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\

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
(g) OF THE SECURITIES EXCHANGE ACT OF 1934 or
 x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    1-11854   NATUZZI S.p.A.
 NATUZZI S.p.A.
(Translation of Registrants name into English)Italy
(Jurisdiction of incorporation or organization)Via Iazzitiello 47, 70029 Santeramo, Italy
(Address of principal executive offices)    Name of each class
    
    Name of each exchange
on which registeredAmerican Depositary Shares
Ordinary Shares with a par value of
 1 each
    
    New York Stock Exchange
New York Stock Exchange*
 Securities registered or to be registered pursuant to Section 12(g) of the
Act: None Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None Outstanding shares of each of the issuers classes of capital or common
stock as of December 31, 2003: 54,681,628 Ordinary Shares Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x
    
    No o
 Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 o
    
    Item 18 x
  *
    
    Not for trading, but only in connection with the registration of the American
Depositary Shares




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##### Table of Contents



TABLE OF CONTENTS Part IItem 1. Identity of Directors, Senior Management and Advisers
    
    
    2Item 2. Offer Statistics and Expected Timetable
    
    
    2Item 3. Key Information
    
    
    2Selected Financial Data
    
    
    2Exchange Rates
    
    
    4Risk Factors
    
    
    4Forward Looking Information
    
    
    7Item 4. Information on the Company
    
    
    8Introduction
    
    
    8Organizational Structure
    
    
    9Strategy
    
    
    9Manufacturing
    
    
    11Products and Design
    
    
    15Markets
    
    
    15Incentive Programs and Tax Benefits
    
    
    18Management of Exchange Rate Risk
    
    
    19Trademarks and Patents
    
    
    19Non-United States Regulation
    
    
    19Environmental Regulatory Compliance
    
    
    20Insurance
    
    
    20Description of Properties
    
    
    20Capital Expenditures
    
    
    21Item 5. Operating and Financial Review and Prospects
    
    
    22Critical Accounting Policies
    
    
    22Results of Operations
    
    
    23Liquidity and Capital Resources
    
    
    29Contractual Obligations and Commercial Commitments
    
    
    30Related Party Transactions
    
    
    31Research and Development
    
    
    31New Accounting Standards under Italian and U.S. GAAP
    
    
    31Item 6. Directors, Senior Management and Employees
    
    
    34Compensation of Directors and Officers
    
    
    40Share Ownership
    
    
    40
 i




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Statutory Auditors
    
    
    41External Auditors
    
    
    41Employees
    
    
    41Item 7. Major Shareholders and Related Party Transactions
    
    
    43Major Shareholders
    
    
    43Related Party Transactions
    
    
    43Item 8. Financial Information
    
    
    44Consolidated Financial Statements
    
    
    44Export Sales
    
    
    44Legal Proceedings
    
    
    44Dividends
    
    
    44Item 9. The Offer and Listing
    
    
    46Trading Markets and Share Prices
    
    
    46Item 10. Additional Information
    
    
    47By-laws
    
    
    47Certain Contracts
    
    
    56Exchange Controls
    
    
    56Taxation
    
    
    57Documents on Display
    
    
    61Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    61Item 12. Description of Securities Other than Equity Securities
    
    
    64Part IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    64Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    64Item 15. Controls and Procedures
    
    
    64Item 16. [Reserved]
    
    
    64Item 16A. Audit committee financial expert
    
    
    64Item 16B. Code of Ethics
    
    
    64Item 16C. Principal Accountant Fees and Services
    
    
    65Part IIIItem 17. Financial Statements
    
    
    65Item 18. Financial Statements
    
    
    65Item 19. Exhibits
    
    
    67BY-LAWSLIST OF SIGNIFICANT SUBSIDIARIESCERTIFICATIONCERTIFICATIONCERTIFICATIONS
  ii




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PRESENTATION OF FINANCIAL AND OTHER INFORMATION Beginning for the fiscal year ended December 31, 2002, Natuzzi S.p.A.
(Natuzzi or the Company) published its audited consolidated financial
statements (the Consolidated Financial Statements) in euro, the single
currency established for certain members of the European Union (including
Italy) upon the commencement of the third stage of the European Monetary Union
(the EMU) on January 1, 1999. For fiscal years ending before December 31,
2002, the Company published its audited consolidated financial statements in
Italian lire, which was legal tender in Italy prior to March 1, 2002. All
amounts in the Consolidated Financial Statements for each period prior to
January 1, 2002 have been restated into euro amounts using the official
lira-euro exchange rate as of January 1, 1999 (euro 1 is equal to lire
1,936.27). In this annual report, references to  or euro are to the euro;
references to lira, lire or Lit. are to the Italian lira (singular) or to
the Italian lire (plural); and references to U.S. dollars, dollars, U.S.$
or $ are to United States dollars. Amounts stated in U.S. dollars, unless otherwise indicated, have been
translated from the euro amount by converting the euro amounts into U.S.
dollars at the noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New
York (the Noon Buying Rate) for euro on December 31, 2003 of U.S.$ 1.2597 per
euro. These foreign currency conversions in this annual report should not be
taken as representations that the foreign currency amounts actually represent
the equivalent U.S. dollar amounts or could be converted into U.S. dollars at
the rates indicated. The Consolidated Financial Statements included in Item 18 of this annual
report are prepared in conformity with accounting principles established by,
and (in the absence of such established principles) accounting principles of
the International Accounting Standards Committee adopted by, the Italian
accounting profession (Italian GAAP). These principles vary in certain
significant respects from generally accepted accounting principles in the
United States (U.S. GAAP). See Note 26 to the Consolidated Financial
Statements included in Item 18 of this annual report. On June 7, 2002 the Company changed its name from Industrie Natuzzi S.p.A.
to Natuzzi S.p.A. 1




