Merloni Elettrodomestici spaConsolidated Financial Statements

Report of the Board of Directorson trends in operations for the first six months of 1998

Prepared pursuant to art. 2428 of the Italian Civil Codeand in accordance with Consob (National Commission for Listed Companies andthe Stock Exchange) resolutions No. 8195 dated 30 June 1994 and No. 9389dated 2 August 1995

Merloni Elettrodomestici SpaRegistered officeViale Aristide Merloni 47 - 60044 Fabriano (Ancona)Share capital Lit. 112,547,936,000 fully paid upRegistered with the previous Register of Companies at Ancona Court,Reg. No. 9677 Registered with Ancona C.C.I.A.A. (Chamber of Commerce for Industry,Agriculture and Handicraft) Reg. No. 85729

Internet - http://www.merloni.com

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Trends in operations

The consolidated financial statements for the first six months of 1998 showprofit of Lit. 30.5 billion, with an increase of Lit. 7 billion approximatelycompared with the same period the previous year.

Group revenues from sales and services are equal to Lit. 1,384 billion(Lit. 1,267 at June 1997) registering a 9.2% increase. The growth is sub-stantially due to the increase in sales volumes, exceeding No. 360,000 pie-ces, 70% of which realized in western Europe, with a 10% increase approxi-mately compared with 30 June of the previous year.

Revenues from sales abroad amounted to Lit. 1,029 billion and accountfor 74 per cent of total sales, of wich Lit. 588 billion relate to EuropeanUnion countries.

Group sales are in line with the growth registered in the Europeanmarket, confirming the continuity in the development trend with the con-solidation of the presence in emerging markets.

Operating profit is equal to Lit. 61.1 billion (Lit. 50.4 billion in the firstsix months of 1997), with an incidence as a percentage of sales which pas-sed from 4 to 4.4 per cent.

Investments amount to Lit. 40 billion (Lit. 58.3 at 30 June 1997),Lit. 34.9 billion of which in tangible and intangible fixed assets (Lit. 48.7at 30 June 1997) and Lit. 5.1 billion (Lit. 9.6 at 30 June 1997) in invest-ments, Lit. 4.4 billion of which in purchases of own shares. The decrease infinancial investments in property, plant and equipment compared wich thesame period in 1997, equal to Lit. 11 billion, is connected with the con-centration of investments in the second six months of the year.

Net indebtedness at 30 June 1998 amounted to Lit. 140 billion, showinga strong decrease compared with the same period the previous year (Lit.385 billion) and further improved compared with net indebtedness at31 December 1997 which amounted to Lit. 167 billion.

Benefits of the decrease in indebtedness are reflected in the Group equitysoudness, as confirmed by the positive trend in the debt/equity ratio whichpassed from 0.42 at 31 December 1997 to 0.33 at 30 June 1998.

Net financial charges decreased to Lit. 6.7 billion, compared withLit. 13.9 billion at 30 June 1997, mainly following the decrease in netfinancial indebtedness and thanks to positive centralized management ofrates and cash. The improvement is even more sifinificant if we conside-red that 1997 included Lit. 4.4 billion of net financial income of FaberFactor Spa, no longer consolidated applying the full consolidationmethod.

Total personnel of the Group in Italy and abroad at 30 June 1998amounted to No. 8,724 individuals (No. 8,333 at 30 June 1997). Theincrease is almost exclusively due to higher production volumes and it ismainly composed of fixed-term contracts.

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Significant events occurred after 30 June 1998 and year-endperspectives

The Ordinary Meeting was called today to approve the revocation and simulta-neous renewal of the buy-back transaction. Following such resolution, a maxi-mum of No. 3,751,293 own shares can be purchased, both ordinary and non con-vertible savings shares. Price cannot be lower than nominal value of Lit. 1,000,and cannot exceed Lit. 20,000 for ordinary shares and Lit. 9,000 for non conver-tible savings shares, and however at prices not lower than average Stock ofExchange costs for the last month, increased or decreased by no more than 30 percent, and at prices not exceeding the Stock of Exchange listing at the time of pur-chase. The purchases described above will take place over a maximum period of18 months.

The Extraordinary Meeting, on the same day, in order to carry out a stockoption transaction, is asked to resolve a share capital increase of maximum Lit. 3billion, issuing a maximum number of 3 million ordinary shares, to be reservedfor the exercise of non transferable subscription options, which will be freely assi-gned to employees forming part of company’s management.

With regard to trends in the market, in the period subsequent to 30 June 1998,the positive trend in Europe and in Eastern countries has continued, while in CIScountries, the strong devaluation of the ruble occurred on 17 August, determineda slow-down in demand even though it did not generate particular insolvencysituations. On the basis of these results and despite the negative background in theRussian market, a growing operating result is projected along the year, howevernot lower than the result registered in 1997.

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– Consolidated balance sheet– Consolidated income statement– Statement of changes in consolidated shareholders’ equity– Consolidated statement of cash flow– Notes to the consolidated financial statements

Appendices to the Directors’ Report

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Consolidated balance sheet(in millions of Italian lire)

Assets 30 June 31 December 30 June1998 1997 1997

Share capital issued and not paid – – –Fixed assetsIntangible fixed assets:Installation and expansion costs 1,068 1,311 1,367Research, development and advertising costs 1,151 1,191 2,389Industrial patent rights and utilization of know-how 15,599 19,113 20,165Concessions, licenses, trademarks and similar rights 12,060 12,536 13,489Goodwill 9,847 13,092 16,332Assets under construction and advances 86 – –Other 1,267 1,342 853

41,078 48,585 54,595Tangible fixed assets:Land and buildings 214,437 217,118 230,872Plant and machinery 189,783 201,867 210,560Industrial and commercial equipment 51,090 61,110 61,681Other goods 25,759 26,010 26,201Work in progress 21,167 13,142 17,178

502,236 519,247 546,492Financial fixed assets:Shareholdings in:– subsidiaries 1,068 431 366– associated companies 36,317 26,045 21,545– other enterprises 11,365 13,427 9,786Receivables:– from associated companies – – 9,809– other receivables (within the subsequent year Lit. 371) 45,205 10,392 10,258Other securities 3,719 3,719 3,719Own shares (total nominal value Lit. 7,503) 33,383 29,023 15,054

131,057 83,037 70,537Total fixed assets 674,371 650,869 671,624Current assetsInventory:Raw materials, auxiliary materials and spare parts 78,097 71,029 69,432Work in progress 14,333 15,039 16,941Finished products and goods for resale 284,243 157,323 267,830Advances 4,633 5,278 2,585

381,306 248,669 356,788Receivables:Trade receivables (after the subsequent year Lit. 424) 711,125 730,070 745,003From subsidiaries 1,323 1,470 912From associated companies 34,908 18,342 20,352From parent companies 24 29 500Other receivables (after the subsequent year Lit. 9,958) 96,057 262,095 165,069

843,437 1,012,006 931,837Short-term investments:Other shareholdings 3,190 – 579Financial receivables 30,621 249,573 201,480

33,811 249,573 202,059Cash:Bank and postal deposits 209,118 240,472 207,263Cash on hand 472 396 477

209,590 240,868 207,740Total current assets 1,468,144 1,751,116 1,698,424Accrued income and prepayments 5,805 5,961 18,422Total 2,148,320 2,407,946 2,388,470

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Liabilities and shareholders’ equity 30 June 31 December 30 June1998 1997 1997

Shareholders’ equity

Share capital 112,548 112,548 112,548

Share-premium reserve 20,856 25,216 39,185

Revaluation reserves 5,284 5,284 5,284

Legal reserve 6,017 6,508 6,485

Reserve for shares in portfolio 33,383 29,023 15,054

Other reserves, separately indicated in the notes 66,900 70,447 66,495

Profits (losses) carried forward 144,086 110,618 110,735

Group profit (loss) for the year 30,501 42,333 23,608

Group Shareholders’ equity 419,575 401,977 379,394Share capital and reserves - minority interest 21,071 19,950 21,290

Profit (loss) for the year - minority interest 1,395 1,605 151

Shareholders’ equity - minority interest 22,466 21,555 21,441442,041 423,532 400,835

