-tion of Merloni and Hotpoint. The new head-quarters of Merloni Elettrodomestici UK, in Pe-terborough, was opened at the same time.

NOVEMBERThe Japanese study MerloniElettrodomestici’s industrial relationsA delegation from Japan’s main engineeringworkers’ union visited Merloni Elettrodomesti-

Ribbon cutting at the inauguration of the newBucharest offices.

The Board of Directors meeting in Peterborough.

ci headquarters and the Albacina plant. The com-pany is seen by the Japanese as a model of goodindustrial relations management.

“I run for Quality” winsbest internal communicationcampaign awardThe “I run for quality” internal communicationcampaign won the 6th edition of the AssorelAward by focusing on a team of employeeswho took part in the New York Marathon toshow how commitment and team spirit canput any objective within reach, professionalor otherwise.

DECEMBERNew name announcementAt a meeting of middle management, VittorioMerloni announced for the first time that In-desit is to become the company’s new name in2005, the 30th anniversary of the founding ofMerloni. Indesit is the Group’s best known brandinternationally.

6

LETTER TO THE SHAREHOLDERS

“ Indesit, the brand to compete in the future ”

72 0 0 3 A N N U A L R E P O R T

L E T T E R T O T H E S H A R E H O L D E R S

Shareholders,

I am happy to be able to report that our company achieved another year of growth, in a context of fierce com-petition and a weak US dollar and UK sterling.

Overall growth of demand for household appliances in Greater Europe was 6% (3.3% in Western Europe,14.4% in Eastern Europe). Much of the increase in volumes, however, was offset by falling prices. Thanks to un-

failing commitment by all its management, our company managed to achieve over20% growth in terms of volumes, sales and operating margin. These results also re-flect the launching of new models throughout the year

A little over two years on from the agreement to acquire the UK enterprise GDA and its famous Hotpoint brand,we may safely say that integration with Merloni Elettrodomestici is complete. This rapid integration of a compa-ny with 6,000 employees and sales of nearly a quarter of total Group sales required a huge effort by the entire or-ganization. But it enabled us, as planned, to upgrade our presence in Western Europe. The UK is now our most im-portant single market in Europe.

At the same time, to meet strongly growing demand in EasternEurope, we decided in a Board meeting in October 2003 to build a newrefrigerator plant and double up our cooker facility in Poland, both already nearing completion, and in Russiawe’ve already opened a new washing machine plant. The new facilities will each turn out a million units a year.

As well as stepping up production we also increased investments in marketing, advertising and the develop-ment of services – by 25%. This is in line with the new competition drivers. After the phase of low costs and ma-jor investments in production, we are now seeing the development of “intangible factors” such as services andabove all the value of brands.

In an increasingly global competitive sce-nario we have decided to change the nameof our company to Indesit, as of January 2005,as this is the Merloni brand best known on a international level. The change of name marks another step forwardin our gradual adoption of a public company philosophy. What remains unchanged is our sense of responsibilityto our investors, clients, suppliers and the communities where we operate.

This is why we will continue in 2004 to work with the same commitment and transparency to create valuenot only for shareholders but for everyone who has an interest in our company.

“… over 20%growth…”

“ The UK is now our most important single market in Europe.”

“… the development of “intangible factors”such as service and the value of brands.”

Vittorio MerloniChairman

8

ANDREA GUERRA EXPLAINS

2003 was a difficult year for many enter-prises. A weak dollar, rising raw materialcosts, competition from Asia. Yet MerloniElettrodomestici doesn’t seem to have suf-fered. Is that so?Yes, that’s right. There was a huge amount ofwork behind the record results of 2003 though.We can’t complain about the demand forhousehold appliances, which in Europe grewmore than in previous years, albeit very un-evenly. But we were heavily penalized by ster-ling exchange rates, strong price competitionand rising raw material costs. We managed to

offset these negative factors by working veryhard on brands and products and our effortsin 2003 were rewarded with an increase inmarket share without sacrificing profitability,which is at its highest level for five years.

But what’s really changed with respect toprevious years? Can you explain?A lot of things. New competitors have joinedthe European markets. Not only Chinese butalso Turkish and Korean operators. Some mar-kets are in rapid transformation. Suppliers anddistributors continue to merge into bigger or-ganizations. And consumers are increasinglydemanding and sensitive to the quality of their

time. It’s not enough to make good products,you need vision, the capacity to react quicklyto changing demand, and international di-mension, to be able to produce and utilize re-sources where supply is most competitive. Wenow have this international dimension. We’reEurope’s no. 3 producer and the no. 1 in sev-eral markets, from the UK to Russia. We pro-duce in six different countries and we even havescouting offices for raw materials in China.

New dimensions and new prospects willhave meant changing your organization aswell?We’re becoming more and more internation-al. There’s no doubt about that. Walk roundour offices, whether Fabriano or Paris, andyou see more and more people from the UK,Italy, Turkey, Russia, The Netherlands, from all

“ It’s said that intelligence is

reflected in the capacity to adapt.

If that’s so, we want to become

an intelligent organization.”

Andrea GuerraCEO

92 0 0 3 A N N U A L R E P O R T

A N D R E A G U E R R A E X P L A I N S

over the world in fact. We source our man-agers from amongst Europe’s top mastersgraduates. We invest heavily in training tocreate a common culture, based on valuesthat everyone shares. This is the only way tomanage complex situations and adapt rapid-ly. It’s said that intelligence is reflected in thecapacity to adapt. If that’s so, we want to be-come an intelligent organization. But inchanging dimensions we must remain sim-ple. This is how we’re changing and there arestill many things to deal with – commercialorganization, production organization, logis-tics, procurement.

How are you re-organizing production?Our industrial plan includes the opening oftwo new plants in 2004 – a washing machineplant in Russia, alongside the existing refrig-erator facility and a new refrigerator plant inPoland. Also in Poland, we’re doubling the ca-pacity of the cooker facility in Lodz. This planwill enable us to re-distribute our productionbetween West and Eastern Europe in line withsales trends.

What else is your strategy based on?It has become clear that to stay competitivein Europe it’s increasingly important to dif-ferentiate yourself, focus on innovation in or-der to create unique values for consumers.We must do what our mission says, “improvethe quality of time” for the people who buyour products. Solutions like vacuum storagein fridges and self-cleaning ovens, or the in-credible improvements in reducing washingmachine and dishwasher noise, are obviousapplications of this strategy.The commercial success of Indesit and Aris-ton products proves this is the right way togo. You have to know how to talk to con-sumers, and offer them real benefits.

We’re getting onto the tricky ground of “in-tangibles” here. How much do they affectthe company’s worth?The market decides what the company isworth. What’s tangible are the major invest-ments the company is making in all areas ofinnovation (around 4% of sales), brands(around 4% of sales) and human resourcesdevelopment, as well as our investments insocial and environmental projects, which areamply illustrated in the sustainability report.There are many unexpressed values in any sys-tem of financial reporting. The most importantof these values for us is undoubtedly our trans-parency, our commitment to talking to all ourinterlocutors, to explaining everything our com-pany is doing and guaranteeing a coherent lineacross all our commitments.

So what direction is the company going in?What are the next steps?We have achieved some impressive results. Infour years we’ve doubled sales and quintu-plicated profits. We’ve made two major ac-quisitions and continued to improve prof-itability. We’re now the leaders in strategi-cally important countries and we have brandsthat are highly appreciated by consumers. Butthere are new challenges, as we already said.To take them up we need an even wider in-ternational vision. We have to complete ourindustrial plan and continue to take on ex-ceptional talent, the sort of people who en-abled us to post the results you see in thesefinancial statements.

“ Constantly improving human resources,

an efficacious and efficient organization, a long-standing

tradition for sustainability and social responsibility, an excellent

financial structure… ”

10

MARKETS AND REGIONS

112 0 0 3 A N N U A L R E P O R T

M A R K E T S A N D R E G I O N S

West EuropeHousehold appliances are products no fami-ly in Western Europe would willingly give up.Consolidated lifestyles and domestic organi-zation just can’t do without fridges, washingmachines and cookers, and even the latestaddition, the dishwasher, is becoming a mustfor one out of every two European citizens.This is why it’s largely a substitution marketand annual growth in this sector tends to below. In 2003 it was around 3%.

Teaming up with mass distributionThe white goods industry in Western Europeruns the risk of being perceived as a commod-ity industry, a maker of traditional, standardgoods with little prospect of capitalizing on newopportunities and services. This approach ig-nores the highly innovative aspects of thehousehold appliances industry and may alsoimpact negatively on the mass distribution op-erators that dominate the commercial scenarioin Europe. Merloni Elettrodomestici has takenup the challenge of involving mass distributionin Europe in a team effort to demonstrate thatthe sector is dynamic, can be a positive influ-ence on people’s lifestyles and create “qualityof time” for end users – which is our mission.100 pilot projects were started up in 2003, inmajor shopping centres in a number of big citiesin Europe, to show that even household appli-ances can have appeal.Together with distributors across the whole ofEurope, Merloni Elettrodomestici developed newdisplay solutions that attract consumers andenable them to understand more directly theinnovations in our new products and the realbenefits that they can get out of them.

Innovate to win over the end userBeing able to go into a point of sale in Paris,Lisbon or Milan and see washing machines ac-

tually working, fridges with their displays litup, in an appealing setting that makes the ap-pliance look like a dream come true – is a bignovelty in our industry. The silent washingmachine that looks after even the most deli-cate items (wool and cashmere) or the fridgethat communicates cooling and food preser-vation status, or the dishwasher that does

West Europe revenuesover consolidated sales

67%

For Merloni ElettrodomesticiFrance is the most importantmarket after the UK.The Group is representedthere by the Scholtès brand, famous for the qualityand design of its products.

wine glasses and pots at the same time, andwith space to spare, down to the self-clean-ing, super-fast oven – they’re all Merloni in-novations that consumers immediately knowhow to exploit. Design too is becoming an in-creasingly important part of new domestic in-teriors, in which household appliances are nowan integral part. So an appliance is no longera mere commodity but a real benefit, a func-tion that improves lifestyle and profoundlyaffects the quality of one’s time.

12


New Europeand the CISNew Europe, strong growthIn 2003 Merloni Elettrodomestici consolidatedits leadership in the New Europe, in Russia andthe Confederation States (CIS). The year saw notonly the announcement of three major invest-ments in production capacity (totalling Euro100m) but also strong commercial growth. Inaddition to investments in the three new plants(start up of the Lipetzk washing machine plantin Russia, the new refrigerator plant and thedoubling of the cooker facility in Lodz in Poland),there were major investments in communica-tion, marketing and services.Between September 2003 and March 2004 thecompany put on two road shows, touching onall the biggest cities, from Moscow to Prague,

In the UK, MerloniElettrodomestici is

the market leader withthe Hotpoint and

Indesit brands.

Designed for the real worldAsked what brands they couldn’t do without,British consumers said that their “top five” in-cluded Hotpoint – a name that’s a veritable in-stitution in the UK. Such is the impressive re-ality in which Merloni Elettrodomestici decid-ed to invest Euro 90m to improve processes andproducts and create a new identity for the Hot-point brand. Today, Hotpoint is a new brand, ca-pable of transmitting new values and guaran-teeing more and more real benefits for Britishconsumers.Hotpoint is now “designed for the real world”,in the words of its new claim, reflecting a crosssection of UK society today: practicality, ro-bustness, quality, reliability and results beingthe main characteristics the population de-mands, ones that Hotpoint has always endorsedand will continue to respond to in the future.When buying a new appliance, 50% of Britishconsumers stay loyal to Hotpoint.

The UK marketThe UK rivals Germany as Europe’s biggest mar-ket. Its consumers are particularly demandingin terms of service. And the reputations ofbrands are taken very seriously too. MerloniElettrodomestici is market leader in the UK witha share of nearly 30%.

Acquisition and integrationin two yearsAround two years ago Merloni Elettrodomesti-ci acquired the Hotpoint brand, along with itsfour factories and the country’s largest servicenetwork, from General Electric. This new reali-ty, which accounts for about a third of the com-pany’s total sales, was integrated rapidly andsuccessfully and Hotpoint and Indesit are nowmarket leaders. One of Europe’s biggest whitegoods makers thus found synergy with its coun-terpart in the UK. Today, 50% of the washingmachines and washer-dryers sold in the UK aremade by Merloni Elettrodomestici.

132 0 0 3 A N N U A L R E P O R T


Merloni Elettrodomesticiis market leader in the CISand other East Europeanmarkets with its Ariston,Indesit and Stinol brands.

New Europe and the CIS revenuesover consolidated sales

33%

from Warsaw to Istanbul, to launch the newAriston identity and new Ariston and Indesitproducts. The Indesit launch culminated in agrand event in Budapest’s Ice Palace.Massive investments were made in Budapest infact, including a call centre serving markets suchas Hungary, Rumania, the Czech Republic andSlovakia, a logistics platform upgrading distri-bution efficiency and a new headquarters forour Eastern European region.

A region enjoying constant growthThe New Europe, including the ten countries re-cently admitted to the European Union, still hassignificant growth potential. It’s a market sim-ilar in size to Western Europe, with over 400million people but with a very low rate of pen-etration of our type of products in family homes.The most common appliance, the washing ma-chine, is present in only 70% of homes.On the foreign exchange front in 2003, the eu-ro gained on the two strongest currencies inthe region, the Polish zloty (14%) and the Russ-

ian rouble (16%). This had two effects. On onehand, it held back margins in the sector and onthe other, more importantly, it accelerated theprocess of re-balancing production and salesin Eastern European countries.

A white goods districtin the heart of RussiaA new plant has been in service in the Lipetzkarea, 400 km from Moscow, since April. Afteracquiring the refrigerator plant in 2000, Mer-loni Elettrodomestici’s production capacity inRussia is now being extended with a washingmachine plant. Further, co-operation with sup-pliers, mainly Italian and Russian, has now cre-ated a veritable white goods district in Russia.This is one of the biggest industrial ventures inthe country to involve the direct commitmentof a Western European multinational.

14

BUSINESS UNITS

152 0 0 3 A N N U A L R E P O R T

B U S I N E S S U N I T S

Washing machinesFive plants in two countriesIn 2003 over 4.7 million appliances were pro-duced, by 4,000 people.The Business Unit has plants in Italy (Comu-nanza, Teverola and Brembate) and the UK(Kinmel Park and Yate), each specialized in aspecific product family. Yate produces all theGroup’s dryers and in 2003 it put 800,000 unitson the market, making Merloni ElettrodomesticiEurope’s biggest maker of dryers. A new washing machine plant, in Lipetzk, Rus-sia, came on line in April 2004.75% of the washing machines produced in2003 were in Class A. This highly significantachievement is due to a number of factors,including concentration on just a few plants,massive use of electronics (already over a thirdof the value of the product) and R&D evermore intent on developing the core compe-tencies needed to feed the market high levelinnovations every year.

Innovations that improve the qualityof time2003 was another year of in-novation for washing ma-chines, with 50% of the rangebeing renewed in order toguarantee ever higher per-formance levels ever closer toconsumers’ needs.The most impressive develop-ment was Ariston’s new SuperSilent, at the cutting edge ofAriston’s A+ machines, whichimprove on the current ClassA standard. The R&D objectivewas to cut washing times by30% and ensure perfect si-lence. This was achieved by theSuper Silent function and thetri-phase motor, allowing themachine to be used quite hap-pily at night.For the fourth consecutiveyear Ariston was the onlybrand in the world to be given the WoolmarkPlatinum Care certification, which ensures thatits wool wash cycles are even more reliable thanhand washing.Another ground breaking achievement was Aris-ton’s development of smart-tag technology. Aminiaturized antenna radio-linked to microchipson clothing enables washing machines to choosethe optimum programme for each load. Inde-sit novelties in 2003 included Time4You, for fastwashing, Refresh, to freshen up all sorts of fab-rics, and Special Sport and Special Shoes forwashing sports apparel and footwear withoutfear of spoiling them.

Washing, Dishwashers,

Cooking and Cooling are Merloni

Elettrodomestici’s Business Units,

each with its own production

facilities covering given territories,

from Russia to Portugal, from

the UK to Turkey, thus enabling

the company to meet market

demand promptly and efficiently.

The Consumer Care Business Unit

covers the whole of Europe

with its call centres

and after-sales centres.

Production by Business UnitWashing machinesand dryers

37%

The latest Ariston: the Super Silent washing machine, with an exclusive tri-phase motor

16

DishwashersOne Group, one facilityAll the Group’s dishwasher production is con-centrated in the None plant, near Turin. Overthe last five years this facility has almost dou-bled its output, from 500,000 units in 1999 to900,000 in 2003. Around 650 people work inNone and they produce both free-standing andbuilt-in dishwashers, standard and slim, for allthe Group’s brands (Ariston, Indesit, Scholtèsand, since July 2003, Hotpoint).One of the key objectives achieved in 2003was the improvement of household applianceperformance quality, as reflected in furtherreduction of factory repair work and the af-ter-sales call rate.

2003 – massive innovationThe entire product range was renewed, movingup from 70% digitalization in 2002 to 95% atthe end of 2003. Today, 85% of Merloni dish-washers are Class A. Impressive results were al-

so obtained in terms of washing times (averagereduction of 30%), while the intelligent SensorSystem eliminates wastage of water, energy andtime by gearing dishwasher operation to actu-al conditions of use. The flexible new baskets(20% more space) make these machines evensimpler and more intuitive to use.

A promising futureThe most interesting aspect of the dishwasherBusiness Unit is its still low market penetrationrate, meaning growth prospects are far brighterthan those of all the other products.In Western Europe in fact less than 40% of fam-ilies own a dishwasher, while in Eastern Europeno more than 2% have one (by comparison,washing machine penetration in Western Eu-rope is around 95%).

Production by Business Unit

Dishwashers

7%

Dishwasher production line in the None plant (Turin)


172 0 0 3 A N N U A L R E P O R T

CookingQuality productsIn 2003, the 3,200 people working in the fivecooking facilities (Lodz in Poland, Blythe Bridgein the UK, Albacina and Refrontolo in Italy, andThionville in France) produced 3.5 million ap-pliances (27% of total units made by the Group).Thanks to strong commitment by the entire or-ganization, impressive levels of quality were at-tained – which is the best possible guaranteeof customer satisfaction.

Making cooking more funInnovations introduced in 2003 improvedproducts in terms of both ergonomic designand practicality. These results came in responseto market research that analyzed consumerrequirements, thus enabling the business unitto launch truly innovative and competitivenew products that also offer a high degree ofpersonalization.In terms of ergonomic design, one of the keynovelties was the new Ariston 75 cm hob, de-signed to be fitted onto a standard 60 cm mod-ule. This solution delivers 25% more usable spacewithout changing the top.The gas cookers have an integrated safety devicein each burner and automatic rapid lighting.

One of the commodities offered by the newAriston and Scholtès built-in ovens is the FastClean system, which destroys all grease depositson the inner walls and thus provides fast clean-ing, with no effort and, most important, with-out using corrosive products.

Production by Business UnitCooking

27%

Environmentally friendly tooAll the innovations in the variouscooking line products have an imme-diate impact on both the environmentand cooking times.Merloni Elettrodomestici was the firstto put Class A ovens on the marketand today over half its built-in ovensand free-standing cookers are in thisenergy class, which delivers a 20% re-duction in consumption.


Ariston stainless steel Xline hob

18


CoolingOver Cooling Unit plantsThere are six plants producing cooling products,each with a different mission (one in Peterbor-ough, north of London, one in Lipetzk, 400 kmfrom Moscow, two in Italy, in Melano and Cari-naro, one in Setubal in Portugal and one in Man-isa in Turkey). Constant growth in Eastern Eu-ropean markets has made it necessary to builda new cooling products plant in Lodz in Poland.It will enter service in October 2004. Around6,900 people work in the Cooling Business Unit.Considerable results were achieved in 2003 interms of reducing production times, especiallyin the recently integrated plants in Lipetzk andPeterborough, which improved their produc-tivity by 13% and 20% respectively. This wasquite exceptional considering that normal an-nual improvement is around 4%.

More cold, less energy2003 was characterized by innovations that de-liver major improvements in terms of food

Quality control in the Cooling Business Unit

Production by Business Unit

Cooling

29%

preservation and energy saving. The key inno-vation in Ariston’s fridges was the new EverFresh system, an exclusive development thatkeeps food under vacuum conditions and man-ages to quadruplicate preservation periods with-out altering organoleptic qualities.The dynamic young Indesit brand introduced in-novations to boost practicality, including numer-ous solutions making storage space more flexi-ble, like the Indesit Play Zone fridges which havea completely modifiable space for bottles andcontainers of all shapes and sizes. Further, NoFrost technology was applied to the “high vol-ume” models to extend the range of large units.

Technologically coolThese developments are the fruit of ongoing re-search into materials used for insulation andthermodynamic operation and above all of thedigitalization process which has had such a greatimpact on the Business Unit in the last few years.On this front Merloni Elettrodomestici has im-proved its fridge digitalization rate from 7% inthe period 1995-2000 to 25% in 2003, whichis well over the industry average. The introduc-

192 0 0 3 A N N U A L R E P O R T


tion of the new electronics has made it possi-ble to limit energy consumption and developvarious revolutionary innovations.

Consumer CareOver 6,000 people servingconsumersService efficiency is in the hands of the 650people working in the call centres in Italy, theCIS, France, Poland, the UK and since the be-ginning of 2004 in Hungary too. They connectconsumers to the 5,000 engineers who thenact with speed and efficiency. The essentialthing for guaranteeing an optimum level ofservice is the Business Unit’s supply chain,which ensures timely delivery of spares bymanaging the entire network of suppliers, rightdown to the technician’s van.

Monitoring, training and qualityEqually important for the attainment of highlevels of efficiency are the analysis and moni-toring of data collected during service work.The results of this analysis are transmitted toall the other Business Units so that the qualityof household appliances can be improved acrossthe entire Group.Massive digitalization of products and standard-ization and simplification of platforms (in termsof both production processes and product tech-nologies) require high levels of competency fromall the engineers and Service Partners engagedeveryday in helping consumers. This is why train-ing seminars and updates are organized everyyear. In 2003, for example, the Consumer CareBusiness Unit provided a six-month trainingcourse to strengthen the network and developthe management skills of consumer care centreowners. There was also an e-learning initiativeto simplify and accelerate the identification ofproblems, to be faster and more effective in in-tervening and to improve customer relationships.

Call Centres can deal with most problems remotely.

20

R&D AND TECHNOLOGY

400 people innovating400 people work in the R&D division, 55 ofwhom focus exclusively on the developmentof “pure” electronics. The Group’s R&D effortis in three main directions: i) simplification ofinterfaces, ii) development of common hard-ware and software platforms for standardi-zation of components, materials and productdevelopment methods, and iii) maximizationof product reliability in terms of both per-formance and customer service. Such are themain aims of the R&D division.The advances made in electronics over the lastfew years have led to perfect integration ofdigital technology in household appliances. In 2003 digitalization of the Group’s prod-ucts reached an average of 70%, with peaksof 95% in dishwashers and 90% in washingmachines, as well as substantial growth inthe Cooling and Cooking Business Units(around 25%).

Merloni Elettrodomestici manages

to keep up a constant stream

of innovations and avant-garde

developments that are revolutionizing

the very concept of the household

appliance. From the first digital

washing machine capable of

connecting to the network to the pay

per use washing machine, vacuum

food preservation and smart tag

technology that enables appliances to

recognize the type of washing or food

and apply the optimum treatment.

Innovations that all have the same

aim, that of guaranteeing improved

quality of time for the consumer.

212 0 0 3 A N N U A L R E P O R T

R & D A N D T E C H N O L O G Y

Research and universitiesMerloni Elettrodomestici’s R&D people oftenwork with universities and research laborato-ries in various countries. After long-term col-laboration with Nicholas Negroponte’s Medial-ab, the company recently entered a major part-nership with the Politecnico di Milano to createan innovation laboratory.In March 2004 a new management committee– the Innovation and Technology Committee –was set up. It includes a number of directorsand internationally renowned academics.Its task is to provide stimulus for all the Busi-ness Units and foster new innovation projectsand the spread of “innovation culture”throughout the organization.