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PART I 
 Item 1. Identity of Directors, Senior Management and Advisers Not applicable. 
 Item 2. Offer Statistics and Expected Timetable Not applicable. 
 Item 3. Key Information 
 Selected Financial Data The following table sets forth selected consolidated financial data for
the periods indicated and is qualified by reference to, and should be read in
conjunction with, the Companys Consolidated Financial Statements and the notes
thereto included in Item 18 of this annual report and the Operating and
Financial Review and Prospects included in Item 5 of this annual report. The
income statement and balance sheet data presented below have been derived from
the Companys Consolidated Financial Statements. The Company, together with its
subsidiaries (collectively, the Group), is primarily engaged in the design,
manufacture and marketing of contemporary and traditional leather- and
fabric-upholstered furniture, principally sofas, loveseats, armchairs,
sectional furniture, motion furniture and sofa beds, and living room
accessories. The Consolidated Financial Statements from which the selected consolidated
financial data set forth below has been derived were prepared in accordance
with Italian GAAP, which differs in certain respects from U.S. GAAP. For a
discussion of the principal differences between Italian GAAP and U.S. GAAP as
they relate to the Companys consolidated net earnings and shareholders
equity, see Note 26 to the Consolidated Financial Statements included in Item
18 of this annual report. 2




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Year Ended December 31,2003
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999(millions of
    
    (millions of euro, except per Ordinary Share and ADS amounts)(1)dollars, exceptper OrdinaryShare and ADSamounts)(2)Income Statement Data:Amounts in accordance with Italian GAAP :Net sales:Leather- and fabric-upholstered
furniture
    
    $
    849.0
    
    
    
    674.0
    
    
    
    734.7
    
    
    
    714.0
    
    
    
    629.3
    
    
    
    524.1Other(3)
    
    
    120.4
    
    
    
    95.6
    
    
    
    70.4
    
    
    
    72.1
    
    
    
    59.2
    
    
    
    39.7969.4
    
    
    
    769.6
    
    
    
    805.1
    
    
    
    786.1
    
    
    
    688.5
    
    
    
    563.8Cost of sales
    
    
    (640.9
    )
    
    
    (508.8
    )
    
    
    (517.4
    )
    
    
    (520.1
    )
    
    
    (426.3
    )
    
    
    (336.5
    )Gross profit
    
    
    328.5
    
    
    
    260.8
    
    
    
    287.7
    
    
    
    266.0
    
    
    
    262.2
    
    
    
    227.3Selling expenses
    
    
    (225.9
    )
    
    
    (179.3
    )
    
    
    (145.4
    )
    
    
    (134.8
    )
    
    
    (109.0
    )
    
    
    (85.0
    )General and administrative expenses
    
    
    (49.4
    )
    
    
    (39.2
    )
    
    
    (40.5
    )
    
    
    (33.5
    )
    
    
    (26.7
    )
    
    
    (22.6
    )Operating income
    
    
    53.2
    
    
    
    42.3
    
    
    
    101.8
    
    
    
    97.7
    
    
    
    126.5
    
    
    
    119.7Other income (expense), net(4)
    
    
    4.7
    
    
    
    3.7
    
    
    
    14.5
    
    
    
    (0.2
    )
    
    
    (21.8
    )
    
    
    (16.8
    )Earnings before taxes and minority
interests
    
    
    57.9
    
    
    
    46.0
    
    
    
    116.3
    
    
    
    97.5
    
    
    
    104.7
    
    
    
    102.9Income taxes
    
    
    (10.7
    )
    
    
    (8.5
    )
    
    
    (25.0
    )
    
    
    (21.9
    )
    
    
    (25.5
    )
    
    
    (20.3
    )Earnings before minority interests
    
    
    47.2
    
    
    
    37.5
    
    
    
    91.3
    
    
    
    75.6
    
    
    
    79.2
    
    
    
    82.6Minority interests
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Net earnings
    
    
    47.0
    
    
    
    37.3
    
    
    
    91.4
    
    
    
    75.6
    
    
    
    79.2
    
    
    
    82.4Net earnings per Ordinary Share and
ADS
    
    
    0.86
    
    
    
    0.68
    
    
    
    1.67
    
    
    
    1.37
    
    
    
    1.39
    
    
    
    1.43Amounts in accordance with
U.S. GAAP :Net earnings
    
    
    47.9
    
    
    
    38.0
    
    
    
    92.0
    
    
    
    71.1
    
    
    
    81.7
    
    
    
    79.4Net earnings per Ordinary Share (basic and
diluted)
    
    $
    0.88
    
    
    
    0.70
    
    
    
    1.68
    
    
    
    1.29
    
    
    
    1.43
    
    
    
    1.38Cash dividend per Ordinary Share
    
    $
    0.17
    
    
    
    0.14
    
    
    
    0.33
    
    
    
    0.29
    
    
    
    0.29
    
    
    
    1.64Weighted average number of Ordinary Shares Outstanding
    
    
    54,681,628
    
    
    
    54,681,628
    
    
    
    54,681,628
    
    
    
    55,027,496
    
    
    
    57,087,391
    
    
    
    57,468,888Balance Sheet Data (as at December 31) :Amounts in accordance with Italian GAAP :Current assets
    
    $
    482.6
    
    
    
    383.1
    
    
    
    402.6
    
    
    
    491.9
    
    
    
    354.2
    
    
    
    377.3Non-current assets
    
    
    389.6
    
    
    
    309.3
    
    
    
    271.9
    
    
    
    224.9
    
    
    
    151.7
    
    
    
    106.8Total assets
    
    
    872.2
    
    
    
    692.4
    
    
    
    674.5
    
    
    
    716.8
    
    
    
    505.9
    
    
    
    484.1Current liabilities
    
    
    157.7
    
    
    
    125.2
    
    
    
    128.7
    
    
    
    252.5
    
    
    
    114.0
    
    
    
    83.3Long-term debt
    
    
    5.3
    
    
    
    4.2
    
    
    
    3.6
    
    
    
    3.3
    
    
    
    0.2
    
    
    
    0.6Minority interest
    
    
    1.1
    
    
    
    0.9
    
    
    
    0.5
    
    
    
    1.5
    
    
    