Provisions for contingencies and obligations

Provision for severance pay and similar obligations 3,423 3,239 4,095

Provision for taxes 15,261 21,509 9,730

Other 68,615 56,736 46,069

87,299 81,484 59,894Staff leaving indemnity 110,165 109,057 111,871Payables

Banks lonas payable

(after the subsequent year Lit. 118,869) 308,912 544,249 712,544

Other financing payables

(after the subsquent year Lit. 69,826) 120,637 126,769 120,516

Advances 3,023 11,096 2,444

Trade payables 534,868 794,281 787,973

Secured payables 174 475 2,438

Payables to subsidiaries 127 861 5

Payables to associated companies 346,378 751 560

Payables to parent companies 1,800 10,411 11,355

Taxes payables 56,127 66,073 24,103

Social security payables 58,182 40,824 20,353

Other payables 62,572 185,357 116,764

1,492,800 1,781,147 1,799,055Accrued liablities and deferred charges 16,015 12,726 16,815Total 2,148,320 2,407,946 2,388,470

Memorandum accounts 30 June 31 December 30 June1998 1997 1997

List of direct and indirect guarantees

Guarantees:

– for the benefit of third parties 25,758 35,389 48,592

Securities:

– for the benefit of third parties 114,149 125,880 139,484

Other memorandum accounts 291,890 265,687 318,587

431,797 426,956 506,663

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Consolidated income statement(in millions of Italian lire)

30 June 30 June 31 December1998 1997 1997

Value of productionRevenues from sales and services 1,384,301 1,267,324 2,799,277Variations in work in progressand finished goods 130,284 71,313 (21,403)Variations in fixed assets – 2,501 1,492Other income(of which grants for the year Lit. 358) 25,035 17,763 37,832

1,539,620 1,358,901 2,817,198Costs of productionRaw materials, auxiliary materials, spare parts and goods 836,649 746,831 1,514,652Services 279,646 215,636 468,835Utilization of third parties’ assets 16,455 15,085 28,640Personnel costs:– salaries and wages 175,239 161,845 309,486– social charges 58,373 54,562 110,721– staff leaving indemnity 8,328 8,084 15,572– other social contributions 5,185 3,422 6,500– other costs 8,881 7,895 16,083Depreciation and writedowns:– depreciation of intangible fixed assets 9,589 10,369 23,838– depreciation of tangible fixed assets 49,909 46,498 91,949– other writedowns of fixed assets – – –– writedown of receivables recorded

as current assets and cash 7,999 10,222 20,505Variation in inventory of raw materials, auxiliarymaterials, spare parts and goods (3,194) (1,264) 15,248Accruals for contingencies 3,265 6,502 22,586Other accruals – – –Other operating charges 22,244 22,831 42,016

1,478,568 1,308,518 2,686,631Difference between value and cost of production 61,052 50,383 130,567Financial income and chargesIncome from shareholdings 501 191 161Other financial income:– receivables recorded as fixed assets – 80 106– securities recorded as fixed assets 118 150 288– securities recorded as current assets – 748 –– other financial income (of which Lit. 2,190 from

non consolidated associated companies) 36,691 55,103 110,531Interest and other financial charges (of which Lit. 820from non consolidated associated companies)(of which Lit. 1 from parent companies) 43,961 70,164 134,692

(6,651) (13,892) (23,606)Adjustment to the value of financial operationsRevaluations:– shareholdings – 784 7,630Writedowns:– shareholdings 6,281 278 623– other investments – – 19

(6,281) 506 6,988Extraordinary income and expenses:Income 285 3,389 4,981Expenses 16,509 16,627 33,159

(16,224) (13,238) (28,178)Results before taxes 31,896 23,759 85,771Income taxes for the year – – 41,833Profit (loss) for the year 31,896 23,759 43,938Profit (loss) for the year - minority interest 1,395 151 1,605Group profit (loss) for the year 30,501 23,608 42,333

These financial statements agree with the accounting records.

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Statement of changes in consolidated shareholders’ equity for the years ended 31 December 1997 and 30 June 1998(in millions of Italian lire)

Share Share- Revaluation Legal Reserve for Other Profits Profit for Totalcapital premium reserve reserve shares in reserves (losses) the year share-

reserve portfolio carried holders’forward equity

Balances at 31 December 1996 112,548 43,058 5,284 5,481 11,181 66,949 102,025 13,330 359,856

Allocation of 1996 consolidated profit 1,027 12,303 (13,330) –

Distribution of dividends (1,350) (3,615) (4,965)

Reclassification to the reserve

for shares in portfolio (17,842) 17,842 –

Utilization of reserves to pay

for the tax on equity (1,008) (1,008)

Grants on investments 16,049 16,049

Variation in the cumulative effectof translation of financial statements in foreign currency (8,059) (8,059)

Substitute tax (2,134) (95) (2,229)

Profit for the year 42,333 42,333

Balance at 31 December 1997 112,548 25,216 5,284 6,508 29,023 70,447 110,618 42,333 401,977

Allocation of 1997 consolidated profit 206 42,127 (42,333) –

Distribution of dividends (2,507) (9,356) (11,863)

Reclassification to the reservefor shares in portfolio (4,360) 4,360 –

Utilization of reserves to payfor the tax on equity (1,229) (1,229)

Utilization of reserves to coverprevious losses (643) 643 –

Variation in the cumulative effectof the translation of financial statements in foreign currency 189 189

Variation in the consolidation area (54) 54 –

Profit for the year 30,501 30,501

Balance at 30 June 1998 112,548 20,856 5,284 6,017 33,383 66,900 144,086 30,501 419,575

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Consolidated statement of cash flow(in millions of Italian lire)

30 June 1998 31 December 1997

A. Net opening cash (1) (179,924) (241,087)

B. Cash flow from (for) operations for the year

Profit (loss) for the period 30,501 42,333

Depreciation 59,498 115,787

(Revaluations) or writedowns of fixed assets (6,281) 6,988

Variations in capital for the year:– receivables recorded as current assets (380,893) (146,336)

– inventory (132,637) 34,260

– trade payables and other payables 490,686 248,032

– accruals and deferrals 6,210 7,072

Net variation in the “staff leaving indemnity” 1,199 (716)

Variation in the provision for risks for taxes (6,248) 12,237

Variations in other provisions for contingenciesand obligations 12,063 26,595

74,098 346,252

C. Cash flow from (for) investment operations

Net disinvestments (investments) in fixed assets:– intangible fixed assets (goodwill excluded) (2,229) (12,755)

– goodwill – (4,084)

– tangible fixed assets (32,481) (83,592)

– investments:

shareholdings (5,756) (18,327)

receivables (34,813) 1,544

own shares (4,360) (17,842)

(79,639) (135,056)

D. Cash flow from (for) financial operations

Increase (decreas) in short-term investments (28,642) (33,096)

Medium/Long-term loans receivednet of reimbursements (10,720) (120,358)

Grants received on capital account – 16,049

Dividends (11,863) (4,965)

Utilization of reserves for taxes (1,229) (3,238)

Variation in shareholders’ equity - minority interest 911 2,310

(51,543) (143,298)

E. Currency effect on medium and long-term items (302) (5,977)

F. Variation in the consolidation area

Net capital for the year 7,155 (14,810)

Short-term investments 249,573 –

Intangible fixed assets 151 (409)

Tangible fixed assets 71 13,183

Provision for contingencies and obligations (91) 1,278

256,859 (758)

G. Cash flow for the period (B+C+D+E+F) 199,473 61,163

H. Net closing cash (A+G) 19,547 (179,924)

(1) That is net short-term financial indebtedness.

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Structure and content of the financial statements

The consolidated financial statements at 30 June 1998 were prepared in confor-mity with the regulations introduced by Law Decree No.127/1991, integrated,with regard to those aspects not specifically dealt with by the Decree, by theaccounting principles stated by the Consigli Nazionali dei Dottori Commercialistie dei Ragionieri (National Board of Chartered Accountants) and, in their absen-ce, by those of the International Accounting Standards Committee (I.A.S.C.) andof the Financial Accounting Standards Board (F.A.S.B.).

These financial statements reflect the full consolidation of the financial state-ments of Merloni Elettrodomestici Spa and its subsidiaries, except for sharehol-dings either not operating or considered not significant.

