Pirelli SpA 2001 financial statements

BOARD APPROVES 2001 FINANCIAL STATEMENTS:

STRATEGIC STRENGTHENING FOLLOWING INVESTMENT IN OLIVETTI-TELECOM GROUP TOGETHER WITH EDIZIONE, INTESA-BCI AND UNICREDITO:
PIRELLI INVESTS 3,170 MILLION EUROS
YEAR CONDITIONED BY MAJOR SLOWDOWN IN TLC CABLES AND SYSTEMS INDUSTRY, AND BY 151 MILLION EUROS IN EXTRAORDINARY CHARGES FOR RESTRUCTURING
DISPOSALS PROGRAMME SET ASIDE

PIRELLI SPA GROUP ACCOUNTS:

CONSOLIDATED SALES: 7,509 MILLION EUROS, +0.4%
GROUP GROSS OPERATING RESULT: 666 MILLION EUROS, -18.8%
OPERATING INCOME: 295 MILLION EUROS, -32.5%
CONSOLIDATED NET INCOME: 86 MILLION EUROS
INVESTMENTS IN TANGIBLE ASSETS: 643 MILLION EUROS
NET DEBT: 0.19 OF SHAREHOLDERS' EQUITY

PARENT COMPANY ACCOUNTS:

PARENT COMPANY NET INCOME: 1,489 MILLION EUROS
RECOMMENDED DIVIDEND 0.08 EUROS PER ORDINARY SHARE AND 0.09 EUROS PER SAVINGS SHARE; NO LONGER INCLUDES THE EXTRAORDINARY COMPONENT PAID IN 2000, REMAINS AT THE LEVEL OF PREVIOUS YEARS

TRONCHETTI: "GROUP BUSINESS PLAN TO BE PRESENTED IN MAY"
OPERATING INCOME FOR 2002 TO MATCH 2001 FIGURE

Milan, 27 March 2002 - The Board of Pirelli SpA met today to examine the consolidated accounts and Parent company financial statements for 2001.

For the Pirelli Group 2001 was characterized by one event above all others: an overall investment of 3,170 million euros in Olimpia - the company set up with Edizione (Benetton Group), Intesa-BCI and Unicredito - to launch the wide-ranging Olivetti-Telecom Italia Group business project.

This move followed on from disposal of the Terrestrial Optical Systems unit to Cisco and of Optical Components to Corning - two small businesses for which turnover did not exceed 250 million euros - which were sold at multiples unprecedented in consideration of their respective incomes performance, which look even more so following developments in their reference markets. These disposals generated net income and financial resources of around 4,000 million euros.
The Group effectively conducted an asset swap and in the process achieved a strategic enhancement. Moreover, through Pirelli Labs the Group is pursuing research and development of advanced technologies, including the next generation of optical technologies, in which the Company has a leading-edge positioning.

As previously noted, the major slowdown in the worldwide economy accompanied a sudden drop in demand in the reference market for the Telecommunications Cables and Systems Sector in the second half of 2001. In order to cope with market conditions, appropriate actions were implemented for rationalizing production and organization. Targetted at achieving flexibility and improving efficiency in all areas of operations, these moves generated extraordinary charges of 151 million euros.

Owing to the solidity of the Company's balance sheet position, and in view of the general market conditions, the forecast disposals plan has been set aside.

Consolidated financial statements

Net sales amounted to 7,509 million euros, up slightly (+0.4%) compared with 2000. The difference was principally due to higher volumes (+3.6%) and the positive impact of prices (+1.3%); this offset the negative repercussions of conversion to euros (-2.6%), a worsening of the mix and other factors (-1.9%).

The gross operating result was equal to 666 million euros, a decrease of 18.8% compared with 2000; operating income was equal to 295 million euros, corresponding to 3.9% of sales, against the 437 million euros posted in 2000 (-32.5%). As already noted, the Telecommunications Cables and Systems Sector was to a large extent responsible for the worsening in results, after the crisis affecting the reference market intensified during the second half of the year, and as a result of lower earnings from the contract to supply Cisco Systems (59 million euros compared with 83 million euros in 2000).