Merloni’s it NetworkOver the years the company has developed the“Merloni Network”, a highly innovative intranetsystem that permeates the entire organization,

Electronics testing in the R&Dlaboratories

involving all departments at all levels. The wholeGroup is thus on line and new companies canbe fully and rapidly integrated. The system hasmade it possible to create a Shared Service Cen-tre (SSC) that concentrates all the Group’s ad-ministration functions in a single operating unitserving both Italy and the rest of the world, sothat the administrative situation can be seen inreal time. The company information system al-so plays a major role in its logistics organiza-tion and helps cut time to market.

22

QUALITY

The Merloni Quality SystemImprovement of the call rate, the prime indica-tor of the quality of performance as reflectedin the percentage of appliances that need at-tention during their first year of service, is themost important result of the Merloni QualitySystem. Improving this value in a year in whichproduction was under considerable “stress” fromthe ever more demanding commercial networkwas a critical goal. And it was achieved thanksto full commitment from all the business func-tions. To attribute even greater importance tocustomers and identify new areas for qualityimprovement, a consumer satisfaction surveyof the Group’s products will be run in 2004. Itwill also include benchmarking against com-petitors’ products.

Quality means savingAn important contribution to improving qual-ity comes from the Consumer Care businessunit, which provides information collected fromcall centres and engineers, thus enabling areasfor improvement to processes to be identified.This has a positive impact on consumer satis-faction but also brings about a continual re-duction of the costs tied to greater quality.

Insistence on quality

is a big priority at Merloni

Elettrodomestici.

It’s why Merloni created

an integrated Quality System

covering all its business functions

- R&D, human resources,

production, marketing, distribution

and after-sales service.

Cooker production line at the Albacina plant (Ancona)

We climb for qualityTo underscore the importance of quality at Merloni Elet-trodomestici, a company award was instituted in 2002, entitled“I run for Quality”. It’s a competition involving all the Group’sproduction plants. The winning plant is the one that at the endof the year has performed best in terms of certain quality pa-rameters. In 2003 the award was won by the Albacina plant. Oneof the external manifestations of this initiative saw a team ofMerloni employees taking part in the New York Marathon. Whichgoes to show that even the most ambitious goals can be achieved.The competition symbolizes the commitment, effort, respect forrules and team work needed to achieve targets. As of 2004though, the company will no longer be content to improve – itwants to reach the peak of customer satisfaction. So quality hasbecome an increasingly demanding challenge and to reflect thisthe competition has changed name and objective, though thespirit and motivation behind it stay the same. It will now becalled “We climb for Quality” and the goal is for a group of em-ployees to climb Mont Blanc in 2004.

232 0 0 3 A N N U A L R E P O R T

SUPPLY CHAIN

Cutting costs with your supply chainAnother crucial function for quality is the sup-ply chain, which is specially designed to sourceand provide materials, organize their handlingduring the production process, both inside andbetween production plants and to arrange fordelivery of the finished product.

This entails choosing the most efficient meansof transport in terms of timing, costs, relia-bility, quality and environmental impact. In 2003 two thirds of the Group’s productswere shipped by rail, allowing a significant re-duction of environmental impact.

Rapid market evolution is forcingenterprises to compete on more than one front at a time. An integrated vision of logisticsallows competitive edge to besharpened whilst cutting costs. In this context Merloni Elettrodomesticican rely on a highly efficient logisticsnetwork capable of respondingpromptly to changing demand in acontinually evolving scenario.

Merloni Elettrodomestici, a fully vertically integrated industry

24

MARKETING AND CORPORATE COMMUNICATION

MarketingUnderstanding consumers’ needsTo be credible a company needs to be able tomake products that meet consumers’ needsas soon they arise or preferably even before.It is therefore fundamentally important to in-vest in research to analyze such needs and ex-pectations.

In 2003 the company spent over Euro 5m onresearch and analysis of consumers and themarket. Dozens of tests were carried out andthe results made it possible to increase bothconsumer satisfaction and brand loyalty.

Marketing and communication areintegral parts of a complex systemwith two complementary objectives.On one hand to understandconsumers’ day to day needs andrespond using the four classic leversof the marketing mix. And on theother to boost the notoriety of thecompany and its brands with thevarious publics involved - consumers,institutions, suppliers, employees,media, shareholders….

2003 salesinvested

in advertising

3%

252 0 0 3 A N N U A L R E P O R T

M A R K E T I N G A N D C O R P O R A T E C O M M U N I C A T I O N

New forms of marketingAlongside the classic communication activities,“non-traditional media” operations became in-creasingly important over the last year. This af-forded consumers high levels of brand experi-ence, as they familiarized with products in con-texts closer to them, in terms of both personalinterest and physical proximity. Household ap-pliances were taken out of the classic settings,as Indesit appeared in gyms and cinemas andAriston was seen in bookstores.

The Ariston Super Silentwashing machine in the windows of Rinascente stores in Italy’s main cities

New Ariston and Indesitdishwashers

In the case of Ariston, it was an initial co-mar-keting operation with Italy’s biggest bookstorechain. A number of Multicenters were used aslocations in which to display Ariston’s newSuper Silent washing machine in operation.Combined with a prize competition, the ini-tiative exploited a channel new to the indus-try and the product to reach a target that per-ceives silence as a key value. Similarly, Inde-sit’s Play Zone fridge, with its fully modifiablespace for diet and energy drinks, was put on

Giugiaro Design for IndesitGiorgetto Giugiaro has been working with MerloniElettrodomestici since 1993, in which time his firmhas given new shape to the Indesit brand philosophy.Starting out with the four brand values (simple, strong,engaging, reliable), styling too has been geared to ob-taining a perfect marriage between aesthetic form andconsumer needs, thus ensuring robustness, function-ality and simplicity of use.

Makio Hasuike for AristonMakio Hasuike’s collaboration with Merloni Elet-trodomestici dates back to 1968. Thanks to the cre-ative spirit of this Japanese designer, Ariston, whichhas always been a synonym for high performance, nowstands for sophisticated design as well. Avant-gardetechnology dressed in an unmistakable style that rep-resents a unique way of looking at household appli-ances and a new dimension in space and functionality.

Indesit sponsoring successesIn line with its “We work, you play” philosophy, In-desit has been sponsoring major sporting events forsome years now. For the last three years it has beentitle sponsor of the European men’s & women’s vol-leyball championship.In the 2003-2004 football season it was main spon-sor of the European Championship qualifying roundsand also of SS Lazio in their Champions League andItalian Cup Final games and of Olympique Marseillein their Champions League and Uefa Cup games. In2004, Indesit begins five years as title sponsor of theATP Champions Race, the world’s most importanttennis competition, which names the top tennis play-er of the year and has now been renamed the Inde-sit ATP Race.In this way Indesit not only offers users of its house-hold appliances more free time but also becomes aprotagonist in the world of sport – thus underlin-ing the brand’s leadership qualities, youthful per-sonality, dynamism and international spirit.

26


Its new philosophy aims to improve the qual-ity of time spent at home, with the family, inthe kitchen. A re-positioning of the brand thatinvolves performance, style and technology.The aim is to become a positive part of con-sumers’ daily lives, with sober, elegant appli-ances that will be perceived as items of fur-niture. The wider objective of this restyling,as happened with Hotpoint in March 2004, isto create a team of strong brands with whichdifferent segments of consumers can identi-fy and perceive as concrete values.Major investments were also made in 2003 tosupport the French brand Scholtès, which isfamous throughout Europe for its design andhigh technology.

Ever present communicationAdvertising played a very important role in2003, with spending up 10% on 2002, at

show in over 100 gymnasiums in northernItaly, to reach a young target tuned into sportand leisure.

Brands that move with the times: a company policyEver keen to develop its brands, the companycontinues to perfect its brand strategies. Ma-jor spending on consumer research identifiedfour groups of consumers with different ex-pectations and needs, on which to developspecific marketing programmes. Each brandwas then effectively geared to the referencetarget in terms of both product developmentand communication.Brands are the key assets on which to con-centrate the company’s efforts for the future.As with Indesit in 2000, so the Ariston brandwas given a completely rejuvenated identityin 2003.

272 0 0 3 A N N U A L R E P O R T


Euro 95m. In particular, a big advertising ef-fort was made with the Ariston campaign andthe launch of new Ariston and Indesit prod-ucts. Investments in consolidating the “re-gional” brands - Scholtès, Hotpoint and Sti-nol – continued.

28


CorporatecommunicationOpen dialogue with stakeholdersMerloni Elettrodomestici believes that a keysuccess factor for a company is the system ofrelationships it manages to create and its ca-pacity to effectively communicate the com-pany’s values to all its interlocutors.The main communication objective at MerloniElettrodomestici is to create the value of cred-ibility by committing itself to coherence be-tween the messages it puts across and actu-al behaviour. To do this, it tries to actively in-volve its stakeholders, both internal andexternal, from consumers to suppliers, fromemployees to financial markets, and to listento their needs.To maintain a correct and univocal rela-tionship with its stakeholders the companyhas initiated Relationship Management, aproject that measures the quality of thecompany’s relationships with its main in-stitutional interlocutors (the media, gov-

ernment and education, financial commu-nity) in three key countries (Italy, Poland andthe UK).

Relationship ManagementResearch to date shows that stakeholders thinkthat the way in which Merloni Elettrodomesti-ci communicates with them and manages theserelationships is effective and credible. In cer-tain cases their judgement came very close to“excellent” and in 2004 this monitoring projectwill be extended to other countries.To render Merloni Elettrodomestici’s communi-cation consistent and univocal in all the coun-tries it operates in, the communication and ex-ternal relations department has laid down guide-lines for successful communication of messagesthat express the company’s style and charac-teristics. They are:• Credibility: for Merloni Elettrodomestici this

means the capacity to maintain commitmentsin terms of profitability and growth. But it al-so means strongly motivated management,transparency and clarity in relationships withstakeholders.

292 0 0 3 A N N U A L R E P O R T


Consolidated corporate presence2003 was also a year in which the Group’sExternal Relations activities in Europe wereupgraded in support of business develop-ment in the various markets. Thanks to thenetwork of public relations the company canrely on, the Group enjoyed a boost in presscoverage (up by around 30%). Over the yearnumerous events were organized for the me-dia in all the countries where Merloni Elet-trodomestici operates, including meetingswith financial analysts and institutional in-vestors, especially those from the UK, Italyand the USA. The creation of preferential ini-tiatives and channels for fostering and main-taining dialogue with public opinion is cru-cial to the consolidation and enhancementof the Group’s reputation.

During the Indesit show at the Colorado Cafè in Milan

Detail of the “We climb for Quality” internalcommunication campaign

Award winning communicationFollowing the various prizes received in 2001 and2002 (including two Oscars for best financial com-munication), Merloni Elettrodomestici won awardsin 2003 as well, including the first edition of theSodalitas Social Award (best internal businessprocesses for social responsibility), the Assorel prizefor “I run for Quality” (best internal communica-tion campaign) and the Network Oscar (best in-ternet site) awarded by Hallvarsson & Halvarsson,a Swedish consulting firm, in collaboration withThe Financial Times.

• Social and environmental responsibili-ty, which means harnessing economic re-sults to social and environmental progressthrough a policy of industrial ethics.

• Encouraging people to compete for lead-ership, with career prospects that attractthe best talents and offer major opportu-nities for growth.

• Brand leadership, through products thatimprove the quality of people’s time, arereliable and guarantee a high level ofservice.

• Lastly, raising stakeholders’ awareness ofthe industry’s capacity to be appealing,and of the company’s research into newcommunication channels capable of reach-ing “difficult” consumers and renderingproducts closer to their lifestyles.

Assorel and Sodalitas prizes won by Merloni Elettrodomestici in 2003.

30

MANAGEMENT AND HUMAN RESOURCES

From left to right: Oscar Groet (New Europe & Export Area Manager), Giuseppe Salvucci (Marketing Manager), Oscar De Sanctis (Consumer Care Business Unit Manager), Enrico Vita(Sourcing Manager), Davide Milone (Dishwashers Manager Business Unit), Giuseppe Cavalli (Washing machines and dryers Business Unit Manager), Andrea Prandi (Communicationand External Relations Manager), Enrico Cola (Cooking Business Unit Manager), Francesco Trovato (West Europe Area Manager), Massimo Rosini (Cooling Business Unit Manager),Luca Moroni (Planning and Control Manager), Cesare Ranieri (Human Resources Manager), Andrea Crenna (Chief Financial Officer), Piero Moscatelli (Quality Manager), Gianluigi Seri(Supply Chain Manager), Roberto Cuccaroni (Italian market Manager, Adriano Mencarini Electronic R&D Manager), Kakha Kobakhidze (General Manager Russia and CIS).

312 0 0 3 A N N U A L R E P O R T

M A N A G E M E N T A N D H U M A N R E S O U R C E S

Merloni Elettrodomestici is

convinced that its human “capital”

is among its most important

intangible assets and is the key

resource for the success

of the enterprise. Thanks to their

capabilities and competencies,

people generate value and enable

the company to stay ahead.

Human resources crossing bordersIn spite of recession, the acquisitions the com-pany has made over the last few years havetripled the number of its employees and givenrise to new internal trends. Merloni Elet-trodomestici currently manages nearly 20,000people in 23 countries, around a half of whomoutside Italy. This naturally makes the compa-ny more “international” (operating in differentcountries) but also, and more significantly, more“multinational” (different peoples and differentcultures working together in a Merloni work-place wherever it is). In fact, new flows of peo-ple between countries have arisen, starting withthe transfer of Italians to foreign subsidiaries,continuing with the arrival of foreign person-nel in Italy and leading to the development ofcross border operation, in which both managersand workers gain multinational experience indifferent markets in order to integrate theircompetencies and know-how.These flows have caused some big changes inthe human resources management system byintroducing a far more complex mix of customsand habits, sociological patterns and lifestyles.All of which requiring coherent response bymanagement systems. In such a scenario, thespeed of the process becomes a crucial elementin making employees integral parts of the newbusiness reality.

Two new tools were put in place to managethis complex situation: MeLA (Merloni Learn-ing Approach), a training system/approach forongoing professional development, and PMS(Performance Management System), whichprovides performance assessment of everyemployee, so that people can improve and de-velop their careers according to their attitudesand competencies.2003 saw actual application of these tools toall employees – 39,450 hours were dedicatedto training against 10,715 in 2002.4,584 employees took part in the MeLA pro-gramme (439 in 2002), while the PMS systeminvolved around 4,000 employees against1,500 in 2002.

Understanding the Group from the insideIn this context, an internal survey provided apicture of how the company is perceived byits employees. The 39 research criteria gener-ated a number of key factors that character-ize the company and the people who work init: results-orientation, working to schedule,effective, continual communication, team spir-it, aspiration towards excellence based onscrupulous commitment, and development ofthe organization in line with its history.

Personnel by category

Personnel by country

25%70%

24%

2%3%

4%

30%

33%

5%

� Managers

� Office personnel

� Workers

� Italy � Poland

� Portugal � Russia

� France � Turkey

� UK � Others

2% 2%

From left to right: GiovanniCarlino (COO), Marco Milani (CEOMerloni Elettrodomestici UK),Andrea Sasso (Chief CommercialOfficer).

32

SUSTAINABLE DEVELOPMENT

332 0 0 3 A N N U A L R E P O R T

S U S T A I N A B L E D E V E L O P M E N T

EnvironmentIn 2003 the company continued to believestrongly in its sustainability policy and workedhard to give the market products to improvethe quality of time whilst being eco-compat-ible as well.Environmental benefits were secured in allphases of product life cycles, from choice ofmaterials to assembly, from product recoveryand recycling to transport (two-thirds by rail).Dimensions and weights were also reduced byrationalizing use of materials.The company immediately responded to new Eu-ropean environmental directives restricting use

of hazardous substances in electrical and elec-tronic equipment (Rohs) and waste representedby equipment at the end of its life cycle (Weee).To this end the company created its own envi-ronmental impact control system, which alsoentails the collaboration of recycling business-es in order to identify areas for improvement.Environmental control was also extended to sup-pliers. In September 2003 the Group ran an ini-tial conformity survey on its 30 main suppliers.Results in hand, the company is now consider-ing integrating its general conditions of supplywith a specific section on the environment andis also looking at the feasibility of instituting en-vironmental mapping of its suppliers.

Society & socialresponsibilityA long-term commitmentMerloni Elettrodomestici has always been par-ticularly sensitive to social issues. Following theearthquake that hit Fabriano in 1997 it set upa crisis unit to offer practical assistance to thelocal population. Since then, it has been activein Turkey, where it built the Ariston Village af-ter the 1999 earthquake, and in Kosovo, whereit ran a project to re-integrate disabled childrenin society. In 2003 it financed the construction

The train: over two-thirds offinished products of theGroup are shippedthroughout Europe with it.

Merloni Elettrodomestici has alwaysupheld an industrial model thatharnesses economic success to social progress. In the districts in which it operates throughoutEurope it is committed to fosteringdevelopment in harmony with the environment and to satisfying the needs of the present generationwithout compromising those of future generations.

Hotpoint brand, with Braille controls and an au-dio instruction booklet.In 2003, International Water Year, the commu-nication and external relations departmentlaunched a project called Water for people, Wa-ter for Life, in support of Mani Tese, a no-prof-it organization. The project funded the con-struction of a well, with a pump and a mill forcereals, in the village of Nayalguè, in BurkinaFaso, and organization of a training course forthe women who will operate the mill.

EthicsAfter its admission to the Ethibel Sustainabili-ty Index in 2002, Merloni Elettrodomestici’s eth-ical and environmental commitment was fur-ther confirmed, in 2003, by its listing in theKempen/SNS Smaller Europe SRI Index, the firstindex to measure the social responsibility ofsmall enterprises. Created by Kempen CapitalManagement and SNS Asset Management, acompany with 30 years experience in ethical in-vestment, it lists 69 companies in 14 countries.For Merloni Elettrodomestici this is yet anoth-er endorsement of results to date and a newstimulus to do even more for both the territo-ry and the environment in general, and for itsemployees. The words of the company’s founderAristide Merloni - “There is no value in the eco-nomic success of any industrial initiative if it isnot also accompanied by commitment to socialprogress ” – are a constant call to action.

34

S U S T A I N A B L E D E V E L O P M E N T

of a multi-purpose community centre (with anewspaper library too) for the earthquake strick-en town of Colletorto in Molise, giving the in-habitants a place in which to resume normalsocial activities.For the third year running it supported the AOF(Fabriano Cancer Relief Association) with fundsfor home care and organized a charity footballmatch to raise funds for cancer research,through the Hotpoint plant in Peterborough(UK). For the same purpose it also took part ina charity auction organized by the ADI (Asso-ciazione Design Industriale) by donating house-hold appliances. In the UK it launched the firsthousehold appliances for the blind, under the

The company’s focus on social responsibility is naturally reflected in its relation-ship with its employees as well. Merloni Elettrodomestici is one of the few com-panies in Europe and the only one in Italy to have signed a Code of Conduct withthe trade unions. The company is seen as a model of enlightened industrial rela-tions by the Japanese, for instance. Japan’s main engineering union, in fact, visit-ed the company to study Merloni’s industrial relations model. The Code also wonthe company the first edition of the Sodalitas Social Award, which selects out-standing initiatives for social responsibility.

352 0 0 3 A N N U A L R E P O R T

A Corporate Governance aligned tointernational best practices The corporate governance system adopted byMerloni Elettrodomestici Spa and the Group itheads (hereafter “Company” or “Merloni”) con-forms for the most part with the principles ofthe Code, which the Board of Directors adopt-ed in a resolution voted on March 14, 2001 inthe conviction that said principles were essen-tial to successful implementation of the fol-lowing corporate governance policies:• clear definition of roles, responsibilities and

degrees of importance of business operations;• improved safeguarding of stakeholders and

boosting of their trust;• maximization of value for shareholders and

all other stakeholders;• improvement of transparency in financial

communication for the market;• improvement of internal control systems.In many areas of corporate governance theCompany’s model reflects some of the most re-cent and advanced regulatory standards andbest practice (such as the Sarbanes-Oxley Act– July 2002 and the Combined Code on Corpo-rate Governance, UK – July 2003).For example, the majority of the Company’s di-rectors are independent, the Company is notsubject to “direction” or “co-ordination” by anyexternal enterprise (as defined by the “Vietti”reform) and since 1996 there has been a clearseparation of powers between the Chairmanand the CEO.Further, on the subject of Internal Dealing andthe Board’s Remuneration Committee, the Com-pany has voluntarily gone well beyond the pro-visions of the Code and Italian law by intro-ducing blocking periods (not required by law),during which Relevant Persons are not allowedto carry out operations involving Company stock,and by halving the deadlines for disclosure ofcompleted operations to the market. The Com-pany’s Human Resources Committee has tasksand functions that are considerably more oner-

ous than those provided for it in the Code (eg.monitoring the state of the organization andthe management’s development plans).

The new Innovation and TechnologyCommitteeMerloni Elettrodomestici’s corporate governancesystem has a new committee, the Innovationand Technology Committee. It works alongsidethe Human Resources and Audit Committeesand its task is to define the strategies and in-vestments needed to develop the Company’sinnovation capability. It will also take action tospread the culture of innovation within the en-terprise and in particular by stimulating all thefunctions involved, from the product businessunits to the electronics laboratory. The new committee will include certain mem-bers of the board (Vittorio Merloni, Andrea Mer-loni, Andrea Guerra and Luca Cordero di Mon-tezemolo), experts and academics such as Pro-fessors Adriano De Majo and Marco Jansiti anda number of company managers.

New developments in 2004 In 2004 the company will adopt an Organiza-tion Model and Code of Conduct for the pur-poses of decree law 231/01. The Model and Codewill render the company’s internal control sys-tem more effective and prevent commission ofthe illicit acts (criminal and administrative) in-dicated in the aforesaid decree law.This is just one of the initiatives that compa-nies must adopt to respond to the demand formore social responsibility towards companystakeholders.

CORPORATE GOVERNANCE

36

BEHIND THE FIGURES

2003, another year of growthOver the year, consolidated sales moved ahead21%, to Euro 3,008m. Around 6% was due tointernal development and the remaining 15%to extra sales arising from full consolidationof GDA.The 2003 results are particularly encouraginggiven the economic background. Firstly, be-cause the situation in the white goods mar-ket is characterized by strong pressure onprices, albeit offset by increasing sales vol-umes. And secondly, because UK sterling, thePolish zloty, the Russian rouble and the Turk-ish lira all lost ground to the Euro.

In spite of this, Ebitda (Euro 387m) and Ebit(Euro 246m) were both up on 2002, by 22%and 21% respectively. These results were part-ly due to the successful integration of GDA(now Merloni Elettrodomestici UK) on sched-ule and on target.

Total net profits rose from Euro 108m to Euro126m (+16%), of which the Group’s interestwas Euro 120m, up 12% on the previous year.Investments in 2003 reached Euro 142magainst Euro 104m in 2002. They were fund-ed by a cash flow from operating activities ofEuro 306m (Euro 326m in 2002).Net financial indebtedness was slightly up,from Euro 181m to Euro 192m, while gearingmoved from 43% in 2002 to 40% in 2003.The ratio of financial charges over sales (1%)was substantially in line with the previous year(0.9%).

Economic value and communicationWith the pay-out ratio stable at 30%, the div-idend pool in 2003 grew around 12.5%, fromEuro 32m to Euro 36m. EVA® has doubled inthe last three years, from Euro 33m in 2001 toEuro 86m in 2003 (Euro 67m in 2002).Another aspect of the company’s growing val- 00 01 02 03

120

100

80

60

40

20

0

EVA(Euro millions)

ue was the intense investor relations activity in2003, which involved not only the company’sinvestor relations structure but the CEO andGeneral Manager as well.

Around 150 meetings were organized and at-tended by over 400 analysts and fund man-agers in all, of whom over 70% representingnon-Italian interests. Numerous road showswere put on in 2003 (touching on Milan, Lon-don, Edinburgh, Paris, Amsterdam, Stockholmand New York) and there was busy contactwith the financial community by conferencecalls as well.

372 0 0 3 A N N U A L R E P O R T

B E H I N D T H E F I G U R E S

350

300

250

200

150

100

50

0

Industrial investments and self-financing, net *(Euro millions)

00 01 02 03

180

150

120

90

60

30

0

Industrial investments(Euro millions)

� Industrial investments

� Self-financing, net

00 01 02 03

(*) total net result + amortization and depreciation

38

MERLONI ELETTRODOMESTICI ON THE STOCKMARKET

2003 was another good year for the Group’sordinary shares, which had risen 48.7% by theyear-end, whilst the savings shares rose 73.5%.All this while the Mibtel Index grew 10.3% andthe Midex 25%. The company’s market capitalization reachedEuro 1,650m against Euro 1,099m in 2002.