The list of companies included in the consolidation area at 30 June 1998 is setout below:

List of companies included Registered Share capital Groupin the consolidation applying the office sharefull consolidation method direct indirect

Merloni Ariston International Sa Luxembourg USD 94,169,000 100 –

Merloni Electrodomésticos Sa Spain EPS 1,900,000,000 78.9 21.1

Merloni Domestic Appliances Ltd Great Britain GBP 38,001,000 46.5 53.5

Merloni Electrodomesticos Sa Portugal PTE 3,365,000,000 – 99.4

Merloni International Trading Bv The Netherlands NLG 600,000 – 100

Merloni Huishoudapparaten Bv The Netherlands NLG 1,000,000 – 100

Indesit Pts Ltd Great Britain GBP 1,000 – 100

Merloni Electroménager Sa France FRF 110,000,000 – 100

Merloni Electroménager Suisse Sa Switzerland CHF 280,000 – 100

Scholtes Nederland Bv The Netherlands NLG 175,000 – 100

Scholtes Warenhandelsgesmbh Austria ATS 250,000 – 100

Scholtes Ireland Ltd Ireland IEP 5,000 – 100

Fabrica Portugal Sa Portugal PTE 2,250,000,000 – 96.4

Merloni Elettrodomestici Beyas EsyaSanayi Ve Ticaret AS Turkey TUL 3,000,000,000,000 90 (*) –

Merloni Elettrodomestici Beyas EsyaPazarlama AS Turkey TUL 17,000,000,000 100 –

Belimovel Construcoes Lda Portugal PTE 2,400,000 – 100

Merloni Financial Services Sa Luxembourg ITL 10,000,000,000 100 –

Merloni Hausgerate Gmbh Germany DEM 1,000,000 – 100

Merloni Investment Ltd Cayman Island USD 3,000,000 95 5

Merloni South AmericaInvestment Ltd Cayman Island USD 3,000,000 – 100

Merloni ReinsuranceCompany Ltd Ireland USD 750,000 – 100

Philco Italia Spa Italy ITL 15,000,000,000 51.7 –

Star Spa Italy ITL 6,500,000,000 70 –

Merloni Indesit Polska Spzoo Poland PLN 117,800 100 –

(*) The percentage includes the shareholding equal to 4.12% owned by Simest Spa, where theGroup parent company has the voting right.

Notes to the consolidated financial statements at 30 June 1998

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List of shareholdings valued Registered Share capital Groupapplying the equity method office share

direct indirect

Faber Factor Spa Italy ITL 16,000,000,000 30 20

Merloni Progetti Spa Italy ITL 15,000,000,000 33 –

Merloni ProgettiInternational Sa Luxembourg ITL 25,000,000,000 – 33

Protecno Sa Switzerland CHF 500,000 – 33

Progelease Spa Italy ITL 1,000,000,000 – 33

Argenton Sa Argentine USD 22,000,000 – 31.2

List of other shareholding Registered Share capital Groupin subsidiaries and associated office sharecompanies direct indirect

M&B Marchi e Brevetti Srl Italy ITL 20,000,000 50 –

Sofarem Sarl La Rèunion FRF 2,500,000 – 20

Merloni Appl. AsiaPacific Pte Ltd Singapore SGD 100,000 – 100

Merloni IndesitHaztartastechnikai kft Hungary HUF 10,000,000 99 –

Merloni Indesit Bulgaria Srlu Bulgaria BGL 7,805,000 100 –

Merloni Elettrodomestici CeskaRepublika Sro Czech Republic CZK 1,000,000 100 –

Merloni ElettrodomesticiPoland Spzoo Poland PLN 20,000 100 –

Merloni Indesit DomaciElektrospotrebice Sro Czech Republic CZK 1,200,000 100 –

Co.Pro. Spa Italy ITL 2,600,000,000 24 –

Compared with the previous year, the consolidation area changed following thechange in criterion utilized for the valuation of the shareholding in Faber FactorSpa; up to 31 December 1997, the company was consolidated applying the fullconsolidation method, while it is presently valued applying the equity method.The choice of the new criterion is due to the decrease in the shareholding per-centage owned to 50%, following the full subscription by Fineldo Spa of the sharecapital increase, and also to the consideration that various operations performedby Faber Factor Spa are no longer restricted within the Group, but they are moreand more directed to the external market.

The financial statements of companies included in the consolidation area wereprepared in accordance with accounting principles and criteria set forth inart.2423 and subsequent articles of the Italian Civil Code, in line with principlesestablished by the Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri(National Board of Chartered Accountants) and, in their absence, with those sta-ted by the International Accounting Standard Committee (I.A.S.C.) and by theFinancial Accounting Standards Board (F.A.S.B.) as recommended by Consob(National Commission for Listed Companies and the Stock Exchange).

The Merloni Elettrodomestici Group considered it appropriate to avail itself ofthe possibility included in paragraph 5 of article 3 of Consob regulations, for thepreparation of the six-monthly report, approved with resolution No.8195 dated30 June 1994, and presented the result for the period gross of taxes as well as ofadjustments and accruals exclusively arising from the application of fiscal legisla-tion.

DeviationsNo exceptional circumstances have arisen such to make it necessary to applydeviations as of art.29, paragraphs 4 and 5 of Law Decree 127/1991.

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VALUATION CRITERIAThe valuation criteria adopted for the preparation of the consolidated financialstatements are in line with those utilized for the preparation of the annual finan-cial statements of the Group parent company and they are consistent with thoserecommended by Consob.

Consolidation and translation principles• Assets and liabilities of consolidated companies are recorded applying the full con-

solidation method. The balance sheet value of consolidated shareholdings is elimi-nated against shareholders’ equity of invested companies; the elimination is madeon the basis of book values at the date of the first inclusion in the consolidation.

• The difference between acquisition cost and shareholders’ equity at current valueof invested companies at the date of acquisition of the shareholding is recorded as“goodwill” in intangible fixed assets and depreciated over five years.

• The portion of shareholders’ equity of minority interest of consolidated subsidia-ries is recorded as “Share capital and reserves - minority interest” among sharehol-ders’ equity, while the portion of minority interest of the net result of such compa-nies is separately disclosed in the consolidated income statement as “Profit (loss) forthe year - minority interest”.

• Profits not yet realized arising from intergroup transactions are eliminated, as wellas receivables and payables and all transactions among companies included in theconsolidation.

• The financial statements of foreign companies were translated into Italian lire onthe basis of the following criteria:– assets and liabilities at the rate of exchange existing at the end of the period;– revenues and costs, as well as income and charges, applying average rates of

exchange for the period;– items forming shareholders’ equity at the rate of exchange existing in the rela-

ted period of formation.Exchange differences arising from the translation of closing shareholders’ equity tohistorical rates of exchange compared with rates of exchange existing at the financial sta-tements’ date, are directly recorded among shareholders’ equity, with differencesbetween the operating result at average rates of exchange and operating result in Italianlire at the rates of exchange existing at the year end in the item “Exchange reserve”,included among “Other reserves”.The following schedule indicates rates applied for the translation:

Currency Opening rate Average rate Closing rate Average rate ofof exchange of exchange of exchange exchange, previous year

US Dollar 1,759.19 1,780.80 1,778.25 1,702.65Deutsche Mark 981.69 985.82 985.18 982.87French Franc 293.44 294.10 293.91 291.73Dutch Guilder 871.06 874.78 873.92 872.25Portuguese Escudo 9.60 9.63 9.62 9.71English Pound 2,913.04 2,937.26 2,965.59 2,801.77Spanish Peseta 11.60 11.618 11.607 11.62Swiss Franc 1,209.90 1,199.89 1,171.06 1,173.93Polish Zloty 498.35 509.16 509.16 498.35

• With regard to foreign subsidiaries and associated companies operating in highinflation-rate countries, shareholdings reflect adjustments arising from theapplication of international principles regarding accounting for inflation. Since1997, the Merloni Group has decided to adopt the international accountingprinciple F.A.S. 52 instead of I.A.S. 29 previously applied. The decision is theresult of the requirement to improve the representation of trends in operationsand shareholders’ equity. The main distortions deriving from the application ofI.A.S. 29 concern: valuation of supplies, valuation of purchases and productioncosts, valuation of fixed assets and accordingly depreciation and therefore sha-reholders’ equity. The above mentioned distortions are caused by the differen-tial inflation-writedown, significant in high inflation-rate countries, where theMerloni Group operates and more significant taking into account that themajority of purchases and investments are carried out in Italian lire. The impacton shareholders’ equity items and on the result for the year deriving from theapplication of the different accounting principle adopted is explained in detailin the paragraph commenting Group shareholders’ equity.

