Merloni Elettrodomestici spaConsolidated Financial Statements

Report of the Board of Directorson trends in operations for the first six months of 1999

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 full paid upRegistered with the previous Register of Companies at Ancona Court, Reg. No. 9677Registered with Ancona C.C.I.A.A. (Chamber of Commerce for Industry,Agriculture and Handicraft) Reg. No. 85729

Internet - http://www.merloni.com

Economic background

Projections for 1999 indicated a difficult six-month period for European eco-nomy and a recovery in the second part of the year. The projection was con-firmed by results achieved in the first six months of the year, while in thesecond half, a lower growth than projected is expected.

Recovery projections have been confirmed by stronger pressure on pricesof raw materials, which could be only partly offset by a strengthening of theEuro on the Dollar. Inflation in Euro countries has remained steady confir-ming the corresponding expected steadiness in the Euro exchange rates; theprojection for a possible recovery in the autumn in the Euro area will dependupon the subsequent actions of the American Federal Reserve expected nextOctober.

Russia, which in previous years had contributed to the development andprofitability of Merloni Elettrodomestici, interrupted the negative economictrend caused by the August 1998 crisis. Our commercial and trademark posi-tion should enable to catch growth opportunities as soon as the recovery ininternal consumption consolidates.

Operating performance

The consolidated financial statements for the first six months of 1999show a result for the period of Lit. 26,080 million compared with 30,501million in the corresponding period in 1998; revenues are equal to Lit.1,315 billion compared with 1,384 of the first half of 1998, showing a 5%decrease.

A mere comparison of figures for the six months does not highlight thetough work carried out by Merloni Elettrodomestici along the followingdirectives:1. a conversion in pressure from Eastern markets towards Western markets2. a decrease in structure costs3. the pursuit of a development policy4. a growing attention to service the customers

The significant recovery realised in Mature markets resulted in their inci-dence on total volumes sold passing from 69% to 75.5%, with an increasehigher than six points compared to the first six months of 1998.

To encourage the conversion, two new Commercial Departments MatureDeveloping markets were set up in Paris and in Lugano respectively, with theobjective of improving commercial efficiency, operating rationalization andsimplification of structures.

The result achieved in mature markets is particularly significant as compe-tition dynamics in these markets deepened. Therefore, the recovery representsnot only a reaction to the Russian crisis but also the constant consolidationof all specific strategic marketing interventions and programmes, tended torenew and strengthen our competitive, products, trademarks and servicespositioning.

GFK/Nielsen data confirm an increase in market share over the first fourmonths of 1999 on all mature markets (except for Germany) and in all pro-ducts lines with a particular progress registered in the dish washers segment.

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The performance achieved at operating level, strongly influenced by a lackof demand in the Russian market, shows a margin which, despite decreasingin absolute terms from 61 to 56 billion compared with the first six monthsof 1998, is substantially at the same level of incidence compared with sales(4.3 % compared with 4.4 in the first six months of 1998), thus proving theimprovement in margins and in efficiency on costs. Furthermore, the signifi-cant growth compared with the previous six months should be noted, whensuch margin amounted to 3.6% of sales.

As far as company’s costs structure is concerned, on the one hand thenumber of personnel decreased through a reorganization plan (wherebytotal costs has been reduced by 7.5%), and, on the other hand, productionat plants was rationalised, particularly in the Refrigeration segment andthrough improving the efficiency of the Thionville plant. In this connec-tion, appropriate accruals have been included in the financial statementsfor the six months, while benefits, in terms of decrease in costs and reco-very of productivity will show their effect in the financial statements forthe next year in full.

Regarding net consolidated indebtedness, it increased compared with thesame period of the previous year (Lit. 194.2 billion compared with Lit. 140.4billion at June 1998); the difference is mainly due to the investment connec-ted with the beginning of operations at the new plant situated in Lodz, expec-ted next October.

Net financial charges increased by two billion approximately (9 billion inthe first six months of 1999 compared with 7 in the period of comparison);the difference is mainly connected with the decrease in exchange gains (resul-ting from the impact of the stabilisation of Euro and lower sales in Dollars)as the effects of higher average exposure were offset by the decrease in the ave-rage cost of financial sources (50% approximately compared with the corre-sponding cost in previous period).

The financial structure confirms the improvement achieved in the periodalso through the debt-equity ratio: 0.33% at June 1998, 0.48% at 31December 1998. 0.43% at June 1999. In the six-month period, the ratioabsorbed the purchase of own shares for Lit. 9.7 billion, within the planapproved at shareholders’ meeting level.

The development process of Merloni Elettrodomestici has not sloweddown: investments amount to over Lit. 86 billion (Lit. 40 billion at 30 June1998), largely for property, plant and equipment (over Lit. 70 billion); a largeportion of such investments relates to the new plant situated in Lodz. Whileoperations connected with the launch of the digital line have continued (thefirst sales are expected by the end of the year, upon completion of Milan call-centre) and with the 2000 Dishwasher Platform.

The willingness for higher focus on service to customers resulted in thecreation of the Business Unit Consumer Care, which will assure the constantoptimization of warranty costs and of the level of service to consumers, besi-des developing new sources of income from innovative services (Digital).

Furthermore, the search for further areas for improvement resulted in thelaunch of an additional project for the restructuring of administrative ser-vices organization of Merloni Elettrodomestici , with the realisation of asingle pan-European Administrative Services Centre at Fabriano head offi-ce premises.

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Project of conformity to the year 2000

The project for the conformity to the year 2000 is in progress as required bythe plan formulated by the control group, whose objective is to prepare a con-tingency plan operating over the duration of the project.

Computer procedures and commercial, distribution, administrative, pro-duction and planning systems have been updated, while post-sale technicalassistance is being completed. Next October, a test campaign will be carriedout at the company’s production plants to check and test industrial plantswith built-in microprocessors.

In August, Information Technology Systems have been upgraded also bycarrying out specific testing activities in “Year 2000” IT environment. Theapplicative software worked properly without causing any problems. At thesame time, a monitoring system has been set up by which all new informa-tion processes will be tested while being implemented, so as to assure theirYear 2000 compliance since the beginning of their use.

The suppliers segment was classified on the basis of the potential risk andof the impact that the non-supply might have on the company’s productionprocesses and targeted actions are in progress with high-impact and high-risksuppliers to solve the problem.

In the first six months of 1999, the costs concerning the project ofconformity to the year 2000 accounted in the statement of income are ofLit. 404 million end the amount included in the fixed assets is of Lit. 1,111million.

Significant event occurred after 30 June 199 and year-endprojections

Within this simplification and strategic rationalization process of MerloniElettrodomestici, at the end of July, the residual minority shareholding inPhilco Spa was acquired, thus acquiring the total direct control of the com-pany. At the same time, “Elettrodomestici” sold part of own shares for a valueof twenty billion Italian lira approximately to the Group, which previouslyheld a minority interest in Philco, which becomes qualified shareholder (sha-reholding exceeding 2%) of the Group parent company.

The dramatic events of the earthquake in Turkey determined the decisionfor humanitarian intervention, to enable Merloni Elettrodomestici to contri-bute to assuage the suffering of the population. This sign of sharing and soli-darity also means the maximum consideration assigned to our presence in thecountry, within the internazionalization the company intends to pursue anddevelop with regard to its operations.

The earthquake did not involve the production plant of the company andthe warehouse; also with regard to local suppliers, significant problems havenot been identified. With regard to the economic perspectives of the country,it will undoubtedly take time to recover lost wealth, but the interventionsscheduled by the International Monetary Union Fund together with solida-rity expressed but other European countries, enable to foresee actual oppor-tunities of recovery. Our year-end sales projections are in line with those regi-stered in the first part of the year.

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As to mature markets, results achieved in July and in August suggest eventhough with prudence, a confirmation of positive projections for futuremonths.

Taking into account the seasonality of the business, macro-economic andmarket reference indicators, actions started long ago and constantly beingrealised, the company deems to be able to show generally improving resultsalso for the second half of the year, particularly compared with the corre-sponding period of the previous year, but also with the annual operatingresult for 1998.

Information per operating segment 1999(million lira)

Western Eastern Rest of ConsolidatedEurope Europe the World

Sales to third parties 1,015,983 129,293 169,756 1,315,032

Inter-segment sales (**) 52,834 – 13,286 –

Total revenues 1,068,817 129,293 183,042 –

Result for the segment (*) 124,740 8,879 16,912 150,531

Non attributable general expenses 94,189

Diff. between Value and cost of Production 56,342

Net financial charges (8,552)

Revaluation (write-down) of shareholdings 2,192

Net extraordinary expenses (23,692)

Result before taxes 26,290

Taxes –

Minority interest 210

Group Result 26,080

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Other information

Assets per segment

Receivables 519,215 89,018 104,203 712,436

Stock 247,032 51,905 38,669 337,606

Total 766,247 140,923 142,871 1,050,042

Long-term assets 517,242 48,755 39,584 605,581

Centralized assets 464,948

Total consolidated assets 2,120,571

Liabilities per segment

Trade payables 624,053 75,035 103,571 802,659

Centralized liabilities 1,317,912

Total consolidated liabilities 2,120,571

(*)Includes the following costs: costs of production, distribution, commercial, administrativeand general costs directly attributable to the markets.