    0.8
    
    
    
    0.8Shareholders equity
    
    
    648.9
    
    
    
    515.1
    
    
    
    495.8
    
    
    
    428.5
    
    
    
    366.5
    
    
    
    378.1Amounts in accordance with
U.S. GAAP :Shareholders equity
    
    $
    569.8
    
    
    
    452.3
    
    
    
    432.3
    
    
    
    364.4
    
    
    
    321.9
    
    
    
    354.7
   (1)
    
    The Companys consolidated financial statements for the fiscal years
ending before December 31, 2002 have been restated from lire to euro using
the exchange rate of Lit. 1,936.27 per euro established in connection with
the commencement of the third stage of the EMU. The Companys
consolidated financial statements reported in euro depict the same trends
as would have been presented if the Company had continued to present its
financial statements in lire.(2)
    
    Amounts are translated into U.S. dollars by converting the euro amounts
into U.S. dollars at the Noon Buying Rate for euro on December 31, 2003 of
U.S.$ 1.2597 per euro.(3)
    
    Sales included under Other principally consist of sales of polyurethane
foam and leather to third parties.(4)
    
    Other income (expense), net is principally affected by gains and
losses, as well as interest income and expenses, resulting from measures
adopted by the Company in an effort to reduce its exposure to exchange
rate risks. See Item 5, Operating and Financial Review and Prospects 
Results of Operations  2003 Compared to 2002, Item 11, Quantitative
and Qualitative Disclosures about Market Risk and Notes 3, 23 and 24 to
the Consolidated Financial Statements included in Item 18 of this annual
report. 3




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Exchange Rates Fluctuations in the exchange rates between the euro and the U.S. dollar
will affect the U.S. dollar amounts received by owners of American Depositary
Shares (ADSs) on conversion by the Depositary (as defined below) of dividends
paid in euro on the Ordinary Shares represented by the ADSs. In addition, most of the Groups costs are denominated in euro, while a
substantial portion of its revenues is denominated in currencies other than the
euro, including the U.S. dollar in particular. Accordingly, in order to protect
the euro value of its foreign currency revenues, the Group engages in
transactions designed to reduce its exposure to fluctuations in the exchange
rate between the euro and such foreign currencies. See Item 5, Operating and
Financial Review and Prospects  Results of Operations  2003 Compared to
2002 and Item 11, Quantitative and Qualitative Disclosures about Market
Risk. The following table sets forth the Noon Buying Rate for the euro expressed
in U.S. dollars per euro. Year:
    
    Average(1)
    
    At Period End1999
    
    
    1.0588
    
    
    
    1.00702000
    
    
    0.9207
    
    
    
    0.93882001
    
    
    0.8909
    
    
    
    0.89012002
    
    
    0.9495
    
    
    
    1.04852003
    
    
    1.1411
    
    
    
    1.2597
 Month ending:
    
    High
    
    LowDecember 31, 2003
    
    
    1.2597
    
    
    
    1.1956January 31, 2004.
    
    
    1.2853
    
    
    
    1.2389February 28, 2004
    
    
    1.2848
    
    
    
    1.2426March 31, 2004
    
    
    1.2431
    
    
    
    1.2088April 30, 2004
    
    
    1.2358
    
    
    
    1.1802May 31, 2004
    
    
    1.2274
    
    
    
    1.1801
   (1)
    
    The average of the Noon Buying Rates for the relevant period, calculated
using the average of the Noon Buying Rates on the last business day of
each month during the period. The effective Noon Buying Rate on June 25, 2004 was $U.S. 1.2145 per 
1.00. 
 Risk Factors Investing in the Companys ADSs involves certain risks. You should
carefully consider each of the following risks and all of the information
included in this annual report. Demand for furniture is cyclical and may fall in the future Historically, the furniture industry has been cyclical, fluctuating with
economic cycles, and sensitive to general economic conditions, housing starts,
interest rate levels, credit availability and other factors that affect
consumer spending habits. Due to the discretionary nature of most furniture
purchases 4




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and the fact that they often represent a significant expenditure to the
average consumer, such purchases may be deferred during times of economic
uncertainty. In 2003, the Group derived 47.5 % of its leather- and fabric-upholstered
furniture net sales from the United States and the Americas, and 46.5% from
Europe. A prolonged economic slowdown in the United States and Europe may have
a material adverse effect on the Groups results of operations. The Group operates principally in a niche area of the furniture market The Group is a leader in the production of leather-upholstered furniture,
with 81.6% of 2003 net sales being derived from the sale of leather-upholstered
furniture. That represents a limited, but growing, portion of the market for
upholstered furniture. Consumers have the choice of purchasing upholstered
furniture in a wide variety of styles, and consumer preference may change.
There can be no assurance that the current market for leather-upholstered
furniture will not decrease. The furniture market is highly competitive The furniture industry is highly competitive and includes a large number
of manufacturers. Competition has increased significantly over the past few
years as companies manufacturing in low-cost countries have begun to play an
important role in the upholstery industry. No single company has a dominant
position in the industry. Competition is generally based on product quality,
brand name recognition, price and service. The Groups principal competitors are other manufacturers of upholstered
furniture. In the United States, the Group competes with a number of relatively
large companies, some of which (particularly certain of those manufacturing
fabric-upholstered furniture as one of a number of diversified operations) are
larger than the Group. The upholstered furniture market in Europe is highly
fragmented. Some of the Groups competitors have attempted to increase market share at
the expense of the Group by copying the Groups products and selling such
products at lower prices than the Group. Management believes that such
attempts to produce copies of the Groups products that are comparable in
design have had success in the past and may continue to have success in the
future. The Group has instituted legal proceedings to defend its competitive
position, even though such initiatives require time and resources to be
effective. No assurance can be given that the Group will be able to maintain
its competitive position. The Groups results are subject to exchange rate risks and other risks related
to the Groups international operations The Group is subject to currency exchange rate risk in the ordinary course
of its business to the extent that its costs are denominated in currencies
other than those in which it earns revenues. Exchange rate fluctuations also
affect the Groups operating results because it recognizes revenues and costs
in currencies other than euro but publishes its financial statements in euro.
The Groups sales and results may be materially affected by exchange rate
fluctuations. For more information, see Item 11, Quantitative and Qualitative
Disclosures about Market Risk. The Group faces other risks relating to its international operations,
including changes in governmental regulations, tariffs or taxes and other trade
barriers, price, wage and exchange controls, political, social and economic
stability, inflation and interest rate fluctuations. 5