The pay-out ratio was stable at 30%, yieldinga dividend of Euro 0.361 per ordinary shareand Euro 0.379 per savings share, up 12.1%and 11.5%, respectively, on 2002.

These dividends were supplemented by theportion due on treasury shares (Euro 0.036).

0

10

15

20

Merloni Elettrodomestici share performance (Euro)

� Merloni Elettrodomestici Spa

� Mibtel

� Midex

01/03/2003 12/31/2003

392 0 0 3 A N N U A L R E P O R T

M E R L O N I E L E T T R O D O M E S T I C I O N T H E S T O C K M A R K E T

Stockmarket data

(at December 31) 1999 2000 2001 2002 2003

Ebitda per share (Euro) 1.44 1.79 2.11 2.95 3.57

Net profit per share (Euro) 0.28 0.46 0.69 0.99 1.11

Cash flow* per share (Euro) 0.96 1.2 1.5 2.05 2.47

Dividend per share (Euro) 0.06 0.13 0.2 0.29 0.325

Price per share (euro) 4.14 4.7 5.82 10.07 14.95

Price per share/net profit per share 14.61 10.14 8.46 10.17 13.51

Price per share/shareholders’ equity per share 1.5 1.5 1.71 2.58 3.37

Pay out ratio (%) 28.5 37.0 30.0 30.0 30.0

Dividend per share/price per share (%) 1.5 2.77 4.22 3.03 2.67

Number of ordinary shares 91,508,268 91,508,268 107,316,122 107,998,372 108,465,122

Share capital (Euro thousands) 58,126 58,126 98,837 99,451 99,871

Market capitalization (Euro thousands) 414,008 480,346 635,596 1,099,038 1,650,427

Debt+Equity/sales (%) 24 33 27 28 24

Debt+Equity/Ebitda 3 2 2 2 2

Data refer to ordinary shares only - * net profit + amortization and depreciation

Events calendar 2004

February 05 Board of Directors meeting Approval of quarterly reportReview of provisional accounts 2003

March 23 Board of Directors meeting Approval of draft financial statements 2003Notice of shareholders’ meetingProposal of new independent auditors

April 30 Shareholders’ meeting (1st call) Approval of financial statements 2003Appointment of new Board of DirectorsAppointment of new independent auditors

May 05 Board of Directors meeting Approval of quarterly reportShareholders’ meeting (2nd call) Approval of financial statements 2003

Appointment of new Board of DirectorsAppointment of new independent auditors

Board of Directors meeting Conferment of powers on ChairmanAppointment of CEO

July 27 Board of Directors meeting Approval of quarterly reportReview of provisional 1st half 2004

September 06 Shareholders’ meeting

October 27 Board of Directors meeting Approval of 1st half reportApproval of quarterly report

� Fineldo Spa

� Merloni Vittorio

� Merloni Progetti

� Fines Spa

� Merloni Ester

� Lazzarini M. Cecilia

� Merloni Francesco

� Treasury shares

� Float

Main shareholdersand float

29.1%39.5%

10.2%

4.6% 0.9%3.0% 1.3%4.6% 6.8%

40

5 YEAR REVIEW

Income statement

(Euro millions) 1999 2000 2001 2002 2003

Sales 1,420 1,601 1,971 2,480 3,008

Ebitda 132 164 226 318 387

Ebit 71 96 139 203 246

Profit after financial income and charges 57 78 116 178 218

Profit before tax 41 63 116 166 197

Group net profit 26 42 74 107 120

Tax rate (%) 36.8 32.3 35.9 34.8 36.4

Balance sheet

(at December 31 - Euro millions) 1999 2000 2001 2002 2003

Tangible and intangible assets 365 583 601 843 860

Non-operating investments (1) 76 84 106 166 153

Working capital 739 962 1,161 1,347 1,292

Total assets 1,180 1,629 1,868 2,356 2,306

Shareholders’ equity - Group 245 286 365 422 481

Shareholders’ equity - Minority interests 5 14 14 99 36

Medium/long-term indebtedness (2) 293 497 513 560 276

Short-term borrowing 637 830 976 1,275 1,513

Cash flows

(Euro millions) 1999 2000 2001 2002 2003

Cash flows from operations 162 166 210 326 306

Cash flows from investments (121) (287) (114) (368) (157)

Cash flows from financial operations (26) (14) (19) 12 (159)

Closing net financial indebtedness 91 227 151 181 192

Residual cash flow (3) 16 (135) 75 (30) (10)

(1) equity investments in financial fixed assets(2) includes staff leaving indemnity and risk reserve(3) cash flows from operating activities + investments + financial activities

Reports and consolidatedfinancial statements

at December 31, 2003

Merloni Elettrodomestici Spa

Chairman Vittorio MerloniCEO Andrea Guerra

Directors Francesco CaioFelice ColomboAlberto FrescoCarl H. HahnHugh MalimAndrea MerloniAristide MerloniEster MerloniFrancesco MerloniLuca Cordero di MontezemoloRoberto Ruozi

Chairman Angelo Casò

Auditors Demetrio MinutoPaolo Omodeo Salè

Reserve auditors Leonello VenceslaiFabrizio Colombo

Francesco CaioAlberto FrescoAndrea GuerraCarl H. Hahn

Chairman Roberto RuoziFelice ColomboHugh MalimVittorio Merloni

Vittorio MerloniAndrea MerloniAndrea GuerraLuca Cordero di Montezemolo

Massimo Tassi

PriceWaterhouseCoopers Spa

42

COMPANY OFFICERS, COMMITTEES AND AUDITORS

Boardof directors

Board of statutoryauditors

Human resourcescommittee

Innovationand technology

committee*

Audit committee

Representative ofsavings shareholders

Independentauditors

* This committee was appointed on March 23, 2004 and also includes external experts and company managers

432 0 0 3 A N N U A L R E P O R T

2003 was a year of uncertainty about the state of the economy and financial markets. It was only towardsthe end of the year that signs of recovery gave some impetus to demand and consumption.The world economy grew by 2.5%, driven mainly by the US economy, which grew by 3.2%. The Euro areasaw growth of 0.5%, while Eastern European countries grew by 4.9%. Russia recorded growth of 6.8%.In the European Union, the UK economy continued to grow (2.2%). The inflation rate in EU countrieswas 2.2%.

2003 was characterized by a constant weakening of the US dollar against the Euro, which had gained 20%by the year end. Sterling also lost ground (10%) and Eastern European currencies fared similarly: the Polish zloty lost 14%, the Russian rouble 16% and the Turkish lira 22%.

The cost of money in the Euro area was 2%, down 0.75% on the 2002 year-end figure, while the interestrate in the UK finished at 3.75%. The interest rate fell in the USA as well, reaching 1% at the end of 2003(25 bps down on the end of 2002).

In 2003 demand for household appliances grew 6% on 2002.Overall volumes in Western Europe were up 3.3%, with peaks in the UK (5.5%) and Spain (8.9%). Growthwas far from even and certain countries saw a decrease in demand for household appliances (Germanydown 5% and The Netherlands down 1.4%).The trend in the white goods sector in Eastern Europe was quite different, with growth in volumes aver-aging 14.4% (CIS 11.8%, Czech Republic 10.5%, Hungary 28% and Rumania 80%). There was also strongpressure on prices in this area though.In this competitive scenario Merloni Elettrodomestici managed to increase its market share in 2003 as well(0.6%).

In 2003 the UK company General Domestic Appliances Holdings Ltd was 60% owned following exercise,in January 2003, of General Electric’s put option on 10% of GDA’s stock. The Group’s investment in the UKcompany was consolidated on a line by line basis in both the balance sheet and income statement, where-as at 31st December 2002 the income statement was drafted on a proportional basis for nine months on-ly. As of 1st June 2003 Merloni Domestic Appliances Ltd transferred its commercial assets and liabilities toGeneral Domestic Appliances Ltd (wholly owned operating subsidiary of General Domestic AppliancesHoldings Ltd), which changed its name to Merloni Elettrodomestici UK Ltd in July. This restructuring op-eration did not have any economic effects for the purposes of the consolidated financial statements. Toenable comparison, detailed data is provided in the following section and also in the supplementary notes,under “Comments on the main income statement items”.

Economicbackground

Currency markets

The white goodsmarket in Europe

Merloni Groupconsolidation area

BOARD OF DIRECTORS’ REPORT

B O A R D O F D I R E C T O R S ’ R E P O R T

Income statement

44

Despite the macro-economic situation outlined above, all the main economic and financial indicators werepositive.

Consolidated income statement (Euro millions)

2003 2002

Sales 3,008 2,480

Change 21% 26%

Gross operating margin (Ebitda) 387 318

% of sales 12.9% 12.8%

Operating margin (Ebit) 246 203

% of sales 8.2% 8.2%

Profit before tax (Pbt) 197 166

Change 19% 43%

Total net profit 126 108

Change 16% 46%

Sales rose 21% in 2003. Of this increase around 6% was internally driven growth, the rest being due toline by line consolidation of General Domestic Appliances Holdings Ltd.

Ebitda rose by 22%; Ebitda over sales moved from 12.8% in 2002 to 12.9% in 2003 thanks to continualimprovements to production efficiency, which partially offset rising personnel costs produced by line byline consolidation of the income statement of General Domestic Appliances Holdings Ltd.

The operating margin (Ebit) was Euro 246m, up 21% on 2002 (Euro 203m), with Ros at 8.2%, in line withthe previous year. Amortization and depreciation amounted to Euro 142m (Euro 115m in 2002), up 23%on 2002. Amortization and depreciation over sales was 4.7%.

Profit before tax (Pbt) rose 19% to Euro 197m (Euro 166m in 2002), which is 6.6% of sales.

Net profit at the year end, after tax for the year (current and deferred), amounted to Euro 126m (ofwhich Euro 5m due to minority interests), or 4.2% of sales, against Euro 108m at the end of 2002 (ofwhich Euro 1m due to minority interests), or 4.4% of sales. The tax rate at the end of 2003 was 36%,against 35% in 2002.

Net Working Capital at 31st December 2003 showed a negative balance of Euro 25m thanks to improve-ments in collection policies and inventory management. Its impact on sales was -0.8% against 0.7% atthe end of 2002. In 2003 too Merloni Group used securitization to realize on receivables. Without this op-eration, the impact of Net Working Capital on sales would have been 3.2% (4.8% in 2002).

Consolidated balance sheet (Euro millions)

December 31, 2003 December 31, 2002

Trade receivables 482 459

Inventories 285 265

Trade payables 792 708

Net working capital (25) 16

% of sales -0.8% 0.7%

Other current assets/liabilities, net (67) (86)

Intangible and tangible fixed assets 942 926

Other medium/long-term assets/liabilities, net (140) (153)

Total assets 709 703

Net financial indebtedness 192 181

Group shareholders’ equity 481 422

Minority interests 36 99

Total shareholders’ equity and financial liabilities 709 703

Net self-financing rose by Euro 44m as operating cash flow moved from Euro 326m in 2002 to Euro306m in 2003.The reduction was due to an increase in the net balance of other assets and liabilities (down by Euro32m between 2002 and 2003 against a variation of Euro 22m between 2001 and 2002) and to the re-duction in net working capital between 2002 and 2003 (Euro 42m) being less than between 2001 and2002 (Euro 57m).

452 0 0 3 A N N U A L R E P O R T

Financialperformance


Consolidated cash flow (Euro millions)


Total net profit 126 108

Amortization and depreciation 142 115

Financial charges (including exchange differences) 30 23

Change in net working capital 42 57

Change in other operating assets/liabilities and provisions (32) 22

Cash flow from operations 306 326

Investments, net (Capex) (159) (357)

Investments in other operations, net - -

Others 2 (11)

Cash flow from investments (157) (368)

Dividends (32) (22)

Financial charges (including exchange differences) (30) (23)

Change in shareholders’ equity (68) 89

Change in the currency conversion reserve (30) (32)

Others - -

Cash flow from financial activities (159) 12

Total cash flow (10) (30)

Net opening financial indebtedness 181 151

Net closing financial indebtedness 192 181

The change in cash flows from financial activities was mainly due to the method of payment (distributionof reserves) for the 10% of General Domestic Appliances Holdings Ltd following General Electric’s exer-cise of its put option in January 2003.

Financial charges over sales was 1%, in line with the previous year (0.9%).

Net financial indebtedness moved from Euro 181m to Euro 192m and gearing from 43% at the end of2002 to 40% at the end of 2003.

Industrial investments in products and processes amounted to Euro 142m, up Euro 38m on the figure for2002 (Euro 104m), and involved all the industrial Business Units and corporate functions of Merloni Elet-trodomestici.

On the marketing front, 2003 saw a significant sharpening of focus on consumers thanks to the intro-duction, in all processes, of segmentation on the basis of their needs. Existing consumer research activi-ties were integrated by a new ongoing survey of brands in the main countries of interest.

Indesit took over leadership in the free-standing segment in Greater Europe with an increase of 1.2 per-centage points on 2002. The “We Work, You Play” pay off continued to drive new products in the variousmarkets – simple, reliable household appliances that free up time for leisure. New features reflecting thisbrand identity include the fast programmes in the new Time4U washing machines (Class A washing in 60minutes) and the basket in the Playzone fridge (containing and fast-cooling over 15 bottles).

Investments

Brands

46


In terms of communication, Indesit strengthened its ties with the sporting world by sponsoring majorfootball teams in various European countries and above all by entering, in December, a five year agree-ment to sponsor the ATP Champions Race (tennis).

2003 saw the market launch of Ariston’s new brand identity, which is centred on passionate commitmentto the home: the love of caring and the joy of sharing. The new brand values are Care, Style, Quality andPerformance. The new pay off is a perfect expression of the new positioning - “Living Together”.

The year’s new campaigns received numerous acknowledgements, including the prestigious Top Brand Ad-vertising in Italy. The new products launched onto the market were also intended to back up the brand’snew promise to consumers, with products like the new silent washing machines and innovative solutionssuch as the Everfresh system (the first integrated vacuum system in a fridge).

Of the regional brands, Scholtès and Hotpoint deserve mention. For Scholtès, 2003 was a year of interna-tionalization, in terms of both brand restyling and re-positioning, which is now centred on the concept of“Performance dedicated to the art of cooking”.With over 80 years of history already behind it, Hotpoint has some big responsibilities – it enjoys leader-ship in the UK market in terms of market share and is one of the top British brands in terms of consumertrust. In 2003 it carried out a brand identity review and launched its new identity early in 2004.

As stated in our comment on investments, 2003 was a year of major commitments. Numerous new mod-els were launched (over half of the items in the Merloni product list - around 3,000 – were renewed) andplans were made for further additions to the product range.

In particular, Ariston renewed the whole of its washing machine and dishwasher ranges and launched thenew 70 cm fridge-freezer combi with Full No-Frost technology.Distinctive features of these new models include: Super silent technology in the washing machines (thanksto the new tri-phase motor), new, large-dimension multi-system baskets in the dishwashers and vacuumtechnology in the fridges (to increase preservation times and protect the organoleptic qualities of food).

In the built-in area, production of the new platform for gas, ceramic glass and induction hobs started upand the new 75 cm Class hobs were launched, with ultra-modern design and innovative cooking func-tions (“Double-Ring Double Regulation”, mixed ceramic glass-gas zones).

The offering of built-in ovens was substantially improved as well, with the launching of the new Quartzranges, featuring an exclusive combination of stainless steel and translucent crystal glass and new colours(Moon, Jade, Sky) to enhance integration with the interior design of kitchens.

The Indesit brand completely renewed its washing machine, dishwasher and fridge ranges and launchednew fridge-freezers with Full No-Frost technology, innovative products that eliminate freezer defrostingand improve/lengthen food preservation.

For Hotpoint, on the other hand, 2003 was the year of full integration with Ariston in terms of productranges, especially in the built-in segment, where a whole new range of hobs, ovens, fridges, fridge-freez-ers and dishwashers was launched.

Products

472 0 0 3 A N N U A L R E P O R T


Business between Group companies is conducted at arm’s length. Business with correlated parties is dealtwith in the relevant section of the supplementary notes, where the nature of the main relationships ofthis type is described, along with the detailed information required by Consob and IAS 24.

Stock option plan for Group executives and middle managersThe extraordinary shareholders’ meetings held on 09/16/1998 (as modified by the meetings on 05/05/2000and 05/07/2001) and October 23, 2001 resolved to increase the share capital pursuant to art. 2441, para-graph 8 of the Italian Civil Code, by a maximum amount of Euro 2,700,000 each, issuing a maximum of6,000,000 ordinary shares with a nominal value of Euro 0.9 to fund a stock option plan for Group ex-ecutives and middle managers. Stock options serve as medium/long-term incentives for employees whoparticipate directly in the achievement of the company’s objectives and thereby retain their loyalty. TheBoard of Directors fixes the amount of options to allot each year. Every year, the Board of Directors orthe Chairman on its behalf, as allowed under shareholder meeting rules, identifies the beneficiaries ofstock options, as indicated by the CEO. For options allotted after July 24, 2003 there is a vesting periodof three years for the first 50% and four years for the remaining 50%, whereas for options allotted pri-or to such date the vesting period was two and three years. Allotment of stock options for Group ex-ecutives and middle managers was continued in 2003. For further details on the progress of the stockoption plans, see Annex 3.

Stock option plan for non-employee directors holding significant postsThe extraordinary shareholders’ meetings on October 23, 2001 and May 6, 2002 voted two capital increases,up to a maximum of 1,600,000 new shares, to fund a stock option plan for non-employee directors in po-sitions significant for the strategic management of the company. The options allotted may be exercisedas of March 31, 2004 and in any case no later than 31st March 2006. The subscription price is Euro 4.76for the 1,400,000 options allotted in 2001 and Euro 9.6954 for the 200,000 options allotted in 2002.

Stock option plan (non-employee directors)

2002 2001

Number Exercise Number Exercise

of options price of options price

(Euro) (Euro)

New rights assigned in the period 200,000 9.6954 1,400,000 4.76

Rights exercised in the period

Rights expired in the period

Rights forfeited in the period

Rights existing at the end of the period 1,600,000 1,400,000

48


Intra-Group businessand business withcorrelated parties

Stock option planfor Group

executives andmiddle managers

In the first quarter of 2004 the Merloni Elettrodomestici Group posted good performance results in all itsmarkets. In January 2004 General Electric exercised its second put option of the Put & Call Agreementtransferring its stake in General Domestic Appliances Holdings Ltd. This brought Merloni’s share in the UKcompany to 68%. The sum paid was around Usd 57m.

The Board voted two new stock option plans, one for the Chairman and one for the CEO of the Group par-ent company. The plans are subordinated to renewal of their appointments as Chairman and CEO for the2004-2006 period, to their remaining in office for the whole of the new term and their achievement ofthe objectives set by the Group Parent company’s 2004-2006 medium-term plan.

The Board of Directors decided to put before the shareholders a proposal for a capital increase of a max-imum of 1,000,000 new ordinary shares to fund a stock option plan for the Chairman, while a maximumof 1,500,000 treasury shares would be used to fund a stock option plan for the CEO.

In 2004 Merloni Elettrodomestici Group will continue to consolidate and strengthen its market share inall the countries where it operates and respond effectively to the differing growth rates in European coun-tries. To this end, Merloni will upgrade its cooking production capacity in Poland and complete the build-ing of a refrigerator plant in Lodz (Poland) and a washing machine plant in Lipetzk (Russia) involving acombined investment of Euro 100m, of which Euro 25m already spent in 2003. 2004 will also see the up-grading of commercial structures in Eastern Europe, with the set up of a new associate in Hungary whichwill manage a call center serving the entire Central Europe area.

1. General principlesThe corporate governance system adopted by Merloni Elettrodomestici Spa and the Group it heads (here-after “Company” or “Merloni”) conforms for the most part with the principles of the Code, which the Boardof Directors adopted in a resolution voted on March 14, 2001 in the conviction that said principles wereessential to successful implementation of the following corporate governance policies:• clear definition of roles, responsibilities and degrees of importance of business operations;• improved safeguarding of stakeholders and boosting of their trust;• maximization of value for shareholders and all other stakeholders;• improvement of transparency in financial communication for the market;• improvement of internal control systems.

In many areas of corporate governance the Company’s model reflects some of the most recent and ad-vanced regulatory standards and best practice (such as the Sarbanes-Oxley Act – July 2002 and the Com-bined Code on Corporate Governance, UK – July 2003).For example, the majority of the Company’s directors are independent, the Company is not subject to “di-rection” or “co-ordination” by any external enterprise (as defined by the “Vietti” reform) and since 1996there has been a clear separation of powers between the Chairman and the CEO.Further, on the subject of Internal Dealing and the Board’s Remuneration Committee, the Company hasvoluntarily gone well beyond the provisions of the Code and Italian law by introducing blocking periods(not required by law), during which Relevant Persons are not allowed to carry out operations involvingCompany stock, and by halving the deadlines for disclosure of completed operations to the market. TheCompany’s Human Resources Committee has tasks and functions that are considerably more onerous than

Post balancesheet events

Plans for 2004

CorporateGovernance

system

492 0 0 3 A N N U A L R E P O R T


those provided for it in the Code (eg. monitoring the state of the organization and the management’s de-velopment plans).The key documents on which the Company’s corporate governance is based are:• its bylaws;• the Rules disciplining Shareholders’ Meetings;• the Company’s disclosures procedure;• the Code on Internal Dealing• the procedure for Significant Operations and Operations with Correlated Parties;• the procedure for notices to the Statutory Audit Committee (art. 150, TUIF).

So that the market can look at the Company’s corporate governance system in detail the above listed doc-uments have been made available on-line (in Italian and English) at www.merloni.com (see page:http://www.merloni.com/eng/finance/1_6_13_corporate_governance.jhtml).

In 2004 the Company will adopt an Organization Model and Code of Conduct for the purposes of decreelaw 231/01. The Model and Code will render the Company’s internal control system more effective andprevent commission of the illicit acts (criminal and administrative) indicated in the aforesaid decree law.

2. Company organization, management and responsibilitiesThe Company’s management and control system is “ordinary” (as defined by Italian law), ie. based on aBoard of Directors, a Statutory Audit Committee and external accountants.These bodies are elected by the shareholders and hold office for three year periods.The majority of independent directors and the key roles they play both on the Board and in its commit-tees ensure effective reconciliation of interests across all the shareholders and a wide base for board roomdiscussions.The Board has set up three committees: Human Resources, Internal Control (with roles and functions asper the Code) and Innovation and Technology.

3. Annual report on Corporate GovernanceThis report (approved by the Company’s Board of Directors on March 23, 2004) was drawn up in accor-dance with Borsa Italiana guidelines dated February 12, 2003 and the “Guide to compiling corporate gov-ernance reports” published in February 2004 by Assonime and Emittenti Titoli Spa.Its purpose is to provide a full description of the corporate governance model adopted by the Companyand report on the current state of compliance with the “Listed Companies Code of Self-discipline” (here-after “Code”). To this end the Report is in two parts:• brief disclosure of the Company’s governance system, its objectives and general principles (policy) and

of its organization and management structures;• analytical comparison between the model of governance actually adopted by the Company and the pro-

visions of the Code; this second part makes it possible to check compliance with the provisions of theCode (which represents best practice in Italy in this matter) and also explains the reasons for departurestherefrom (only one).

For any other information, please refer to the Annual report on Corporate Governance.