Western Europe includes: Italy, France, Portugal, Spain, Germany, The Netherlands, GreatBritain, Belgium, Denmark, Finland, Island, Norway, Sweden, Ireland, Austria, Switzerland,Grece and furthermore for operating reason the following countries are included: Cypus,Albania, Macedonia,Croatia, Serbia and SloveniaEastern Europe includes: the ICS, Poland, Romania, Bulgaria, Hungary and CzechRepublic.The Rest of the World includes: Turkey, South America, North America, Africa, Australia,Middle East and Far East.

(**) Includes intercompany revenues from sales and services, made in one operating segmentand sold in others.

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

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Appendices to the Directors’ Report

Assets 30 June 31 December 30 June 1999 1998 1998

Share capital issued and not yet paid – – –Fixed assetsIntangible fixed assets:Installation and expansion costs 2,161 2,603 1,068Research, development and advertising costs 3,016 2,108 1,151Industrial patent rights and utilization of know-how 15,879 16,755 15,599Concessions, licenses, trademarks and similar rights 13,251 12,834 12,060Goodwill 4,532 6,604 9,847Assets under construction and advances – – 86Others 11,842 10,616 1,267

50,681 51,520 41,078Tangible fixed assets:Land and building 220,260 216,006 214,437Plant and machinery 195,267 209,817 189,783Industrial and commercial equipment 51,843 57,114 51,090Others 24,304 28,187 25,759Assets under construction and advances 63,226 26,607 21,167

554,900 537,731 502,236Financial assets:Investments in:– subsidiaries 280 264 1,068– associated companies 44,094 41,266 36,317– other companies 13,220 13,049 11,365Receivables:– from associated companies – – –– from others

(amount falling due within one year Lit. 251) 43,906 60,623 45,205Other securities 3,719 3,719 3,719Own shares (nominal value Lit.10,629) 59,390 49,643 33,383

164,609 168,564 131,057Total fixed assets 770,190 757,815 674,371Current assetsStocks:Raw materials, auxiliary materials and spare parts 58,625 74,163 78,097Work in progress 18,187 17,176 14,333Finished products and goods for resale 254,459 199,972 284,243Advances 6,335 2,761 4,633

337,606 294,072 381,306Receivables:Trade receivables (amount falling due beyond one year Lit. 1,514) 677,152 696,650 711,125From subsidiaries 1,365 837 1,323From associated companies 33,919 35,063 34,908From parent companies – – 24Others (amount falling due beyond one year Lit. 11,914) 78,718 63,974 96,057

791,154 796,524 843,438Short-term investments:Other shareholdings 1,891 1,489 3,190Financial receivables 25,578 17,979 30,621

27,469 19,468 33,811Cash:Bank and postal deposits 183,944 278,105 209,118Cash on hand 869 404 472

184,813 278,509 209,590Total current assets 1,341,042 1,388,573 1,468,145Accrued income and prepayments 9,339 5,617 5,805Total 2,120,571 2,152,005 2,148,321

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Consolidated balance sheet(in million of Italian lira)

Liabilities and shareholders’ equity 30 June 31 December 30 June 1999 1998 1998

Shareholders’s equityShare capital 112,548 112,548 112,548Share-premium reserve – 4,596 20,856Revaluation reserves 10,779 10,779 5,284Legal reserve 7,132 6,116 6,017Reserve for own shares 59,390 49,643 33,383Other reserves, detailed in the notes on the accounts 63,292 66,022 66,900Profits (losses) carried forward 171,081 144,016 144,086Group profit (loss) for the year 26,080 40,700 30,501Group Shareholders’ equity 450,302 434,420 419,575Share capital and reserves – minority interest 16,394 15,721 21,071Profit (loss) for the year – minority interest 210 1,148 1,395Shareholders’ equity – minority interest 16,604 16,869 22,466

466,906 451,289 442,041Provisions for contingencies and obligationsProvision for severance pay and similar obligations 4,013 3,667 3,423Provision for taxes 12,214 13,293 15,261Others 77,458 55,277 68,615

93,685 72,237 87,299Staff leaving indemnity 107,801 105,895 110,165PayablesBank loans and overdrafts 381,866 474,150 308,913(falling due beyond one year Lit. 57,702)Other financial payables 70,322 94,185 120,637(falling due beyond one year Lit. 48,593)Advances 3,497 14,525 3,023Trade payables 494,811 408,504 534,868Notes payables 190 149 174Payables to subsidiaries 159 486 127Payables to associated companies 304,002 356,672 346,378Payables to parent companies – 31 1,800Taxation payables 58,851 62,989 56,127Social security payables 56,211 59,233 58,182Other payables 63,926 40,770 62,572

1,433,835 1,511,694 1,492,801Accrued liabilities and deferred charges 18,344 10,890 16,015Total 2,120,571 2,152,005 2,148,321

Memorandum accounts 30 June 31 December 30 June 1999 1998 1998

List of direct and indirect guaranteesGuarantees:– for the benefit of third parties 13,340 16,935 25,758– for the benefit of associated companies 450 450 –Real securities:– for the benefit of third parties 81,080 95,786 114,149Other memorandum accounts 180,194 152,523 291,890

275,064 265,694 431,797

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Consolidated balance sheet(in million of Italian lira)

30 June 30 June 31 December1999 1998 1998

Value of productionRevenues from sales and services 1,315,032 1,384,301 2,836,947Variations in work in progress and finished goods 55,257 130,284 47,481Variations in internal construction capitalised 172 – 501Other income (of which grants for the year Lit. 840) 12,959 25,035 48,725

1,383,420 1,539,620 2,933,654Costs of productionRaw materials, auxiliary materials, spare parts and goods 724,420 836,649 1,558,754Cost for services 242,342 279,646 547,295Utilization of third parties’ assets 13,794 16,455 31,235Personnel costs:– salary and wages 162,575 175,239 335,624– social contributions 51,488 58,373 112,117– staff leaving indemnity 8,117 8,328 15,864– other social contributions 4,850 5,185 9,056– other costs 8,797 8,881 18,621Depreciation and writedowns:– depreciation of intangible fixed assets 7,240 9,589 19,718– depreciation of tangible fixed assets 51,442 49,909 97,245– other writedowns of fixed assets 10 – – – writedown of receivables recorded

as current assets and cash 8,704 7,999 26,077Variation in stock of raw materials, auxiliary materials, spare parts and goods 16,230 (3,194) (1,816)Accrual for contingencies 9,032 3,265 12,082Other operating charges 18,037 22,244 38,146

1,327,078 1,478,568 2,820,018Difference between value and cost of production 56,342 61,052 113,636Financial income and chargesIncome from investments 171 501 1,727Other financial income:– securities recorded as fixed assets 81 118 223– securities recorded as current assets 320 – –– other financial income (of which Lit. 571 from

non consolidated associated companies) 38,963 36,691 79,281Interest and other financial charges (of which Lit. 207 from non consolidated associated companies) 48,087 43,961 94,807

(8,552) (6,651) (13,576)Adjustment to the value of financial operationsRevaluations– investments 2,192 – 2,752Writedowns– investments – 6,281 5,988

2,192 (6,281) (3,236)Extraordinary income and expenses:Income (of which capital gains on disposals Lit. 18) 845 285 3,231Expenses (of which taxes related to previous years Lit. 75) 24,537 16,509 22,493

(23,692) (16,224) (19,262)Results before taxes 26,290 31,896 77,562Income taxes for the year – – 35,714Profit (loss) for the year 26,290 31,896 41,848Profit (loss) for the year - minority interest 210 1,395 1,148Group profit (loss) for the year 26,080 30,501 40,700

These financial statements agree with accounting records.

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Consolidated income statement(in million of Italian lira)

Assets 30 June 31 December 30 June 1999 1998 1998

Share capital issued and not yet paid – – – Fixed assetsIntangible fixed assets:Installation and expansion costs 1,116 1,344 552Research, development and advertising costs 1,558 1,089 594Industrial patent rights and utilization of know–how 8,201 8,653 8,056Concessions, licenses, trademarks and similar rights 6,844 6,628 6,228Goodwill 2,341 3,411 5,086Assets under construction and advances – – 44Others 6,116 5,483 654

26,175 26,608 21,215Tangible fixed assets:Land and building 113,755 111,558 110,747Plant and machinery 100,847 108,361 98,015Industrial and commercial equipment 26,775 29,497 26,386Others 12,552 14,557 13,303Assets under construction and advances 32,654 13,741 10,932

286,582 277,715 259,383Financial assets:Investments in:– subsidiaries 145 136 552– associated companies 22,773 21,312 18,756– other companies 6,828 6,739 5,870Receivables:– from associated companies – – –– from others

(amount falling due within one year Euro 130) 22,676 31,309 23,346Other securities 1,921 1,921 1,921Own shares (nominal value Euro 5,489) 30,672 25,638 17,241

85,013 87,056 67,685Total fixed assets 397,770 391,379 348,284Current assetsStocks:Raw materials, auxiliary materials and spare parts 30,277 38,302 40,334Work in progress 9,393 8,871 7,402Finished products and goods for resale 131,417 103,277 146,799Advances 3,272 1,426 2,393

174,359 151,876 196,928Receivables:Trade receivables (amount falling due beyond one year Euro 782) 349,720 359,790 367,265From subsidiaries 705 432 683From associated companies 17,518 18,109 18,028From parent companies – – 12Others (amount falling due beyond one year Euro 6,153) 40,654 33,040 49,609

408,597 411,370 435,599Short-term investments:Other shareholdings 977 769 1,647 Financial receivables 13,210 9,285 15,814

14,187 10,054 17,462Cash:Bank and postal deposits 94,999 143,629 108,000Cash on hand 449 209 244