The overall extraordinary income and charges shows a negative balance of 16 million euros. This compares with a positive balance of 4,277 million euros in 2000, which was boosted by gains from the sale of Terrestrial Optical Systems to Cisco Systems (1,409 million euros) and the sale of Optical Components to Corning (3,351 million euros). Extraordinary income in 2000 was counterbalanced by charges for restructuring and rationalization of production amounting to 433 million euros. The 2001 financial year principally saw gains from real estate disinvestments by the Cables and Systems Sector (61 million euros), an earn-out of 70 million euros on conclusion of agreements with Cisco Systems, and charges incurred by rationalization drives corresponding to 151 million euros.

The yearly accounts consequently closed with consolidated net income of 86 million euros, against 3,626 million euros in 2000. Contributing factors were the decrease in the balance of extraordinary income/charges (4,293 million euros), lower operating income (142 million euros), an improvement in financial charges (20 million euros) and the lower impact of taxation charges (875 million euros), principally associated with last year's Cisco and Corning transactions.

The parent company share of the result was equal to 82 million euros (equal to 0.04 euros per share), against 3,632 million euros for the preceding year (equal to 1.82 euros per share).

Free cash flow, excluding the investment in Olimpia, was passive to an extent of 152 million euros due to an imbalance of around 300 million euros between investments and write-downs.

Net financial position is passive to an extent of 1,089 million euros, compared to a positive position of 3,495 million euros at year-end 2000. The decrease compared with the preceding year was essentially the result of the investment in Olimpia (3,170 million euros, inclusive of associated charges), payment of taxes already accounted and provided for during the previous year (614 million euros), distribution of profit for the 2000 financial year (287 million euros) and payment of 173 million euros for optimization of production under a plan for which provisions had already been made in the 2000 accounts.

Consolidated shareholders' equity increased from 5,958 million euros at year-end 2000 to 5,660 million euros at year-end 2001.

The net debt/shareholders' equity ratio was equal to 0.19.

The Group's ongoing commitment to research and development was proven by the increase in R& D spending, which rose from 213 million euros to 237 million euros (3.2% of sales against 2.8% in 2000).

Group headcount at year-end 2001 was equal to 39,127, down from the year-end 2000 figure of 41,914.

Group performance in 2001

Investment in the Olivetti-Telecom Italia Group through Olimpia, a company set up ad hoc for this purpose with Edizione Finance International SA, Intesa-Bci and Unicredito, was the most significant event to occur during the year. Olimpia acquired 1,552,662,120 Olivetti ordinary shares and 68,409,125 warrants from Bell SA at a respective unit cost of 4.175 and 1.0875 euros. Compared with this initial value, the average balance sheet value of Olivetti shares currently held in the portfolio (2,524,127,813 shares corresponding to a 28.7% stake) now corresponds to 3.14 euros per share. This would further be reduced to 2.79 euros per share, should the warrants in portfolio be exercised and all the bonds be converted. The significant reduction of the average balance sheet price is therefore a consequence of:
the lower balance sheet value of Olivetti shares acquired directly on the market prior to 27 July 2001
the terms of the agreement reached with Bell majority shareholders on 19 September 2001 for transfer of the Olivetti holding
the covering of the loan from Bell which is repayable in the form Olivetti shares from the Olimpia portfolio;
the exercise of the aforementioned warrants and of pre-emption rights held by Olimpia as part of the Olivetti capital increase last October.

As previously announced, the strong slowdown in the worldwide economy accompanied a sudden drop in demand in the reference market for our Telecommunications Cables and Systems Sector in the second half of 2001. In order to cope with market conditions, appropriate actions have been implemented for rationalizing production and organization, oriented towards achieving flexibility and improving efficiency in all areas of operations. These actions generated extraordinary charges of 151 million euros..

There follows a breakdown of performance by individual business sector:

Cables and Systems
During 2001 company Energy operations were split off from Telecommunications operations in the various national markets in order to improve focus and management efficiency. In consequence, two holding companies - Pirelli Cavi e Sistemi Energia SpA and Pirelli Cavi e Sistemi Telecom SpA - were established after the split of Pirelli Cavi e Sistemi SpA.
To facilitate comparison with the preceding year, and in view of the state of advancement of separation of these two corporate entities during 2001, all results illustrated below continue to refer to the total aggregate of Cables and Systems operations.