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The price of the Groups principal raw material is difficult to predict Leather is used in approximately 75% of the Groups upholstered furniture,
and the acquisition of cattle hides represents approximately 35% of total cost
of goods sold. The raw hides markets dynamics are dependent on the
consumption of beef, the levels of worldwide slaughtering, worldwide weather
conditions and on different sectors levels of demand: shoe manufacturers,
leather automotive, furniture and clothing. The Groups ability to increase
product prices following increases in raw material costs is limited by market
forces, and therefore the Group may not be able to maintain its margins during
periods of significant increases in raw material costs. The Groups past results and operations have significantly benefited from
government incentive programs which may not be available in the future Historically, the Group has derived significant benefits from the Italian
Governments investment incentive programs for under-industrialized regions in
Southern Italy, including tax benefits, subsidized loans and capital grants.
See Item 4, Information on the Company   Incentive Programs and Tax
Benefits. The Italian Parliament has replaced these incentive programs for
under-industrialized regions in Southern Italy with a new investment incentive
program for all under-industrialized regions in Italy, which is currently being
implemented through grants and research and development benefits. The Italian
Parliament has also approved a tax credit for companies investing in
under-industrialized regions in Italy. There can be no assurance that the
Group will receive these grants, benefits or tax credits for any of its current
or future investments in Italy. In recent years, the Group has opened manufacturing operations in China,
Brazil and Romania that have been granted with tax benefits and export
incentives. There can be no assurance that these tax benefits and export
incentives will continue to be available to the Group in the future. The Group is dependent on qualified personnel The Groups ability to maintain its competitive position will depend to some
degree upon its ability to continue to attract and maintain highly qualified
managerial, manufacturing and sales and marketing personnel. There can be no
assurance that the Group will be able to continue to recruit and retain such
personnel. In particular, the Group has been dependent on certain key
management personnel in the past, and there can be no assurance that the loss
of key personnel would not have a material adverse effect on the Groups
results of operations. Control of the Company Mr. Pasquale Natuzzi, who founded the Company and is currently Chairman of
the Board of Directors and Chief Executive Officer, owns 47.7% of the issued
and outstanding Ordinary Shares of the Company (52.8% of the Ordinary Shares if
the Ordinary Shares owned by members of Mr. Natuzzis immediate family (the
Natuzzi Family) are aggregated) and controls the Company, including its
management and the selection of its Board of Directors. As of December 16,
2003, Mr. Natuzzi holds his entire beneficial ownership of Natuzzi S.p.A.
shares (other than 196 ADSs) through INVEST 2003 S.r.l., an Italian holding
company (having its registered office at Via Gobetti 8, Taranto, Italy)
wholly-owned by Mr. Natuzzi. In addition, the Natuzzi Family has a right of first refusal to purchase
all the rights, warrants or other instruments which The Bank of New York, as
Depositary under the Deposit Agreement dated as of May 15, 1993, as amended and
restated as of December 31, 2001 (the Deposit Agreement), among the Company,
The Bank of New York, as Depositary (the Depositary), and owners and
beneficial owners of American Depositary Receipts (ADRs), determines may not
lawfully or feasibly be made available to owners of ADSs in connection with
each rights offering, if any, made to holders of Ordinary Shares. 6




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Investors may face difficulties in protecting their rights as shareholders or
holders of ADSs The Company is incorporated under the laws of the Republic of Italy. As a
result, the rights and obligations of its shareholders and certain rights and
obligations of holders of its ADSs are governed by Italian law and the
Companys Statuto(or By-laws). These rights and obligations are different from
those that apply to U.S. corporations. Furthermore, under Italian law, holders
of ADSs have no right to vote the shares underlying their ADSs, although under
the Deposit Agreement, ADS holders have the right to give instructions to The
Bank of New York, the ADS depositary, as to how they wish such shares to be
voted. For these reasons, the Companys ADS holders may find it more difficult
to protect their interests against actions of the Companys management, board
of directors or shareholders than they would as shareholders of a corporation
incorporated in the United States. 
 Forward Looking Information Natuzzi makes forward-looking statements in this annual report. Statements
that are not historical facts, including statements about the Groups beliefs
and expectations, are forward-looking statements. Words such as believe,
expect, intend, plan and anticipate and similar expressions are
intended to identify forward-looking statements but are not exclusive means of
identifying such statements. These statements are based on current plans,
estimates and projections, and therefore readers should not place undue
reliance on them. Forward-looking statements speak only as of the dates they
were made, and the Company undertakes no obligation to update or revise any of
them, whether as a result of new information, future events or otherwise. Forward-looking statements involve inherent risks and uncertainties. The
Company cautions readers that a number of important factors could cause actual
results to differ materially from those contained in any forward-looking
statement. Such factors include, but are not limited to: effects on the Group
from competition with other furniture producers, material changes in consumer
demand or preferences, significant economic developments in the Groups primary
markets, significant changes in labor, material and other costs affecting the
construction of new plants, significant changes in the costs of principal raw
materials, significant exchange rate movements or changes in the Groups legal
and regulatory environment, including developments related to the Italian
Governments investment incentive or similar programs. Natuzzi cautions readers
that the foregoing lists of important factors are not exhaustive. When relying
on forward-looking statements to make decisions with respect to the Company,
investors and others should carefully consider the foregoing factors and other
uncertainties and events. 7