50


Attached hereunder are the following annexes:

• Annex 1: Shares held by directors, statutory auditors and general managers - December 31, 2003.• Annex 2: Stock options allotted to directors and general managers.• Annex 3: Stock options allotted to group executives and middle managers.• Annex 4: Positions held by directors of Merloni Elettrodomestici Spa in other listed companies,

finance houses, banks, insurance companies and other large concerns.• Annex 5: Board of directors and its committees.• Annex 6: Statutory audit committee.• Annex 7: Other provisions of the self-discipline code

March 23, 2004

For the Board of Directors

Vittorio MerloniChairman

Annexes

512 0 0 3 A N N U A L R E P O R T


52

Annex 1SHARES HELD BY DIRECTORS, STATUTORY AUDITORS AND GENERAL MANAGERS - DECEMBER 31, 2003

Surname Company invested in Ownership Number of shares Number Number Number of sharesand name held at end of shares of shares held at end

of previous year acquired sold of 2003

Merloni Vittorio Merloni Elettrodomestici Spa through trust company Sirefid Spa 72,160 698,300 72,160 698,300 (1)

ordinary sharesindirect through Fineldo Spa 42,678,794 186,344 - 42,865,138indirect through Merloni Progetti Spa 554,000 137,213 416,787indirect through Merloni Progetti Int. Sa 1,100,000 30,000 194,964 935,036indirect through Merloni Elettrodomestici Spa, 11,039,750 - - 11,039,750treasury shares without voting rightsthrough Franca Carloni, spouse - 254,840 254,840 (1)

through trust company Sirefid SpaMerloni Elettrodomestici Spa indirect through Fineldo Spa 6,000 - - 6,000savings sharesMerloni Electroménager Sa direct 1 - - 1

Merloni Ester Merloni Elettrodomestici Spa indirect through Fines Spa 7,343,866 - - 7,343,866ordinary shares

direct 5,042,400 - - 5,042,400

Colombo Felice Merloni Elettrodomestici Spa through subsidiary CO.GE.FIN 1,804,722 - - 1,804,722ordinary shares

Merloni Andrea Merloni Elettrodomestici Spa through trust company Sirefid Spa: 1,560 254,840 - 256,400 (1)

ordinary shares 254,840 - direct 1,560

Merloni Aristide Merloni Elettrodomestici Spa through trust company Sirefid Spa: 12,000 254,840 - 266,840 (1)

ordinary shares 254,840 - direct 12,000

Caio Francesco Merloni Elettrodomestici Spa direct 1,000 - - 1,000ordinary shares

Merloni Francesco Merloni Elettrodomestici Spa direct 2,329,000 - - 2,329,000ordinary shares

through trust company Cordusio Spa 2,685,653 - - 2,685,653through Maria Cecilia Lazzarini, spouse 1,649,500 3,500 - 1,653,000through Maria Cecilia Lazzarini, spouse, 1,623,700 - - 1,623,700through trust company Cordusio Spa

Milani Marco Merloni Elettrodomestici Spa direct - 20,000 20,000 —(2)

ordinary shares

Sasso Andrea Merloni Elettrodomestici Spa direct - 22,500 22,500 0 (2)

ordinary shares

Total 77,944,106 1,725,164 446,837 79,222,433(1) Increase due to family donation(2) Stock option


532 0 0 3 A N N U A L R E P O R T

Annex 2STOCK OPTIONS ASSIGNED TO DIRECTORS AND GENERAL MANAGERS - 2003

Options held Options assigned Options exercised Options Options heldat start of year during year during year expired at year end

during year

(A) (B) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

Name and Office Number Average Average Number Average Average Number Average Average Number Number Average Averagesurname held of exercise maturity of exercise maturity of exercise market of of options exercise maturity

options price options price options price price on options (=1+4 priceexercise -7-10)

Vittorio ChairmanMerloni 1,000,000 4.760 2004-2006 1,000,000 4.760 2004-2006

Andrea CEOGuerra 465,000 4.741 2004-2006 465,000 4.741 2004-2006

Marco CEO MerloniMilani Elettr. UK 195,000 4.737 2004-2006 20,000 4.488 10.812 175,000 4.775 2004-2006

Andrea GeneralSasso manager 65,000 6.197 2005-2007 22,500 4.666 11.776 42,500 6.197 2005-2007

Roberto Director Ruozi 100,000 4.760 2004-2006 100,000 4.760 2004-2006

Felice Director Colombo 100,000 4.760 2004-2006 100,000 4.760 2004-2006

Hugh Director Malim 100,000 9.695 2004-2006 100,000 9.695 2004-2006

Carl H. Director Hahn 100,000 4.760 2004-2006 100,000 4.760 2004-2006

Francesco Director Caio 200,000 4.709 2004-2007 200,000 4.709 2004-2007

Alberto Director Fresco 100,000 9.695 2004-2006 100,000 9.695 2004-2006

Total 2,425,000 2,382,500


54

Annex 3STOCK OPTIONS ASSIGNED TO GROUP EXECUTIVES AND MIDDLE MANAGERS

2003 2002 2001 2000 1999No. Average Average No. Average Average No. Average Average No. Average Average No. Average Average

options price market options price market options price market options price market options price marketprice price price price price

Existingrightsat 1/1 2,460,250 10.0720 2,527,500 5.8240 1,372,500 4.7020 665,000 4.6588 4.138

New rightsassignedin year 405,000 12.6479 12.1474 700,000 7.9258 9.5865 1,192,500 4.8082 4.7378 762,500 4.8481 740,000 4.6588 4.1481

Detail 635,000 4.488

127,500 4.88

Rightsexercisedin year 466,750 12.1474 682,250 9.5865 5,000 4.6588 4.7378

Detail 40,000 4.6588 420,000 4.6588

174,250 4.488 38,750 4.88

42,500 4.88 223,500 4.488

210,000 4.8082

Rightsexpiredin year

Rightsforfeitedin year 205,000 12.1474 85,000 9.5865 32,500 4.7378 55,000 4.8481 75,000 4.6588

Detail 5,000 4.6588 25,000 4.488 12,500 4.6588 37,500 4.6588

10,000 4.488 10,000 4.88 15,000 4.488 12,500 4.488

5,000 4.88 50,000 4.8082 5,000 4.88 5,000 4.88

60,000 4.8082

120,000 7.9258

5,000 12.6479

Rightsexistingat year end 2,193,500 14.8580 2,460,250 10.072 2,527,500 5.824 4.702 4.6588 4.138

of whichexercisableat year end 607,250 242,750 332,500 4.6588


552 0 0 3 A N N U A L R E P O R T

Annex 4POSITIONS HELD BY DIRECTORS OF MERLONI ELETTRODOMESTICI SPA IN OTHER LISTED COMPANIES, FINANCE HOUSES,BANKS, INSURANCE COMPANIES AND OTHER LARGE CONCERNS.

Director Office Company

Vittorio Merloni Chairman Fineldo SpaDirector Cofiri Spa (1)

Efibanca SpaMerloniTermoSanitari Spa

Francesco Caio Managing Director Cable and Wireless plcDirector Motorola Inc. (2)

Felice Colombo CEO Co.Ge.Fin. SpaDirector Finpart Spa

Carl H. Hahn Director Atradius ngs AgPerot Systems Corporation Hawesko Holding AG

Hugh Malim Chairman Barclays Financial Services Italia SpaBanca Woolwich Spa

Vice-Chairman Barclays Private Equity Spa

Andrea Merloni Director Fineldo Spa

Aristide Merloni Director Fineldo Spa

Ester Merloni Sole Director Fines SpaDirector Fineldo Spa

MerloniTermoSanitari Spa

Francesco Merloni Chairman MerloniTermoSanitari SpaMerloni Finanziaria SpaMerloni Invest SpaM.I. Energia Spa

Luca Cordero di Montezemolo Chairman Ferrari SpaMaserati Spa

Director Fiat SpaTod’s SpaPPR–Pinault/Printemps RedouteUnicredit Banca d’Impresa Spa

Roberto Ruozi Chairman Factorit SpaPalladio Finanziaria SpaTouring Club ItalianoePlanet SpaAXA Interlife SpaAXA Assicurazioni SpaAXA Sim SpaUAP VITA SpaMediolanum Spa

Director Mediaset SpaGewiss SpaData Service SpaL’Oréal Italia Spa

Chairman, Statutory Audit Committee Borsa Italiana Spa

(1) Stood down 15/01/2004(2) Stood down March 2003


56


Annex 5CORPORATE GOVERNANCE - BOARD OF DIRECTORS AND ITS COMMITTEES

Board of Directors Internal Human InnovationControl Resources and Technology

Committee # Committee Committee

Post Members Executives Non-executives Independent * * * * Number of * * * * * * * * * * * * * * * * * * * * *other posts* *

Chairman Merloni Vittorio • 100% 4 • 100% •CEO Guerra Andrea • 100% 0 • 25% •Director Caio Francesco • • 40% 2 • 50%

Director Colombo Felice • • 100% 2 • 100%

Director Fresco Alberto • • 100% 0 • 100%

Director Hahn H. Carl • • 80% 3 • 100%

Director Malim Hugh • • 80% 3 • 100%

Director Merloni Andrea • 100% 1 •Director Merloni Aristide • 100% 1

Director Merloni Ester • 100% 3

Director Merloni Francesco • 100% 4

Director Montezemolo • • 40% 6 •Luca Cordero

Director Ruozi Roberto • • 60% 14 • 100%

# Departure from recommendations of the Code: the Chairman sits on this Committee even though he is an executive director, given the Committee’s focus on operatingmanagement risk evaluation. His participation is a guarantee for stakeholders. An appointments committee has never been set up because the shareholders have neverhad any difficulty in finding candidates.

* A single asterisk indicates that a director was appointed from a minority list.

* * This column shows the number of positions held (director or statutory auditor) in other companies listed in regulated markets, including non Italian ones, financehouses, banks, insurance companies and other large organizations. Annex E to the Report details such posts in full.

* * * A “•” in this column indicates that a director is also a committee member.

* * * * This column shows directors’ attendance (in %) at Board and committee meetings.

Number of meetings heldin the reference period

Boardof Directors: 5

Internal ControlCommitte: 3

Human ResourcesCommittee: 4

The Innovation and Technology Committeewas set up on 23rd March 2004

Annex 6CORPORATE GOVERNANCE - STATUTORY AUDIT COMMITTEE

Post Members Members’ attendance at Committee meetings (%) Number of other posts**

Chairman Casò Angelo 100% 3

Standing auditor* Minuto Demetrio 100% 1

Standing auditor Salè Paolo Omodeo 100% 0

Reserve auditor Venceslai Leonello

Reserve auditor* Colombo Fabrizio

Number of meetings during the reference period: 8

Required quorum for submission of lists by minority shareholders for the election of one or more standing auditors (ex art 148 TUF): 2%

* A single asterisk indicates that the auditor was appointed from a minority list.

* * This column shows the number of positions held (director or statutory auditor) in other companies listed in regulated markets, including non Italian ones, finance houses,banks, insurance companies and other large organizations.

572 0 0 3 A N N U A L R E P O R T


Annex 7CORPORATE GOVERNANCE - OTHER PROVISIONS OF THE SELF-DISCIPLINE CODE

YES NO Reasons for departure from the recommendations of the CodeDelegation of powers and operations with correlated parties

Has the Board delegated powers and defined their:

a) limits •b) mode of exercise •c) reporting frequency? •

Does the Board review and approve operations of special •economic, equity and financial importance(including operations with correlated parties)?

Has the Board defined guidelines and criteria for identifying •“significant” operations?

Are the aforesaid guidelines and criteria described in the report? •Has the Board defined special procedures for reviewing •and approving operations with correlated parties?

Are the procedures for reviewing and approving operations •with correlated parties described in the report?

Procedures for the most recent appointment of directorsand statutory auditors

Submission of candidacies for directorships occurred at least •ten days beforehand?

Were candidacies for directorships accompanied •by full information?

Were candidacies for directorships accompanied by statements •of eligibility for “independent” status?

Submission of candidacies for the post of auditor occurred • The bye-laws provide for five days. at least ten days beforehand?

Were candidacies for the post of auditor accompanied •by full information?

Shareholder meetings

Has the Company approved rules disciplining •shareholders’ meetings?

Are the Rules attached to the report (or does the report say •where they can be obtained/downloaded)?

Internal control

Has the Company appointed internal control officers? •Are such officers independent of operating area managers? •Who is in charge of internal control The Group Chief Internal Auditor (pursuant to art. 9.3 of the Code)?

Investor relations

Has the Company appointed an investor relations manager? •Who is the investor relations manager (address and e-mail)? Elisabetta Vilizzi - Address: Viale Certosa 247 - 20151 Milano

[email protected]

58

INFORMATION BY REGION AS OF DECEMBER 31, 2003 (Euro thousands)

Economic results by region Western Europe Eastern Europe Rest of the world Consolidated

Sales to third parties 2,019,849 817,217 170,675 3,007,741

Inter-company sales (**) 108,090 66,248 40,822

Total revenues 2,127,939 883,464 211,497

Result by region (*) 138,718 164,656 24,096 327,470

Non attributable general expenses 81,948

Difference between value and cost of production 245,522

Net financial charges (28,002)

Revaluation (writedown) of investments (1,631)

Net extraordinary charges (18,412)

Result before taxes 197,477

Taxes 71,916

Minority interests 5,263

Group result 120,298

OTHER INFORMATIONAssets by region

Breakdown by region (%) 76% 12% 12%

Receivables 367,648 55,447 58,683 481,779

78% 17% 5%

Inventories 222,078 47,203 15,307 284,588

Total 589,726 102,649 73,991 766,367

Placement of long-term assets 629,607 207,792 22,966 860,364

Centralized assets 679,139

Total consolidated assets 2,305,870

Liabilities by region

Breakdown by region (%) 70% 26% 4%

Suppliers 557,283 206,056 28,556 791,895

Centralized liabilities 1,513,975

Total consolidated liabilities 2,305,870

(*) Includes the following types of cost: production, distribution, commercial, administrative and general costs directly attributable to markets.The Western Europe region includes Italy, France, Portugal, Spain, Germany, The Netherlands, the UK, Belgium, Denmark, Finland, Iceland, Norway, Sweden, Ireland,Austria, Switzerland, Greece, as well as Cyprus, Albania, Macedonia, Croatia, Serbia and Slovenia.The Eastern Europe region includes the CIS, Poland, Rumania, Bulgaria, Hungary, the Czech Republic and Slovakia.The Rest of the world includes Turkey, South America, North America, Africa, Australia, Middle and Far East.

(**) Includes revenues from inter-company sales and services produced in one region and sold in another.(***) The three regions are “client-oriented” for the purpose of this data summary. Revenues and relative costs for a given region may therefore also contain data relating to

Group companies that invoice clients in that region but reside in countries outside it.


Consolidated financial statementsat December 31, 2003

60

Consolidated balance sheet

ASSETS (Euro thousands)


A) Share capital issued and not yet paid - -B) Fixed assetsI - Intangible fixed assets:

1) installation and expansion costs 4,728 2,8322) research, development and advertising costs 14,592 7,6333) industrial patent rights and utilization of know-how 34,717 30,2934) concessions, licenses, trademarks and similar rights 63,720 67,4905) goodwill - -5-bis) consolidation difference 39,632 38,7246) intangible assets in progress and payments on account 15 7557) others 4,373 5,333

Total 161,777 153,060II - Tangible fixed assets:

1) land and buildings 239,219 251,0972) plant and machinery 294,211 302,9623) industrial and commercial equipment 77,622 67,2994) other goods 53,965 48,6305) fixed assets and advances 33,474 19,977

Total 698,491 689,965III - Financial fixed assets

1) shareholdings in:a) subsidiaries 138 111b) associated companies 46,610 48,096d) other enterprises 1,712 1,908

2) receivables:d) from others 71,738 82,804- of which falling due in the subsequent period 859

3) other securities 10 -4) treasury shares 32,974 32,974

total nominal value 10,929Total 153,182 165,893

Total fixed assets (B) 1,013,450 1,008,918

C) Current assetsI - Inventory:

1) raw and auxiliary materials and spare parts 56,387 68,7642) work in progress 11,535 10,7023) contract work in progress 40 714) finished goods 214,587 184,6395) advances 2,039 1,185

Total 284,588 265,361II - Receivables:

1) trade receivables 462,474 408,852- of which falling due in the subsequent period 109

2) from subsidiaries 1,781 1,273- of which falling due in the subsequent period -

3) from associated companies 17,464 48,981- of which falling due in the subsequent period -

4) from parent companies 60 6- of which falling due in the subsequent period -

5) from others 96,280 77,158- of which falling due in the subsequent period 7,168

Total 578,059 536,270III - Financial assets not held as fixed assets:

6) other securities 29,732 -7) financial assets not held as fixed assets 2,897 6,106

Total 32,629 6,106IV - Cash:

1) banks and postal deposits 373,277 523,0202) cheques 21 103) cash on hand 334 351

Total 373,632 523,381

Total current assets (C) 1,268,908 1,331,118

D) Accrued income and prepayments 23,512 15,870 - interest on loans -

TOTAL 2,305,870 2,355,906

CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2003

612 0 0 3 A N N U A L R E P O R T

C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S A T D E C E M B E R 3 1 , 2 0 0 3

Liabilities (Euro thousands)

December 31, 2003 December 31, 2002A) Shareholders’ equity:

I - Share capital 99,871 99,451II - Share premium reserve 20,702 18,936III - Revaluation reserves 4,165 4,105IV - Legal reserve 9,627 12,551V - Reserve for treasury shares 32,974 32,974VI - Statutory reserves - -VII - Other reserves, indicated separately in the notes 36,830 (3,941)VIII - Profit (loss) carried forward 156,964 151,180IX - Group profit (loss) 120,298 106,925Group shareholders’ equity 481,431 422,181X - Share capital and reserves - minority interests 30,596 98,151XI - Profit (loss) for the year - minority interests 5,263 1,093Shareholders’ equity - minority interests 35,859 99,244

Total 517,290 521,425B) Reserves for risks and charges

1) pensions and similar obligations 1,748 2,4642) taxation 10,627 1,8423) consolidation reserve for future risks and charges - 8,3474) others 65,843 81,638

Total 78,218 94,291C) Staff leaving indemnity 62,044 59,003D) Payables:

1) debentures 150,000 150,000- of which falling due in the subsequent period -

2) convertible debentures - -- of which falling due in the subsequent period -

3) banks loans payable 436,073 558,151- of which falling due in the subsequent period 64,061

4) other financing payables 83,456 84,109- of which falling due in the subsequent period 71,195

5) advances 7,289 6,089- of which falling due in the subsequent period -

6) trade payables 567,681 493,244- of which falling due in the subsequent period -

7) secured payables - -- of which falling due in the subsequent period -

8) payables to subsidiaries 2,947 1,558- of which falling due in the subsequent period -

9) payables to associated companies 213,512 208,588- of which falling due in the subsequent period -

10) payables to parent companies 466 247- of which falling due in the subsequent period -

11) taxes payable 69,454 73,879- of which falling due in the subsequent period 7

12) social security payables 36,332 33,149- of which falling due in the subsequent period -

13) other payables 47,297 42,171- of which falling due in the subsequent period 1

Total 1,614,507 1,651,185 E) Accrued liabilities and deferred charges 33,811 30,002

- interest on loans -TOTAL 2,305,870 2,355,906

Memorandum accounts (Euro thousands)

December 31, 2003 December 31, 2002Direct and indirect guaranteesguarantees:

- for the benefit of third parties 3,641 2,966other guarantees:

- for the benefit of third parties - -collaterals:

- for the benefit of third parties - 3,911purchase or sale commitments 251,795 354,618third party goods held by the Company 3,712 -TOTAL 259,148 361,495

62


Consolidated income statement (Euro thousands)

2003 2002A) Value of production

1) revenues from sales and services 3,007,741 2,480,2252) variations in work in progress and finished goods 39,679 24,8013) variations in contract work in progress (31) 574) variations in fixed assets 11,231 3,6055) other income 50,971 43,112

- of which grants for the year 294Total 3,109,591 2,551,800B) Cost of production

6) raw and auxiliary materials, spare parts and goods 1,633,123 1,346,2027) services 492,002 429,1878) utilization of third party assets 45,454 28,7269) personnel costs:

a) payroll 399,160 287,252b) social security 89,053 76,069c) staff leaving indemnity 10,534 9,980d) pensions and similar obligations 268 443e) other costs 9,384 8,450

10) amortization/depreciation and writedowns:a) amortization of intangible fixed assets 28,634 22,403b) depreciation of tangible fixed assets 113,147 92,555c) other writedowns of fixed assets 2 185d) writedown of receivables recorded as current assets and cash 12,682 6,536

11) variations in raw and auxiliary, spare parts and goods inventories 5,882 6,39712) provisions for risks 3,771 9,63913) other provisions 778 -14) other operating charges 20,195 24,541

Total 2,864,069 2,348,565Difference between value and cost of production (A-B) 245,522 203,235C) Financial income and charges

15) income from shareholdings: 39 788- of which from other enterprises 39

16) other financial income:a) receivables stated as fixed assets 770 1,160

- from associated companies 770d) other income 48,763 73,060

- others 48,76317) interest and other financial charges 77,574 100,638

- from associated companies 32- from parent companies 4- others 77,538

Total (28,002) (25,630)D) Adjustments to the value of financial assets

18) revaluations: a) shareholdings 2,159 2,404

19) writedowns: a) shareholdings 3,790 -

Total (1,631) 2,404E) Extraordinary income and charges

20) income 13,448 11,026- gains on disposals 1,382- others 12,066

21) charges 31,860 25,398- losses on disposals 703- prior year taxes 879- others 30,278

Total (18,412) (14,372)Result before taxes (A-B+C+D+E) 197,477 165,637

22) Income tax for the year 71,916 57,61923) Profit (loss) for the year 125,561 108,018

Profit (loss) for the year - minority interests 5,263 1,093Profit (loss) for the year - Group 120,298 106,925

632 0 0 3 A N N U A L R E P O R T


STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY (Euro thousands)

Balance at Reclassif- 2002 Dividend Exercise Conversion Changes Other Exchange Result Balance at12/31/2002 -ications attribution distribution of stock of saving in consolidation movements translation for the 12/31/2003

(**) of consolidated options shares area reserve yearprofit

Shareholders’ equityGroup:

Share capital 99,451 420 99,871

Share premium 18,936 1,765 20,702reserve

Revaluation 4,105 60 4,165reserve

Legal reserve 12,551 (8,299) 5,375 9,627

Statutory reserve - -

Reserve for 32,974 32,974treasury shares

Extraordinary 354 69,990 70,344reserve

Reserve for grant 19,762 4 820(*) 20,586to capital accounts

Currency (25,067) (29,853) (54,920)exchangereserve

Consolidation 987 (189) 797reserve

Other reserves 23 23

Profit (loss) 151,180 6,064 31,560 (32,130) 289 156,964carried forward

Profit (loss) 106,925 (106,925) 120,298 120,298for the year

Total shareholders’ 422,181 (2,171) - (32,130) 2,185 - - 920 (29,853) 120,298 481,431equity - GroupMinority interests:

Capital and reserves 98,151 2,171 1,093 (65,024) (5,793) 30,596

Profit (loss) 1,093 (1,093) 5,263 5,263

Total shareholders’ 99,244 2,171 - - - - - (65,024) (5,793) 5,263 35,859equity - Minorityinterests

TOTAL 521,425 - - (32,130) 2,185 - - (64,104) (35,646) 125,561 517,290

(*) Disbursement of loans under law 488.

