REPORT ON OPERATIONS

Dear Shareholders,

In 2010 the CIR Group reported consolidated net income of € 56.9 million compared to € 143.4 million in 2009. The year benefited from the results of the prompt action taken to counter the effects of the crisis which resulted in an improvement in the profitability of the operating groups. In a comparison with the previous year it should be noted that last year’s net income figure included non-recurring and capital gains of a total of € 106.7 million from the subscription of a capital increase in Sorgenia by Verbund and from the partial disinvestment of shares in hedge funds.

The contribution of the operating companies rose from € 32.7 to € 64.9 million, thanks above all to the significant rise in the net result of the Espresso and Sogefi groups, which managed to counter the crises in their respective business sectors with a series of efficiency enhancing and business development actions undertaken over the last two years.  

The result of CIR and its financial holding companies substantially broke even after posting net income of € 4 million in 2009.

Despite the continuing difficult economic situation, in 2010 the CIR Group posted an important increase in its revenues and margins thanks to the improved performance of all the main operating subsidiaries. Consolidated sales revenues came in at € 4,805.5 million, up from € 4,266.8 million in the previous year (+12.6%) while EBITDA came to € 400.1 million and was up by 35.8% from € 294.6 million in 2009.

The CIR group today includes five business sectors: utilities (electricity and gas), media (publishing, radio, television), automotive components (filters and suspension components), healthcare (care homes, rehabilitation centres, hi-tech services) and financial investments (venture capital, private equity and financial services).

In the utilities sector with a market scenario still strongly affected by the difficult economic situation, the Sorgenia group reported revenues of € 2,668.5 million, posting a rise of 14.7% from the figure of € 2,325.8 million in 2009, EBITDA of € 151.1 million (+28.2% from € 117.8 million in 2009) and net income of € 50.4 million, down from € 66.9 million in the previous year due to higher financial expense resulting from the higher average level of debt in the period. In both years earnings benefited from tax credits on important investments made in greater production capacity. During the year the group continued to roll out its business plan, with investments in new production capacity both from conventional sources and from renewables. On February 28 2011 the company presented its Business Plan 2011-2016 to the financial community.

In the media sector, although the publishing sector is still in a critical situation, the Espresso group reported revenues of € 885 million, in line with the previous year, thanks to a rise in advertising revenues. The gross operating margin (EBITDA) was € 147.2 million, up by 38% partly because of the drastic cost cutting resulting from the reorganization programs. Net income came in at € 50.1 million, up from € 5.8 million in the previous year.

In 2010, its thirtieth year of business, the Sogefi group achieved a significant improvement in all its main management indicators with a return to profit, which came in at € 18.8 million after a net loss of € 7.6 million in 2009. After a difficult 2009 because of the crisis in the car sector, the group returned to growth in all of its markets, especially in the emerging countries, and in all its market segments. Revenues totalled € 924.7 million (+18.4% from € 781 million in 2009) and EBITDA came in at 86.7 million, rising by 83.6% from € 47.2 million in the previous year. Despite the group’s higher volumes of activity, its net financial debt declined from € 170.2 million at December 31 2009 to € 164.9 million at December 31 2010.

The KOS group continued to strengthen its operating businesses in order to consolidate its position in the private healthcare market in Italy. In the year the group reported consolidated revenues of € 325.4 million (+19%) compared to 2009 (€ 273.4 million), thanks to the development of all areas of the business and to the new acquisitions made during the year. The gross operating margin (EBITDA) was € 42.1 million, up by 27.5% from € 33 million in 2009 and net income was € 4 million versus a position of substantial breakeven in 2009.  

In the financial services sector the company Jupiter Finance operates in non-performing loans. At December 31 2010 the nominal value of its portfolio of loans under management totalled approximately € 2.3 billion, of which some 60% acquired through securitization vehicles and the remaining 40% managed on behalf of other investors.

With a deed notified on October 23 2009, Fininvest S.p.A. appealed against ruling no. 11786 of October 3 2009 of the Milan Law Court which sentenced Fininvest S.p.A. to pay CIR patrimonial damages for the sum of € 749,955,611.93 plus interest at the legal interest rate on the above sum from the date of the ruling until payment is made. With this ruling, the Court also sentenced Fininvest to pay compensation for the non-patrimonial damage suffered by CIR, postponing settlement of this until a later verdict; lastly it sentenced Fininvest to reimburse CIR’s legal costs including € 981.80 of advances, € 6,394.86 of expenses, € 16,148.00 of taxes and € 2,000,000.00 of legal fees plus general expenses of 12.50% of the duties and fees plus IVA and CPA as per the terms of the law.

At the hearing of 22.12.2009 fixed by the Court of Appeal for the discussion of Fininvest’s request of a suspension of the executive efficacy of the above mentioned verdict, Fininvest gave CIR a bank guarantee at the first request for the sum of € 806 million. On receipt of this, CIR said that it would not have the first degree ruling executed until the Court of Appeal has published its verdict.

On 3.2.2010, CIR filed an appearance in the Court of Appeal, requesting the rejection of the impugnment proposed by Fininvest. It also proposed an incidental appeal against certain clauses of the first degree verdict and petitioned that Fininvest be sentenced to pay the compensation for patrimonial damage, quantified in the sum of € 342.259.187,26, plus revaluation and interest as from 24.1.1991. During the proceedings the Court ordered an official technical opinion, which was filed on September 23 2010. On November 23 2010 there was a hearing to give the conclusions and subsequently the parties filed their respective final defences. On March 4 2011 a hearing was held for the oral discussion before the Court of Appeal after which the case was kept on hold awaiting a decision.

The charts on the following pages show a breakdown by business sector of the economic and financial results of the Group, a breakdown of the contribution of the main subsidiaries and the aggregate results of the CIR holding and its financial holding company subsidiaries (CIR International, CIGA Luxembourg , CIR Investment Affiliate and Dry Products).