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Comments to the main items in the balance sheet(All amounts shown in these notes to the financial statements are expressed in millions

of Italian lire)

ASSETS

Fixed assets

Intangible fixed assets

The composition and summary movements in intangible fixed assets are detailedas follows:

Description Opening Increases Decreases Exchange Closingbalance differences balance

Installation andexpansion costs 1,311 – 245 2 1,068

Research, developmentand advertising costs 1,191 123 164 1 1,151

Industrial patentrights and utilizationof know-how 19,113 2,042 5,470 15,685

Concessions, licenses, trademarksand similar rights 12,536 3 479 12,060

Goodwill 13,092 – 3,245 – 9,847

Other 1,342 64 140 1 1,267

Total 48,585 2,232 9,743 4 41,078

The break-down of installation and expansion costs at historical cost is as follows:

Description Historical costs at Historical costs at 30/06/98 31/12/97

Costs for establishment of companies 2,209 2,529

Costs for share capital increase 1,059 1,152

Costs for mergers 45 45

Costs for start-up of new productions 1,060 1,060

Total 4,373 4,786

Accumulated depreciation 3,305 3,475

Balances 1,068 1,311

During the year, the increase of Lit. 2,042 million in industrial patent rights andutilization of know-how, is largely due to expenses incurred by the Group parentcompany to develop and strengthen software programs (Lit. 2,027 million). Costsfor the purchase and internal production relating to software no longer utilizedwere fully depreciated for Lit. 2,551 million.

With regard to concessions, licenses, trademarks and similar rights, the Indesit tra-demark, purchased following the merger of the company bearing the same name,was annulled as fully depreciated. Licenses mainly include the right to the utiliza-tion of the CAD/CAM three-dimensional application software and the right tothe utilization of the Ariston trademark, expiring in 2050.

Therefore, the closing balance of goodwill includes the residual value ofgoodwill of Merloni Progetti Spa (Lit. 1,170 million), following the acquisition ofa 33 per cent share in 1994, Philco Italia Spa (Lit. 3,744 million) following theacquisition of a further 3.34 per cent share in 1995, Fabrica Portugal Sa (Lit. 542million) following the acquisition of a further 14.8 per cent share in 1996,

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Merloni Elettrodomestici Beyaz Sanayi Ve Ticaret As (Lit. 1,561 million) followingthe acquisition of a further 20.7 per cent share in 1996 and Star Spa(Lit. 2,830 million) following the acquisition of a further 40 per cent share in 1997.

Other includes:

– expenses concerning offices in the CIS for a residual value of Lit. 351 million;– financial charges on loans received for the acquisition of property plant and

equipment by the subsidiary Merloni Electroménager Sa of Lit. 634 million.

Tangible fixed assetsThe composition and summary movements in tangible fixed assets are describedin the following schedule:

Movements Land Plant Industrial and Other Work Totaland and commercial goods in

buildings machinery equipment progress

Opening values

Historical cost (*) 254,898 503,478 270,693 77,462 13,142 1,119,673

Revaluations 30,301 9,576 315 1,902 - 42,094

Accumulated deprec. (68,082) (311,187) (209,898) (53,353) - (642,520)

Writedowns - - - - - -

Total 217,118 201,867 61,110 26,010 13,142 519,247

Variations

Purchases 1,619 10,200 7,615 5,072 8,107 32,613

Revaluations - - - - - -

Disposals (7) (1,476) (60) (635) - (2,178)

Utilization ofdepreciation funds 2 1,438 60 439 - 1,939

Depreciation forthe year (4,583) (22,496) (17,669) (5,160) - (49,908)

Writedowns - - - - - -

Variations in theconsolidation area - - - (72) - (72)

Exchange differences 288 157 34 (3) 12 488

Other variations - 94 - 108 (94) 108

Total (2,681) (12,083) (10,020) (251) (8,025) (17,010)

Closing values

Historical cost 256,510 512,201 278,248 81,827 21,249 1,150,036

Revaluations 30,301 9,576 315 1,902 - 42,094

Accumulateddepreciation (72,663) (332,245) (227,507) (58,074) - (690,489)

Writedowns - - - - - -

Exchange differences 288 157 34 (3) 12 488

Other variations - 94 - 108 (94) 108

Total 214,437 189,783 51,090 25,759 21,167 502,236

(*) Historical cost includes the effects of fluctuations in rates of exchange on tangible fixedassets in foreign currency starting from 1987, the first year of full consolidation.

16

Investments projected for 1998, a large part being realized in the second part of the year,are intended to renew and extend the products’ range and to the reorganizationand computerization of processes.

The Lit. 72 million decrease relating to the variation in the consolidation arearepresents the effect of the exclusion of Faber Factor Spa.

As indicated below in the comments to memorandum accounts, part of pro-perty, plant and equipment is subjected to restrictions and guarantees againstloans received in the medium and long term.

Financial fixed assets

ShareholdingsAt 30 June 1998, the most important shareholdings not included in the consoli-dation area applying the full consolidation method are the following:

30/06/98 31/12/97

Shareholdings in Ownership Balance Ownership Balancesubsidiaries percentage sheet value percentage sheet value

Merloni Indesit Haztartastechnikai Kft 99.00 149 99.00 149

Merloni Indesit Bulgaria Srlu 100.00 40 100.00 40

Merloni Indesit DomaciElektrospotrebice Sro 100.00 60 100.00 60

Merloni Appliances Asia Pacific Pte Ltd 100.00 124 100.00 121

Merloni ElettrodomesticiCeska Republika Sro 100.00 51 100.00 51

Merloni Elettrodomestici Poland Spzoo 100.00 644 100.00 10

Total 1,068 431

The shareholdings listed above, valued applying the cost method, despite beingmajority shareholdings were not consolidated as commercial operations perfor-med are not significant. Among these, Merloni Elettrodomestici Poland Spzoo,where the shareholding passed to Lit. 644 million following the share capitalincrease.

30/06/98 31/12/97

Shareholdings in associated Ownership Balance Ownership Balancecompanies percentage sheet value percentage sheet value

M&B Marchi e Brevetti Srl 50.00 10 50.00 10

Argentron Sa 31.18 5,372 31.18 5,690

Merloni Progetti Spa 33.00 17,914 33.00 20,200

Faber Factor Spa 50.00 12,250 – –

CO.PRO. Spa 24.00 624 – –

Other minor shareholdings – 147 – 145

Total 36,317 26,045

17

30/06/98 31/12/97

Shareholdings in other Ownership Balance Ownership Balanceenterprises percentage sheet value percentage sheet value

Haier Merloni (Qingdao)Washing Machine Co. Ltd 12.50 4,860 12.50 4,860

Meurice Ets 10.00 2,173 10.00 2,150

Istituto Mobiliare Italiano 0.02 1,204 0.02 1,204

Necchi Compressori Spa 8.75 791 8.75 791

Akros Spa 0.18 587 0.18 587

Factor Industriale Spa – – 8.83 2,088

Centro Energia Teverola Spa 5.00 1,500 5.00 1,500

Centro Energia Operator Teverola Srl 5.00 5 5.00 5

Other minor shareholdings – 245 – 242

Total 11,365 13,427

Faber Factor Spa is included for the first time among shareholdings in associatedcompanies. The Company was previously consolidated applying the full consoli-dation method, as previously commented. Furthermore, the balance of the itemincludes the shareholding of the Group parent company in CO.PRO Spa, a newlyestablished company operating in the domestic appliances segment, as well asadjustments of shareholdings to shareholders’ equity.

The shareholding in Factor Industriale Spa is no longer included in the balan-ce following the exclusion of Faber Factor Spa, which owns its shares, from thefull consolidation area.

Receivables

Other receivablesThe amount is mainly composed (Lit. 42,790 million) of a deposit in US dollarsof the Lugano branch of Merloni Ariston International Sa and of long-term loans(Lit. 1,959 million) granted by the Group parent company to employees who suf-fered damages to property following the earthquake occurred on 26 September1997 and subsequently in the Marches and Umbria regions. The loans, bearinginterest at subsidized rates (treated in compliance with fiscal legislation) last tenyears and are reimbursed through monthly instalments. The portion expiringwithin the subsequent year is equal to Lit. 266 million.

Other securitiesThe item is composed of securities recorded as fixed assets, purchased by theGroup parent company in 1994 having a nominal value of Lit. 3,755 million,with maturity in 2000, recorded at purchase cost and which are not expected tobe sold within the next twelve months.

Own sharesThe Lit. 4,361 million increase is due to the purchase in the first six months of1998 by the Group parent company, of No.695,000 ordinary shares and subse-quent sale of No.47,500 ordinary shares. At 31 December 1997, No.6,856,000shares were already included in the portfolio.

18

At the end of the period, the Group parent company on the whole had in portfo-lio No.7,503,500 own ordinary shares, for a value of Lit. 33,383 million.Therefore, the average unit purchase price is equal to Lit. 4,449.