(**) Reserves under shareholders’ equity have been reclassified with respect to balances al December 31, 2002

64

NET FINANCIAL POSITION (Euro thousands)

December 31, 2003 December 31, 2002Financial receivables not held as fixed assets 33,488 6,106Bank and postal deposits 373,277 523,020Cash on hand 356 362Short-term bank loans payable 372,012 388,301Other short-term financing payables 12,261 1,014Short-term payables to associated companies for leasing 178 1,095Debentures payables within year end 150,000 -Net short-term position 127,330 (139,078)Medium/Long-term financial receivables 70,889 82,804Debentures - 150,000Medium/Long-term bank loans payable 64,061 169,850Other long-term financing payables 71,195 83,095Long-term payables to associated companies - 417Net long-term position 64,367 320,558Net total position 191,697 181,480

CASH FLOW STATEMENT (Euro thousands)

2003 2002Result of operations 245,522 203,235Depreciation and amortization 141,782 115,143Taxation (71,916) (57,619)Gross operating cash flow 315,388 260,759Change in net operating working capital 22,538 47,243

Change in trade receivables (22,667) (29,319)Change in inventories (19,227) (75,624)Change in trade payables 83,503 121,318Change in other short-term assets/liabilities (19,071) 30,868

Change in staff leaving indemnity 3,041 2,364Change in other reserves (16,073) 30,094Net operating cash flow 324,894 340,460Investment/divestments in/of tangible fixed assets (121,674) (237,054)Investment/divestments in/of intangible fixed assets (excluding goodwill) (36,442) (81,432)Change in goodwill (907) (38,725)Investment/divestments in/of financial fixed assets 1,655 (11,274)Cash flow from investments (157,368) (368,485)Free cash flow 167,526 (28,025)Financial charges/income (29,633) (23,226)Extraordinary charges/income (18,412) (14,372)Change in share capital 420 614Change in reserves 513 3,873Change in conversion reserve (29,853) (31,950)Change in treasury shares - 594Change in minority interest (68,648) 84,063Dividends (32,130) (21,893)Residual cash flow (10,217) (30,322)

CHANGE IN NET FINANCIAL POSITION Decreases (increases) in financial fixed assets 11,056 (49,664)Decreases (increases) in short-term financial assets 123,225 (48,246)Increases (decreases) in long-term loans (268,104) 11,194Increases (decreases) in short-term loans 144,040 117,038Total change in net financial position 10,217 30,322


Notes to the consolidatedfinancial statements

at December 31, 2003

66

The financial statements as of December 31, 2003 were drafted in accordance with decree law 127/1991and regarding matters not specifically provided for in said law with the accounting standards prom-ulgated by the “Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri” (CNDC) or otherwisethose of the International Accounting Standard Board® (IASB, formerly IASC International AccountingStandard Committee) and the Financial Accounting Standards Board (FASB). Further, these supple-mentary notes were prepared in accordance with the provisions regarding disclosure of financial in-formation in decree law 58/1998 (“Draghi” consolidated law) and subsequent decrees in enforcementand addition thereto and in line with CONSOB recommendations.

The consolidated statements include the accounts of the Group parent company Merloni Elettrodomesti-ci Spa and of its Italian and non-Italian subsidiaries forming the Merloni Group in which Merloni Elet-trodomestici Spa directly or indirectly holds more than 50% of stock or has de facto control. Companiesin which it has an investment of over 20% or in which it exercises significant control under the terms ofart. 2359 Civil Code are stated using the equity method.Non-material subsidiaries (accounting for less than 0.5% of revenues overall) were excluded from the con-solidation area on the grounds that their exclusion would not detract from clear understanding of the fi-nancial statements, as allowed under art. 29, decree law 127/91.As illustrated in the directors’ report, the consolidation area underwent variations with respect to De-cember 31, 2002 due to the line by line consolidation of the balance sheet and income statement of Gen-eral Domestic Appliances Holdings Ltd, whose income statement at December 31, 2002 had been consol-idated on a proportional basis for nine months. Detailed comparative data is provided below in the sec-tion entitled “Comments on the main income statement items” and refers in particular to the economiceffect that line by line consolidation would have had at December 31, 2002. The stake owned in General Domestic Appliances Holdings Ltd moved from 50% to 60% following exer-cise of a put option by General Electric in January 2003. The price of the option was Usd 72m, of whichthe equivalent of Euro 69m was paid by distribution of the reserves of General Domestic Appliances Hold-ings Ltd. As of June 1, 2003 Merloni Domestic Appliances Ltd transferred its commercial assets and liabil-ities to General Domestic Appliances Ltd, which changed its name to Merloni Elettrodomestici UK Ltd inJuly. This restructuring operation did not have any economic effects for the purposes of the consolidatedfinancial statements.In 2003 Merloni Brembate Spa (former Philco Italia Spa) and Star Spa were merged into Merloni Elet-trodomestici Spa to simplify the ownership structure. These extraordinary operations generated mergerdifferences in the balance sheet of Merloni Elettrodomestici Spa but did not affect the Group’s consoli-dated statements.The statements of consolidated companies were drawn up in accordance with the accounting standardsand criteria provided for in art. 2423 and subseq., Civil Code, and in line with those promulgated by the“Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri” or, otherwise, the International Account-ing Standard Board® (IASB, formerly IASC International Accounting Standard Committee) and the Finan-cial Accounting Standard Board (FASB).Adjustments made in the financial statements of the Group parent company or those of its subsidiariesfor the sole purpose of enjoying otherwise unobtainable tax benefits have been eliminated from the con-solidated statements.The post balance sheet events illustrated in the directors’ report are an integral part of the supple-mentary notes.The companies included in the consolidation area at December 31, 2003 are listed in Annexes.

NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS

Formatand content

672 0 0 3 A N N U A L R E P O R T

N O T E S

There were no exceptional cases requiring departure from standard procedure as allowed by art. 29, claus-es 4 and 5, decree law 127/1991.

The evaluation criteria adopted in preparing the consolidated statements are in line with those used bythe Group, which follows Consob recommendations.

INTANGIBLE FIXED ASSETSThis item concerns expenses with deferred utility, reported in the financial statements at purchase or pro-duction cost, including accessory charges and amortized on a straight line with regard to the residual pos-sibility of utilization.• Installation and expansion costs are amortized over five years.• Research, development and advertising costs are amortized over three years, except for planning costs

for new projects, which are amortized over five years.• Industrial patent rights and utilization of know-how are recorded as assets at purchase or production

cost. The item includes costs for the development and integration of data processing systems. Purchasecost includes accessory costs. Such costs are amortized each year with regard to the residual useful eco-nomic life, which normally corresponds to five years.

• Costs for licenses and trademarks are recorded at purchase cost including accessory costs and are amor-tized on the basis of the residual possibility of utilization.

• Goodwill (or consolidation difference) is the difference between the shareholders’ equity of subsidiaries andthe cost stated in the parent company’s and subsidiaries’ balance sheets. After any attribution of such dif-ference to subsidiaries’ assets or liabilities, goodwill is amortized over a period of five or ten years, whichev-er is deemed more appropriate in relation to the capacity of the investment from which the goodwill emergedto produce income or free cash flow in excess of normal long-term income generation. The value of good-will is reviewed at the end of every year using internationally accepted methods (discounted cash flow).

• Other intangible assets mainly include: charges for the acquisition of mortgages and shareholdings,costs sustained for third-party goods amortized as a function of the duration of related contracts.

TANGIBLE FIXED ASSETSTangible fixed assets, reported net of the accumulated depreciation provision, are booked at purchase orproduction cost, with the exception of fixed assets revalued in accordance with legislation.Costs include accessory charges and costs directly attributable to the assets. At the time of acquisition ofbusiness operations, some fixed assets were valued at market value, on the basis of expert appraisals. Main-tenance costs of an ordinary nature are fully charged to the Income statement. Maintenance costs of anincremental nature are attributed to the fixed assets to which they refer and depreciated in relation totheir residual possibility of utilization.Property, plant and equipment are depreciated on a straight line basis at rates reflecting their residual pos-sibility of utilization, which, with regard to Italian companies, corresponds to the ordinary rates requiredby fiscal legislation, reduced by 50 percent in the first year of operation of the fixed assets.

Depreciation rates utilized for the individual categories of fixed assets are:

Buildings and light constructions 3% - 10%

Plant and machinery 10% - 20%

Industrial and commercial equipment 10% - 33%

Other goods:

- motor vehicles and internal transport vehicles 15% - 30%

- furniture and office machines and data processing systems 12% - 30%

Exemptions

Evaluationcriteria

N O T E S

68

In the case in which, independently of depreciation that has already been accounted for, a permanent lossin value occurs, the fixed asset is written down by the same amount; when, in subsequent years the as-sumptions behind the writedown no longer apply, the original value is restated.Work in progress and advances to suppliers are recorded in the assets section on the basis of cost incurredand/or advances paid including directly attributable expenses.

INVESTMENTSShareholdings in associated companies are stated applying the equity method.Other shareholdings where the Group’ interest is not significant or which perform limited operations areconsolidated by the cost method; the balance sheet value is prudentially adjusted in cases of permanentloss in the value of the invested company.Receivables recorded as investments are valued at the presumed realizable value.Securities are recorded at purchase cost; when the value that can be deduced from market trends is per-manently lower than the value recorded, that value is adjusted through a writedown.Own shares, purchased on the basis of a shareholders’ resolution, as provided for in Italian law and withrespect for the limits therein specified, are valued at cost; eventual writedowns are disclosed in the eventof permanent loss in value.

INVENTORYInventory is valued at the lower of acquisition and production cost, determined on the basis of currentcosts, and presumed market value.The parent company values closing inventory by the LIFO step-by-step method.The application of this method did not generate significant differences compared with valuation at cur-rent costs.Cost is determined by the same criteria as that for tangible fixed assets; presumed realizable value is cal-culated taking into account selling costs.Obsolete and slow moving stock is valued with regard to the possibility of utilization or sale.

RECEIVABLESReceivables are recorded at the value resulting from the difference between their nominal value and thebad debt provision necessary to determine presumed realizable value.

CASHCash at year end is valued at nominal value. In the following notes any possible qualification on the cash in hand use is disclosed either deriving fromthe local legislation in countries with currency restrictions either deriving from third parties agreement.

ACCRUALS AND DEFERRALSAccruals and deferrals are recorded applying the accrual principle.

692 0 0 3 A N N U A L R E P O R T

N O T E S

GRANTS ON CAPITAL ACCOUNTSGrants to capital accounts under laws passed after January 1st, 1998 are posted to the income statementas “Other income” for the portions pertaining to the current period; portions pertaining to future periodsare posted to the balance sheet as “Deferred income”. These funds are only written to the income state-ment when the recipient company is certain of their collection. Grants to capital accounts under lawspassed prior to 1993 are recorded as “Other reserves” under shareholders’ equity in the balance sheet,gross of relevant taxes. Grants received under laws passed between 1993 and 1997 are also recorded as“Other reserves,” but net of relevant deferred taxes, as written to the tax reserves due to the change in tax-ation procedure.Since 1997, non-repayable grants that may be classified as “Grants to plant accounts” are recorded whenthe relevant admission decree is issued and deferred to future periods for an amount equal to the resid-ual value of the financed assets. Amounts granted for use in the current period are recorded as “Other in-come”.

PROVISIONS FOR RISKS AND CHARGESProvisions for risks and charges are set aside to cover losses or payables, of a precise nature and eithercertain or likely to occur, which in any case at year end could not be determined in terms of the amountand date of occurrence. Provisions reflect the best estimate on the basis of available information. Possi-ble risks for which the creation of a liability is only considered possible are indicated in the explanatorynotes without making any provision to in the reserve for risks.

STAFF LEAVING INDEMNITYFor Italian companies, the staff leaving indemnity, recorded in accordance with the requirements of theNational Labour Contract and in compliance with existing legislation, corresponds to the current com-mitment of the Group regarding employees at the financial statements’ closing date, less advances paidand the tax advance required by legislation.For foreign companies, a severance fund is set aside in accordance with local laws.For the defined benefit plan in the following notes is disclosed any information in respect of the equityvalue of the pension scheme, estimated on the basis of the most consistent actuarial hypotesis.

PAYABLESPayables recorded as liabilities in the balance sheet are recorded at nominal value.

REVENUESRevenues are recognized at the time of transfer of ownership, which generally corresponds with shipment.

DIVIDENDSDividends and relative tax credit are written to the year in which they are voted or collected.

N O T E S

70

INCOME TAXES FOR THE YEARTaxes for the year are determined on the basis of a realistic forecast of tax charges for the year and foryears fiscally not yet defined, taking into account possible exemptions and tax credits and applying exist-ing fiscal legislation. They are recorded net of advances paid and withholding taxes in the item “Taxespayable.” Deferred taxes are also set aside in accordance with the provisions of CNDC accounting princi-ple No. 25. Taking into account balance sheet and income statement components with deferred taxabili-ty/deductibility, both deferred tax assets and liabilities were calculated. In compliance with the principleof prudence, valuations were made taking expected earnings into account to the extent that these earn-ings are enough to obtain the tax benefit for which defferred tax assets are booked.

LEASED ASSETSThe economic effects of the registration of assets originally purchased, sold and subsequently boughtback under sale and leaseback contracts were reflected in the consolidated financial statements in ac-cordance with the criteria required by IAS 17 as better reflecting the economic and operating natureof the transaction. Operating leases are reported by recording installments in the Income statementon an accrual basis.

TRANSACTIONS IN FOREIGN CURRENCIESShort-term trade receivables and payables, the current portion of medium-long term payables and re-ceivables and liquid reserves in foreign currencies existing at the close of the year expressed originally incurrencies of countries not belonging to the Euro zone and recorded in the balance sheet at the exchangerate on the day of the operation are converted and posted in the financial statements at the year-end ex-change rate. Profits and losses arising from the currency conversion (conversion differences) of individ-ual short-term receivables and payables at the exchange rate on the balance sheet date are credited/deb-ited to the income statement as financial items.Medium-long term receivables and payables in foreign currencies are also posted in the financial state-ments by converting foreign currency amounts at the exchange rates on the balance sheet date. If con-version of individual medium/long term receivables and payables in foreign currencies (excluding the cur-rent portion) produces gains, they are deferred and attributed to the fiscal year in which they become cur-rent. The deferral of profits from exchange rate conversions is posted to the “Reserve for deferred profitson exchange rates,” in the balance sheet, under liabilities.Losses or gains arising from differences between exchange rates on the billing date (spot rate) and thoseapplied to any hedging operations (forward rate) are written to “financial income and charges” in the in-come statement.

COMMITMENTS, GUARANTEES AND RISKSCommitments and guarantees are indicated in the “Memorandum accounts” at contractual value.Risks for which the occurrence of a liability is either certain or likely are set aside in the reserve for riskson the basis of adequacy criteria.Risks where the liability is only considered possible are described in the explanatory notes withoutmaking any provision to the relative reserve.

712 0 0 3 A N N U A L R E P O R T

N O T E S

• Consolidated companies’ assets and liabilities are stated on a global, line by line basis. The book valueof consolidated investments is eliminated against their shareholders’ equity on the basis of the relevantaccounting values as of their first inclusion in the consolidation area.

• The difference between the cost of acquisition and the shareholders’ equity (at current values) of share-holdings at their acquisition date is written to the assets and liabilities of such investments, where pos-sible. Any positive differences are stated in Goowill under intangible fixed assets and amortized withinfive years (GDA in 10 years). If, on the other hand, shareholders’ equity is greater than acquisition costafter eventual reduction of the value of fixed assets and provision to the “Consolidation reserves for fu-ture risks and charges”, such surplus is written to the “Consolidation reserve” under consolidated share-holders’ equity.

• The portion of shareholders’ equity relating to 3rd party shareholders of consolidated subsidiaries is stat-ed in “Capital and reserves, minority interests”, under shareholders’ equity, whereas minority interestsin the net incomes of such companies are stated separately in the consolidated income statement un-der “Profits/losses for year, minority interests”.

• Profits not yet realized on operations between Group companies are eliminated, as are all receivablesand payables and transactions between companies in the consolidation area.

• Similar exclusions are made when stating associated companies on an equity basis, so that their valueswill not include any profit or loss such companies have in respect of the Group.

• Foreign company statements were converted into Euro as follows:- assets and liabilities at the exchange rates in force at the year end;- revenues and costs, income and charges, at the average exchange rates over the period;- shareholders’ equity items at the rates in force at the time such amounts were originated.

Foreign exchange differences arising from conversion of year-end shareholders’ equity values at histori-cal rates to those in force at the balance sheet date are written directly to shareholders’ equity, togetherwith differences between the economic result expressed at average exchange rates and the Euro value atyear-end rates, in the “Currency conversion reserve” item under “Other reserves”.The table below details the rates applied in converting currencies outside the Euro area.

Currency Opening Average Closing Average exchange rateexchange rate exchange rate exchange rate previous year

US dollar 0.95356 0.88427 0.79177 1.05939

Argentina peso 0.28242 0.30156 0.26702 0.32344

UK sterling 1.53728 1.44527 1.41884 1.58939

Polish zloty 0.24870 0.22506 0.21268 0.25755

Average exchange rates are weighted in relation to the turnover of individual companies.In the case of foreign subsidiaries and associates in countries with high inflation rates, values of invest-ments reflect adjustments made in application of international accounting principles regarding inflation.Since 1997 Merloni Group has been using the international accounting standard FAS 52 instead of IAS 29,which was previously applied to improve representation of the Group’s income performance and share-

Consolidationand currency

conversionprinciples

holders’ equity. The main distorting effects of IAS 29 concerned the statement of inventories, the over-statement of production purchasing and the over-statement of costs and fixed assets and thence of de-preciation. Such distorting effects are generated by the inflation-devaluation differential and are ampli-fied by the fact that most purchases and investments by subsidiaries are in Euro.The impact of FAS 52 on shareholders’ equity and profit for the year is detailed in the notes to the rele-vant items of Group shareholders’ equity.

In the course of 2003 the Company carried forward its 5-year revolving securitization operation, whichinvolves monthly without-recourse transfer of a portfolio of commercial paper with an average value ofaround Euro 120m.Funds needed to finance acquisition of debt are to come from the issue of commercial paper by Hexagon,a multi-seller vehicle managed by Crédit Agricole Indosuez, whose commercial paper is in the form ofshort-term monthly securities with a maximum Standard & Poor’s A-1+, which is equivalent to an AAAmedium-term rating.

The role of Merloni Spa, which does not control Crédit Agricole Indosuez or its Hexagon vehicle, either di-rectly, indirectly or through a trust company, is that of collecting the debt under transfer. Merloni Elet-trodomestici also acts as servicer for Crédit Agricole Indosuez, in that it is charged with the accountingand operating management of the operation.

The balance sheet items affected by this securitization operation are indicated in the notes hereunder.

In 2003, in line with the provisions of European Regulations 1606/2002, July 19, 2002, which require com-panies listed in the European Union to produce consolidated financial statements to International Finan-cial Reporting Standards (IFRS) as of January 1, 2005, Merloni Group launched a project for transition fromcurrent Italian accounting standards to IFRS so that the new rules can be adopted within the term re-quired by law.Analysis so far indicates that conversion to IFRS will have most impact on the following areas: formats(income statement, balance sheet, cash flow statement) and contents of supplementary notes; recordingand evaluation of goodwill and trademarks, derivatives operations, stock options, research and develop-ment expenses, tangible fixed assets, pension funds and staff leaving indemnity; statement of treasuryshares and extraordinary income items.

Securitization

IAS Project

72

N O T E S

732 0 0 3 A N N U A L R E P O R T

N O T E S

Assets

FIXED ASSETS

INTANGIBLE FIXED ASSETSThe table below details the composition and movements of the company’s intangible fixed assets.

Commentson the main

balance sheetitems

(Euro thousands) Opening Increases Decreases Amortization Change in Currency exchange Reclassifications Closingbalance consolidation area differences balance

Installation and 2,832 3,052 (43) (1,114) - - 1 4,728expansion costs

Research, development 7,633 12,102 - (5,023) - - (120) 14,592and advertising costs

Industrial patent rights 30,293 15,985 - (12,422) 9 - 851 34,717and utilizationof know-how

Concessions, licenses, 67,490 1,261 (49) (4,988) 8 - - 63,720trademarksand similar rights

Goodwill 38,724 5,595 - (4,745) - - 58 39,632

Fixed assets 755 - - - - - (740) 15under constructionand advances

Others 5,333 237 37 (341) (294) (673) 74 4,373

Total 153,060 38,233 (55) (28,634) (277) (673) 122 161,777

Installation and expansion costs (historical) break down as follows:

(Euro thousands) Historical cost 12/31/2003 Historical cost 12/31/2002

Incorporation expenses 1,732 1,466

Capital increase expenses 304 304

Merger costs 23 23

Start-up costs 7,334 4,548

Total 9,393 6,341

Accumulated amortization 4,666 3,509

Balance 4,728 2,832

The “Installation and expansion costs” item consists mainly of costs incurred in prior years for the startup of the web site and expenses for the new Stinol production facility in Lipetzk (Russia).The “Research & development and advertising costs” item refers mainly to investments by the Group par-ent company and the associate Wrap Spa for development of technologically innovative products.The Euro 12,102,000 increase in intangible assets under research & development costs relates largely todevelopment costs (Euro 10,661,000), both internal and external, incurred by Merloni Group for renewalof its product range and the relative design work. The major drive for product renewal in 2003 can be seenby comparing costs capitalized in 2003 and 2002.In particular, the main projects that generated these costs were for renewal of built-in hobs, cookers, ovensand combi fridges, development of new washing machine lines and “big size” products and renewal ofdishwasher lines. The costs created by such projects were also capitalized on the basis of an analysis of

their future usefulness in light of the process of conversion to IFRS that the company is conducting andtaking into account the provisions of IAS 38, which makes capitalization mandatory, whereas it is cur-rently optional under PPCC24. The overall impact of such capitalization of costs is Euro 9,046,000.The increase in “Industrial patent rights and utilization of know-how” is largely due to expenses incurredby the Group parent company for projects launched in previous years and still in progress, and in partic-ular for the development and upgrading of integrated software programs. The main projects in this con-text are C2C (Close to Customer), implementation of Group systems in the UK and in general the exten-sion of the SAP system to all Group companies.The “Concessions, licenses, trademarks and similar rights” item refers mainly to SAP licenses acquired bythe Group parent company in prior years and in 2003.

The “Goodwill” item refers to General Domestic Appliance Holdings Ltd, which controls the operating com-pany Merloni Elettrodomestici UK Ltd. This item is amortized on a straight-line basis over 10 years. Thevariation recorded over the year reflects accessory charges, including costs for commissions on stand byletters of credit relating to the Put&Call agreement with General Electric. The amortization period, as perart. 2426 Civil Code, was determined on the basis of the reference period adopted during appraisal of theUK company for acquisition purposes. The operation was conducted, in fact, on the basis of an appraisalthat discounted cash flows back over ten years, the period that the directors of Merloni ElettrodomesticiUK Ltd estimated the company could produce financial flows in excess of normal long-term capacity togenerate free cash flow.At the end of the year specific assessments were made of the recoverability of the goodwill (impairmenttest), also in relation to the UK company’s current income and financial prospects. The impairment testendorsed the value indicated at the time of the acquisition appraisal.

“Fixed assets under construction and advances” shows a decrease of Euro 740,000 reflecting the start-upof the projects mentioned above.

74

N O T E S

752 0 0 3 A N N U A L R E P O R T

N O T E S

TANGIBLE FIXED ASSETSThe table below details the composition and movements of tangible fixed assets.

(Euro thousands) Land and Plants and Industrial and com- Other Work in progress Totalbuildings machinery -mercial equipment goods and advances

OPENING VALUES

Historical cost 322,366 687,607 306,827 134,786 19,977 1,471,563

Revaluations 41,034 6,241 2,289 1,184 - 50,748

Accumulated depreciation (112,214) (390,890) (241,817) (87,567) - (832,488)

Writedowns (89) 4 - 227 - 142

Total 251,097 302,962 67,299 48,630 19,977 689,965

CHANGES

Acquisitions 5,019 33,348 35,228 24,183 45,535 143,314

Revaluations - - - - - -

Disposals (2,188) (25,371) (5,056) (2,515) (319) (35,449)

Depreciation for the year (12,792) (53,806) (30,203) (16,346) - (113,147)

Utilization of depreciation fund 821 23,227 4,356 1,751 - 30,155

Writedowns - - - (2) - (2)

Change in consolidation area - - - - - -

Conversion difference (4,776) (7,042) (1,000) (2,195) (308) (15,321)

Other changes 2,039 20,892 6,999 458 (31,411) (1,023)

Total (11,878) (8,751) 10,323 5,335 13,498 8,526

CLOSING VALUES

Historical cost 318,776 700,270 339,811 145,696 33,474 1,538,028

Revaluations 41,034 6,258 2,289 1,184 - 50,765

Accumulated depreciation (120,501) (412,321) (264,478) (93,233) - (890,533)

Writedowns (90) 3 - 318 - 231

Total 239,219 294,211 77,622 53,965 33,474 698,491

The investments made over the year relate to upgrading of production capacity, rationalization of pro-duction lines through standardization of processes and product platforms, widening of the product range,improvement of quality, reduction of production costs through automation, reduction of stocks and im-provement of customer service by replacement of permanent plant with flexible, computer-driven sys-tems, and improvement of work safety.

The “disposals” item includes disinvestments arising from routine replacement of industrial fixed assets(mainly plant and machinery and equipment). Part of such disposals (Euro 12,852,000) relates to theThionville plant in France.

The variation in “Fixed assets under construction and advances” is largely due to construction of plants inRussia and Poland (see section “Plans for 2004”).