95,448 143,838 108,244Total current assets 692,590 717,138 758,233Accrued income and prepayments 4,823 2,901 2,998Total 1,095,184 1,111,418 1,109,515

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Consolidated balance sheet(in thousand of Euro)

Liabilities and shareholders’ equity 30 June 31 December 30 June 1999 1998 1998

Shareholders’s equityShare capital 58,126 58,126 58,126Share-premium reserve – 2,374 10,771Revaluation reserves 5,567 5,567 2,729Legal reserve 3,683 3,159 3,108Reserve for own shares 30,672 25,638 17,241Other reserves, detailed in the notes on the accounts 32,688 34,098 34,551Profits (losses) carried forward 88,356 74,378 74,414Group profit (loss) for the year 13,469 21,020 15,752Group Shareholders’ equity 232,562 224,359 216,692Share capital and reserves – minority interest 8,467 8,119 10,882Profit (loss) for the year – minority interest 108 593 720Shareholders’ equity – minority interest 8,575 8,712 11,603

241,137 233,071 228,295Provisions for contingencies and obligationsProvision for severance pay and similar obligations 2,073 1,894 1,768Provision for taxes 6,308 6,865 7,882Others 40,004 28,548 35,437

48,384 37,307 45,086Staff leaving indemnity 55,675 54,690 56,895PayablesBank loans and overdrafts(falling due beyond one year Euro 29,801) 197,217 244,878 159,540Other financial payables(falling due beyond one year Euro 25,097) 36,318 48,642 62,304Advances 1,806 7,502 1,561Trade payables 255,549 210,975 276,236Notes payables 98 77 90Payables to subsidiaries 82 251 66Payables to associated companies 157,004 184,206 178,889Payables to parent companies – 16 930Taxation payables 30,394 32,531 28,987Social security payables 29,031 30,591 30,048Other payables 33,015 21,056 32,316

740,514 780,725 770,967Accrued liabilities and deferred charges 9,474 5,624 8,271Total 1,095,184 1,111,418 1,109,515

Memorandum accounts 30 June 31 December 30 June 1999 1998 1998

List of direct and indirect guaranteesGuarantees:– for the benefit of third parties 6,890 8,746 13,303 – for the benefit of associated companies 232 232 – Real securities:– for the benefit of third parties 41,874 49,469 58,953 Other memorandum accounts 93,062 78,772 150,749 Total 142,059 137,219 223,005

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Consolidated balance sheet(in thousand of Euro)

30 June 30 June 31 December1999 1998 1998

Value of productionRevenues from sales and services 679,157 714,932 1,465,161 Variations in work in progress and finished goods 28,538 67,286 24,522 Variations in internal construction capitalised 89 – 259 Other income (of which grants for the year Euro 434) 6,693 12,929 25,164

714,477 795,147 1,515,106Costs of productionRaw materials, auxiliary materials, spare parts and goods 374,132 432,093 805,029Cost for services 125,159 144,425 282,654Utilization of third parties’ assets 7,124 8,498 16,132Personnel costs:– salary and wages 83,963 90,503 173,335– social contributions 26,591 30,147 57,904– staff leaving indemnity 4,192 4,301 8,193– other social contributions 2,505 2,678 4,677– other costs 4,543 4,587 9,617Depreciation and writedowns:– depreciation of intangible fixed assets 3,739 4,952 10,183– depreciation of tangible fixed assets 26,568 25,776 50,223– other writedowns of fixed assets 5 – – – writedown of receivables recorded as current assets and cash 4,495 4,131 13,468 Variation in stock of raw materials, auxiliary materials, spare parts and goods 8,382 (1,650) (938)Accrual for contingencies 4,665 1,686 6,240Other operating charges 9,315 11,488 19,701

685,379 763,617 1,456,418Difference between value and cost of production 29,098 31,531 58,688Financial income and chargesIncome from investments 88 259 892Other financial income:– securities recorded as fixed assets 42 61 115 – securities recorded as current assets 165 – – – other financial income (of which Euro 295 from

non consolidated associated companies) 20,123 18,949 40,945 Interest and other financial charges (of which Euro 262 from non consolidated associated companies) 24,835 22,704 48,964

(4,417) (3,435) (7,011)Adjustment to the value of financial operationsRevaluations– investments 1,132 – 1,421Writedowns– investments – 3,244 3,093

1,132 (3,244) (1,671)Extraordinary income and expenses:Income (of which capital gains on disposals Euro 9) 436 147 1,669Expenses (of which taxes related to previous years Euro 39) 12,672 8,526 11,617

(12,236) (8,379) (9,948)Results before taxes 13,578 16,473 40,057Income taxes for the year – – 18,445Profit (loss) for the year 13,578 16,473 21,613Profit (loss) for the year – minority interest 108 720 593Group profit (loss) for the year 13,469 15,752 21,020

These financial statements agree with accounting records.

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Consolidated financial statements (in thousand of Euro)

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Share Share Revaluation Legal Reserve for Other Profit Profit for Total capital premiums reserve reserve shares in reserves (losses) the period share-

reserve portfolio carried holders’ forward equity

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

Allocation of the 1997 consolidated profit 305 42,028 (42,333) –

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

Reclassification to reserve

for shares in portfolio (20,620) 20,620 –

Utilization of reserves to pay

the tax on equity (1,229) (1,229)

Utilization of reserves

to cover prior years’ losses (643) 643 –

Revaluation of fixed assets in Portugal 5,495 5,495

Variation in the cumulative effect

of the translation

of financialstatements in foreign currency (689) (689)

Variation in the consolidation area (54) 83 29

Profit for the year 40,700 40,700

Balances at 31 December 1998 112,548 4,596 10,779 6,116 49,643 66,022 144,016 40,700 434,420

Allocation of the 1998 consolidated profit 1,016 671 39,013 (40,700) –

Distribution of dividends (11,948) (11,948)

Reclassification to reserve

for shares in portfolio (4,596) 9,747 (5,151) –

Variation in the cumulative effect

of the translation

of financial statements in foreign currency 1,750 1,750

Profit for the year 26,080 26,080

Balance at 30 June 1999 112,548 10,779 7,132 59,390 63,292 171,081 26,080 450,302

Statement of changes in consolidated shareholders’ equity for the period ended 31 December 1998 and 30 June 1999(in million of Italian lira)

30 June 1999 31 December 1998

A. Net opening cash (1) (122,179) (179,924)

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

Profit (loss) for the period 26,080 40,700

Depreciation 58,682 116,964

(Revaluations) or writedowns of fixed assets 2,192 (3,236)

Variations in capital for the year:

– receivables recorded as current assets 4,968 (333,980)

– inventory (43,534) (45,403)

– trade payables and other payables 38,288 370,793

– accruals and deferrals 3,732 1,273

Variation in the “staff leaving indemnity” 1,906 (3,071)

Variation in the provision for risks for taxes (1,079) (8,216)

Variation in other provisions for risks 22,527 (1,031)

113,762 134,793

C. Cash flow from (for) investment operations

Disinvestments (investments) in fixed assets:

– intangible fixed assets (goodwill excluded) (6,401) (22,805)

– tangible fixed assets (68,246) (115,802)

– investments:

shareholdings (5,572) (12,929)

receivables 16,717 (50,231)

own shares (9,747) (20,620)

(73,249) (222,387)

D. Cash flow from (for) financial operations

Increase (decrease) in financial assets not held as fixed assets (7,599) (16,000)

Mediuam/long-term loans received net of reimbursements (39,623) (82,579)

Revaluation of fixed assets – 5,495

Dividends (11,948) (11,863)

Utilization of reserves for taxes – (1,229)

Variation in shareholders’ equity - minority interest (265) (4,686)

(59,435) (110,862)

E. Currency effect on medium and long-term items 1,750 (687)

F. Variation in the consolidation area

Net capital for the year – 7,184

Financial assets not held as fixed assets – 249,573

Intangible fixed assets – 151

Tangible fixed assets – 71

Provisions for risks – (91)

– 256,888

G. Cash flow for the period (B+C+D+E+F) (17,172) 57,745

H. Net closing cash (1) (A+G) (139,351) (122,179)

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

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Consolidated statement of cash flow(in million of Italian lira)

Structure and content of the financial statementsThe consolidated financial statements at 30 June 1999 were prepared inaccordance with Law Decree No.127/1991 and integrated by the accountingprinciples stated by the Consigli Nazionali dei Dottori Commercialisti e deiRagionieri (National Board of Chartered Accountants) and, in their absence,by those of the International Accounting Standards Committee (I.A.S.C.)and of the Financial Accounting Standards Board (F.A.S.B.). Furthermore, inthe preparation of the notes on the accounts, new regulations regarding infor-mation on companies, introduced by Law Decree No.58/1998 (“Testo UnicoDraghi”) and subsequent enacting and integrating Decrees were taken intoaccount, as well as CONSOB (National Commission for Listed Companiesand the Stock Exchange) recommendations issued in October 1998, concer-ning the following:

• Information to be presented in year end financial statements, in interimfinancial reporting and in notices to the public, following the introductionof Euro;

• Communication regarding financial statements information on trends inoperations for the various categories of operations and geographic areaswhere the company operates, in accordance with IAS 14 (SegmentReporting).

As to CONSOB recommendation dated 9 October 1998, on the “Year2000 issue”, information are included in the Directors’ report on operations.

These financial statements reflect the full consolidation of the financial sta-tements of Merloni Elettrodomestici Spa and its subsidiaries, except for inve-stments either not operating or considered not significant.