Current assets

InventoryThe balance of the item is Lit. 381,306 million. The Lit. 132,637 million increa-se is attributable to the seasonality of production.

ReceivablesThe item shows a balance of Lit. 843,437 million (Lit. 1,012,006 million at 31December 1997) and its composition is set out below:

Trade receivablesTrade receivables amount to Lit. 711,125 million net of the bad debts provisionof Lit. 49,499; the Lit. 18,945 million decrease compared with the previous year,taking into account the increase in sales, shows an improvement in bad debts.

The Group parent company and some subsidiaries have insurance contracts tocover insolvency risks.

Among receivables of the Group parent company there are amounts expiringafter the year of Lit. 424 million.

Receivables were written down to cover risks of losses of receivables in litigationand whose recoverability is however doubtful. The accrual for the period isLit. 7,999 million.

Receivables from subsidiaries and associated companiesThe balances of the item are composed as follows:

Subsidiaries 30/06/98 31/12/97Merloni Indesit Bulgaria Srlu 509 507

Merloni Indesit Domaci Sro 651 646

Merloni Indesit Haztartastechnikai Kft 146 317

Merloni Elettrodomestici Poland Spzoo 17 –

Total 1,323 1,470

Associated companies 30/06/98 31/12/97Faber Factor Spa 16,820 –

Argentron Sa 9,631 9,481

Merloni Progetti Spa 5,003 4,896

Protecno Sa 123 1,479

Sofarem Sarl 3,202 2,233

M&B Marchi e Brevetti Srl 129 253

Total 34,908 18,342

Receivables from Group companies, having a financial and commercial nature,are regulated at market conditions. More information is included in the paragraphdealing with intergroup relationships.

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Receivables from parent companiesThe Lit. 24 million balance represents the receivable for commissions matured onthe guarantee granted the previous year to Fineldo Spa by the Group parent com-pany for the benefit of the affiliated company Centro Energia Spa.

Other receivablesThe item is composed as follows:

Description 30/06/98 31/12/97

Social security 3,828 838

Advances to employees 1,923 1,780

Tax authorities 58,511 30,171

Suppliers, advances for services 13,850 7,967

Customers, factoring – 178,610

Affiliated companies – 376

Third parties for sale of New World Holding Ltd – 16,248

Other 17,945 26,105

Total 96,057 262,095

The balance of trade receivables for factoring was annulled for the effect of thedeconsolidation of Faber Factor Spa. Receivables from the Tax Authorities show an amount recoverable after the sub-sequent year equal to Lit. 8,480 million relating to the Group parent company. Other receivables include an amount recoverable after the subsequent year equalto Lit. 1,478 million relating to guarantee deposits of the Group parent companyfor Lit. 1,420 million and of Philco Italia Spa of Lit. 58 million. “Other” includes Lit. 7,710 million relating to a receivable of MerloniElettrodomestici Spa from minority shareholders of Merloni ElettrodomesticiBeyaz Esya Sanayi Ve Ticaret As. Taking into account difficulties in recoveringsuch receivable, the Group parent company intends to accept the proposal of deb-tors to receive as partial payment the shares owned by them in the Turkish subsi-diary (equal to 10%). Such shares are valued in the consolidated financial state-ments on the basis of underlying shareholders’ equity prepared utilizing interna-tional accounting principles required for companies operating in hyperinflationcountries.

Short-term investments

Other shareholdingsWithin the completion of the sale of New World Ltd, the purchaser Stoves GroupPlc, transferred as partial payment of amounts due, No.800,000 own shares for2,080,000 English pounds. The shareholding, equal to 3%, in Stoves Group Plc,a company listed in the London Stock of Exchange, operating in the domesticappliances segment, is not considered as important as to project a commitment inthe medium/long-term. The writedown of Lit. 3,060 million recorded in thefinancial statements was necessary taking into account the quotation of sharesregistered at 30 June 1998.

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Financial receivablesThe balance of the item is composed as follows:

Description 30/06/98 31/12/97

Suppliers, factoring advances – 230,307

Affiliated companies, factoring advances – 9,474

Parent companies, factoring advances – 9,792

Financial receivables from Faber Factor Spa 30,621 –

Total 30,621 249,573

Following the exclusion of Faber Factor Spa from the consolidation area, the con-solidated financial statements no longer include receivables recorded amongshort-term investments for factoring operations. The item presently includes thereceivable of the Group parent company from Faber Factor Spa relating to theinternal current account regulated at market conditions.

CashCash, equal to Lit. 209,590 million, shows the balance at the end of the period ofbank and postal deposits and cash on hand. The decrease over 31 December 1997of Lit. 31,278 million is mainly due to the reimbursement of banks loans and tothe payment of tax advances and settlement payments of taxes carried out in June.

Prepayments and accrued incomeThe value recorded in the financial statements, equal to Lit. 5,805 million, inclu-des accruals of interest receivable (Lit. 1,010 million), prepayments of interest paya-ble and financial charges (Lit. 722 million), insurance premiums (Lit. 482 million),rent and instalments (Lit. 795 million) other operating costs (Lit. 2,746 million).

LIABILITIES

Shareholders’ equity

Movements in items forming shareholders’ equity are attached in the appendix.

Share capitalAt 30 June 1998, the share capital, fully subscribed and paid up, is composed asfollows:

Description Shares at the end of the period

number value

Ordinary shares 91,508,268 91,508,268,000

Savings shares 21,039,668 21,039,668,000

21

Share-premium reserveLit. 4,360 million of the reserve were utilized to create the “Reserve for shares inportfolio” following buy-back transactions performed by the Group parent com-pany and previously commented.

Legal reserveThe net decrease of Lit. 491 million relates to the utilization of such reserve by thesubsidiary Merloni Ariston International Sa to cover previous losses (Lit. 643 million),to the exclusion of Faber Factor Spa from the consolidation area (Lit. 54 million);the allocation of profits realized in 1997 increased the reserve by Lit. 206 million.

Reserve for shares in portfolioThe reserve was created in 1996 by the Group parent company following buy-back transactions, as required by art.2357 ter of the Italian Civil Code. In 1998,the reserve increased by Lit. 4,360 million.

Other reservesThe composition of other reserves is set out below:

Description 30/06/98 31/12/97

Grants on capital account 66,072 67,301

Cumulative translation effect 625 436

Extraordinary reserve – 2,507

Consolidation reserve 203 203

Total 66,900 70,447

The cumulative translation effect includes exchange differences arisen from thetranslation of financial statements in foreign currency which, in conformity withI.A.S. No.21, were directly recorded in consolidated shareholders’ equity; further-more, the item includes the effects of the change in valuation applying the equitymethod for foreign invested companies (at 30 June 1998 negative forLit. 3,438 million).

The extraordinary reserve was entirely utilized to distribute dividends while thedecrease in Grants on capital account (Lit. 1,229 million) relates to the paymentof the tax on equity carried out by the Group parent company..

Profits (losses) carried forwardAt the end of the period, the item amounts to Lit. 144,086 million.The item includes losses carried forward of Lit. 8,482 million (Lit. 16,180 mil-lion at 31 December 1997) relating to associated companies, valued applying theequity method and to Necchi Compressori Spa. Lit. 5,023 million of the decrea-se over the previous period are due to Faber Factor Spa presently included amongassociated companies.As already commented in the paragraph regarding consolidation and translationprinciples, the Turkish subsidiary, to neutralize the effect of hyperinflation existingin the country where it operates, in 1997 adopted the international accounting

22

standard F.A.S. 52 instead of I.A.S. 29. Had the company continued to applyI.A.S. 29, the result for the period would have been lower by Lit. 597 million andshareholders’ equity would have been higher by Lit. 8,854 million.

Provisions for contingencies and obligationsThe item shows a balance of Lit. 87,299 million (Lit. 81,484 million at the endof 1997) and its composition is as follows:

Provision for severance pay and similar obligationsThe item amounts to Lit. 3,423 million (Lit. 3,239 million at the end of the pre-vious year) and it includes the estimate of severance pay costs of some foreign sub-sidiaries.

TaxesThe provision for taxes is equal to Lit. 15,261 million (Lit. 21,509 million theprevious year) and it includes both deferred tax liabilities (against items formingincome with deferred taxability) and deferred tax assets (relating to items formingincome with deferred fiscal deductibility) in accordance with IAS 12 revised.Furthermore, it includes the fiscal effects of consolidation adjustments, mainlycalculated to reflect the writedown of anticipated depreciation and in order foraccounting principles of subsidiaries to be in line with Group accounting princi-ples.