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Item 4. Information on the Company 
 Introduction The Group is primarily engaged in the design, manufacture and marketing of
contemporary and traditional leather- and fabric-upholstered furniture,
principally sofas, loveseats, armchairs, sectional furniture, motion furniture
and sofa beds, and living room accessories. The Group has positioned its
products principally in the medium price range and emphasizes value, quality,
style, variety and service. The Group is the worlds leader in the production of leather-upholstered
furniture and has a leading share of the market for leather-upholstered
furniture in the United States and Europe (as reported by CSIL (CSIL), an
Italian market research firm, with reference to market information related to
the year 2002). In 2000, the Company launched Italsofa, a new promotional
brand aimed at the low end of the upholstery market, while in January 2002, the
Company introduced the new logo for the Natuzzi brand, which is aimed at
identifying the Companys medium to high end of the market products. The Group
currently designs 100% of its products and manufactures  directly or through
third parties  approximately 70% of its products in Italy. Production outside
of Italy is solely for the Italsofa brand. Within Italy, the Group sells its
furniture principally through franchised Divani & Divani by Natuzzi furniture
stores. As at March 31, 2004, 137 Divani & Divani by Natuzzi stores were
located in Italy. Outside of Italy, the Group sells its furniture principally
on a wholesale basis to major retailers and also through 75 stores named
Natuzzi Store and 29 Divani & Divani by Natuzzi stores. The Group also sells
furniture through 13 Kingdom of Leather stores, which it purchased in 2003. On June 7, 2002 the Company changed its name from Industrie Natuzzi S.p.A.
to Natuzzi S.p.A. The Company, which operates under the trademark Natuzzi, is
a società per azioni(stock company) organized under the laws of the Republic
of Italy and was established in 1959 by Mr. Pasquale Natuzzi, who is currently
Chairman of the Board of Directors, Chief Executive Officer and controlling
shareholder of the Company. Substantially all of the Companys operations are
carried out through various subsidiaries that individually conduct a
specialized activity, such as leather processing, foam production and shaping,
furniture manufacturing, marketing or administration. In an effort to maximize the efficiency of the Groups organizational
structure, at an extraordinary general meeting on November 21, 2003, the
Companys shareholders approved the merger of Style & Comfort S.r.l into the
Company (the Company owned 100% of the capital stock of Style & Comfort S.r.l.
prior to the merger). The merger became effective on January 1, 2004. The Companys principal executive offices are located at Via Iazzitiello
47, 70029 Santeramo, Italy, which is approximately 25 miles from Bari, in
Southern Italy. The Companys telephone number is: +39 080 882 0111. The
Companys main subsidiaries engaged in the distribution of the Groups products
are Natuzzi Americas, Inc. (Natuzzi Americas), located at 130 West Commerce
Avenue, High Point, North Carolina 27261 (telephone number +1 336 887-8300),
for the U.S. market, and Natuzzi Asia Ltd, located at Unit 2005 20th Floor,
Tower 1, The Gateway, 25 Canton Road, Tsimshatsui, Kowloon H.K. (telephone
number +852 2 6224646), for Asia. 8




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Organizational Structure At June 23, 2004, the Companys principal operating subsidiaries are: Percentage ofName
    
    ownership
    
    Registered office
    
    ActivitySpagnesi SpA
    
    
    99.95
    
    
    Quarrata, Italy
    
    
    (1
    )Italsofa Bahia Ltda
    
    
    97.99
    
    
    Bahia, Brazil
    
    
    (1
    )Italsofa (Shanghai) Ltd
    
    
    100.00
    
    
    Shanghai, China
    
    
    (1
    )Italsofa Romania Srl
    
    
    100.00
    
    
    Baia Mare, Romania
    
    
    (1
    )Minuano Nordeste S.A.
    
    
    100.00
    
    
    Pojuca, Brazil
    
    
    (1
    )Natco SpA
    
    
    99.99
    
    
    Santeramo in Colle, Italy
    
    
    (2
    )I.M.P.E. SpA
    
    
    90.83
    
    
    Qualiano, Italy
    
    
    (3
    )Natuzzi Americas, Inc
    
    
    100.00
    
    
    High Point, NC, U.S.A.
    
    
    (4
    )Natuzzi Asia Ltd
    
    
    100.00
    
    
    Hong Kong, China
    
    
    (4
    )Natuzzi Ibérica S.A.
    
    
    100.00
    
    
    Madrid, Spain
    
    
    (4
    )Natuzzi (Switzerland) AG
    
    
    97.00
    
    
    Dietikon, Switzerland
    
    
    (4
    )Natuzzi Nordic A/S
    
    
    100.00
    
    
    Copenhagen, Denmark
    
    
    (5
    )Natuzzi Benelux NV
    
    
    100.00
    
    
    Herentals, Belgium
    
    
    (5
    )Natuzzi Germany GmbH
    
    
    100.00
    
    
    Düsseldorf, Germany
    
    
    (5
    )Natuzzi United Kingdom Ltd
    
    
    100.00
    
    
    West Thurrock, U.K.
    
    
    (6
    )Esmeralda Holdings Ltd
    
    
    100.00
    
    
    West Thurrock, U.K.
    
    
    (4
    )Kingdom of Leather Ltd
    
    
    100.00
    
    
    West Thurrock, U.K.
    