Total sales amounted to 4,688 million euros (against 4,591 million euros in 2000), registering growth of 2.1%.

The gross operating result of 357 million euros (against 466 million euros during the preceding year) was equivalent to 7.6% of sales (10.2% in 2000); operating income, at 179 million euros (against 289 million euros during the preceding year), corresponded to 3.8% of sales (6.3% in 2000). These results were held back not just by the previously noted market-wide crisis, but also lower income from the agreement to supply Cisco Systems (59 million euros compared with 83 million euros in 2000), by charges arising from the insolvency of a number of customers, and by higher costs incurred by increased company size in the wake of acquisitions undertaken in recent years.

The net result was equal to 76 million euros, against 1,780 million euros during the preceding year, which included gains from the sale of Terrestrial Optical Systems (1,409 million euros) and Optical Components (1,081 million euros), alongside 233 million euros in charges for restructuring.

At 31 December 2001 employees were 18,314 (against 20,496 at year-end 2000).

Below are highlights broken down by specific sector of operations:

Terrestrial Telecommunications Cables and Systems
As observed earlier, the 2001 financial year was characterized in the first half by growing demand, which was followed by a dramatic turnaround in the second half of the year that subsequently spread to all markets.

Sales of telecommunications cables and systems amounted to 1,230 million euros, compared with 1,376 million euros in 2000 (-10.6%), after the dramatic drop-off in demand during the second half of the year.

The operating result was equal to 76 million euros, against 154 million last year, accounting for a 6.2% ratio of sales.

Any potential recovery of the market in 2002 is expected no earlier than the second half of the year. In any event, as a result of planned and implemented restructuring actions and the contribution of ongoing new product development, Pirelli is well-placed and well-equipped to further consolidate its position on the world market.

Despite the drastic reduction in investment by our customers in Submarine Telecommunications Cables and Systems, we have continued to pursue our research and development programmes with the objective of being ready to seize opportunities as they arise when the market recovers. This includes the agreement with Siemens Information and Communications Networks (ICN), signed last May, which aims at jointly developing optical long-distance telecommunications transmission systems. Also of note was the acquisition last December of the Sumatra Backbone contract, whereby Pirelli Submarine Telecom Systems Italia SpA is to supply a turnkey 40 Gigabit per second submarine link as part of the Pirelli - Siemens Consortium, which is contracted to build an extremely high performance submarine and terrestrial fibre optic backbone for the island of Sumatra.

Energy Cables and Systems
Turnover grew significantly year-on-year, notwithstanding the market slowdown registered during the last quarter of the year.
Sales posted 11.7% growth, rising from 3,162 million euros in 2000 to 3,532 million euros, principally as a result of turnover arising from the acquisition of operations formerly belonging to BICC and NKF, which contributed earnings throughout the year. By individual market, Europe and South America posted higher turnover, while turnover was down in North America as a result of unfavourable economic conditions. Restructuring activities were concentrated in the United Kingdom, Italy (former BICC interests) and Germany.

The operating result amounted to 52 million euros (1.5% of sales), against 58 million euros last year.

Tyres
At 2,831 million euros, sales recorded a fall of 1.7% compared with 2000 (2,880 million euros), despite volume holding steady (+0.5%) and the price/mix improving (+1.8%); these factors proved insufficient to compensate for the negative repercussions of exchange rates (-4%).

The gross operating result of 347 million euros (against 370 million euros during the preceding year) corresponded to 12.3% of sales (12.8% in 2000), while operating income was equal to 172 million euros (6.1% of sales), compared with 180 million euros in 2000 (6.3% of sales). The positive impact of volume and mix, backed up by cost reduction drives, failed to offset the negative variable of exchange rates, the erosion of price/raw material costs, and higher labour costs.

The net result amounted to 34 million euros (against a loss of 172 million euros in 2000), after extraordinary income/charges passive to an extent of 27 million euros (-224 million euros in 2000), and financing charges which remained at the same level as last year.

Investments in capital assets increased by approximately 21% to 262 million euros (9.3% of sales), an improvement on the figure of 216 million recorded in 2000. round 63% of investments are situated in European factories and 24% in South America. Projects are oriented towards innovative production processes, expansion of production capacity for flagship products, and the rollout of new products. In particular, vehicle tyre industry production capacity is being increased for high performance tyres employing MIRS (Modular Integrated Robotized System) technology in Italy (Milan - Bicocca), Germany and England, while construction has begun on the first MIRS factory in the US (Georgia). In South America and Europe the conversion of production capacity to high performance products continues, alongside a general upgrading of installed traditional technological processes.