The companies included in the consolidation area at 30 June 1999 arelisted below:

18

Notes to the consolidated financial statements at 30 June 1999

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

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

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

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

Merloni Electrodomésticos 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

Scholtès Nederland Bv The Netherlands NLG 175,000 – 100

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

Merloni Elettrodomestici

Beyaz Esya Sanayi Ve Ticaret As Turkey TUL 3,154,342,398,000 14.1(*) 85.9

Merloni Elettrodomestici

Beyaz Esya Pazarlama 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 Hausgeräte Gmbh Germany DEM 1,000,000 – 100

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

Merloni South America

Investment Ltd Cayman Island USD 3,000,000 – 100

Merloni Reinsurance

Company 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 –

Merloni Elettrodomestici

Poland Spzoo Poland PLN 43,270,000 100 –

(*) The percentage includes the 4.12% shareholding owned by Simest Spa, where the Groupparent company holds the vote right. Furthermore, it includes the share owned by debtorsminority shareholders (10 per cent), ad the Group parent company intends their proposal toreceive owned by them as settlement of the receivable claimed.

19

List of shareholding valued Registered Share capital Gorupapplying 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 Progetti International Sa Luxembourg ITL 25,000,000,000 – 33

Protecno Sa Switzerland CHF 500,000 – 33

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

Argentron Sa Argentine USD 22,000,000 – 31.2

List of other shareholdings Registered Share capital Gorupin subsidiaries and associated office sharecompanies direct indirect

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

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

Merloni Appliance

Asia Pacific Pte Ltd Singapore Rep. SGD 100,000 – 100

Merloni Indesit

Háztartástechnikai Kft Hungary HUF 10,000,000 99 –

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

Merloni Elettrodomestici

Ceska Republika Sro Czechoslovak Rep. CZK 1,000,000 100 –

Merloni Indesit

Domaci Elektrospotrebice Sro Czechoslovak Rep. CZK 1,200,000 100 –

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

Scholtès Warenhandelsgesmbh Austria ATS 250,000 – 100

Scholtès Ireland Ltd Ireland IEP 5,000 – 100

No variations have occurred in the consolidation area compared with thefinancial statements as of 31 December 1998.

The financial statements of companies included in the consolidation areawere prepared in accordance with general accepted accounting principles setforth in art.2423 and following articles of the Italian Civil Code, in line withItalian GAAP stated by the Consigli Nazionali dei Dottori Commercialisti edei Ragionieri (National Board of Chartered Accountants) and, in theirabsence, with international principles stated by the International AccountingStandards Committee (I.A.S.C.) and by the Financial Accounting StandardsBoard (F.A.S.B.), as recommended by Consob (National Commission forListed Companies and the Stock Exchange).

Merloni Elettrodomestici Group avails itself of the possibility granted byparagraph 5 of article 3 of Consob regulations, for the preparation of interimfinancial report, approved with Resolution No.8195 dated 30 June 1994, andpresents the result for the period gross of taxes and of adjustments andaccruals exclusively arising from the application of fiscal legislation.

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

20

ACCOUNTING POLICIESThe valuation criteria adopted for the preparation of the consolidated finan-cial statements are in line with those utilized by the Group parent companyfor the preparation of the annual financial statements and they are consistentwith those recommended by Consob.

Consolidation and translation principles• Assets and liabilities of consolidated companies are recorded by applying the

full integration method. The balance sheet value of consolidated sharehol-dings is offset against shareholders’ equity of subsidiaries included into theconsolidation area ; the elimination is made on the basis of book values atthe date of their first inclusion in the consolidation.

• The difference between investment at cost and shareholders’ equity at cur-rent value of consolidated companies at the date of acquisition of the sha-reholding, is recorded as “goodwill” in intangible fixed assets and deprecia-ted over five years.

• The portion of shareholders’ equity of minority interest of consolidated sub-sidiaries is recorded as “Share capital and reserves - minority interest”among shareholders’ equity; the portion of minority interest of the netresult of such companies is separately disclosed in the consolidated incomestatement as “profit (loss) for the period - minority interest”.

• Profits not yet realised arising from intergroup transactions are eliminated,as well as receivables and payables and all transactions regarding companiesincluded in the consolidation.

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

exchange rate for the period;– items forming shareholders’ equity, at the exchange rate ruling in the

period of their acquisition or formationExchange differences arising from the translation of closing shareholders’equity by applying the historical exchange rate rather than the exchange raterunning at financial statements’ date, are directly recorded to shareholders’equity along with differences between the operating result at average exchan-ge rate and operating result translated in Italian lira at the exchange rateruling at year end, in the item “Exchange reserve” included among “Otherreserves”.

The following schedule indicates exchange rates applied in the translationof currencies not included in the Euro area in whose connection fixed ratesof exchange in force at 31 December 1998 have been applied to.

Currency Opening rate Average rate Closing rate Average rate of exchange of exchange of exchange of exchange previous period

US Dollar 1,653.10 1,778.68 1,874.78 1,736.36

English Pound 2,763.16 2,878.76 2,950.28 2,863.65

Swiss Franc 1,208.41 1,210.53 1,207.60 1,198.41

Polish Zloty 474.38 459.78 477.15 474.38

21

With regard to foreign subsidiaries and associated companies operating inhyper inflation rate countries, shareholdings reflect adjustments arising fromthe application of international principles regarding accounting for inflation.Since 1997, the Merloni Group has decided to apply the internationalaccounting principle F.A.S. 52 instead of I.A.S. 29 previously used. The deci-sion is the result of the requirement to improve the representation of trendsin operations and shareholders’ equity. The main distortions deriving fromthe application of I.A.S. 29 concern: inventory valuation, valuation of pur-chases and production costs, valuation of fixed assets and accordingly depre-ciation and therefore shareholders’ equity. The above mentioned distortionsare caused by the devaluation-inflation spiral, significant in high inflationrate countries, where Merloni Group operates and more significant takinginto account that the majority of purchases and investments are carried outin Italian lira.

The impact on shareholders’ equity items and on the result for the periodderiving from the application of the different accounting principle is explai-ned in detail in the paragraph related to Group shareholders’ equity.

22

ASSETS

Fixed assets

Intangible fixed assets

Set out below a breakdown of movements in intangible fixed assets:

Description Opening Increases Decreases Exchange Closingbalance differences balance

Installation and

expansion costs 2,603 – 446 4 2,161

Research, development

and advertising costs 2,108 1,175 267 – 3,016

Industrial patent rights

and utilization

of know-how 16,755 2,808 3,684 – 15,879

Concessions, licences, trademarks

and similar rights 12,834 811 394 – 13,251

Goodwill 6,604 – 2,072 – 4,532

Others 10,616 1,602 423 47 11,842

Total 51,520 6,396 7,286 51 50,681

Installation and expansion costs at historical cost are composed as follows:

Description Historical cost Historical cost30/06/1999 31/12/1998

Cost for incorporation 2,218 2,215

Share capital increases 659 1,077

Merger costs 45 45

Start-up costs of new productions 1,060 1,060

Total 3,982 4,397

Accumulated depreciation 1,821 1,794

Financial statements’ balance 2,161 2,603

The increase in research, development and advertising costs relates to invest-ments carried out by the Group parent company regarding the restyling ofproducts with the Indesit trademark and the development of the innovativevideo monitor of the Ariston Digital line: the Home Smart Monitor.

Advertising costs are not included in the above table.The increase in industrial patent rights and utilization of know-how is

mainly due to expenses incurred by the Group parent company for the deve-lopment and improving software programs (Lit. 2,281 million).Furthermore, the increase is also due to expenses incurred by the subsidiaryPhilco Italia Spa, to improve the accounting system, also in view of theintroduction of the Euro and to get it compliant with year 2000 (Lit. 528million).

The increase of Lit. 800 million in concessions, licenses, trademarks and 23

Comments to the balance sheet figures (All amounts shown in these notes to the financial statements are expressed in million of Italian lira)

similar rights is due to expenses incurred by the Group parent company forthe study and realization of the new Indesit trademark logo.

The closing balance of goodwill includes net book value of goodwill ofPhilco Italia Spa (Lit. 1,248 million) following the purchase of a further 3.34per cent share in 1995, of Fabrica Portugal Sa (Lit. 324 million) following thepurchase of a further 14.8 per cent share in 1996, of MerloniElettrodomestici Beyaz Sanayi Ve Ticaret As (Lit. 938 million) following thepurchase of a further 20.7 per cent share in 1996 and of Star Spa (Lit. 2,022million) following the purchase of a further 40 per cent share in 1997.

The increase in others is mainly due to the reclassification of Lit. 1,080 mil-lion regarding software previously capitalized as hardware by the Turkish sub-sidiary.