    
    (4
    )Natuzzi Trade Service Srl
    
    
    100.00
    
    
    Bari, Italy
    
    
    (7
    )Natuzzi
Netherlands Holding BV
    
    
    100.00
    
    
    Amsterdam, Netherlands
    
    
    (6
    )
   (1)
    
    Manufacture and distribution(2)
    
    Intragroup leather dyeing and finishing(3)
    
    Production and distribution of polyurethane foam(4)
    
    Distribution(5)
    
    Commercial and marketing services(6)
    
    Investment holding(7)
    
    Services See Note 1 to the Consolidated Financial Statements for further
information on the Companys subsidiaries. 
 Strategy Since 1981, the Group has concentrated its efforts mainly on the
production and marketing of leather-upholstered furniture. Since 1983, when the
Group first targeted the United States market, the leather-upholstered
furniture market in the United States has expanded significantly, due in large
part, in the view of management, to the sale, marketing and quality of Natuzzi
products. According to the most recent data available referring to year 2002
(as published in 2003 by CSIL (CSIL), an Italian market research firm) the
Group is the leader in the leather-upholstered furniture segment in the United
States, 9




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with a 10.7% market share. In the United States, the initial efforts of
the Company were concentrated on increasing the size of the leather-upholstered
furniture segment in the overall furniture market. Having accomplished that
goal, and facing increased competition at the low end of the leather furniture
market, the Group is pursuing a strategy of producing higher quality furniture,
available in different styles and coverings (leather, fabric and micro fiber),
at all price points. Since 1988, the Group has followed a strategy of diversifying its
geographic markets through increased emphasis on sales outside the United
States, particularly in Europe. The Group has increased its market share in the
highly fragmented European market, at the expense of its smaller European
competitors, by relying on the efficiency of its manufacturing capabilities to
produce higher quality products than its competitors, at comparable price
points. With 13 years of retail experience, Natuzzi has also began to focus on
increasing its market share in the highly fragmented global furniture retail
market by opening additional stores that sell upholstered-furniture and
accessories with the Natuzzi brand. As at March 31, 2004, 137 Divani & Divani
by Natuzzi stores were located in Italy. Outside of Italy, the Group had 75
stores named Natuzzi Store and 29 Divani & Divani by Natuzzi stores. As at
March 31, 2004, the Group also owned 13 Kingdom of Leather stores, which were
purchased in 2003. Additionally, in 2003 the Group opened its flagship store
in Soho, in New York City, to enhance its brand awareness in the United States
and around the world. The Groups current marketing strategy for its Natuzzi
brand is to create brand awareness around the world. The Group has also taken a number of steps to broaden its product lines.
In 1991, the Group introduced a line of leather-upholstered motion furniture in
the United States and Europe. With the June 1994 acquisition of a controlling
interest in Spagnesi S.p.A. (Spagnesi), the Company entered into the market
for traditional upholstered furniture. Finally, in 1996, the Group launched its
fabric-upholstered furniture line, known as the soft cover collection, which
is sold primarily in Europe. In 1999, the Group further broadened its product offerings by introducing
a new concept, the Decorator, intended to add further value to its product
offerings. The Decorator concept is designed to provide customers with room
package solutions by helping consumers abilities to live in tastefully
furnished homes within their economic means. The concept involves developing
these interior design solutions by coordinating the Groups armchairs and sofas
(in different styles and coverings) with matching coffee tables, lamps and
rugs, in order to develop innovative alternatives to more traditional living
room decoration schemes. The Group believes that this service simplifies the
work of the retailer, who otherwise would be required to source individual
furniture pieces from different suppliers and employ dedicated interior
decorators in order to offer similarly comprehensive decor solutions to
consumers. Management believes that this new approach will strengthen the
Groups relationships with the worlds leading distribution chains. Today, an
evolved version of the Decorator concept called the Total Look Living Room is
available through Natuzzi Galleries (described below) and Natuzzi Stores. As a way of improving service through the reduction of delivery times, the
Group introduced the SoFast Program in October 1999. The SoFast Program is a
furniture collection characterized by high quality and distinctive design,
which is offered to clients at faster delivery times than the Groups other
collections. In October 2000, the Group launched the Italsofa Collection, aiming to
compete in the promotional segment with a collection of lower-priced furniture
identified by a distinctive brand associated with Italian quality and style.
The production of Italsofa started in January 2001 and has since sold
successfully. In 2003, Italsofa represented 30.5 % of total seats sold by the
Group. 10




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The Groups marketing and production strategy is supported by its design
capabilities, on demand planning system and quality control procedures.
Management believes that these elements enable the Group to provide products
that are higher in quality than those of its competitors at comparable price
points. In addition, management believes that its ability to assess and adapt
quickly to changes in consumer preferences provides the Group with a
competitive advantage. A critical element of the Groups strategy has been its
ability to increase efficiency by coordinating all aspects of the product cycle
and manufacturing process through the use of its computerized management
information system. This coordination begins with the design of new products
for specific price points based on computer analysis of market demands, as
reflected in orders from and sales to its customers and other market
information provided by the Groups worldwide network of sales agents. The
Group then uses its management information system to monitor and control the
costs and prices of each element and product, as well as supervise the receipt
of orders from customers. Furthermore, this information system also allows the
Group to administer the purchase and process of raw materials, the
manufacturing of finished products and the delivery of finished products to
customers. The Company has retained the Natuzzi brand for its higher priced product
lines and is investing resources in consumer advertising to increase brand
awareness. In January 2002, during the Cologne Furniture Fair in Germany, the
Company launched a new visual image campaign to strengthen the Natuzzi name.
The campaign aims to identify the brand with the Groups goal of satisfying a
broad range of consumer lifestyles and tastes. In 2003, the Natuzzi brand
represented 69.5 % of total seats sold by the Group. In October 2002, the Group launched the Pasquale Natuzzi Collection,
which offers customers high-range distinctive products in terms of design,
materials and project development. In 2002, the Company also launched a new Natuzzi Galleries program in an
effort to improve distribution by installing a designated Natuzzi branded space
inside prime retailer stores (this concept is also referred to as having a
shop-in-shop). The advertising and the internal decorations used in these
Natuzzi Galleries (also known as the Natuzzi Display System) are the same as
those used in the Natuzzi Stores, resulting in a single visual identity for the
Natuzzi brand in Natuzzi Stores and Natuzzi Galleries. Test Natuzzi Galleries
have been opened around the world and the monitoring of sales indicates that in
almost all the locations revenues per square foot increased at these locations
following the installation of the Natuzzi Galleries. Since 2002, the Groups Interior Design & Engineering Retail Department
has been working with worldwide Natuzzi Stores, Natuzzi Galleries and certain
other Natuzzi projects for the purpose of achieving the careful and coherent
integration of products, styles, brand values, communication and display
elements. 
 Manufacturing As at December 31, 2003, the Group manufactured its products in 13
production facilities located in Italy. Nine of the facilities are engaged in
the cutting, sewing and assembling of semi-finished and finished products and
employ approximately 2,193 workers. Ten of these assembly facilities are
located in or within a 25 mile radius of Santeramo, where the Company has its
headquarters. In addition, Spagnesi manufactures its products in a facility
located in Quarrata, near Florence. The assembly operations conducted in the Groups facilities involve
stretching elastic webbing onto the furnitures frames (which are constructed
either at the Groups principal assembly facility or by subcontractors),
attaching foam to the frames, and cutting and sewing the upholstery and
attaching it to the frames. These operations, which retain many characteristics
of production by hand, are 11