Research and development activities
R& D is carried out through an integrated network of research centres and development and engineering units in different countries, funded to the sum of 237 million euros, of which 112 million euros (2.4% of sales) for the Cables and Systems Sector and 125 million euros for the Tyres Sector.The latter shows an increase of around 11% on the preceding year to correspond to 4.4% of turnover; this spending generated successful homologation with major car manufacturers, new high performance products and implementation of the MIRS process.
Pirelli Labs, the Group's brand new research lab for basic and advanced research, was established in 2001 and it's directly linked to a number of agreements and consortia with major private and university research centres in Italy and worldwide. Pirelli Labs is divided into:
Pirelli Labs Optical Innovation, which concentrates on research into photonics and development of optical devices employing nanotechnology, in addition to industrialization of next generation extremely high performance fibre optics capable of transmitting up to 10 Terabits per second over distances far in excess of current standards.
Pirelli Labs Materials Innovation, which focuses on development of compounding processes associated with MIRS (on behalf of the Tyres Unit) and research into new coatings for optical fibres (on behalf of the Telecom Cables and Systems Unit). For the Energy industry, research into new superconducting materials constitutes the main arena of study, while more long-term research projects are underway in the field of distributed energy generation, particularly fuel cells and photovoltaic systems.
Prospects for 2002

For the Group as a whole, economic expectations for the current year lead us to believe that there may well be a recovery starting in the second half of the year. Early performance this year signalled signs of a recovery in the Telecommunications Cables and Systems Sector compared with late 2001. Other operations have continued to confirm current trends; high voltage and submarine investments by the main energy utilities continue to suffer delays.
While underlining the uncertainty that prevails on the markets, conditions lead us to believe that the operating result for 2002 should substantially match 2001 levels, boosted by the rationalization drives that have been applied to production and company organization over the last two years, which have been accelerated during the last six months.Parent company accounts

The accounts of Parent company Pirelli SpA for the 2001 financial year closed with net income of 1,489 million euros, compared with 1,733 million euros in 2000. This result continues to benefit from dividends arising from the disposal of Optical Components to Corning.

The Board of Directors shall recommend to the Shareholders' Meeting, convened for 8 May on first call and 9 May on second call, the distribution of a dividend of 0.08 euros per ordinary share and 0.0904 euros per savings share. The dividend no longer includes the extraordinary components paid out in 2000 (0.155 euros per ordinary share and 0.1654 euros per savings share), as a result of the exceptional nature of the capital gains posted, and remains at the levels paid out in the late nineteen nineties. Dividend pay out is scheduled from 23 May 2002.

Chairman Marco Tronchetti Provera commented: " Two thousand and one was a year of enormous change against a recessionary macroeconomic background. On one hand, we made our strategic decision to invest in Olivetti-Telecom Italia, one of Europe's leading telecommunications companies; on the other hand, there was a worldwide economic slowdown which was particularly strongly felt in one of our important reference markets, notably cables and systems for telecommunications. The year's results bear out these contrasting phenomena.

" We will be presenting the Group business plan in May. We are highly focused on creating value in our traditional and recently acquired core businesses. Our priorities are to focus on strategic activities, achieve efficiency gains, and unceasingly strengthen the Group's financial structure. Against a less unfavourable macroeconomic backdrop, these actions will enable the Group to fully express its value and to meet the expectations of its shareholders and all its stakeholders."

In Appendix are statement of income and balance sheet highlights. These accounts have not yet been certified by the external auditors nor verified by the Board of Auditors.

--- Appendix 1 -Pirelli Group SpA consolidated financial statement highlights
--- Appendix 2 -Pirelli SpA Cables and Systems and Tyres consolidated financial statement data
--- Appendix 3 -Pro-forma consolidated illustration of statements of income and balance sheets assuming the full consolidation of Olimpia SpA and valuation of the holding in Olivetti SpA on a shareholders' equity method basis
--- Appendix 4 -Pirelli SpA Parent Company accounts highlights