Tangible fixed assets

Set out below a summary of movements in tangible fixed:

Movements Land Plant Industrial and Other Assets under Totaland and commercial goods construction

buildings machinery equipment and advances

Opening valuesHistorical cost(*) 262,753 557,524 294,925 86,065 26,607 1,227,874Revaluations 34,001 11,540 316 2,186 – 48,043Accumulated deprec. (80,748) (359,247) (238,127) (60,064) – (738,186)Writedowns – – – – – –Total 216,006 209,817 57,114 28,187 26,607 537,731VariationsPurchases 9,191 10,990 9,941 2,954 37,217 70,293Revaluations – – – – – –Disposals (4) (2,769) (1,743) (1,789) – (6,305)Utilization of depreciation funds – 2,210 1,713 1,415 – 5,338Depreciation for the year (5,071) (25,768) (15,181) (5,422) – (51,442)Writedowns – – – – – –Variation in the consolidation area – – – – – –Exchange differences 138 195 (1) 2 31 365Other variations – 592 – (1,043) (629) (1,080)Total 4,254 (14,550) (5,271) (3,883) 36,619 17,169Closing valuesHistorical cost 271,940 565,745 303,123 87,230 63,824 1,291,862Revaluations 34,001 11,540 316 2,186 – 48,043Accumulated deprec. (85,819) (382,805) (251,595) (64,071) – (784,290)Writedowns – – – – – –Exchange differences 138 195 (1) 2 31 365Other variations – 592 – (1,043) (629) (1,080)Total 220,260 195,267 51,843 24,304 63,226 554,900

(*) Historical cost includes the effects of fluctuations in exchange rates on tangible fixed assetsin foreign currency starting from 1987, the first year that the group prepared the consolida-ted accounts.

24

Purchases made in the first six months of 1999 include Lit. 25,620 millionof investments carried out in Poland for the new plant. The decision of theGroup parent company to redeem the leasing regarding the warehouse andthe building utilized as offices, situated in None, and expiring in 2003, hasdetermined a different accounting policy; according to the I.A.S. 17 interna-tional accounting principles, it has been included in purchases of “land andbuildings” for Lit. 7,169 million. Depreciation was calculated over 20 years,on the basis of an expert appraisal.

As afterwards indicated in the comment to memorandum accounts, partof property, plant and equipment is subject to restrictions and guaranteesagainst loans received in the medium and long term.

InvestmentsAt 30 June 1999, the most significant subsidiaries not consolidated were thefollowing:

30/06/99 31/12/98Subsidiaries Shareholding Balance Shareholding Balance

percentage sheet value percentage sheet value

Merloni Indesit Haztartastechnikai Kft 99.00 – 99.00 –

Merloni Indesit Bulgaria Srlu 100.00 40 100.00 40

Merloni Indesit Domaci

Elektrospotrebice Sro 100.00 60 100.00 60

Merloni Appliance Asia Pacific Pte Ltd 100.00 129 100.00 113

Merloni Elettrodomestici

Ceska Republika Sro 100.00 51 100.00 51

Total 280 264

The above-mentioned shareholdings, valued by applying the cost method,despite being majority shareholdings, have not been consolidated, as com-mercial operations performed are deemed as not significant.

The shareholding in Merloni Indesit Haztartastechnikai Kft was fully writ-ten down due to negative shareholders’ equity.

30/06/99 31/12/98Associated Shareholding Balance Shareholding Balance companies percentage sheet value percentage sheet value

M&B Marchi e Brevetti Srl 50.00 10 50.00 10

Argentron Sa 31.18 5,809 31.18 4,994

Merloni Progetti Spa 33.00 22,965 33.00 21,873

Faber Factor Spa 50.00 14,531 50.00 13,628

Co.Pro. Spa 24.00 624 24.00 624

Other minor shareholdings – 155 – 137

Total 44,094 41,266

25

30/06/99 31/12/98Other Shareholding Balance Shareholding Balance companies percentage sheet value percentage sheet value

Haier Merloni (Qingdao)

Washing Machine Co. Ltd 12.50 4,860 12.50 4,860

Haier Merloni Electrical Appl.Co.Ltd 15.00 3,091 15.00 3,091

Meurice Ets 10.00 1,516 10.00 1,337

Istituto Mobiliare Italiano 0.02 1,204 0.02 1,204

Necchi Compressori Spa 8.75 791 8.75 791

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 – 253 – 261

Total 13,220 13,049

Investments in associated companies have been accounted for by applying thenet equity method, as a result their closing balance includes the adjustmentsmade accordingly.

Receivables

From othersThe amount is mainly composed (Lit. 41,072 million) of bank deposits ofthe Lugano branch of Merloni Ariston International Sa and of long-termloans (Lit. 2,014 million) granted by the parent company to employees whosuffered damages to real estate following the earthquake occurred on 26September 1997 and the days afterwards in the Marches and Umbria regions.The loans, which bear interest at subsidized rates (treated in compliance withfiscal legislation) last 10 years and are monthly reimbursed with constantinstalments. The portion falling due within one year is equal to Lit. 251 mil-lion.

Other securitiesOther securities are composed of securities recorded as fixed assets, purcha-sed by the Group parent company in 1994, having a nominal value of Lit.3,755 million.

Own shares The increase of Lit. 9,747 million is due to the purchase by the Group parentcompany of No.1,521,000 ordinary shares and to the resale of No. 339,000ordinary shares; No. 9,447,500 were already included in the portfolio at 31December 1998.

At the end of the period, the Group parent company had No.10,629,500own ordinary shares in portfolio with a value of Lit. 59,390 million; therefo-re, the average purchase price is equal to Lit. 5,587.

26

Current assets

Stocks

The balance has increased by Lit. 43,534 million compared with 31December 1998 also due to the effect of the seasonality of production. Thebalance has decreased by Lit. 43,700 million compared with 30 June 1998.

Receivables

Item shows a balance of Lit. 791,154 million (Lit. 796,524 million at 31December 1998) that is composed as follows:

Trade receivablesTrade receivables amount to Lit. 677,152 million net of the bad debts provisionof Lit. 68,845 million and they relate to commercial transactions and to servicesrendered. The decrease by Lit. 19,498 million compared with the end of the pre-vious period is a result of improvement in delay of payment allowed to clients.

The Group parent company and some subsidiaries have insurance con-tracts to cover insolvency risks.

Receivables were written down to cover risks of losses arising from receiva-bles in litigation and whose recoverability is in any case doubtful. The accrualfor the period is equal to Lit. 8,704 million.

With regard to the Group receivables from customers in the CIS, it has beenincreased the portion of bad debts provision allotted to CSI trade receivables inorder to get it lined-up to the actual analysis of collectibility. Such accrual is notrelevant and relates to the ordinary credit management. In fact, it should benoted that the situation of collections has come back normal in spite of a lowersales level and selected customers, which however assure the Group a potentialgrowth in more positive economic-financial market conditions.

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

Subsidiaries 30/06/99 31/12/98Merloni Indesit Bulgaria Srlu 304 273Merloni Indesit Domaci Sro 1,061 564Merloni Indesit Haztartastechnikai Kft – –Total 1,365 837

Associated companies 30/06/99 31/12/98Faber Factor Spa 20,815 12,758Argentron Sa 6,468 11,192Merloni Progetti Spa 3,486 8,172Protecno Sa – 789Co.Pro Spa – 6Sofarem Sarl 2,968 1,853M&B Marchi e Brevetti Srl 182 293Total 33,919 35,063

27

Receivables from Group companies having a financial and commercial natu-re are settled at fair market conditions. Further information is reported inparagraph on related parties.

OthersSet out below a breakdown of the balance sheet figures:

Description 30/06/99 31/12/98

Social Security 5,999 1,760

Advances to employees 1,354 1,547

Tax authorities 56,579 48,179

Suppliers, advances for services 5,937 6,292

Other 8,849 6,196

Total 78,718 63,974

Receivables form the tax authorities show an amount recoverable beyond thesubsequent year of Lit. 10,829 million; Lit. 8,975 million relate to the Groupparent company, Lit. 398 million to the Portuguese subsidiary MerloniElectrodomésticos Sa and Lit. 1,456 million to the subsidiary Philco Italia Spa.

Other receivables include an amount collectible beyond one year equal toLit.1,085 million relating to guarantee deposits of the Group parent com-pany of Lit. 1,028 and of the subsidiary Philco Italia Spa of Lit. 57 million.

Short term investments

Other shareholdingsItem includes 3 per cent shareholding in Stoves Group Plc, a company listedon the London Stock Exchange operating in the domestic appliances segmentconsidered not as significant as to require a commitment in the medium-longterm. On the basis of average listings registered by the English company inJune 1999, the value of investments was revalued by Lit. 402 million.

Financial receivables The balance sheet figure is composed as follows:Description 30/06/99 31/12/98

Receivables from Faber Factor Spa 25,578 17,979

Total 25,578 17,979

The item includes the Group parent company receivable from Faber FactorSpa regarding the internal current account agreement managed at fair marketterms and conditions.

Cash

The balance of cash (Lit. 184,813 million) includes short-term bank depositsof the Lugano branch of the subsidiary Merloni Ariston International Sa foran amount equals to Lit. 78,991 million (Lit. 156,513 million in 1998)remunerated at fair market terms.

28

The value of cash net of bank deposits, equals to Lit. 105,822 million (Lit.121,996 million at 31 December 1998), represents the balance of banks andpostal current accounts which has decreased compared to the previous periodby Lit.16,174 million.

Accrued income and prepaymentsThe value recorded in the financial statements of Lit. 9,339 million shows anincrease compared with the one at the 1998 year end and that added up toLit. 3,722 million.

Item includes interest receivable (Lit. 2,369 million), prepayments of calloptions (Lit. 2,658), prepayments of interest payable and financial charges(Lit. 100 million), prepayment of interest payable relating to bills of theSabatini Law (Lit. 7 million), insurance premiums (Lit. 889 million), adver-tising costs (Lit. 850 million), rents and instalments (Lit. 845 million), otheroperating costs (Lit. 1,621 million).

LIABILITIES

Shareholders’ equity

Share capital

At 30 June 1999, the Share Capital, fully subscribed and paid up is compo-sed as follows:

Description Shares at the end of the year

number value

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

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

Share premiums reserve

Lit. 4,596 million of the reserve, at 31.12.98 were utilized to increase the“Reserve for own shares in portfolio”.