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coordinated at the Groups principal assembly facilities through the use
of the management information system, which identifies by number each component
of a piece of furniture  e.g., frame, cushions, leather  and facilitates
its automated transit and storage within the factory, in part through a
bar-coded bin and pick system. As part of an effort to decrease costs through
increased productivity and flexibility, automatic guided vehicles supervised by
a central computer have been installed at one of the Groups principal assembly
facilities to move products through the production chain. In other facilities,
materials are currently moved by hand or conveyor belt, rather than on an
automated basis. The production process for Spagnesis traditional upholstered
furniture includes the additional step of manufacturing and finishing the
exposed portions of the wooden frames. Operations at all of the Groups
production facilities are normally conducted Monday through Friday with two
eight-hour shifts per day. Two of the Groups production facilities are involved in the processing of
leather hides to be used as upholstery. One of the facilities is a leather
dyeing and finishing plant located near Udine that employed approximately 312
workers as at December 31, 2003. The Udine facility receives both raw and
tanned cattle hides, sends raw cattle hides to subcontractors for tanning, and
then dyes and finishes the hides. The other facility, located near Vicenza, is
a warehousing operation that receives semi-finished hides and sends them to
various subcontractors (who operate under the supervision of Natuzzi
technicians) for processing, drying and finishing, and then arranges for the
finished leather to be shipped to the Groups assembly facilities. The Vicenza
operation employed approximately 30 workers as at December 31, 2003. Hides are
tanned, dyed and finished on the basis of orders given by the Groups central
office in accordance with the Groups on demand planning system, as well as
on the basis of estimates of future requirements. The movement of hides through
the various stages of processing is monitored through the management
information system. See    Supply-Chain Management. The Group produces, directly and by subcontracting, 9 grades of leather in
approximately 41 finishes and 274 colors. The hides, after being tanned, are
split and shaved to obtain uniform thickness and separated into top grain and
split. (Top grain is used, in varying quantities, in the manufacture of all
Natuzzi leather products, while split is used in addition to top grain in some
of the Groups lower price-point products.) The hides are then colored with
dyes and treated with fat liquors to soften and smoothen the leather, after
which they are dried. Finally, the semi-processed hides are treated to improve
the appearance and strength of the leather and to provide the desired finish.
The Group also purchases finished hides from third parties. One of the Groups production facilities, which is located near Naples and
employs approximately 56 workers, is engaged in the production of flexible
polyurethane foam and, with production capacity in excess of the Groups needs,
often sells foam to third parties. The foam produced at the Naples facility
pursuant to a patented process results in a high quality material without using
any auxiliary blowing agent and is sold under the
Eco-FlexTM trade name. The Group owns the land and buildings for its principal assembly
facilities located in Santeramo, Matera, Altamura and Quarrata, its leather
dyeing and finishing facility located near Udine, its foam-production facility
located near Naples and its facilities located in Ginosa, Laterza, Brazil and
Romania, while the land and buildings of the remaining production facilities
are leased from lessors, with several of whom the Group enjoys long-term
relationships. Although the lease terms are of varying lengths, Italian law
provides that any such lease must have a minimum term of six years. This
minimum term, however, is enforceable only by the lessee. The lease agreements
provide for rents that generally increase each year in line with inflation.
Management believes that the prospects are good for renewing the agreements on
acceptable terms when they expire. The Group owns substantially all the
equipment used in its facilities. 12




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In 2000, the Group announced the launch of a new, low-price upholstered
furniture collection, known as Italsofa. The Company plans to manufacture the
Italsofa Collection completely outside Italy at plants located in Brazil, China
and Romania. As at December 31, 2003, the Group entrusted approximately 20% of its
production needs (in particular assembly) to subcontractors, all located within
a 20-mile radius of Santeramo. The Group supplies to each subcontractor the
product design, the finished leather, the pre-cut cushions, the wooden frames
and the other assembly materials. Each subcontractor then assembles these
materials into finished products under the supervision of the Groups
technicians, who are responsible for quality control. Each contract with a
subcontractor is for an indefinite period, subject to termination by either
party with prior notice (which generally is required to be given 4 months prior
to termination), and provides for the furniture to be assembled at a fixed cost
per unit that increases annually in line with inflation. Management believes
that four months notice prior to termination is a sufficient period of time to
allow the engagement of a replacement subcontractor on acceptable terms or to
increase the Groups in-house production capability if necessary. Raw Materials.The principal raw materials used in the manufacture of the
Groups products are cattle hides, polyurethane foam, polyester fiber, wood and
wood products. The Group purchases hides from slaughterhouses and tanneries located
mainly in Italy, Brazil, Colombia, Australia, Germany, Uruguay, Scandinavian
countries, the United States, New Zealand, and Eastern Europe. The hides
purchased by the Group are divided into several categories, with hides in the
lowest categories being purchased mainly in Brazil, Colombia, and Ukraine;
those in the middle categories being purchased mainly in Australia, New
Zealand, Italy and the United States and those in the highest categories being
purchased in Germany and Scandinavian countries. A significant number of hides
in the lowest categories are purchased at the wet blue stage  i.e., after
tanning  while some hides purchased in the middle and highest categories are
unprocessed. The Group has implemented a leather purchasing policy according to
which a percentage of leather is purchased at a finished or semi-finished
stage. Therefore, the Group has had a smaller inventory of split leather to
sell to third parties. Approximately 80% of the Groups hides are purchased
from 19 suppliers, with whom the Group enjoys long-term and stable
relationships. Hides are generally purchased from the suppliers pursuant to
orders given every one/two months specifying the number of hides, the purchase
price and the delivery date. Hides purchased from Europe are delivered directly
by the suppliers to the Groups leather facilities near Udine and Vicenza,
while those purchased overseas are delivered to an Italian port, where they are
inspected by technicians of the Group and then sent to the Udine facility and
subcontractors. Management believes that the Group is able to purchase leather
hides from its suppliers at reasonable prices as a result of the volume of its
orders, and that alternative sources of supply of hides in any category could
be found quickly and at acceptable cost if the supply of hides in such category
from one or several of the Groups current suppliers ceased to be available or
was no longer available on acceptable terms. The supply of raw cattle hides is
principally dependent upon the consumption of beef, rather than on the demand
for leather. During 2003, the price paid by the Group for cattle hides decreased due to
an excess in supply of raw hides and due to the Groups purchasing policy
focused on finding quality hides in easily-accessible markets. During the
first months of 2004, prices for raw cattle hides have been unstable, primarily
due to the general uncertainty in the worldwide economy. The Group obtains the chemicals required for the production of
polyurethane foam from major chemical companies located in Europe (including
Germany, Italy and the United Kingdom) and the polyester fiber filling for its
polyester fiber-filled cushions from several suppliers, located mainly in
Korea, China and Taiwan. The chemical components of polyurethane foam are
petroleum-based commodities, and the prices for such components are therefore
subject to, among other things, 13