The “Currency conversion differences” item reflects the loss in value of the Polish zloty and the UK ster-ling and its effects on the assets and liabilities of Merloni Indesit Polska Spzoo and General Domestic Ap-pliances Holdings Ltd.

FINANCIAL FIXED ASSETS

ShareholdingsThe table below details, as of December 31, 2002, the main shareholdings not stated line by line as theydo not affect a true and correct representation of the Group’s equity and income situation:

Shareholdings 12/31/2003 12/31/2002in subsidiaries Equity interest Balance sheet Equity interest Balance sheet(*) Euro thousands (%) value (*) (%) value (*)

Merloni Indesit Bulgaria Srlu 100.00 21 100.00 21

Consorzio Consumer Care 98.12 5 99.99 6

Merloni Appliances Asia Pacific Pte Ltd 100.00 74 100.00 74

Merloni Elettrodomestici Ceska Republika Sro 100.00 26 100.00 26

Merloni Domestic Appliances Norway As 100.00 12 100.00 12

Merloni Electroménager Suisse Sa - - 100.00 (28)

Total 138 111

The table below details shareholdings stated on an equity basis, as of December 31, 2003.

Shareholdings 12/31/2003 12/31/2002in associated companies Equity interest Balance sheet Equity interest Balance sheet(*) Euro thousands (%) value (*) (%) value (*)

M&B Marchi e Brevetti Srl 50.00 10 50.00 10

Merloni Progetti Spa 33.00 7,820 33.00 8,020

Faber Factor Spa 50.00 11,013 50.00 14,560

MPE Spa 33.00 6,791 33.00 5,088

Adria Lab Srl 40.00 290 40.00 290

Haier Merloni (Qingdao) Washing Machine Co. Ltd 30.00 6,732 30.00 8,566

Haier Merloni Electrical Appl. Co. Ltd 30.00 2,965 30.00 3,469

Tradeplace Bv 20.00 500 20.00 500

Distretto dell’Elettrodomestico 22.22 10 22.22 10

Aermarche Spa 41.40 10,388 29.40 7,492

Others - 91 - 91

Total 46,610 48,096

The table below details shareholdings stated on a cost basis, as of December 31, 2003.

Shareholdings 12/31/2003 12/31/2002in associated companies Equity interest Balance sheet Equity interest Balance sheet(*) Euro thousands (%) value (*) (%) value (*)

Meurice Ets 10.00 862 10.00 862

Sanpaolo IMI 0.01 561 0.01 561

CO.PRO. Spa 6.42 130 16.00 326

Others - 159 - 159

Total 1,712 1,908

76

N O T E S

772 0 0 3 A N N U A L R E P O R T

N O T E S

RECEIVABLES

Receivables from othersThis amounts includes:• bank deposits made by Merloni International Business Sa with international credit institutions to se-

cure loans provided by such banks to Merloni Group companies (Euro 25,654,000);• Merloni Elettrodomestici UK Ltd tied deposits in international credit institutions as a guarantee for com-

pleting the acquisition of GDA (Euro 45,225,000);• caution money (Euro 290,000) provided by the Group parent company;• long-term loans (Euro 569,000) granted by the Group parent company to employees who suffered prop-

erty damages as a result of the earthquakes in 1997.

Treasury sharesThe value of this item did not change in 2003.At the year-end the Group parent company held a total of 11,039,750 of its own ordinary shares writtenfor Euro 32,974,000, the average unit purchase price being Euro 2.99 Euro.

WORKING CAPITAL

INVENTORIESThis item shows a balance of Euro 284,588,000 (Euro 265,361,000 at December 31, 2002). The variationwith respect to December 31, 2002 reflects increased production and sales volumes in 2003.

RECEIVABLESThis item stands at Euro 578,059,000 (Euro 536,270,000 at December 31, 2002) and is made up of:

Trade receivablesThis item amounts to Euro 462,474,000 net of writedowns totalling Euro 41,834,000 and relates to com-mercial transactions and provision of services.The Group parent company and a number of subsidiaries entered insurance contracts to cover part of theinsolvency risks involved.Certain receivables were written down to cover the risk of losses on litigation and other doubtful accounts.Provision for the period amounts to Euro 12,682,000 (Euro 6,536,000 at December 31, 2003).The increase in the balance of trade receivables and provisions for writedowns is mainly due to the in-crease in sales over the year and the provisions, in particular reflect the Group’s conservative policy re-garding doubtful accounts.The item is stated net of amounts relating to the securitization operation commented on in the directors’report, totalling Euro 120,740,000 (Euro 117,000,000 in 2002).

Receivables from subsidiaries and associated companiesBalances for these items are as follows (in Euro thousands):

Subsidiaries 12/31/2003 12/31/2002

Merloni Indesit Bulgaria Srlu 122 206

Indesit Hausgerate Vertriebs GmbH - 19

Merloni El. Ceska Republika Sro 403 266

M.D.A. Hellas Mepe 17 93

Merloni El. Haztartastechnikai Kft - 76

Merloni Electroménager Suisse 76 92

Scholtes Austria 19 -

Merloni Domestic Appliances Norway As 1,144 521

Total 1,781 1,273

Associated companies 12/31/2003 12/31/2002

Faber Factor Spa 16,827 46,597

Merloni Progetti Spa 17 37

Protecno Sa 59 68

Sofarem Sàrl - 2,102

MPE Spa 310 -

M&B Marchi e Brevetti Srl 89 14

Adria Lab Srl 162 163

Total 17,464 48,981

Financial and trade receivables from Group companies are dealt with at arm’s length.The decrease in receivables from Faber Factor reflects routine collection and payments between the Groupand Faber, as described in the section on business with correlated parties.

Receivables from parent companiesThis item (Euro 60,000) relates to receivables due to the Group parent company from Fineldo Spa for back-charging of costs for personnel on secondment.

Other receivablesBalances for these items are as follows:

(Euro thousands) 12/31/2003 12/31/2002

Social security 740 892

Advances to employees 3,089 1,903

Tax authorities 76,436 54,887

Suppliers, advances for services 3,669 8,504

Insurance reimbursements 835 4,874

Receivables for sale of business operation - 265

Deposits 661 -

Grants to operating account 198 2,363

Others 7,652 3,470

Total 96,280 77,158

78

N O T E S

792 0 0 3 A N N U A L R E P O R T

N O T E S

Receivables from tax authorities consist mainly of balances relating to the Group parent company (Euro49,994,000), Merloni Indesit Polska (Euro 6,492,000), Merloni Electroménager Sa (Euro 5,561,000) and ZaoRefrigerator Plant Stinol (Euro 3,711,000). The main items are: • steel export rebates (Group parent company): Euro 6,446,000;• plant account subsidies to collect (Group parent company): Euro 16,609,000;• VAT credit: Euro 26,083,000;• advance income tax: Euro 10,965,000;• deferred tax: Euro 16,035,000, divided between the various Group companies, and principally: Merloni

Elettrodomestici Spa Euro 6,277,000; General Domestic Appliances Holdings Ltd Euro 4,286,000; Mer-loni Electrodomesticos Sa Euro 3,513,000; Merloni Indesit Polska Spzoo Euro 516,000; Merloni Haus-gerate GmbH Euro 242,000;

• rebates on advance tax: Euro 1,873,000, for advance tax paid in 2003 by the Polish associate.Receivables from others are mainly subsidies (Euro 2,409,000) due to Merloni Elettrodomestici Spa andWrap Spa from various organization, insurance credit (Euro 560,000) and Euro 870,000 arising from theIRS operations described under memorandum accounts.

FINANCIAL ASSETS NOT HELD AS FIXED ASSETS

Other securitiesThis item includes securities underwritten by Merloni International Business Sa (Euro 29,732,000) for thepurposes of a securitization operation.These securities (maturity 15th January 2004) were issued by a French “Fonds Commun de Créances” and arerenewable monthly over the entire operation (5 years). New securities are subscribed every month and theones subscribed the previous month are repaid at the same time at an actual value, which may differ fromthe subscription value depending on the performance of the securitization operation and especially on debtcollection success rates. Their value at December 31, 2002 was Euro 30,822. Given their rolling nature andtie-in with the securitization operation, they were stated under “Other securities” instead of cash balances.

Non capitalized financial receivablesThis item refers mainly to the Group parent company’s credit with Faber Factor Spa regarding current ac-count relationships conducted at arm’s length for the purposes of invoice discounting. Further informa-tion is provided in the section on business with correlated parties.

CASH BALANCESTotal cash balances stand at Euro 373,632,000 (Euro 523,381,000 in 2002) and include:• short-term bank deposits of Merloni International Business Sa (Group treasury company): Euro 147,330,000

(Euro 303,569,000 in 2002);• bank and postal current accounts: Euro 225,947,000 (Euro 188,629,000 at December 31, 2002).• cash and cash equivalents in hand: Euro 355,000.

All the amounts under “Cash balances” are freely available. Some of the bank deposits (Euro 60,230,000)are in countries applying currency restrictions (especially Poland, Russia and Turkey). Such restrictions donot apply to use of cash for trade and/or financial transactions - but merely prevent companies estab-lished in those countries from participating in the Group’s cash pooling system.

ACCRUED INCOME AND PREPAYMENTSThis item breaks down as follows.

(Euro thousands) 12/31/2003 12/31/2002

Accrual of interest receivable 6,142 2,416

Prepayment of interest payable 1,535 1,680

Insurance premiums 107 1,861

Advertising costs 173 3

Rents and leases 154 2,791

Premium on debenture loan issue 88 164

Other operating costs 830 2,029

Other prepayments 14,483 4,926

Total 23,512 15,870

The “Accrual of interest receivable” items refers mainly to interest accrued to the current accounts of var-ious Group companies with banks.

The “prepayment of interest payable” item reflects movements in currency exchange charges relative totied deposits of Merloni Elettrodomestici UK Ltd with international credit institutions securing loans tocomplete the GDA acquisition (Euro 13,281,000).

80

N O T E S

812 0 0 3 A N N U A L R E P O R T

N O T E S

Liabilities

SHAREHOLDERS’ EQUITY

SHARE CAPITALShare capital at December 31, 2003 was fully paid in and subscribed and made up as follows:

Description Shares at year endNumber Euro

Ordinary shares 108,465,122 97,618,609.80

Savings shares 2,502,844 2,252,559.60

Total 110,967,966 99,871,169.40

With respect to the previous year, share capital rose by Euro 420,000 as a result of stock options being ex-ercised in 2003.

Resolutions by the extraordinary meetings of the shareholders on 09/16/98 (as subsequently modified byshareholder meetings on 05/05/2000 and 05/07/2001) and 10/23/2001 allow, pursuant to art. 2441, clause8, Civil Code, for two capital increases of up to Euro 2,700,000 each through the issue of an overall max-imum of 6,000,000 ordinary shares of par value Euro 0.90 to fund a Group stock option plan for its exec-utives and managers.

Following the first resolution, 1,154,000 subscription options had been exercised as of December 31, 2003,resulting in the issue of 1,154,000 ordinary shares of par value Euro 0.90.

Further, the meetings on October 23, 2001 and May 6, 2002 voted, pursuant to art. 2441, clauses 5 and 6,Civil Code, two capital increases of up to 1,600,000 ordinary shares of par value Euro 0.90 to fund a Groupstock option plan for non-employee directors holding strategically important posts.

(in Euro) Voted share Subscribed andcapital (*) paid up share

capital (*) (**)

Share capital after savings to ordinary share conversion 98,832,569.40 98,832,569.40

1st stock option plan, employees, initiated September 19, 1998 2,700,000.00 1,038,600.00

2nd stock option plan, employees, initiated October 23, 2001 2,700,000.00 -

1st stock option plan, directors, initiated October 23, 2001 1,260,000.00 -

2nd stock option plan, directors, initiated May 6, 2002 180,000.00 -

Total 105,672,569.40 99,871,169.40

(*) ordinary and savings shares(**) as per the Companies Register at December 31, 2003

(**)

SHARE PREMIUM RESERVEThis reserve, at Euro 20,702,000, shows an increase of Euro 1,765,000 following exercise of stock optionsby managers.To obtain subsidies for industrial investments requiring investment of own capital under the programmecontract “Distretto dell’elettrodomestico società consortile arl”, as per CIPE (inter-ministerial committeefor economic programming) resolution dated 11/15/2001, the share premium reserve is tied at Euro16,401,000 till 12/31/2004.

REVALUATION RESERVENo movements were recorded in this reserve.

LEGAL RESERVEThis reserve rose by Euro 5,375,000, net of the reclassification shown in the shareholders’ equity account,following allocation of profits realized by the Group parent company in 2002.

TREASURY SHARE RESERVEThere was no change in this reserve, which was set up in 1996 by the Group parent company following anumber of buy-back operations (as provided for in art. 2357 ter, Civil Code).

OTHER RESERVESOther reserves break down as follows:

(Euro thousands) 12/31/2003 12/31/2002

Capital accounts grants reserve 20,586 19,762

Currency exchange reserve (54,920) (25,067)

Extraordinary reserve 70,344 354

Consolidation reserve 797 987

Restricted profits reserve 23 23

Total 36,830 (3,941)

The “Grants to capital account” item shows an increase of Euro 820,000 reflecting new grants received bythe Group parent company (under law 488/92).

“Cumulative currency conversion effect” includes exchange differences arising from conversion of finan-cial statements in foreign currencies written directly to consolidated shareholders’ equity; the item alsoshows the effects of currency conversion on the stating of foreign investments on an equity basis.

The extraordinary reserve shows an increase of Euro 69,990,000 following allocation of Group parent com-pany profits for 2002.Merloni Elettrodomestici Spa has made two applications for credit facilities for its investment programmesat the Albacina and Melano plants. To obtain these facilities the Group parent company has tied Euro18,954,000 of this reserve as follows:

• Euro 13,015,000 for the Albacina programme (Project 75662/11, approved by decree 100679, 07/10/2001,Ministry of Productive Activities);

82

N O T E S

832 0 0 3 A N N U A L R E P O R T

N O T E S

• Euro 5,939,000 for the Melano project (Project 75663/11, approved by decree 111820, 02/12/2002, Min-istry of Productive Activities).

The restricted profits reserve was set up by the Group parent company in compliance with art. 13, decreelaw 124, 1993 and subsequent amendments, in order to enjoy certain tax benefits.

PROFITS (LOSSES) CARRIED FORWARDAt the year-end this item amounted to Euro 156,964,000.The item includes Euro 12,507,000 of retained profit (Euro 10,092,000 at December 31, 2002) relating toassociated companies stated on an equity basis.

RECONCILIATION WITH THE GROUP PARENT COMPANY STATEMENTSThe table below is a reconciliation of shareholders’ equity data, including profit for the year, as per thebalance sheets of the Group parent company Merloni Elettrodomestici Spa at December 31, 2003 and De-cember 31, 2002 and consolidated shareholders’ equity at the same dates.

(Euro thousands) 12/31/2003 12/31/2002Shareholders’ Result Shareholders’ Result

equity for the year equity for the year

Merloni Elettrodomestici Spa balance sheet 304,577 39,486 293,934 107,495

Differences between values of consolidated investments and relative book values 175,286 119,394 131,961 144,274

Consolidation of companies on an equity basis 2,691 (2,313) 7,177 2,404

Elimination of adjustments made for tax purposes 7,718 2,546 5,172 -

Effect of aligning consolidated accounts with Group accounting principles 4,329 (615) 3,681 212

Elimination of inter-company profits (3,392) 1,460 (4,347) 2,307

Write off of gains on Wrap Spa spin-off (9,896) 2,159 (12,055) 1,941

Fiscal effects (4,395) (590) (3,341) 774

Dividends received from associated companies 4,513 (41,229) - (152,481)

Consolidated Group balance sheet 481,431 120,298 422,182 106,926

As already explained in the section on consolidation and conversion principles, certain Group compa-nies and in particular those based in Russia and Turkey, adopted the accounting standard FAS 52 toneutralize the effects of hyper-inflation. The main impact of applying FSA 52 instead of IAS 29 to thebalance sheet and income statement is on companies in Turkey, a country with a high inflation/de-valuation differential. Had these companies applied IAS 29 instead of FSA 52, profits for the year wouldhave been down by Euro 3,768,000, whereas shareholders’ equity would have been up by Euro 4,129,000.

RESERVES FOR RISKS AND CHARGESThis item shows a balance of Euro 78,218,000 (Euro 94,291,000 at the end of 2002), as detailed below.

PENSIONS AND SIMILAR OBLIGATIONSThis stands at Euro 1,748,000 (Euro 2,464,000 in 2002), and includes the estimated pension costs of cer-tain foreign subsidiaries.

UK employees of Merloni Elettrodomestici UK Ltd. (60% owned) partecipate in a fixed income pensionfund whose assets are separate from the company’s. 2003 saw completion of a process of aggrega-tion of the employees of the two previous pension funds of General Domestic Appliances Holdings Ltd(now Merloni Elettrodomestici UK Ltd) and of Merloni Domestic Appliances Ltd. On the basis of actu-arial appraisals of the pension fund’s assets at December 31, 2003 applying the new UK accountingstandard FRS17, the overall deficit of the fund amounted to £ 25,913,000 (Euro 36,766,000 at the year-end exchange rate) net of fiscal effects. The deficit at December 31, 2002 stood at £ 20,880,000 (Euro32,093,000 at the year end exchange rate). According to actuarial estimates, this deficit led to an ad-justment of pension contributions equal to 9.1% of pensionable salaries, compared to the previouscontribution rates of 8.9% of the old General Domestic Appliances Holdings Ltd fund and 16.4% ofthe old Merloni Domestic Appliances Ltd fund.

TAXESThe tax reserve, standing at Euro 10,627,000 (Euro 1,842,000 the previous year) accounts for deferred taxcharges in relation to balance sheet and income statement items deductible/taxable in subsequent yearsin accordance with CNDC accounting standard 25. It also reflects the fiscal effects of consolidation ad-justments designed to eliminate postings of a purely fiscal nature and to bring subsidiaries’ accountingstandards into line with those of the Group. No deferred tax charges were stated for the non-distributedprofits of subsidiaries, in that it may reasonably be assumed that such reserves will not be used in waysthat will affect their non-taxability.If dividend pay-outs were to be made using the reserves of Luxembourg-based Merloni Ariston Interna-tional (which controls a number of Group operating companies) and the profits of Zao Refrigerator PlantStinol, the resulting deferred tax charge would amount to Euro 8,410,000.

OTHERS

Consolidation reserve for risks and chargesThe reserve created following the first-time consolidation, in 2000, of the subsidiary Zao Refrigerator PlantStinol was fully appropriated by writing the residual portion on the balance sheet at December 31, 2002(Euro 8,347,000) to the income statement, under extraordinary items.The balance at the year end (Euro 663,000) is due to the effect of the goodwill generated by the acquisi-tion of a further 10% of General Domestic Appliances Holdings Ltd in 2003.

Product guarantee reserveThis reflects estimated service costs on products covered by 1-year or long-term guarantees. It stands atEuro 43,829,000 (Euro 50,926,000 at the end of 2002) and is deemed adequate in relation to the risk in-volved. A significant portion of this reserve is in support of the increasing numbers of long-term com-mercial guarantee facilities offered to customers.The reserve is calculated using a number of variables, the main ones being the call rate (meaning the

84

N O T E S

852 0 0 3 A N N U A L R E P O R T

N O T E S

percentage rate of intervention on products), time between sell in and sell out (time to start of guar-antee) and average unit cost of intervention (cost of replacements plus cost of labour). The decrease inthe reserve is due mainly to a drop in the call rate reflecting both improved product quality (Euro3,523,000) and a new calculation method that excludes from the call rate the interventions made out-side the legal guarantee (Euro 3,574,000).

Restructuring reserveThis reserve stands at Euro 7,619,000 and refers mainly to a complex restructuring and re-organizationplan (Euro 6,891,000) for Merloni Electroménager Sa.The remaining Euro 730,000 is the residual portion of the reserve set up in 2002 following the integrationof Merloni Elettrodomestici UK Ltd.

Supplementary customer indemnity reserveStanding at Euro 907,000 (Euro 829,000 the previous year) the reserve refers exclusively to the Group par-ent company.

Reserve for litigation in progressThis reserve (Euro 692,000) reflects provisions made by subsidiaries Argentron Sa (Euro 175,000) and Mer-loni Electroménager Sa (Euro 454,000) and Merloni Elettrodomestici Spa (Euro 63,000) against litigationrisks.

Future risks reserveStanding at Euro 12,133,000 the reserve contains provisions by Merloni Elettrodomestici Spa against lit-igation involving employees (Euro 130,000), extraordinary donations (Euro 52,000), risks relating to lossof non-trade receivables (Euro 50,000) and the residual portion of a reserve relating to the merger of Mer-loni Brembate Spa (Euro 433,000) in view of pending litigation with the State. It also contains reserves setup by the following companies: subsidiary Merloni Reinsurance Company Ltd (Euro 1,796,000) against in-surance risks; Zao Refrigerator Plant Stinol (Euro 778,000) against sundry charges; Merloni ElectrodomesticosSa (Euro 195,000) against pending litigation with employees; subsidiary Merloni Electroménager Sa (Eu-ro 458,000) against loss of non-trade receivables; subsidiary Merloni Elettrodomestici UK Ltd (Euro 1,733,000)against other risks.The item also includes Euro 5,605,000 relating to a commitment on the part of Merloni ElettrodomesticiUK Ltd to improve the functionality of a particular washing model. The reserve was drawn on over the yearto cover costs incurred for improvement to said model.

STAFF LEAVING INDEMNITYChanges over the year were as follows (Euro thousands):

Balance at 12/31/2002 59,003

Portion accrued and written to the income statement 10,534

Indemnity paid in period (7,495)

Closing balance at 12/31/2002 62,044

The table below is a breakdown of total employees by category:

Category Employees at 12/31/2003 Employees at 12/31/2002 Average in 2003

Managers 156 148 151

Office personnel 5,448 4,138 4,547

Workers 13,396 15,190 14,645

Total 19,000 19,476 19,343

2,114 employees (of which 1,836 operatives and 278 office staff) are on fixed-term contracts at 12/31/2003.During the year a number of operatives at Merloni Elettrodomestici UK Ltd were switched to officegrade.

PAYABLESThe table below details interest bearing payables and financial assets, thus giving a picture of net finan-cial indebtedness:

(Euro thousands) 12/31/2003 12/31/2002

Receivables from others 71,738 82,804

Other capitalized securities 10 -

Non-capitalized financial assets 32,629 6,106

Bank and postal deposits 373,277 523,020

Cash and cash equivalent in hand 356 362

Total financial assets 478,010 612,292

Debentures 150,000 150,000

Payables to banks 436,073 558,151

Payables to other lenders 83,456 84,109

Payables to associated companies 178 1,512

Total financial liabilities 669,707 793,772

Total 191,697 181,480

Net financial indebtedness rose from Euro 181,480,000 to Euro 191,697,000 as a result of routine man-agement of current year financial cash flows and investments made over the year. Gearing dropped from43% at December 31, 2002 to 40% at December 31, 2003.

The figure for financial payables to associated companies refers to Faber Factor Spa following applicationof IAS 17 to a leasing contract regarding production and office facilities in None (Turin).

86

N O T E S

872 0 0 3 A N N U A L R E P O R T

N O T E S

DEBENTURESThis item includes the Euro 150m debenture loan (maturity November 9, 2004) issued in 1999 by the sub-sidiary Merloni Ariston International Sa. The bond was issued under par, so the issue premium is discountedaccordingly on the basis of duration and issue expenses, as explained in the notes on accruals and defer-rals. The Group parent company issued a bank guarantee of the same amount to secure the loan, as com-mented in the notes to the memorandum accounts.

BANK LOANS PAYABLEBreakdown and changes are as follows:

(Euro thousands) 12/31/2003 12/31/2002

Banks, current accounts 343,177 370,307

Long-term bank loans 92,896 187,844

Total 436,073 558,151

Payables to banks at December 31, 2003 amounted to Euro 436,073,000, of which Euro 372,012,000 fallingdue in the next period and Euro 64,061,000 from the second to fifth periods.

Medium/long-term loans are usually repayable in six-monthly instalments.

Credit lines are not usually secured by collateral or bank guarantees and represent around half of the avail-able credit facilities.