OtherWe set out below the most important items:

Provision for products’ guaranteeThe provision represents the estimate of costs to be incurred for guaranteed assi-stance on products sold covered by guarantee; the provision amounts toLit. 37,779 million (Lit. 32,232 million at the end of 1997) and it is consideredadequate to cover the specific risk to which it refers.

Provision for future risksThe provision was accrued by the Group parent company in 1997, for a Lit. 4,500million amount, following a technical problem arisen on a particular model ofwashing machine for the English and Dutch markets. Lit. 1,221 million of theprovision were utilized, and therefore the closing balance amounts to Lit. 3,279million.

Provision for restructureThe provision amounts to Lit. 5,706 million and it relates to future extraordinaryinterventions on the organization structure of some foreign subsidiaries.

Exchange fluctuations provisionThe provision recorded in the financial statements of Lit. 5,180 million is consi-dered adequate with regard to the estimate of existing losses at 30 June 1998, forthe effect of exchange fluctuations on currency transactions having both a com-mercial and financial nature, including forward contracts signed as cover.

23

Provision for agents’ indemnityThe provision amounts to Lit. 1,410 million (Lit. 2,074 million the previousyear) of which Lit. 900 million pertain to the Group parent company which hasbeen accruing the provision since 1995.

Provision for lawsuits in progressThe provision amounts to Lit. 889 million and it was created in 1997 with regardto risks connected with pending lawsuits.

The provision concerns pending lawsuits with the social security and withemployees for a Lit. 466 million amount. The Group parent company did not con-sider it appropriate to calculate any accrual as the liability is considered only possible.

Provision for country risk The creation of such prudent provision was necessary to reflect in the financial sta-tements the risk represented by the present situation in the CIS. The accrual, equalto Lit. 10,000 million was estimated on the basis of trade receivables from custo-mers residing in that country, taking into account both trends in official quotationsof Russian state securities with one-year maturity, established in the first half ofAugust, and the implicit short-term interest which can be stripped from the nomi-nal value in dollars of the above mentioned receivables. Receivables from customersin the CIS in the consolidated financial statements at 30 June 1998 are equal toLit. 91,810 million net of amounts accrued against specific and generic risks ofLit. 5,835 million. Sales realized in the period of Lit. 206 billion approximately areequal to 14.75 per cent of total sales of the Group. Amounts collected subsequentlyamount to Lit. 53,123 million, while at 31 August 1998 receivables amounted toLit. 102,678 million. The loss, in terms of total contribution to profit following thedecrease in sales in the Russian market, even though significant, will be partially off-set by a decrease in costs in the country and by higher volumes in other markets.

Staff leaving indemnityWe set out below movements in the item:Balance at 31 December 1997 109,057

Variation in the consolidation area (91)

Portion matured and accrued in the income statement 8,328

Indemnity paid in the year 7,129

Closing balance 110,165

We set out below the composition of employees divided per category:Qualification Exmployees Employees 1998 Average

at 30 June 1998 at 31 December 1997

Executives 99 96 98

Employees 2,075 2,007 2,039

Workers 6,550 5,776 6,232

Total 8,724 7,879 8,356

Of these, 1,684 (1,608 workers, 76 employees) with fixed-term contract in 1998,while 626 (584 workers, 42 employees) with fixed-term contract in 1997.

With regard to the variation in the consolidation area, the decrease is equal to23 employees.

24

Payables

Banks loans payable

The detail is as follows:

Description 30/06/98 31/12/97

Within 12 months 190,043 420,792

Expiring from the 2nd to the 5th subsequent financial year 115,005 111,866

Expiring after the 5th subsequent financial year 3,864 11,591

Total 308,912 544,249

Bank credit lines are not generally secured by guarantees Loans are generally reimbursable through six-monthly instalments.

Other financing payablesOther financing payables at 30 June 1998 amount to Lit. 120,637 million, detai-led as follows:

Description 30/06/98 31/12/97

Within 12 months 50,811 27,639

Expiring from the 2nd to the 5th subsequent financial year 65,020 77,884

Expiring after the 5th subsequent financial year 4,806 21,246

Total 120,637 126,769

Other financing payables, expiring between the second and the fifth financial year,include the payable to Simest Spa (a company operating in foreign markets sup-plying technical, administrative, organization and financial assistance), arisingfrom the renewal of the contract whereby the Group parent company sold toSimest Spa shares of the subsidiary Merloni Elettrodomestici Beyaz Esya SanayiVe Ticaret As (124 billion Turkish lire of capital) for a countervalue of Lit. 7,400million not including any portion of the majority premium. In fact, the sale con-tract requires through guarantees to buy back the above mentioned share within30 September 1999 at the higher of sale price and corresponding shareholders’equity value.

Furthermore, Simest Spa, in the period of ownership of the shareholding, exer-cises vote rights in accordance with specific indications of MerloniElettrodomestici Spa.

Accordingly, the consolidated financial statements include the ownership per-centage in the company up to 90 per cent, reclassifying Lit. 7,400 million due toSimest Spa among medium-term payables.

Trade payablesThe balance of Lit. 534,868 million decreased by Lit. 259,413 million for theeffect of the exclusion of Faber Factor Spa from the full consolidation area; in factthe balance of trade payables transferred to that company is now included in paya-bles to associated companies. Therefore, if the balance of payables to Faber FactorSpa is added to the balance of trade payables, it can be noted that the balanceincreases, due to higher purchases of raw materials and services connected withthe increase in sales as well as with better payment terms obtained.The analysis of payables bearing interest and of financial operations discloses the

25

following net financial indebtedness:

30/06/98 31/12/97

Other receivables 45,205 10,392

Other securities 3,719 3,719

Total investments 48,924 14,111

Receivables not recorded as fixed assets 30,621 249,573

Bank and postal deposits 209,118 240,472

Cash on hand 472 396

Total current assets 240,211 490,441

Banks loans payables 308,912 544,249

Other financing payables 120,637 126,769

Secured payables (subsidized loanspursuant to the Sabatini law) – 248

Total payables 429,549 671,266

Total 140,414 166,714

Payables to subsidiaries and associated companiesThe composition of the item is as follows:

Subsidiaries 30/06/98 31/12/97

Merloni Indesit Bulgaria Srlu 45 146

Merloni Indesit Domaci Sro 5 705

Merloni Elettrodomestici Poland Spzoo – 10

Merloni Appliances Asia Pacific Pte Ltd 77 –

Total 127 861

Associated companies 30/06/98 31/12/97

M&B Marchi e Brevetti Srl – 247

Merloni Progetti Spa 474 266

Argentron Sa 14 238

Faber Factor Spa 345,488 –

Co.Pro Spa 402 –

Total 346,378 751

Payables to parent companiesThe Lit.1,800 million amount relates to the transfer transaction by Fineldo Spaof its tax credit to Merloni Elettrodomestici Spa.

Taxes payableThe item is mainly composed of payables for current income taxes for the pre-vious year of Lit. 2,659 million; withholdings to employees, professionals and selfemployed of Lit. 24,972 million; value added tax of Lit. 25,045 million, taxes onequity of the Group parent company of Lit. 2,449 million. The payable relatingto the suspension of payment of taxes granted to the Group parent company as itis located in one of the municipalities damaged following the earthquake occur-

26

red on 26 September 1997 is equal to Lit. 20,321 million (Lit. 8,832 million at31 December 1997).

Social security payablesThe balance of the item shows a net increase of Lit. 17,358 million over the pre-vious period, mainly due to the suspension of payments (Lit. 37,137 million at30 June 1998, Lit. 22,240 million at 31 December 1997) granted to the Groupparent company following the above mentioned earthquake.

Other payablesThe balance is composed as follows:

Description 30/06/98 31/12/97

Payables to employees 56,741 37,033

Payables to customers for factoring – 136,436

Payables to affiliated companies 5 1,957

Residual amount on purchase of Fabrica Portugal Sa 680 2,017

Payables to shareholders for dividends 1,829 –

Other 3,317 7,914

Total 62,572 185,357

Payables to employees represent the amount due for wages and holidays maturedby employees at the financial statements’ date.Among “Other” the most significant amounts regard the Group parent companyfor a Lit. 556 million amount relating to local taxes temporarily suspended due tothe above mentioned earthquake.