Legal reserve

The reserve increased by Lit. 1,016 million following the allocation of profitrealized in 1998.

Reserve for own shares in portfolio

The reserve was created in 1996 by the Group parent company following buyback transactions, as required by article 2357 ter of the Italian Civil Code.The reserve increased by Lit. 9,747 million.

Other reserves

The composition of other reserves is as follows:

29

Description 30/06/99 31/12/98

Grants on capital account 60,921 66,072

Cumulative translation effect 1,497 (253)

Extraordinary reserve 671 –

Consolidation reserve 203 203

Total 63,292 66,022

Grants on capital account decreased by an available amount of Lit. 5,151 mil-lion as the amount was utilised by the Group parent company to increase thereserve for own shares in portfolio.

The cumulative translation effect includes exchange differences arising fromthe translation of financial statements in foreign currency which according toI.A.S. No.21 were directly recorded to consolidated shareholders’ equity; further-more, the item includes the effect of the valuation applying the equity methodof foreign associated companies (at 30 June 1999 negative by Lit. 4,452 million).

The extraordinary reserve, equal to Lit. 671 million, was created by theGroup parent company allocating profit for the year.

Profits (losses) carried forward

Item amounts to Lit. 171,081 million as at 30 June 1999.The item includes losses carried forward by Lit. 6,712 million (Lit. 8,482

million at 31 December 1998) relating to associated companies, valuedapplying the equity method, and to Necchi Compressori Spa.

Reconciliation between consolidated financial statements andthe Group parent company financial statements

Set out below the reconciliation between the consolidated net equity andincome with parent company’s net equity and income as of 30 June 1999 and31 December 1998.

30/06/99 31/12/98

Share-holders’ Result for Share-holders’ Result for equity the year equity the year

Financial statements for the yearMerloni Elettrodomestici Spa 278,830 6,997 283,781 13,283Difference between subsidiaries net equity and the related investment balance sheet book value 198,094 17,188 161,867 53,027Associated companies valued by applying net equity method (9,215) 1,790 (8,278) 2,365Elimination of local fiscal rules interferences 2,295 (245) 3,366 886Adjustments booked to get subsidiaries balance sheet lined up with group accounting principles 4,664 190 2,588 602Elimination of intercompany profits (25,180) 610 (10,256) 1,230Deferred tax assets 814 67 1,352 418Dividends received from subsidiaries – (517) – (31,111)Group consolidated financial statements 450,302 26,080 434,420 40,700

30

As already commented in the paragraph on consolidation and translationprinciples, the Turkish subsidiary, to neutralize the effect of hyperinflationexisting in the country where it operates, in 1997 has adopted the interna-tional accounting principle F.A.S. 52 instead of I.A.S. 29. Had the companycontinued to apply I.A.S. 29 the result for the period would have been lowerby Lit. 724 million and shareholders’ equity would have been higher by Lit.5,417 million.

Provisions for contingencies and obbligationsThe item shows a balance of Lit. 93,685 million (Lit. 72,237 million at theend of 1998) and its composition is detailed as follows:

Pensions for severance pay and similar obligations

Item is equal to Lit. 4,013 million (Lit. 3,667 million at the end of the pre-vious period) and it reflects the estimate of pension and retirement costs ofsome foreign subsidiaries personnel.

Provision for taxes

The tax provision is equal to Lit. 12,214 million (Lit. 13,293 million the pre-vious period) and it takes into account both deferred tax liabilities and deferredtax assets in accordance with IAS 12 revised. Furthermore, it reflects the fiscaleffects of consolidation adjustments made in order to get accounting principlesapplied by subsidiaries consistent with Group’s accounting principles.

Others

The most significant figures are as follows:

Provision for products’ warrantyThe provision represents the estimate of costs to be incurred for assistance onproducts sold covered by warranty. The provision amounts to Lit. 38,780million (Lit. 39,627 million at the end of 1998) and it is considered adequa-te to cover the specific risk which it has been accrued for.

Provision for future risksThe item includes Lit. 4,583 million relating to planned technical maintena-ces not yet carried out, on particular products sold in the previous years,mainly on British market.

Following the Shareholders’ resolution, dated 16 September 1998, a pro-vision was accrued of Lit. 1,500 million, of which Lit. 600 million utilised inthe previous year’s financial statements, for the reconstruction of an impor-tant architectural complex with historical, cultural and religious relevancesituated in Fabriano and seriously damaged by last year’s earthquake. Lit. 500million has been utilised in the first six months of 1999.

Furthermore, the item includes our accrual of Lit. 1,800 million to builda new village, for the Turkish population hit by the earthquake.

31

Provision for restructuringThe provision amounts to Lit. 17,907 million and it relates to future extraor-dinary interventions on the Group organization structure, which should besettled within the end of the year.

Exchange fluctuations provisionThe provision recorded in the financial statements of Lit. 2,502 million cor-responds to the exchange differences net position, generated by applying theexchange rates, running at June 30, to the group currency balances.

Provision for agents’ leaving indemnityThe provision amounts to Lit. 1,512 million (Lit. 1,555 million the previousperiod) of which Lit. 1,072 million of the Group parent company, which hasbeen accruing the provision since 1995.

Provision for litigationsThe Group parent company has a litigation in progress with national socialsecurity institutions and with tax authorities, in whose respect, supported bythe opinion of its legal consultants, it does not consider to make any accrual.Furthermore, during the year, three notices of assessment were notified toMerloni Elettrodomestici Spa by Tax Office, in connection with a mergertransaction. The Group parent company appealed against such notices withthe relevant authorities; in January 1999 the Tax Office annulled one of suchnotices.

Referring as above, company’s management and its fiscal consultants con-sider such contestations and related reasons unfounded, and therefore thecompany does not consider to make any accrual against such contingent taxliabilities.

Staff leaving indemnityThe amount is computed in accordance with laws and labour contracts. Atthe termination of employment each employee of any category, from workerto manager, excluding independent workers, is entitled to receive a deferredsalary computed on a formula basis which takes into consideration the grossannual salary and the seniority of the employee. For each year of service, theemployee matures a portion of “TFR” which is equal to the annual grosssalary divided by 13.5 (approximately one month’s salary). The portion isrevalued every year taking into consideration 0.75% of the rate inflation.Accordingly, since the computation is based solely on actual payroll data, noactuarial involvement is necessary.

Movements in the item were as follows:

Balance at 31 December 1998 105,895

Portion matured and accrued to the income statement 8,117

Indemnity paid in the year (6,211)

Closing balance 107,801

32

We set out below the composition of employees divided per category:

Qualification Employees Employees at 1999 Averageat 30/06/1999 31/12/1998

Executives 100 90 99

Employees 1,980 2,011 1,970

Workers 5,696 5,615 5,771

Total 7,776 7,716 7,840

Of these, 942 (829 workers, 113 employees) with fixed-term contract in1999, and 694 (682 workers, 12 employees) with fixed-term contract in1998.

Payables

Banks loans and overdraftsDetails and variations are summarised as follows:

Description 30/06/99 31/12/98

Bank overdrafts 324,164 400,688

Long-term bank loans 57,702 73,462

Total 381,866 474,150

Bank credit lines are normally not secured by guarantees and they amount toLit. 756,400 million as a whole.

Bank debts at 30 June 1999 amount to Lit. 381,866 million, of which Lit.324,164 million falling due within one year, and the remaining (Lit. 57,702million) expiring within the second to the fifth year afterwards. No reimbur-sements are due beyond five years.

Medium/long-term loans are generally re-payable through six-monthlyinstalments. Furthermore, some loans are guaranteed with mortgages on pro-perty, plant and equipment for an amount of Lit. 15,040 million.

Other financing payablesAt 30 June 1999 loans amounted to Lit. 70,322 million, of which Lit. 21,729million falling due within one year, and the remaining broken-down as fol-lows on the basis of their expiration date:

Expiring period Amount

From the 2nd to the 5th year 38,747

Beyond the 5th year 9,846

Total 48,593

Instalments are generally six-monthly. Some loans are guaranteed with mort-gages on property, plant and equipment for a total amount of Lit. 49,981million.

Other financing payables expiring within one year include payables toSimest Spa (a company operating in foreign markets supplying technical,

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administrative, organizational and financial assistance), arising from therenewal of the contract whereby the Group parent company sold shares of itssubsidiary Merloni Elettrodomestici Beyaz Esya Sanayi Ve Ticaret As (124billion Turkish lira of capital) at a value of Lit. 7,400 million not includingany portion of the majority premium. In fact, the sale contract requiresthrough guarantees to buy back the shares described above within 30September 1999 at the higher of sale price and corresponding shareholders’equity value.

Furthermore, Simest Spa, in the period of ownership of the shareholding,exercises vote rights on the basis of specific indications given by MerloniElettrodomestici Spa.

Accordingly, the consolidated financial statements reflect a 100% owner-ship in the company’s stock capital by reclassifying Lit. 7,400 million due toSimest Spa as payables.

AdvancesLit. 3,497 million included in balance sheet figure of Lit. 3,497 relate toGroup parent company and substantially include year-end quantity pre-miums to be paid for next year

Trade payablesThe balance is equal to Lit. 494,811 million and has increased by Lit. 86,307million due to a growth in purchases and better payment terms allowed bysuppliers.