OTHER FINANCING PAYABLESLoans existing at December 31, 2003 stand at Euro 83,456,000, of which Euro 12,261,000 falling due inthe next period and the rest as follows:

Maturity Amount (Euro thousands)

From the 2nd to 5th successive year 69,795

Beyond the 5th year 1,400

Total 71,195

Other financing payables show a decrease of Euro 653,000 against the previous year due to repaymentsin 2003.

Repayments are usually six-monthly.

TRADE PAYABLESThe balance of trade payables, Euro 567,681,000, shows an increase of Euro 74,028,000 on the figure atDecember 31, 2002 (Euro 493,244,000 ).The balance should be considered along with the balance payable towards the associated company FaberFactor Spa, which also includes the amount of trade payables under factoring.

PAYABLES TO SUBSIDIARIES AND ASSOCIATED COMPANIESBreakdown and changes are as follows (Euro thousands):

Subsidiaries 12/31/2003 12/31/2002

Merloni Indesit Bulgaria Srlu 204 185

Merloni Appliances Asia Pacific Pte Ltd 327 218

Merloni El. Ceska Republika Sro 540 172

M.D.A. Hellas Mepe 154 311

Scholtès Austria 353 421

M.D.A. Norway As 1,369 251

Total 2,947 1,558

These are trade payables to subsidiaries not in the consolidation area because their financial statementswould not affect a true and correct representation of the Group’s financial and economic position.

The table below details payables to associated companies at 12/31/2003 (Euro thousands).

Associated companies 12/31/2003 12/31/2002

Faber Factor Spa 212,178 202,655

Merloni Progetti Spa 566 2,362

Aermarche Spa 184 3,275

M.&B. Marchi e Brevetti Srl 160 -

Adria Lab Srl 424 296

Total 213,512 208,588

Further comments and details on payables to associated companies are provided in the notes on inter-company business.

TAXES PAYABLEThis item consists mainly of current income tax payables (Euro 20,476,000), withholding tax for employ-ees and professional and self-employed collaborators (Euro 17,946,000) and VAT (Euro 31,032,000). Theamount for withholding tax includes certain sums (Euro 9,646,000) payment of which was temporarilysuspended by virtue of the Group parent company’s location in a disaster zone (earthquake in 1997).

SOCIAL SECURITY PAYABLESThe balance of Euro 36,332,000 refers to employees.

88

N O T E S

892 0 0 3 A N N U A L R E P O R T

N O T E S

OTHER PAYABLESThe balance is as follows:

(Euro thousands) 12/31/2003 12/31/2002

Payables to personnel 40,650 35,108

Sundry 6,647 7,063

Total 47,297 42,171

Payables to personnel are amounts accrued towards employees for pay and outstanding holidays at thebalance sheet date.

The main amounts under “Sundry” refer to the Group parent company in relation to the Cometa pensionfund (Euro 649,000), local tax payments temporarily suspended after the earthquake mentioned above(Euro 287,000) and insurance payables (Euro 451,000).

ACCRUED LIABILITIES AND DEFERRED CHARGESThis item breaks down as follows:

(Euro thousands) 12/31/2003 12/31/2002

Accrual of interest payable 4,393 6,862

Deferral of interest on debenture loan 1,275 1,275

Commissions 21 453

Other operating expenses 4,870 2,917

Deferral of grants to capital account 22,089 15,021

Deferral of interest receivable 417 485

Other accruals and deferrals 747 2,989

Total 33,811 30,002

“Accrual of interest payable” refers mainly to the Group parent company (Euro 1,839,000) and General Do-mestic Appliances Holdings Ltd (Euro 2.554,000) in connection with short-term borrowing from banks. In2003 the Group parent company wrote grants to its capital account (Euro 10,703,000) in addition toamounts already stated in 2002 (Euro 15,021,000). Of these, Euro 3,636,000 was written to the incomestatement under “Other income and revenues”, while the remaining amounts (Euro 22,089,000) will bewritten to future year income statements.

Memorandum accounts

The memorandum accounts record commitments to and by third parties. The memorandum accounts atthe bottom of the balance sheet include guarantees provided excluding those between Group companiesand those which are already stated in the balance sheet under payables. To give the full picture, guaran-tees provided and received are described in detail below.• Bank guarantees provided by the Group parent company (Euro 160,284,000) are in favour of: Banca

Nazionale del Lavoro di Napoli (Euro 232,000); a pool of banks comprising Lehman Brothers, Paribas andUniCredito Italiano (Euro 150,000,000) to secure a Eurobond issued by Merloni Ariston International SA;the European Commission (Euro 52,000) securing grants to Wrap Spa; Crédit Agricole (Euro 10,000,000)relating to a securitization operation. No commissions accrue on these guarantees.

• Bank guarantees provided by other Group companies (Euro 3,409,000) are in favour of: Sodiest (Euro144,000); Polish tax authorities (Euro 1,899,000) for customs clearance; Turkish government and sup-pliers (Euro 1,377,000). No commissions accrue on these guarantees.

• Bank guarantees in favour of 3rd parties on behalf of the Group parent company (Euro 89,788,000) wereissued by: Assicurazioni Generali (Euro 929,000) in favour of organizations issuing grants under law219/81 to plants in Southern Italy; Banca Commerciale Italiana (Euro 441,000) for EIB loans; IstitutoBancario Sanpaolo IMI (Euro 222,000) securing payments to public administrations and 3rd party sup-pliers; Credito Italiano (Euro 74,000) in favour of finance authorities for lotteries and prize competitions(Euro 55,000); Banca Nazionale del Lavoro (Euro 8,837,000) for grants relating to the programme con-tract for the Southern area; Monte dei Paschi di Siena (Euro 235,000) covering ECSC/EIB loans; Bancadi Roma (Euro 1,526,000) securing loans from EIB; Fineldo Spa (Euro 77,469,000) securing a loan pro-vided by Mediocredito Centrale under law 100/90.

• Bank guarantees in favour of 3rd parties on behalf of other Group companies (Euro 246,179,000) wereissued by: Barclays Capital (Usd 285,600,000) in favour of General Electric to secure Merloni Elet-trodomestici UK Limited’s Put & Call Agreement relating to acquisition of the remaining 40% of Gen-eral Domestic Appliances Holdings Ltd; Caixa De Catalunya and Cocicom (Euro 309,000) on behalf ofMerloni Electrodomésticos Sa (Spain); various clients (Euro 19,304) covering credit risk to Merloni Elet-trodomestici Beyaz Esya Pazarlama As; various banks (Euro 387,000) securing trade receivables of ZaoRefrigerator Plant Stinol; ABN Amro (Euro 51,000) on behalf of Merloni International Trading Bv.

• Put options acquired and call options sold by Merloni Elettrodomestici UK Holdings Limited for the ac-quisition of General Domestic Appliances Holdings Ltd, as detailed below:

Type of operation Currency Foreign currency amount Euro equivalent

PUT options Usd 285,600,000 226,128,266

CALL options Usd 285,600,000 226,128,266

90

N O T E S

912 0 0 3 A N N U A L R E P O R T

N O T E S

These operations relate to rights/obligations in respect of General Electric to buy/sell the remaining 40%of the investment in General Domestic Appliances Holdings Ltd. The Euro equivalent is calculated at theyear-end exchange rate. Merloni Elettrodomestici Spa provided Barclays Capital with a counter-guar-antee in favour of Merloni Elettrodomestici UK Holdings Limited in relation to above mentioned guar-antee received from the latter in connection with the Put & Call Agreement (counter-value Euro226,128,000).

• Other commitments (Euro 25,667,000) relate to: Merloni Elettrodomestici Spa for acquisition of fixedassets (Euro 13,144,000) and leasing payments (Euro 3,247,000), Wrap Spa (Euro 209,000) for leasingpayments, Zao Refrigerator Plant Stinol (Euro 9,067,000) for acquisition of fixed assets.

Third party goods are suppliers’ stock held in Group company warehouses as consignment stock (Euro3,712,000).

The subsidiary Merloni International Business Sa provides exchange risk hedging operations for Groupcompanies. Operations in progress at December 31, 2003 are described below.• Dollar hedging relative to the Put & Call Agreement between Merloni Elettrodomestici Spa, Merloni Elet-

trodomestici UK Holdings Ltd and General Electric, maturity 9th January 2004, as detailed in the tablebelow:

Type of operation Currency Foreign currency amount Euro equivalent

Forward purchase Usd 10,000,000 9,336,196




• Acquisition of call options in Euro and put options in Usd relative to the Put & Call Agreement betweenMerloni Elettrodomestici Spa, Merloni Elettrodomestici UK Holdings Ltd and General Electric, as detailedin the table below:

Type of operation Currency Foreign currency amount Euro equivalent Maturity

Eur/Usd purchase Usd 57,120,000 49,364,791 04/01/2005



• Acquisition of call options in Usd and put options in Euro relative to the Put & Call Agreement betweenMerloni Elettrodomestici Spa, UK Holdings Ltd and General Electric, as detailed in the table below:

Type of operation Currency Foreign currency amount Euro equivalent Maturity

Purchase Usd/Eur Usd 57,120,000 51,927,273 04/01/2005



• Turkish lira hedging operations:

Type of operation Currency Foreign currency amount Amount in EuroTurkish lira (Trl) equivalent

Trl/Usd forward sale Usd 13,000,000 18,807,100,000 10,253,174.54

The Euro value of these contracts is calculated at the exchange rates in force on maturity.• IRS on a notional Euro 38.5m to hedge loan contracts for the same amount and maturity, running from

21/06/2001 and maturing 12/22/2008. From 12/21/2003 Merloni Elettrodomestici Spa is paying a six-monthly interest rate of 4.99% and receives from its counterpart a 6-month Euribor plus 55 bps overthe reference amount.

• IRS on a notional Euro 38.5m to hedge loan contracts for the same amount and maturity, running from10/10/2001 and maturing 04/10/2009. Up to 04/10/2004 Merloni Elettrodomestici Spa pays a rate of4.6% provided the 6-month Usd Libor rate doesn’t exceed 6.75% (currently at around 1.09%) and re-ceives from its counterpart a 6-month Euribor plus 55 bps over the reference amount. From 04/10/2004Merloni Elettrodomestici Spa will pay a 6-monthly rate of 5.145% and will receive from its counterparta 6-month Euribor plus 55 bps over the reference amount.

• IRS on a notional Euro 100m (two contracts for Euro 75m and Euro 25m) running from November 9,2001 and maturing November 9, 2004, with annual interest settlements. Merloni Elettrodomestici willpay a 5.3% gap floater if the threshold rate (year end Usd Libor) doesn’t exceed 6.5% (currently around1.38%), and receive from its counterpart a fixed rate of 6.3% p.a.

• FX Currency Swap to ensure adequate interest rate hedging of a deposit of Usd 57.12m made by Mer-loni Elettrodomestici UK Ltd on the basis of a stand by letter of credit issued by Barclays Plc in favourof General Electric for the “Put & Call” option agreement between Merloni Elettrodomestici UK Limitedand General Electric. Under this agreement Merloni International Business receives from Barclays a 3-month Euribor less 25 bps paid on the Euro amount and pays a 3-month Usd Libor on the Usd amount.The amount on which to calculate the Euro equivalent varies quarterly with the exchange rate at thebeginning of the reference coupon period. In this way the operation managed to align interest rates be-tween funding in Euro and depositing in Usd.

92

N O T E S

932 0 0 3 A N N U A L R E P O R T

N O T E S

Value of productionThis item shows a closing balance of Euro 3,109,591,000, up Euro 577,791,000 on December 31, 2002. AtDecember 31, 2002 revenues arising from consolidation of General Domestic Appliances Holdings Ltdamounted to Euro 284,994,000. If the income statement of General Domestic Appliances Holdings Ltd hadbeen consolidated line by line at December 31, 2002, the revenues item would have shown a balance ofEuro 2,765,219,000 and the increase for the year for the Group would have been Euro 241,733,000.The table below details revenues from sales of goods and services (Euro thousands):

Revenues from sales and services 2003 2002

Revenues from sales of finished products and raw materials 2,876,049 2,390,743

Revenues from provision of services 131,692 89,482

Total 3,007,741 2,480,225

Revenues from sales of goods and services breaks down by region as follows (Euro thousands):

Region 2003 2002

Italy 467,722 442,390

European Union 1,577,306 1,198,820

Other countries 962,713 839,015

Total 3,007,741 2,480,225

The increase in sales was due to both higher volumes in all markets, and especially in Eastern Europeancountries, and an improved sales mix.

“Other revenues and income”, totalling Euro 50,971,000, includes:• appropriation of provisions made in prior years (Euro 13,747,000);• insurance rebates (Euro 555,000);• capital gains on assets disposed of for routine renewal purposes (Euro 293,000);• grants to the operating account (Euro 294,000);• recovery of expenses (of which Euro 16,763,000 relating to General Domestic Appliances Holdings Ltd);• rents (Euro 1,695,000);• contributions to the capital account (Euro 3,837,000);• revenues from work not covered by product guarantee (Euro 3,775,000);• export subsidies (Euro 2,112,000);• royalties (Euro 258,000);• services not included under typical business (Euro 3,931,000);• other income (Euro 3,711,000).

Commentson the main

income statementitems

Cost of productionCost of production amounted to Euro 2,864,069,000, up Euro 515,504,000 on 2002.

• “Costs of raw and auxiliary materials, spare parts and goods”, including variations in raw materials in-ventories, at Euro 1,639,005,000, was up Euro 286,406,000 on December 31, 2002 due to increased pro-duction and sales volumes. The same costs relating to General Domestic Appliances Holdings Ltd as ofDecember 31, 2002 amounted to Euro 151,173,000. If the income statement of General Domestic Ap-pliances Holdings Ltd had been consolidated fully at December 31, 2002, this item would have showna balance of Euro 1,503,472,000, and the increase for the year, for the Group, would have been Euro135,698,000.

• The table below details the costs of services (Euro thousands):

Costs for services 2003 2002

Advertising, promotion and marketing 110,581 90,811

Distribution costs 135,157 119,175

Third party processing 15,374 15,377

Maintenance 17,866 20,730

Consulting 27,840 30,199

Power and motive force 28,400 18,626

Technical assistance 41,161 42,508

General expenses 115,623 91,761

Total 492,002 429,187

All cost items show a reduction in the ratio to sales except for energy. The increase in general expensesrelates mainly to the Group parent company and General Domestic Appliances Holdings Ltd. Costs forservices at December 31, 2002 included energy, advertising, maintenance, consulting and 3rd party pro-cessing relating to General Domestic Appliances Holdings Ltd (Euro 15,628,000). If the income statementof General Domestic Appliances Holdings Ltd had been consolidated fully at December 31, 2002, the bal-ance of these costs would have been higher by the same amount.Advertising, promotion and marketing costs rose, albeit in line with sales, reflecting the numerous ad cam-paigns for Indesit and Ariston in various markets.

• Costs for using 3rd party assets refer to operating rents and leasing payments.• Personnel costs amount to Euro 508,399,000, up Euro 126,205,000 on December 31, 2002. Personnel

costs for General Domestic Appliances Holdings Ltd at December 31, 2002 amounted to Euro 85,000,000.If the income statement of General Domestic Appliances Holdings Ltd had been consolidated 100% atDecember 31, 2002, the balance of personnel costs would have been Euro 467,194,000, and the increasefor the year, for the Group, would have been Euro 41,206,000. The increase in personnel costs over sales(from 15% at December 31, 2002 to 17%) is thus entirely due to 100% consolidation of General Do-mestic Appliances Holdings Ltd. Calculating this ratio using the pro forma data shows that it would haveremained unaltered had GDA been consolidated 100% at December 31, 2002.

• Amortization, depreciation and writedowns include amortization of goodwill relating to General Do-mestic Appliances Holdings Ltd. Amortization and depreciation amount to Euro 141,783,000 (up Euro26,640,000). Writedown of receivables amounts to Euro 12,682,000, up Euro 6,146,000 on December31, 2002. The increase relates mainly to the UK and reflects conservative assessment of credit recoveryprospects.

94

N O T E S

952 0 0 3 A N N U A L R E P O R T

N O T E S

• “Provisions for risks” refers mainly to the product guarantee reserve, which represents estimated costsof service intervention on products under guarantee. The reduction is commented on in the section ofthe notes dealing with the reserve for risks and charges.

• “Sundry operating charges”, at Euro 20,195,000 (Euro 24,541,000 in 2002) refers mainly to losses on re-ceivables (Euro 1,729,000), insurance (Euro 172,000), taxes and dues (Euro 6,689,000), losses on dis-posals (Euro 1,342,000), membership fees (Euro 2,196,000), entertainment expenses (Euro 1,340,000),stationery and printed matter (Euro 701,000) and study and test materials (Euro 905,000). This item isdown on the previous year by Euro 4,346,000, in spite of 100% consolidation of General Domestic Ap-pliances Holdings Ltd, thanks to economies of scale within the Group.

Financial income and charges

INCOME FROM SHAREHOLDINGSThe balance includes profits paid to the Group parent company by Istituto Bancario Sanpaolo – IMI Spa(Euro 31,000) and other minor shareholdings.

OTHER FINANCIAL INCOMEThe balance of Euro 49,533,000 breaks down as follows:

(Euro thousands) 2003 2002

Interest receivable from associated companies 770 1,160

Interest receivable from customers 3,516 3,732

Interest receivable on bank deposits 10,102 17,835

Exchange rate fluctuations 34,098 49,376

Other interest and income 1,047 2,117

Total 49,533 74,220

Interest receivable from associated companies refers to financial transactions with Faber Factor Spa andAdrialab conducted at arm’s length.Further details on this item are provided in the notes on inter-company business.

Exchange rate fluctuations refer to financial income arising from gains made on currency exchange andfrom statement of balance sheet items in currencies other than the Euro at year end exchange rates in-stead of the rates in force when the items arose. Also included is income from currency exchange hedg-ing operations.

INTEREST AND OTHER FINANCIAL CHARGESThe balance stands at Euro 77,574,000 and breaks down as follows:

(Euro thousands) 2003 2002

Interest paid to parent company 4 470

Interest paid to associated companies 32 961

Interest paid to banks 19,690 25,281

Interest paid to other lenders 2,516 5,101

Exchange rate fluctuations 43,444 52,534

Effect of inflation accounting (282) 4,058

Interest paid to debenture holders 9,000 9,000

Other interest and charges 3,170 3,233

Total 77,574 100,638

Further detailed information on interest paid to associated companies is to be found in the notes on in-ter-company business.

Exchange rate fluctuations refer to financial charges arising from losses made on currency exchange andfrom statement of balance sheet items in currencies other than the Euro at year-end exchange rates in-stead of the rates in force when the items arose. Also included are losses currency exchange hedging op-erations.

Inflation accounting standards (FAS 52) were applied to the statements of subsidiary Merloni ElettrodomesticiBeyaz Esya Sanayii Ve Ticaret As, which operates in a country with a high inflation rate.

Interest paid to debenture holders includes interest payable accrued on the debenture loan issued by thesubsidiary Merloni Ariston International Sa, as commented on in the notes to liabilities.

96

N O T E S

972 0 0 3 A N N U A L R E P O R T

N O T E S

Adjustments to the value of financial assets

REVALUATION OF SHAREHOLDINGSThe balance of Euro 2,159,000 is due to the portion of Group profits for the year arising from statementon an equity basis of associated companies M.P.E. Spa (Euro 1,704,000), Haier Merloni Electrical Ltd (Euro209,000, increase) and Haier Merloni Washing Machine Ltd (Euro 246,000, increase).

WRITEDOWN OF SHAREHOLDINGSThis item shows a balance of Euro 3,790,000 and reflects the Group’s share of losses for the year arisingfrom statement on an equity basis of the associate Faber Factor Spa (Euro 3,547,000, decrease), MerloniProgetti Spa (Euro 212,000, decrease) and Aermarche Spa (Euro 31,000).

Extraordinary income and charges

EXTRAORDINARY INCOMEThis item includes: Euro 1,382,000 relating to gains on disposal of non-operating assets, Euro 8,347,000appropriated from the consolidation reserve for risks and charges relating to Zao Refrigerator Plant Sti-nol, Euro 2,909,000 of sundry contingent gains; the remaining Euro 810,000 refers to prior year taxes.

EXTRAORDINARY CHARGESThe main postings under extraordinary charges are:• Euro 18,440,000 for restructuring plans;• Euro 703,000 for losses on disposals of assets not pertaining to routine business;• Euro 320,000 for donations, of which Euro 295,000 to charity, cultural and social initiatives and Euro

25,000 to individual persons;• Euro 4,526,000 for a tax amnesty for Merloni Elettrodomestici Spa up to 2002;• Euro 6,992,000 for other costs arising in respect of prior years;• Euro 879,000 for prior year taxes.

TaxThe balance of this item, Euro 71,916,000, includes both the current year tax charges of individual con-solidated companies and deferred tax credit/charges of said companies and of the consolidated balancesheet. In particular, current year tax amounts to Euro 66,511,000, deferred tax charges to Euro 13,308,000and deferred tax credit Euro 7,903,000.

As stated in the directors’ report, operations with associated and affiliated parties were carried out in 2003.Listed below are all the parties involved in such operations, whether commercial or financial.

Associated and affiliated companiesAssociated companies: Adria Lab Srl

Aermarche SpaFaber Factor SpaFaber Factor International SàrlM&B Marchi e Brevetti SrlMP Asia SrlMerloni Progetti Energia SpaMerloni Progetti SpaSofarem SàrlProtecno Sa

Affiliated companies: AM Spa (1) (affiliated to a number of Group directors)Benelli Spa (controlled by a Group director)Colombo Spa (controlled by a Group director)Fineldo Spa (controls Merloni Group)MCP Eventi Srl (affiliated to a Group director)Merloni Partecipazioni e Servizi Srl (controlled by a Group director)Merloni Termosanitari Spa (controlled by a Group director)Barclays Bank (affiliated to a Group director)Motonline Spa (controlled by a Group director)Nautica Due Spa (affiliated to a Group director)Netscalibur Italia Spa (two of its directors are Group directors as well)Thermowatt Spa (controlled by a Group director)

(1) Operates in the white goods sector and thus a direct competitor.

Business with the main associated and affiliated companiesThe Faber Factor Group provides Merloni Elettrodomestici Group companies with various direct and indi-rect financial services (mainly invoice discounting) to Merloni Group companies through its operatingcompanies Faber Factor Spa and Faber Factor International Sàrl. The indirect financial services are invoicediscounting (Faber Factor was set up in 1994 for this very purpose) for suppliers of the Merloni Group,which is thus debtor in respect of Faber, to which it makes payments to settle its balances with suppliers.In 2003 the total amount for which Merloni was a debtor was Euro 811,787,000, which is reflected in thebalance sheet under payables to associated companies (see table overleaf).As a direct service to the Group, Faber Factor provides a credit collection service for raw materials sup-plied to transformers, which subsequently sell on the components they make and bill Merloni for the costof the materials plus processing costs. In this respect Faber Factor also provides a compensation service.In 2003 the amount of credit Merloni transferred was Euro 57,018,000, as reflected in the consolidatedbalance sheet under receivables from associated companies (see table overleaf).Financial cash flows arising from the direct and indirect business described above are disciplined by a cur-rent account contract. The average balance of such current account business in 2003 (reflected in non-capitalized financial receivables) amounted to Euro 20m, whereas the year–end figure was Euro 2,897,000.Merloni Progetti Spa is an associated company which in 2003 was awarded a contract by Merloni to build

98

N O T E S

Operations withassociated and

affiliatedcompanies

992 0 0 3 A N N U A L R E P O R T

N O T E S

a new washing machine plant in the Lipetzk industrial district. The contract entails a cost of around Euro15m. Against this plant construction contract (still in progress) Zao Refrigerator Plant Stinol made an ad-vance payment of Euro 7,257,000 (written to fixed assets under construction and advances). Merloni Prog-etti also provides Merloni Elettrodomestici with office leasing services in Milan.Aermarche is an associated company that provides aircraft hire services for Merloni management. Ther-mowatt and Colombo Spa sell household appliance components to Merloni Group, while MCP Eventi Srlprovides management of meetings and conventions for the Group.Detailed below are the balance sheet and income statement values reflecting business with the abovementioned associated and affiliated companies.