Accrued liabilities and deferred chargesThe item shows a balance of Lit. 16,015 million (Lit. 12,726 million the previousyear) and it is composed of accruals for interest payable (Lit. 3,256 million), com-missions (Lit. 1,068 million), other accruals for various operating expenses(Lit. 5,962 million), insurance (Lit. 818 million); furthermore it is composed ofdeferrals for interest receivable (Lit. 3,437 million) and other deferrals (Lit. 1,474million).

Memorandum accountsPhilco Italia Spa issued guarantees of Lit. 204 million to the tax authorities.Merloni Electroménager Sa issued guarantees of Lit. 1,173 million to French cre-dit institutions. Merloni Indesit Polska Spzoo issued guarantees for total Lit. 82million for the benefit of the tax authorities. The Turkish subsidiary issued gua-rantees of Lit. 8,221 million to the Tax Authorities. Furthermore, the Portuguesesubsidiaries issued guarantees of Lit. 7,578 million to public institutions. MerloniElectrodomésticos sa - Spain, issued guarantees of Lit. 250 million to financialinstitutions. Guarantees issued by the Group parent company are detailed as fol-lows:

27

• Lit. 5,000 million to the affiliated company Centro Energia Teverola Spa (CETSpa) as guarantee of contractual commitments undertaken with CET Spa.Merloni Elettrodomestici received the pro rata counter-guarantee of the othershareholders of CET Spa (Lit. 1,250 million from Merloni Progetti Spa,Lit. 2,500 million from Foster Wheeler Spa, Lit. 250 million from MP & S Srland Lit. 750 million from Merloni Termosanitari Spa respectively) includedamong guarantees received.

• Lit. 250 million to Foster Wheeler Italiana Spa (FWI Spa) as guarantee for the5 per cent (pro rata of additional contractual commitments undertaken by CETSpa with regard to FWI Spa);

• Lit. 3,000 million to Istituto Bancario San Paolo di Torino as guarantee for the5 per cent (pro rata) of the loan granted to CET Spa.

No commission matures on guarantees.Collaterals consisting of mortgages issued to third parties, equal to Lit. 114,149million, regard loans received from the institutions listed below:

Institution Amount

Banca Nazionale del Lavoro 12,901

Efibanca 35,715

Istituto Mobiliare Italiano 41,899

Istituto Bancario S.Paolo di Torino 7,992

Isveimer 6,659

Mediocredito Regionale Marche 712

Mediocredito Lombardo 8,271

Total 114,149

Other memorandum accounts, totalling Lit. 291,890 million, are composed asfollows:Item Amount

Bills 623

Customers subject to bankruptcy proceedings 6,470

Rental and leasing commitments 12,479

Commitments for financial coverage 85,906

Guarantees received from third parties 96,128

Guarantees received from associated companies 1,250

Guarantees received from parent company 11,237

Items forming income with deferred taxability 42,993

Items forming income with deferred deductibility (25,211)

Purchase commitments of fixed assets 44,940

Collaterals issued by customers 15,074

Total 291,890

Commitments for financial coverage arise from forward contracts which will becarried out after 30 June 1998.

Furthermore, at 30 June 1998, the Group parent company had forward tran-sactions in progress to cover a portion of sales in foreign currency with expiry in

28

the second half of 1998, composed of purchase and sale of American-type optionsat null cost with maturity ranging between July and December 1998, whose totalvalue (in millions of Italian lire) can be summarized as follows:

Currency Option Total Total premiumvalue

US Dollars USD Put purchase 70,000 1,128 negative

US Dollar USD Call sale 75,980 1,128 positive

English pounds GBP Put purchase 29,260 685 negative

English pounds GBP Call sale 30,529 685 positive

Taking into account the perfect matching of the maturity of the individual tran-sactions and the amount of related premiums paid and collected, these were notrecorded in the balance sheet. No item forming income either positive or negati-ve was disclosed with regard to trends in rates of exchange in the period rangingfrom the date of signature of transactions and the year end, in compliance withthe principle of consistency in the identification of items forming income arisingboth from transactions carried out as cover and from covered transactions, as theyboth pertain to the subsequent financial year.

Purchase commitments of fixed assets, besides commitments for the purchaseof property, plant and equipment, include Lit. 21,119 million relating to optionsfor the acquisition of shareholdings which can be exercised by the related party.

29

Value of productionThe income statement item shows a closing balance of Lit. 1,539,620 million,with a Lit.180,719 million increase over the same period in the previous year.Revenues from sales of goods and services are composed as follows:

Revenues from sales and services 30/06/98 30/06/97

Revenues from sales of finished products and raw materials 1,367,450 1,242,475

Revenues from services 16,851 24,849

Total 1,384,301 1,267,324

Revenues from sales and services registered a 9.2 per cent increase and their break-down is as follows:

Area 30/06/98 30/06/97

Italy 355,024 330,876

European Union 587,539 568,267

Other countries 441,738 368,181

Total 1,384,301 1,267,324

The increase in sales is essentially due to higher volumes, in line with marketgrowth.

Other income mainly includes capital gains on fixed assets sold for normalrenewal requirements, reimbursement of customs duties on exports of finishedproducts, insurance reimbursements, the utilization of provisions accrued in pre-vious years, exceptional income and grants received for the year.

Costs of productionThe income statement item shows a balance of Lit. 1,478,568 million, with aLit. 170,050 million increase over the previous period.The variation mainly concerns the following items:

• Costs of raw materials, auxiliary materials, spare parts and goods increasedby Lit. 89,818 million, following higher consumption connected with theincrease in sales and in closing inventory of semifinished and finished pro-ducts. The increase in the item must obviously be considered together withthe variation in inventory of raw materials, auxiliary materials and spareparts, recorded in item B.11 in the income statement.

• Costs for services increased by Lit. 64,010 million mainly for higher tran-sport costs connected with higher volumes, higher investments in adverti-sing and increased expenses for consultants following several projects regar-ding administrative and commercial aspects.

• Personnel costs increased by Lit. 20,198 million. Despite the increase, thepercentage incidence of labour cost on value of production has howeverremained unchanged.

Comment to the main items in the income statementAll amounts shown in these notes to the financial statements are expressed in millionsof Italian lire

30

Financial income and charges

Other financial incomeOther income, composed as follows:

Description 30/06/98 30/06/97

Interest receivable from customers 4,672 11,107

Interest receivable on bank deposits 7,566 2,116

Interest receivable from associated companies 2,190 74

Exchange fluctuations 21,185 39,086

Other interest and income 1,078 2,720

Total 36,691 55,103

Interest receivable from customers registered a decrease of Lit. 6,435 million netof the Lit. 9,140 million decrease due to the exclusion of Faber Factor Spa fromthe consolidation area.

Interest and other financial chargesThe composition of the balance is set out below:

Description 30/06/98 30/06/97

Interest paid to banks 13,340 26,012

Interest paid to other financing institutions 3,030 3,595

Exchange fluctuations 17,038 32,516

Accounting effect for inflation 8,325 1,253

Interest paid to associated companies 820 –

Other interest and charges 1,408 6,788

Total 43,961 70,164

The change in valuation of Faber Factor Spa from full consolidation to the equitymethod mainly determined a decrease in interest paid to banks of Lit. 3,211 mil-lion and in other charges of Lit. 1,526 million.

The accounting effect for inflation refers to the application of internationalstandards (F.A.S. No.52) to the financial statements of the subsidiary MerloniElettrodomestici Beyaz Esya Sanayi Ve Ticaret As operating in a high inflation-rate country.

Adjustment to the value of financial operations

Writedown of shareholdingsThe balance of Lit. 6,281 million is due to the registration of the portion of los-ses for the period of the Group arising from the valuation applying the equitymethod of the associated companies Faber Factor Spa (Lit. 1,146 million),Merloni Progetti Spa (Lit. 1,692 million) and Argentron Sa (Lit. 383 million);furthermore, the balance includes the writedown of Lit. 3,060 million of the sha-reholding in the English company Stoves Group Plc commented in the sectiondealing with short-term investments.

31

Extraordinary income and expenses

Extraordinary incomeThe balance of Lit. 285 million mainly includes insurance reimbursements col-lected by the subsidiary Philco Spa for damages suffered following the 1996 flood(Lit. 283 million); the residual amount of Lit. 2 million relates to other exceptio-nal income of the Group parent company.