Notes payablesThe balance of Lit. 190 million, includes bills issued to suppliers by somesubsidiaries. The item does not show portions expiring beyond the oneyear.

The analysis of payables and of financial operations reveals the following netfinancial indebtedness:

30/06/99 31/12/98

Other receivables 43,906 60,623

Other securities 3,719 3,719

Total investments 47,625 64,342

Short term financial receivables 25,578 17,979

Bank and postal deposits 183,944 278,105

Cash on hand 869 404

Total current assets 210,391 296,488

Banks loans and overdrafts 381,866 474,150

Other financing payables 70,322 94,185

Total Payables 452,188 568,335

Total 194,172 207,505

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Payables to subsidiaries and associated companiesBalance sheet figure can be detailed as follows:

Subsidiaries 30/06/99 31/12/98

Merloni Indesit Domaci Sro – 303

Merloni Appliance Asia Pacific Pte Ltd 159 183

Total 159 486

Associated companies 30/06/99 31/12/98

M&B Marchi e Brevetti Srl – 338

Merloni Progetti Spa 4,823 3,633

Argentron Sa 93 65

Faber Factor Spa 299,086 352,636

Total 304,002 356,762

Taxes payableThe item is mainly composed of payables for current income taxes of the pre-vious year by Lit. 4,279 million estimated on the basis of a reasonable projec-tion of the tax charge, taking into account possible exemptions and tax cre-dits pursuant to regulations and rates locally in force; withholdings toemployees, professionals and self employed by Lit. 25,430 million; valueadded tax by Lit. 27,100 million, and substitute taxes on profits accrued toshareholders’ equity in previous years without payment of taxes of Lit. 874million. The payable regarding the suspension of payment of taxes granted tothe Group parent company as resident in one of the municipalities damagedby the earthquake of 26 September 1997 is equal to Lit. 20,321.

Social Security payablesThe item shows an amount of Lit. 56,211 million and relates, mainly, tosocial security payables for personnel.

Other payablesThe balance can be detailed as follows:

Description 30/06/99 31/12/98

Payables to personnel 57,609 33,244

Payables to affiliated companies 373 453

Others 5,944 7,073

Total 63,926 40,770

Payables to personnel represent the debits for wages and holidays matured byemployees at the financial statements’ date.

Among “Others”, the most significant amounts relate to the Group parentcompany: Lit. 1,554 million payable to shareholders for dividends; Lit. 556million of local taxes temporary suspended due to the above-mentionedearthquake.

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Accrued liabilities and deferred chargesThe item shows a balance of Lit. 18,344 million (Lit. 10,890 million the pre-vious period) and it is composed of accruals of interest payable (Lit. 1,294million), commissions (Lit. 657 million), other accruals for various operatingcosts (Lit. 3,663 million) and it is also composed of deferrals of put options(Lit. 2,658), deferrals of portions of grants on capital account pertaining tofuture years (Lit. 1,366 million), guarantee contributions (Lit. 1,266) intere-st receivable (Lit. 4,634 million) other deferrals (Lit. 44 million) and otheraccruals (Lit. 2,762 million).

Memorandum accountsPhilco Italia Spa issued guarantees of Lit. 204 million to the tax authorities.Merloni Electroménager Sa issued guarantees of Lit. 899 million to Frenchcredit institutions. Furthermore, the Portuguese associated companies issuedguarantees of Lit. 6,105 million to public institutions.

Merloni International Trading Bv (Lugano branch - Switzerland) issued abank guarantee of Lit. 52 million for the benefit of financial institutions.Merloni Electrodomesticos Sa - Spain issued guarantees of Lit. 181 million tofinancial institutions. Guarantees issued by the Group parent company aredetailed as follows:• Lit. 5,000 million to the affiliated company Centro Energia Teverola Spa

(CET Spa) as guarantee for contractual commitments undertaken. MerloniElettrodomestici received the pro-rata counterguarantee of CET Spa othershareholders (Lit. 1,250 million from Merloni Progetti Spa, Lit. 2,500 mil-lion from Foster Wheeler Spa, Lit. 250 million from MP&S and Lit. 750million from Merloni Termosanitari Spa respectively);

• Lit. 250 million to Foster Wheeler Italiana Spa (FWI Spa) as guarantee of5% (pro-rata of additional contractual commitments undertaken by CETSpa with regard to FWI Spa);

• Lit. 450 million to Banca Nazionale del Lavoro di Napoli as partial gua-rantee of a loan granted to Co.Pro Spa;

• Lit. 499 million to Itainvest as guarantee of a debenture loan granted toCo.Pro Spa;

• Lit. 150 million to the affiliated company CET Spa as guarantee of con-tractual commitments undertaken by the affiliated company CEOT Srl.

No commissions mature on guarantees.Collaterals consisting of mortgages issued to third parties, equal to Lit.

81,080 million, regard loans received from the institutions listed below:

Institution (million lira)

Banca Nazionale del Lavoro 9,046Efibanca 25,734Istituto Mobiliare Italiano 20,086Istituto Bancario S.Paolo di Torino 5,994Credit Bail 9,404Ademn 227Isveimer 4,161Mediocredito Lombardo 6,428Total 81,080

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Other memorandum accounts, totalling Lit. 180,194 million, are detailed asfollows:

Item (million lira)

Receivables transferred to Faber Factor Spa 299

Commitments for rents and leasing instalments 7,125

Guarantees received from third parties 85,244

Guarantees received from associated companies 1,250

Guarantees received from affiliated companies 1,000

Guarantees received from the parent company 9,850

Purchase commitments of property, plant and equipment 63,685

Purchase commitments of raw materials 11,741

Total 180,194

Purchase commitments of fixed assets, besides commitments for the purcha-se of tangible and intangible fixed assets, include Lit. 27,500 million ofoptions for the purchase of shareholdings, realised at the end of July 1999.Such latter purchase is remarked in the paragraph concerning the significantevents occurred after 30 June 1999 and perspectives for the end of the year,included in the report of the Board of Directors.

The subsidiary Merloni Ariston International Sa has some sale and pur-chase forward contracts and swap contracts in currency to cover the net expo-sure at the end of the year, which can be summarized as follows:

Transaction Currency Amount Amount in million in currency of Italian Lira

Forward sale GBP 40,000,000 114,778

Swap GBP 1,802,650 5,265

Swap USD 33,900,000 63,198

The final result arising from the overall valuation of forward transactionsand exposure in foreign currency is a positive outcome of Lit.846 millionnot recorded to the income statement as stated by Group accounting prin-ciples.

Furthermore, the subsidiary Merloni Ariston International Sa at 30 June1999 had some forward transactions in progress composed of put and calloptions of the American type, at zero cost with expiry ranging from July toDecember 1999, whose total value can be summarized as follows:

Currency Option Total value Total premium

US dollars USD Call sale 133,369 2,658

US dollars USD Put purchase 129,500 2,658

English pounds GBP Call sale 203,315 –

English pounds GBP Put purchase 197,750 –

The amount of premiums relating to the above-mentioned transactions wasappropriately deferred as pertaining to the next period.

37

Value of productionThe income statement item shows a closing balance of Lit. 1,383,420 mil-lion, with a 10 per cent decrease compared with 30 June 1998 value (Lit.156,200 million).

Revenues from sales of goods and services are detailed as follows:

Revenues from sales and services 30/06/99 30/06/98

Revenues from sales of finished products

and raw materials 1,292,293 1,367,450

Revenues from services 22,739 16,851

Total 1,315,032 1,384,301

A breakdown of revenues from sales and services per geographic area is set outbelow:

Area 30/06/99 30/06/98

Italy 376,317 355,024

European Union 620,990 587,539

Other countries 317,725 441,738

Total 1,315,032 1,384,301

The decrease in sales is attributable to the decline in the Russian market whilesales in other mature markets have increased by 6 per cent.

Other income mainly includes the gain on disposal of fixed assets sold forordinary renewal requirements, reimbursement of customs duties on exports offinished products, insurance reimbursements, utilization of provisions accruedin prior years, other exceptional income and grants received on capital account.

Costs of productionThe income statement item shows a balance of Lit. 1,327,078 million, witha decrease compared with the previous period of Lit. 151,490 million.

The variation mainly relates to the following:• industrial costs which benefited from the result of rationalization and pro-

duction simplification actions, which will also be carried on the followingmonths and of the positive impact on prices of the most important rawmaterials purchased by the Group;

• costs for services decreased by Lit. 37,304 million, mainly due to lowerexpenses for advertising, to the decrease in transport costs due to lowervolumes of sales in areas far from production sites and to the decrease ingeneral structure costs;

• personnel costs decreased by Lit. 20 billion due to actions undertaken afterthe Russian crisis in order to reduce average Group personnel with a resul-ting decrease in costs;Costs for services include Lit. 487 million of charges concerning the tran-

sition process to the Euro currency, met in the first months of 1999.The increase in accruals for risks equal to Lit. 5,767 million is substantial-

ly due to the estimate of costs connected with interventions to be carried outon defective products sold in the British, Dutch and French markets.

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Comments to significant figures in the income statement(All amounts shown in these notes to the financial statements are expressed in million of Italian lira)

Financial income and charges

Other financial income

Other income detailed as follows:

Description 30/06/99 30/06/98

Interest receivable from customers 4,895 4,672

Interest receivable on bank deposits 7,317 7,566

Interest receivable from associated companies 571 2,190

Exchange fluctuations 26,056 21,185

Other interest and income 124 1,078

Total 38,963 36,691

Interest receivable from associated companies relates to the relationshiphaving a financial nature with Faber Factor Spa settled at fair market terms.