Fixed assets (Euro thousands)

Associated co. 12/31/2003 Type of transaction Counterpart

Merloni Progetti Spa 7,254 Advances for plant construction Zao Refrigerator Plant Stinol

Merloni Progetti Spa 1,282 Purchase of tangible fixed assets Merloni Elettrodomestici Spa

Adria Lab Srl 1,223 Purchase of intangible fixed assets Merloni Elettrodomestici Spa

Total 9,759

Affiliated co. 12/31/2003 Type of transaction Counterpart

Barclays Bank 45,225 Financial Merloni ElettrodomesticiUK Holdings Ltd

Total 45,225

Receivables from associated companies

(Euro thousands) 12/31/2003 Type of transaction Counterpart

Faber Factor Spa 16,827 Commercial Merloni Elettrodomestici Spa

Merloni Progetti Energia Spa 310 Commercial Merloni Elettrodomestici Spa

Adria Lab Srl 162 Commercial Merloni Elettrodomestici Spa

M&B Marchi e Brevetti Srl 89 Commercial Merloni Elettrodomestici Spa

Protecno Sa 59 Commercial Merloni Elettrodomestici Spa

Merloni Progetti Spa 17 Commercial Merloni Elettrodomestici Spa

Total 17,464

Receivables from affiliated companies


Sofarem Sàrl 527 Commercial Merloni International Business Sa

Colombo Spa 288 Commercial Merloni Elettrodomestici Spa

Merloni Termosanitari Spa 33 Commercial Merloni Elettrodomestici Spa

Sofarem Sàrl 9 Commercial Merloni Elettrodomestici Spa

Benelli Spa 1 Commercial Merloni Elettrodomestici Spa

Total 858

Financial receivables not held as assets


Faber Factor Spa 2,897 Financial Merloni Elettrodomestici Spa

Total 2,897

Payables to banks


Barclays Bank 63,848 Financial General Domestic Appliances Holdings Ltd

Total 63,848

100

N O T E S

1012 0 0 3 A N N U A L R E P O R T

N O T E S

Payables to associated companies


Faber Factor Spa 194,700 Commercial Merloni Elettrodomestici Spa

Faber Factor Spa 7,073 Commercial Merloni Electroménager Sa

Faber Factor Spa 5,704 Commercial Merloni Indesit Polska Spzoo

Faber Factor Sp 3,205 Commercial Merloni Electrodomesticos Sa - PT

Faber Factor Spa 1,285 Commercial Merloni Elettrodomestici BeyazEsya Pazarlama As

Merloni Progetti Spa 566 Commercial Merloni Elettrodomestici Spa

Adria Lab Srl 424 Commercial Merloni Elettrodomestici Spa

Aermarche Spa 184 Commercial Merloni Elettrodomestici Spa

M&B Marchi e Brevetti Srl 160 Commercial Merloni Elettrodomestici Spa

Faber Factor Spa 80 Commercial Merloni Hausgerate GmbH

Faber Factor Spa 62 Commercial Merloni International Trading Bv

Faber Factor International Sàrl 39 Commercial Merloni Electroménager Sa

Faber Factor Spa 29 Commercial Merloni Electrodomesticos Sa – SP

Faber Factor International Sàrl 1 Commercial Merloni Elettrodomestici Spa

Total 213,512

Payables to affiliated companies


Thermowatt Spa 2,306 Commercial Merloni Elettrodomestici Spa

Colombo Spa 761 Commercial Merloni Elettrodomestici Spa

Merloni Termosanitari Spa 325 Commercial Merloni Elettrodomestici Spa

AM Spa 37 Commercial Merloni Elettrodomestici Spa

Total 3,429

Memorandum accounts


Barclays Bank 180,902 Financial General Domestic Appliances Holdings Ltd

Barclays Bank 45,225 Financial Merloni International Business Sa

Total 226,127

Value of production

Value of production includes amounts relating to transactions with associated companies, as detailed be-low:

(Euro thousands) 2003 Type of transaction Counterpart

Faber Factor Spa 678 Other revenues Merloni Elettrodomestici Spa

Sofarem Sàrl 308 Revenues from sales Merloni International Business Sa

Merloni Progetti Energia Spa 250 Other revenues Merloni Elettrodomestici Spa

Sofarem Sàrl 116 Revenues from sales Merloni Elettrodomestici Spa

Merloni Progetti Spa 14 Revenues from services Merloni Elettrodomestici Spa

Total 1,366

Affiliated co. 2003 Type of transaction Counterpart

Colombo Spa 749 Revenues from sales Merloni Elettrodomestici Spa

Merloni Termosanitari Spa 34 Revenues from services Merloni Elettrodomestici Spa

Total 783

Cost of production


Aermarche Spa 3,872 Provision of services Merloni Elettrodomestici Spa

Faber Factor Spa 1,727 Provision of services Merloni Elettrodomestici Spa

M&B Marchi e Brevetti Srl 347 Provision of services Merloni Elettrodomestici Spa

Adria Lab Srl 304 Provision of services Merloni Elettrodomestici Spa

Merloni Progetti Spa 225 Provision of services Merloni Elettrodomestici Spa

Merloni Progetti Spa 142 Provision of services Zao Refrigerator Plant Stinol

Sofarem Sàrl 13 Provision of services Merloni Elettrodomestici Spa

Faber Factor Spa 2 Interest Merloni Electroménager Sa

Total 6,632


Thermowatt Spa 5,290 Costs for components Merloni Elettrodomestici Spa

MCP Eventi Srl 3,265 Provision of services Merloni Elettrodomestici Spa

Colombo Spa 1,978 Costs for components Merloni Elettrodomestici Spa

Nautica Due Spa 574 Provision of services Merloni Elettrodomestici Spa

Merloni Termosanitari Spa 562 Provision of services

& components Merloni Elettrodomestici Spa

Netscalibur Italia Spa 112 Provision of services Merloni Elettrodomestici Spa

Merloni Partecipazionie Servizi Spa 95 Provision of services Merloni Elettrodomestici Spa

AM Spa 92 Costs for components Merloni Elettrodomestici Spa

Benelli Spa 33 Provision of services Merloni Elettrodomestici Spa

Motonline Spa 24 Provision of services Merloni Elettrodomestici Spa

Total 12,025

102

N O T E S

1032 0 0 3 A N N U A L R E P O R T

N O T E S

Financial income and charges (Euro thousands)

Associated co. 2003 Type of transaction Counterpart

Faber Factor Spa 765 Interest and other income Merloni Elettrodomestici Spa

Adria Lab Srl 5 Interest and other income Merloni Elettrodomestici Spa

Total 770

Affiliated co. 2003 Type of transaction Counterpart

Faber Factor Spa 31 Interest and other charges Merloni Elettrodomestici Spa

Faber Factor International Sàrl 1 interest and other charges Merloni Electroménager Sa

Total 32

These financial statements provide a true and correct view of the consolidated financial position and con-solidated results of operations for the period.

104

N O T E S

Companies consolidated Registered office Share capital Group interestline by line direct indirect

Merloni Ariston International Sa Luxembourg Eur 100,289,985 100 -

Merloni Electrodomesticos Sa Spain Eur 11,500,000.01 78.95 21.05

Argentron Sa Argentina Ars 22,000,000 71.18 -

Merloni Domestic Appliances Ltd UK Gbp 90,175,500 19.60 80.40

Merloni Electrodomesticos Sa Portugal Eur 16,825,000 - 99.44

Merloni International Trading Bv The Netherlands Eur 272,270 - 100

Merloni International Business Sa Switzerland Chf 250,000 - 100

Indesit Pts Ltd UK Gbp 1,000 - 100

Merloni Electroménager Sa France Eur 17,000,000 - 100

Scholtès Nederland Bv The netherlands Eur 79,412 - 100

Fabrica Portugal Sa Portugal Eur 11,250,000 - 96.4

Merloni Elettrodomestici Beyaz EsyaSanayi Ve Ticaret As Turkey Trl 6,992,921,114,000 - 100

Merloni Elettrodomestici Beyaz Esya Pazarlama As Turkey Trl 17,000,000,000 100 -

Merloni Financial Services Sa Luxembourg Eur 5,170,000 99.99 0.01

Merloni Hausgerate GmbH Germany Eur 550,000 - 100

Merloni Reinsurance Company Ltd Ireland Usd 750,000 - 100

Wrap Spa Italy Eur 27,766,950 89.29 -

Wrap America Inc. USA Usd 100,000 - 89.29

Zao Refrigerator Plant Stinol CIS Rur 1,175,145,000 85 -

Merloni Indesit Polska Spzoo Poland Plz 258,876,500 98.53 -

Merloni UK Finance Llp UK Eur 95,750,000 99 1

Aei Gala Ltd UK Gbp 1,000 - 60

Airdun Limited UK Gbp 15,000 - 60

Ariston Group Service Limited UK Gbp 100 - 60

Cannon Industries Ltd UK Gbp 1,500,000 - 60

Creda Appliances Ltd UK Gbp 100 - 60

Creda Domestic Appliances Service Ltd UK Gbp 1,000 - 60

Creda Limited UK Gbp 5,850,000 - 60

Fixt Limited UK Gbp 2 - 60

General Domestic Appliances Holdings Ltd UK Gbp 26,000,000 - 60

General Domestic Appliances International Ltd UK Gbp 100,000 - 60

Merloni Elettrodomestici UK Ltd UK Gbp 5,010,000 - 60

General Domestic Appliances Sales Ltd UK Gbp 100 - 60

Gwyn J. Evans & Co. Ltd UK Gbp 5,000 - 60

Hotpoint Sales Ltd UK Gbp 775,000 - 60

Hotpoint UK Ltd UK Gbp 50 - 60

Industrial Design Unit Limited UK Gbp 100 - 60

Jackson Appliances Ltd UK Gbp 750,000 - 60

Merloni Elettrodomestici UK Holding Ltd UK Eur 163,000,000 - 100

Oatley Technical Developments Ltd UK Gbp 100 - 60

Rtc International Ltd UK Gbp 50,000 - 100

Xpelair Ltd UK Gbp 825,000 - 60

1052 0 0 3 A N N U A L R E P O R T

N O T E S

Shareholdings stated Registered office Share capital Group intereston an equity basis direct indirect

Faber Factor Spa Italy Eur 8,000,000 30 20

Merloni Progetti Spa Italy Eur 10,000,000 33 -

Haier Merloni Washing Machine Co. Ltd China Usd 24,000,000 30 -

MPE Spa Italy Eur 10,000,000 33 -

Aermarche Spa Italy Eur 25,000,000 41.4 -

Haier Merloni Electrical Appliance Co. Ltd China Usd 12,000,000 15 15

Other investments in associated Registered office Share capital Group interestand affiliated companies direct indirect

M&B Marchi e Brevetti Srl Italy Eur 20,000 50 -

Sofarem Sàrl La Réunion Eur 382,500 - 20

Merloni Appl. Asia Pacific Pte Ltd Singapore Sgd 100,000 - 100

Merloni Domestic Appliances Norway Ltd Norway Nok 100,000 - 100

Merloni Indesit Haztartastechnikai Kft Hungary Huf 10,000,000 99 -

Merloni Indesit Bulgaria Srlu Bulgaria Bgn 7,805,000 100 -

Merloni Elettrodomestici Ceska Republika Sro Czech Republic Czk 1,000,000 100 -

Indesit Hausgerate Vetriebs. GmbH Austria Eur 11,250,000 - 100

Tradeplace Bv The Netherlands Eur 30,000 20 -

Scholtès Ireland Ltd Ireland Iep 5,000 - 100

Adria Lab Srl Italy Eur 150,000 40 -

Merloni Domestic Appliances Hellas Mepe Greece Eur 18,000 - 100

Consorzio Consumer Care Italy Eur 5,538 98.12 -

Distretto dell’Elettrodomestico Soc. Consortile a rl Italy Eur 46,481 22.22 -

EMOLUMENTS PAID TO DIRECTORS, STATUTORY AUDITORS AND GENERAL MANAGERS - 2003

(A) (B) (C) (D) (E) (F) (G) (H)Name Office Period in office End Emoluments for Non Bonuses Otherand surname of office office in Merloni monetary and other emoluments

Elettrodomestici benefits (*) incentivesSpa

Vittorio Merloni Chairman of the board 01/01/2003–12/31/2003 2003 financialstatements 914,421.00 349,000.00 77,500.00 (1)

Andrea Guerra CEO 01/01/2003-12/31/2003 2003 financialstatements 275,825.00 4,828.74 2,054,000.00 254,202.26 (2)

Francesco Caio Director 01/01/2003-12/31/2003 2003 financialstatements 15,495.00 135.52 (3)

Felice Colombo Director 01/01/2003-12/31/2003 2003 financialstatements 25,825.00

Luca Corderodi Montezemolo Director 01/01/2003-12/31/2003 2003 financial

statements 15,495.00

Alberto Fresco Director 01/01/2003-12/31/2003 2003 financialstatements 25,825.00 138.24 (3)

Carl H. Hahn Director 01/01/2003-12/31/2003 2003 financialstatements 20,660.00 5,638.63 (3)

Hugh CharlesBlagden Malim Director 01/01/2003-12/31/2003 2003 financial

statements 20,660.00

Andrea Merloni Director 01/01/2003-12/31/2003 2003 financialstatements 25,825.00 80,000.00 (4)

Aristide Merloni Director 01/01/2003-12/31/2003 2003 financialstatements 25,825.00

Ester Merloni Director 01/01/2003-12/31/2003 2003 financialstatements 25,825.00

Francesco Merloni Director 01/01/2003-12/31/2003 2003 financialstatements 25,825.00

Roberto Ruozi Director 01/01/2003-12/31/2003 2003 financialstatements 20,660.00

Angelo Casò Chairman of boardof statutory auditors 01/01/2003-12/31/2003 2004 financial

statements 51.000.00 3,873.79 (3)

Demetrio Minuto Statutory auditor 01/01/2003-12/31/2003 2004 financialstatements 30,600.00 1,418.82 (3)

Paolo Omodeo Salè Statutory auditor 01/01/2003-12/31/2003 2004 financialstatements 30,600.00

Marco Milani CEO Merloni El. UK 01/01/2003-12/31/2003 - 1,027,000.00 729,857.97 (5)

Giovanni Carlino General manager 04/18/2003-12/31/2003 - 1,563.88 78,000.00 199,132.12 (2)

Andrea Sasso General manager 01/01/2003-12/31/2003 - 3,522.99 67,500.00 303,606.01 (2)

(*) By resolution of the shareholders dated 05/07/2003, directors and statutory auditors are covered by an insurance policy (also covering general managers, directors andstatutory auditors of Group companies) with an annual premium of around Euro 41,000.

(1) Lump-sum reimbursement of expenses(2) Emoluments for management post at Merloni Elettrodomestici Spa(3) Reimbursement of expenses(4) Emoluments for term as chairman of the board of directors of Wrap Spa(5) Emoluments for term as CEO of Merloni Elettrodomestici UK Holding Ltd

106

N O T E S

1072 0 0 3 A N N U A L R E P O R T

N O T E S

INDEPENDENT AUDITORS’ REPORT

108

Braille: a touch-language enabling the blind to read.

Call rate: number of service requests over total products sold.

Working capital, net: the difference between short-term assets and short-term liabilities of a trade and financial nature

Class A / A+: European certification given to appliances combining high performance and minimum energy consumption.

Ebitda/Ebit: earnings before interest, taxes, depreciation and amortization (gross operating margin) / earnings before interest andtaxes (operating margin).

EVA - Economic Value Added: an indicator of the capacity of a business to create new value, calculated on the basis of sustainableoperating margin after taxes, less the average cost of invested capital multiplied by invested capital.

Ever Fresh: an exclusive food preservation system employing vacuum technology.

Fast clean: a fast, automatic and cost-saving oven cleaning system that incinerates residues.

Gearing: an indicator of indebtedness, being the ratio of net financial payables to shareholders’ equity

Investment ratio: the ratio of investments to sales.

Intangible (assets): knowledge and relationships that can give a company competitive edge.

MeLA - Merloni Learning Approach: a training system/approach providing continuous personal and professional development ofhuman resources.

Pay out ratio: ratio of last dividend paid to consolidated net profits.

Pay per use: an innovative formula in which washing machines are hired, not bought, payment being for each single wash.

Play Zone: a fully modular space in Indesit fridges for storage of bottles and containers of all shapes and sizes.

PMS - Performance Management System: a system for assessing employees’ professional performance, so they can improve anddevelop their careers on the basis of their aptitudes and competencies.

ROHS: Community Directive disciplining the use of hazardous substances in electrical and electronic equipment.

ROE - Return on equity: a profitability indicator based on the ratio of net result to the average value of shareholders’ equity overthe period.

ROI - Return on investment: a profitability indicator based on the ratio of operating result to the average value of net investedcapital over the period.

ROS - Return on sales: a profitability indicator based on the ratio of operating result to net sales.

Shared Service Center (SSC): unit which centralizes all the Group’s administrative and fiscal services in the Fabriano headquarters.

Sensor system: a digital technology for washing machines and dishwashers, based on sensors that detect dirt levels so that theappropriate washing cycle can be selected automatically.

Smart tag: microchips on articles of clothing read by an appliance, via miniturized radio antennas, so it can select the right washprogramme.

Stock option: a faculty granted by enterprises to their managers whereby the latter may buy or subscribe a certain number ofcompany shares at a favourable, predetermined price and within a limited period of time.

Super Silent: a washing machine system that lowers the noise level during operation.

Supply chain: the organizational and IT structure that manages and coordinates business processes, from procurement of materialsand components through to delivery of finished products.

Time to market: the time lapsing between conception of a new product idea and its launch onto the market.

WEEE - Waste Electrical and Electronic Equipment: EU Directive regulating the end of the life cycle of household appliances.

WRAP - Web Ready Appliances Protocol: an exclusive technology enabling household appliances to dialogue amongst themselvesand with the outside world. Wrap is also the name of the company spearheading the Group’s research efforts in the field of electronics.

GLOSSARY

1092 0 0 3 A N N U A L R E P O R T

110

Lisbon

Setubal

Madrid

Blythe Bridge

Peterborough

London

Kinmel Park

Yate

Group Headquarters

Sales office

Manufacturing plants

Washing machines & dryers

Dishwashers

Cooking

Cooling

SUBSIDIARIES WORLDWIDEARGENTINA Argentron SaLavalle 472 - 1st floor - C1047AAJ Buenos Aires

AUSTRIA Indesit Hausgeräte Vetriebs GmbHBundesstrasse 66-87840 Zeltweg

BELGIUM Meurice MerloniChaussée de Bruxelles, 151 - 6040 Jumet

BULGARIA Merloni Indesit Bulgaria LtdWorld Trade Center, 36 Dragan Tsancov Blvd., Block B, Office 412 - 1057 Sofia

CHINA Merloni International Business SARepresentative Office, 1901&1910 Shanghai Times Square - 93 Huai Hai Road,Shanghai 200021

CIS Merloni International Trading bvBusiness Park, WC Pavillion, 46 - Prospect Mira - Moscow

CZECH REPUBLIC Merloni Elettrodomestici Czech Republic SroMerloni Elettrodomestici Czech Republic Sro U Nákladového nádrazí, 2/1949130 00 Praha 3

FRANCE Merloni Electroménager Sa3 Bd. G. Bidault, Croissy Beaubourg - 77437 Marne La Vallée Cedex 2

GERMANY Merloni Hausgeräte GmbHHainer Weg, 13-15 - 60599 Frankfurt am Main

GREECE Merloni Hellas Ltd29 Michalakopoulou Street - 11528 Athens

HUNGARY Merloni IndesitHáztartástechnikai Kft., Szépvölgyi Business Park - Szépvölgyi út 35-37. A ép., II em., H-1037 Budapest

ITALY Merloni Elettrodomestici Spa- Viale Aristide Merloni, 47 - 60044 Fabriano (AN)- Strada Provinciale Arceviese - Località Ca’ Maiano - 60044 Fabriano (AN)

LUXEMBOURG Merloni Ariston International Sa19-21 Bd du Prince Henri - 1724 Luxembourg

NORWAY Merloni Domestic Appliances Norway ASNils Hansens Vei, 13 - 0668 Oslo

POLAND Merloni Indesit PolskaUl. Dàbrowskiego, 216 - 93-231 Lódz

PORTUGAL Merloni Electrodomésticos SaRua Abranches Ferrão, 10-14° D - Edificio Atlanta Park ll - 1600-001 Lisboa

RUMANIA Merloni Elettrodomestici SpaBvd Basarabiei, 28A - Sector 2 - Bucharest

SINGAPORE Merloni Appliance Asia Pacific Pte Ltd138 Cecil Street, #08-01A Cecil Court - 069538 Singapore

SPAIN Merloni Electrodomésticos SaEdificio Europa III, C/ San Rafael n. 1 - Portal 4 Bajo G - 28108 Alcobendas Madrid

SWITZERLAND Merloni International Business SaCentro Gerre 2000 - Via Pobiette 11 - 6928 Manno (Lugano)

THE NETHERLANDS Merloni HuishoudapparatenVeldzigt 22 - 3454 PW De Meern

TURKEY Merloni Elettrodomestici Beyaz Esya Pazarlama ASBalmumcu cad.Karahasan sok.no.15 - Balmumcu Besiktas - 80700 Istanbul

UKRAINE Merloni International Trading bvMuzeiny Lane 4 - Kiev 01001

UK Merloni Elettrodomestici UKMorley Way, Peterborough PE2 9JB

1112 0 0 3 A N N U A L R E P O R T

S U B S I D I A R I E S W O R L W I D E

Paris Thionville

Luxembourg

Bruxelles

Amsterdam

Oslo

Frankfurt

LuganoRefrontolo

BrembateMilano

NoneFabriano

Comunanza

AthensManisa

Istanbul

Sofia

Bucharest

CarinaroTeverola

Roma

Albacina Melano

Budapest

Moscow

Lipetzk

Prague

Bratislava

Wien

Lódz

Kiev

REGISTERED OFFICEMerloni Elettrodomestici SpaViale Aristide Merloni, 4760044 Fabriano (AN) - ItalyTel. +39 0732 6611Fax +39 0732 662501

STATUTORY DATAShare capital: 99,871,169.40 EuroRegistered with the Ancona Court companies registerTax code/ Vat Reg. no.: 00693740425

COMMUNICATION AND EXTERNAL RELATIONSTel. +39 0732 662429Fax +39 0732 662380

INVESTOR RELATIONSTel. +39 0732 662381Tel. +39 02 307021

INTERNETwww.merloni.com

Merloni ElettrodomesticiCommunication and External RelationsMay 2004

CONSULTANCY AND COORDINATIONBonaparte 48, Milan

FINANCIAL INFORMATIONFinancial statements dept.Merloni Elettrodomestici

GRAPHICSRaimondo Monti - In Pagina, Saronno (VA)

PHOTOSVittorio Merloni: Bob KriegerAndrea Guerra: Visual Team - Simone FalcettaManagers: Giovanni VumbacaMerloni Elettrodomestici archives

PHOTOLITHOEmmegi Multimedia Srl, Milan

PRINTINGLarovere, Milan - Italy

INFORMATION AND CONTACTS

Merloni Elettrodomestici SpaViale Aristide Merloni, 47 - 60044 Fabriano (AN)

Tel. +39 0732 6611Italy

w w w . m e r l o n i . c o m

ANNUAL REPORT 2003 - SUMMARYAudited by PricewaterhouseCoopers

ANNUAL REVIEW

Merloni Elettrodomestici by numbers 2

2003 events 4

Letter to the shareholders 6

Andrea Guerra explains 8

Markets and regions

West Europe 11The UK market 12New Europe and the CSI 12

Business Units

Washing machines 15Dishwashers 16Cooking 17Cooling 18Consumer Care 19

R&D and technology 20

Quality 22

Supply chain 23

Marketing and corporate communication 24

Management and human resources 30

Sustainable development 32

Corporate governance 35

Behind the figures 36

Merloni Elettrodomestici on the stockmarket 38

5 year review 40

REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS

Company officers, committees and auditors 42

Board of directors’ report 43

Annexes 52

Consolidated financial statements

at December 31, 2003 59

Notes 65

Independent auditors’ report 108

Glossary 109

Subsidiaries worldwide 110

Information and contacts 112

AN

NU

AL

RE

PO

RT

20

03

Annual report2003

Audited by PricewaterhouseCoopers - Indesit...

Documents

Transcript of Audited by PricewaterhouseCoopers - Indesit...