Extraordinary expensesExtraordinary expenses include Lit. 3,473 million incurred by the Group parentcompany as incentives to resignation of employees; Lit. 249 million relate to defer-red taxes not accrued in previous years; Lit. 2,739 million concern the reorganiza-tion of some foreign subsidiaries; Lit. 10,000 million (Lit. 1,000 million relatingto the Group parent company and Lit. 9,000 million to the subsidiary MerloniInternational Trading Bv) as prudential accrual against the “country risk” connec-ted with the present economic situation in countries of the former Soviet Unionalready commented in the section on provisions for contingencies. The residualamount of Lit. 48 million includes other exceptional expenditure (Lit. 20 millionof the Group parent company and Lit. 28 million of the Spanish subsidiary).

The Group parent company has some lawsuits in progress with the SocialSecurity, with the Tax Authorities and with the VAT Department in whose con-nection, supported by the opinion of its legal consultants, it does not consider tocalculate any accrual.

Transactions with associated and affiliated partiesIn the first six months of 1998, several transactions were carried out with associa-ted and affiliated companies. These transactions having a commercial and finan-cial nature, also existing in previous years, are commented in this section as ofConsob recommendation dated 2 March 1998, in line with I.A.S. 24.

The above mentioned transactions, which include sales of finished products, ser-vices rendered, granting of loans, were carried out with the companies listed below:

Associated companies:Argentron SaM & B Marchi e Brevetti SrlProtecno SaSofarem SarlMerloni Progetti SpaFaber Factor SpaProgelease SpaMerloni Progetti International Sa

Affiliated companies:Merloni Partecipazioni e Servizi Srl (invested by the same legal entity)Aermarche Spa (invested by the same legal entity)R.T.C. International Spa (invested by the same legal entity)Centro Energia Spa (invested by the same legal entity)Fineldo Spa (invested by the same legal entity)Benelli Spa (controlled by the same legal entity)Merloni Termosanitari Spa (controlled by a director, shareholder of the

Group)

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Receivables from associated companies

Associated company 30/06/98 Nature of the transaction Related party

Argentron Sa 9,631 commercial Merloni Elettrodomestici Spa

Merloni Progetti Spa 5,003 commercial/financial Merloni Elettrodomestici Spa

Sofarem Sarl 2 commercial Merloni Elettrodomestici Spa

Sofarem Sarl 3,200 commercial Merloni International Trading Bv

M&B Marchi e Brevetti Srl 128 utilizzation Merloni Elettrodomestici Spaof trademarks

M&B Marchi e Brevetti Srl 1 sale of trademarks Merloni Ariston International Sa

Faber Factor Spa 16,820 financial Merloni Elettrodomestici Spa

Protecno Sa 123 commercial Merloni Elettrodomestici Spa

Total 34,908

Relationships having a commercial nature are connected with the sale of finishedproducts, raw materials and services. The portion relating to Merloni Progetti Spais Lit. 594 million of dividends not yet collected by the Group parent company at30 June 1998.

Relationships having a financial nature with Faber Factor Spa relate to the tran-sfer of receivables by the Group parent company.

Receivables from affiliated companiesAffiliated companies 30/06/98 Nature of the transaction Related party

Merloni Termosanitari Spa 1 services rendered Merloni Elettrodomestici Spa

Benelli Spa 3 sale of goods and services Merloni Elettrodomestici Spa

Total 4

Receivables not recorded as fixed assetsAffiliated companies 30/06/98 Nature of the transaction Related party

Faber Factor Spa 30,621 financial Merloni Elettrodomestici Spa

Total 30,621

The balance shows the internal current account between the Group parent companyand the associated company Faber Factor Spa regulated at normal market conditions.

Payable to associated companies

Associated companies 30/06/98 Nature of the transaction Related party

Co.Pro. Spa 403 capital subscription Merloni Elettrodomestici Spa

Merloni Progetti Spa 474 commercial Merloni Elettrodomestici Spa

Argentron Sa 14 commercial Merloni Elettrodomestici Spa

Faber Factor Spa 324,790 financial Merloni Elettrodomestici Spa

Faber Factor Spa 31 financial Merloni Indesit Polska Spzoo

Faber Factor Spa 269 financial Star Spa

Faber Factor Spa 17 financial Merloni El.Beyaz Esya Tic.A.S.

Faber Factor Spa 5,203 financial Merloni Electroménager Sa

Faber Factor Spa 2,923 financial Merloni Electrodomésticos Sa

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Associated companies 30/06/98 Nature of the transaction Related party

Faber Factor Spa 4,100 financial Fabrica Portugal Sa

Faber Factor Spa 79 financial Merloni Electrodomésticos Sa

Faber Factor Spa 23 financial Merloni Hausgerate Gmbh

Faber Factor Spa 7,896 financial Philco Italia Spa

Faber Factor Spa 156 financial Merloni Domestic Appliances

Total 346,378

Transactions having a financial nature with Faber Factor Spa derive from transferof receivables by the suppliers of the Group.

Payables to affiliated companies

Affiliated companies 30/06/98 Nature of the transaction Related party

Merloni Termosanitari Spa 1,864 commercial Merloni Elettrodomestici Spa

Benelli Spa 47 commercial Merloni Elettrodomestici Spa

Total 1,911

Value of production

Revenues from sales and services include amounts relating to transactions withassociated and affiliated companies, detailed as follows:

Associated companies 30/06/98 Nature of the transaction Related partyMerloni Progetti Spa 360 services rendered Merloni Elettrodomestici Spa

Merloni Progetti Spa 376 sale of raw materials Merloni Elettrodomestici SpaMerloni Progetti Spa 1,254 sale of finished products Philco Italia SpaSofarem Sarl 3,577 sale of finished products Merloni International Trading Bv

Argentron Sa 6,969 sale of finished products Merloni Elettrodomestici SpaFaber Factor Spa 317 services rendered Merloni Elettrodomestici Spa

Total 12,853

Transactions having a purely commercial nature occurred between the subsidiaryMerloni International Trading Bv and Sofarem Sarl represent the performance ofsupply contracts, being the latter one of the major customers of the company.

Affiliated companies 30/06/98 Nature of the transaction Related party

Merloni Termosanitari Spa 503 services rendered Merloni Elettrodomestici Spa

R.T.C. International Spa 14 services rendered Merloni Elettrodomestici Spa

Aermarche Spa 1 sale of finished products Merloni Elettrodomestici Spa

Benelli Spa 15 other income Merloni Elettrodomestici Spa

Total 535

Costs of production

Costs of raw materials, auxiliary materials, spare parts and goods include Lit.1,662million relating to purchases of finished products from the affiliated companyMerloni Termosanitari Spa by the Group parent company.

Costs for services include the following transactions with associated and affilia-ted companies:

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Associated companies 30/06/98 Nature of the transaction Related party

Merloni Progetti Spa 168 services rendered Merloni Elettrodomestici Spa

Faber Factor Spa 375 services rendered Merloni Elettrodomestici Spa

Total 543

Affiliated companies 30/06/98 Nature of the transaction Related party

Merloni Termosanitari Spa 422 purchase of materials Merloni Elettrodomestici Spaand technical assistance

Merloni Termosanitari Spa 815 purchase of spare parts Merloni Elettrodomestici Spa

Aermarche Spa 2,027 transport of passengers Merloni Elettrodomestici Spa

R.T.C. International Spa 395 costs of services Merloni Elettrodomestici Spa

Benelli Spa 64 entertainment account Merloni Elettrodomestici Spa

Merloni Partecipazioni& Servizi Srl 112 rents payable Merloni Elettrodomestici Spa

Total 3,771

Costs for utilization of third parties’ assets include Lit. 1,067 million of leasinginstalments paid to the indirect associated company Progelease Spa by MerloniElettrodomestici Spa.

Financial income and charges

Other income includes Lit. 2,190 million of interest receivable by the Groupparent company regarding the associated company Faber Factor Spa followingtransactions having a financial nature.

Interest and other financial charges include amounts charged by the associatedcompany Faber Factor Spa, for interest and commissions on factoring transactionscarried out with the companies listed below:

Associated companies 30/06/98 Nature of the transaction Related party

Faber Factor Spa 624 interest and commissions Merloni Elettrodomestici Spa

Faber Factor Spa 2 interest and commissions Merloni Electroménager Sa

Faber Factor Spa 30 interest and commissions Merloni Electrodomésticos Sa

Faber Factor Spa 164 interest and commissions Philco Italia Spa

Total 820

These financial statements give a true and correct view of the consolidated finan-cial position and of the consolidated result of operations for the year.

The Board of DirectorsThe ChairmanVittorio Merloni

Fabriano, 16 September 1998