Interest and other financial charges

The balance is composed as follows:

Description 30/06/99 30/06/98

Interest paid to banks 8,291 13,340

Interest paid to other financing institutions 4,504 3,030

Exchange differences 27,342 17,038

Accounting effect for inflation 7,606 8,325

Interest paid to associated companies 207 820

Other interest and charges 137 1,408

Total 48,087 43,961

Interest paid to associated companies relates to Faber Factor Spa and is com-mented in the paragraph on relationships with associated and affiliated com-panies.

The accounting effect for inflation refers to the application of internatio-nal accounting principles (F.A.S. No.52) to the financial statements of thesubsidiary Merloni Elettrodomestici Beyaz Esya Sanayi Ve Ticaret As opera-ting in a hyper inflated economy.

Adjustment to the value of financial operations

Revaluations The balance of Lit. 2,192 million reflects the inclusion of the portion of pro-fit for the period pertaining to the Group, arising from the valuation of theassociated companies Faber Factor Spa (Lit. 649 million), Merloni ProgettiSpa (Lit. 1,092 million) e Argentron Sa (Lit. 49 million) by applying theequity method; furthermore, the balance includes the revaluation of Lit. 402million of the book value at cost of the investment in the English companyStoves Group Plc commented in the section on short-term financial assets.

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Extraordinary income and expenses

Extraordinary incomeThe balance of Lit. 845 million mainly includes other exceptional income(Lit. 827 million) and gains on sales of fixed assets (Lit. 18 million).

Extraordinary expensesExtraordinary expenses include Lit. 21,189 million allocated to the newGroup reorganization plan. Of these Lit. 4,776 million have already been uti-lized and Lit. 16,413 million have been accrued. Moreover in the balancethere are Lit. 1,800 million related to the accrual for the realization of a newvillage for the population who suffered damages following the earthquake inTurkey. Lit. 469 million regards other exceptional expenditure and Lit. 75million relate to deferred tax liabilities not accrued in prior years.

Transactions with associated and affiliated companiesIn the course of the first six months of 1999, several transactions were carriedout with associated and affiliated companies. Such relationships having acommercial and financial nature, carried out also in previous years, are com-mented in this paragraph as of Consob recommendation dated 2 March1998, in line with I.A.S. 24.

The above mentioned transactions, which include sales of finished pro-ducts, rendering of services and granting of loans, were carried out with thecompanies 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 (held by the same shareholder)Aermarche Spa (held by the same shareholder)R.T.C. International Spa (held by the same shareholder)Centro Energia Spa (held by the same shareholder)Benelli Spa (held by the same shareholder)Merloni Termosanitari Spa (held by a director, shareholder of the

Group)

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Receivables from associated companies

Associated companies 30/06/99 Nature of the transaction Related party

Argentron Sa 6,468 Commercial Merloni Elettrodomestici Spa

Merloni Progetti Spa 3,486 Commercial Merloni Elettrodomestici Spa

Sofarem Sarl 3 Commercial Merloni Elettrodomestici Spa

Sofarem Sarl 2,965 Commercial Merloni International Trading Bv

M&B Marchi e Brevetti Srl 182 Utilization of trademarks Merloni Elettrodomestici Spa

M&B Marchi e Brevetti Srl 1 Sale of trademark Merloni Ariston International Sa

Faber Factor Spa 20,814 Financial Merloni Elettrodomestici Spa

Total 33,919

Relationships having a commercial nature relate to the sale of finishedproducts, raw materials and services rendered. In particular, relationshi-ps of the Group parent company with the associated company MerloniProgetti Spa mainly concern services rendered connected with the perfor-mance of projects for the development of production sites in China andin Brazil. Furthermore, they include services such as the administrationof human resources and costs for the study and development of new pro-cesses and products. Relationships having a financial nature with FaberFactor Spa arise from transfer of receivables by the Group parent com-pany.

Receivables from affiliated companies

Affiliated companies 30/06/99 Nature of the transaction Related party

Merloni Termosanitari Spa 942 Services Merloni Elettrodomestici Spa

Benelli Spa 1 Commercial Merloni Elettrodomestici Spa

MP&S 1 Commercial Merloni Elettrodomestici Spa

Total 944

Short term financial receivables

Associated companies 30/06/99 Nature of the transaction Related party

Faber Factor Spa 25,578 financial Merloni Elettrodomestici Spa

Total 25,578

The balance reflects the internal current account agreement between theGroup parent company and the associated company Faber Factor Spa settledat fair market terms.

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Payables to associated companies

Associated companies 30/06/99 Nature of the transaction Related party

Merloni Progetti Spa 210 Commercial Merloni Elettrodomestici Spa

Argentron Sa 5 Commercial Merloni Elettrodomestici Spa

Faber Factor Spa 271,459 Financial Merloni Elettrodomestici Spa

Faber Factor Spa 12,237 Financial Merloni Electroménager Sa

Faber Factor Spa 1 Financial Merloni International Trading

Faber Factor Spa 9,209 Financial Philco Italia Spa

Faber Factor Spa 8 Financial Merloni Hausgerate Gmbh

Faber Factor Spa 4,222 Financial Merloni Electrodomesticos Sa

Faber Factor Spa 1,939 Financial Fabrica Portugal Sa

Argentron Sa 88 Commercial Merloni International Trading

Faber Factor Spa 2 Financial Merloni Indesit Polska Spzoo

Faber Factor Spa 9 Financial Merloni Elettrodomestici Poland Spzoo

Merloni Progetti Spa 4,613 Commercial Merloni Elettrodomestici Poland Spzoo

Total 304,002

Transactions having a financial nature with Faber Factor Spa arise from tran-sfer of receivables by Group suppliers.

The commercial relationship with the subsidiary Merloni ElettrodomesticiPoland Spzoo and with the associated company Merloni Progetti Spa is con-nected with the supply of plants and know-how for the construction of thenew production site.

Payables to affiliated companies

Affiliated companies 30/06/99 Nature of the transaction Related party

Merloni Termosanitari Spa 1,772 Commercial Merloni Elettrodomestici Spa

Benelli Spa 12 Commercial Merloni Elettrodomestici Spa

Aermarche Spa 373 Services Merloni Elettrodomestici Spa

Total 2,157

Value of production

Revenues from sales and services include amounts relating to transactionswith associated and affiliated companies, listed below:

Associated companies 30/06/99 Nature of the transaction Related party

Merloni Progetti Spa 421 Services Merloni Elettrodomestici Spa

Merloni Progetti Spa 5 Sale of raw materials Merloni Elettrodomestici Spa

Sofarem Sarl 3,215 Sale of finished products Merloni International Trading Bv

Argentron Sa 4,921 Sale of finished products and spare parts Merloni Elettrodomestici Spa

Faber Factor Spa 314 Services Merloni Elettrodomestici Spa

Total 8,876

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Transactions having a purely commercial nature between the subsidiaryMerloni International Trading Bv and Sofarem Sarl represent the execu-tion of supply contracts as the latter is one of the major customers of thecompany.

Affiliated companies 30/06/99 Nature of the transaction Related party

Merloni Termosanitari Spa 940 Services Merloni Elettrodomestici Spa

Merloni Termosanitari Spa 10 Sale of finished products Merloni Elettrodomestici Spa

Benelli Spa 3 Sale of finished products Merloni Elettrodomestici Spa

Total 953

Other income includes Lit. 150 million of income of the subsidiary PhilcoItalia Spa regarding the associated company Merloni Progetti Spa due to saleof know-how.

Costs of production

Costs of raw materials, auxiliary materials, spare parts and goods include Lit.1,720 million relating to purchases of finished products and Lit. 282 millionrelating to purchases of spare parts from the affiliated company MerloniTermosanitari Spa by the Group parent company.

Costs for services include the following transactions with associated andaffiliated companies:

Associated companies 30/06/99 Nature of the transaction Related party

Merloni Progetti Spa 120 Services Merloni Elettrodomestici Spa

Argentron Sa 107 Services Merloni International Trading Bv

Faber Factor Spa 500 Services Merloni Elettrodomestici Spa

Total 727

Affiliated companies 30/06/99 Nature of the transaction Related party

Merloni Termosanitari Spa 228 Services Merloni Elettrodomestici Spa

Aermarche Spa 1,530 Transport of passengers Merloni Elettrodomestici Spa

R.T.C. International Spa 285 Costs for services Merloni Elettrodomestici Spa

Benelli Spa 13 Representative Merloni Elettrodomestici Spa

Merloni Partecipazioni & Servizi Srl 63 Rent payable Merloni Elettrodomestici Spa

Total 2,119

Financial income and charges

Other income includes Lit. 571 million of interest receivable of the Groupparent company from the associated company Faber Factor Spa followingtransactions having a financial nature.

Interest and other financial charges include amounts charged by the asso-ciated company Faber Factor Spa and Progelease Spa, for interest and com-missions on factoring transactions and loans carried out with the partiesdetailed below:

43

Associated companies 30/06/99 Nature of the transaction Related party

Faber Factor Spa 80 Interest and commissions Merloni Elettrodomestici Spa

Faber Factor Spa 127 Interest and commissions Philco Italia Spa

Progelease Spa 300 Interest and commissions Merloni Elettrodomestici Spa

Total 507

These financial statements give a true and correct view of the consolidatedfinancial position and of the consolidated result of operations for theperiod.

The Board of DirectorsThe ChairmanVittorio Merloni

Fabriano, 15 September 1999

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