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fluctuations in the price of crude oil. The Group obtains wood and wood
products for its wooden frames from suppliers in Italy and Eastern Europe, and
recently, through its plants located in Romania, the Group began directly
engaging in the cutting and transformation of wood from Romanian forests. Since 1996, the Group has purchased fabric for its line of
fabric-upholstered furniture from manufacturers in Italy, Taiwan, Korea and
Japan. Of the fabric purchased by the Group, approximately 90% is
ultramicrofibre. With regard to the Groups collection of home furnishing accessories
(tables, lamps, carpets, home accessories in different materials), most of the
suppliers are located in Italy and other European countries, while some
hand-made products (such as carpets) are made in India. Supply-chain Management.The Group schedules its manufacture and supply
of raw materials and components on the basis of an on demand planning system.
This system allows the Group to manage a high number of product combinations
(in terms of the number of models, versions and coverings codes) offered to the
market while maintaining a high level of customer service, low inventories and
low risk of obsolescence (in spite of low product lifetime). Special programs
with short lead times are provided for a limited number of customers and
collections/products combinations. All planning activities (finished goods load
optimization, customer orders acknowledgement, production and suppliers
planning) are synchronized in order to guarantee that during the production
process, the correct materials are located in the right place at the right
time, thereby achieving a maximum level of service and minimum handling and
transportation costs. This system is used for all products and markets in which the Group sells
its goods. For example, in the case of furniture being purchased by a U.S.
customer, as soon as an order is sent to the Groups sales office in the United
States (High Point, North Carolina), the data is entered directly into the
Groups central computer system, saving administrative lead time and allowing
the Group to operate more efficiently. In order to incur the lowest costs and achieve the best product quality,
the Group attains the optimum load level for shipping through the use of
tailor made software. Since the prices quoted to customers are based on
shipments of full containers, if a customers order does not represent optimal
use of container space, revisions to the customers order will be suggested.
Upon finalization of the customers order, the computer system generates an
order proposal that is reviewed to determine feasibility in terms of the types
of products, quantity and timing, based on customer requests. In order to
incorporate all of the Groups new products (i.e., furnishings and
accessories), the Group has launched a medium-long term project to develop more
complete and sophisticated software. This planning process allows for the optimum use of the available
technology, capacity and human resources, while minimizing costs and achieving
high quality. Once production is scheduled, the Groups Material Requirement
Planning Information System produces a proposed list of raw materials and
components to be ordered. This list is analyzed, reviewed and combined with the
Groups global procurement scheduling. All purchases from suppliers are then
planned. Procurement lead times are relatively short; leather is generally
available within three weeks of ordering and certain components are supplied by
a ready from stock service. The Group strives to achieve optimum levels of
inventories while keeping service levels high by using state-of-the-art
software. The entire process, from the receipt of a customers order to the shipment
of the finished products from the Groups assembly facilities, on average takes
from six to seven weeks, excluding backlog. The lead times can be different for
special programs (such as Italsofa, and SoFast, described below) or when an
unusually high level of orders is received. The time required for delivery to
the customer varies depending on where the customer is located (transport lead
times vary widely depending on the distance of the destination from the

production units). 14




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Transportation.The Groups furniture is delivered to customers by common
carriers. Furniture destined for the United States and the Americas and other
markets outside Europe is transported by sea in 40 high cube (hc)
containers, while furniture produced for the European market is generally
delivered by truck and, in some cases, by railway and by sea in containers. In
2003, the Group shipped 16,931 containers (40 hc) to overseas countries and
approximately 6,000 full load mega-trailer trucks to European destinations. The Group relies principally on several shipping and trucking companies
operating under time-volume service contracts to deliver its products to
customers and to transport raw materials to the Companys plants and processed
materials from one plant to another. In general, the Group prices its products
to cover its door-to-door shipping costs, including all customs duties and
insurance premiums. Most of the Groups overseas suppliers are responsible for
delivering raw materials to the port of departure, therefore transportation
costs for these materials are generally under the Groups control. The Group
also owns a small number of trucks, which are used to transport raw and
processed materials and finished products to and from subcontractors and
between the Groups facilities in the Santeramo area. Since September 2003 the Group has operated an on-line Transportation
Portal to enable transportation suppliers to provide the Company with all
relevant information, including rail station/port arrival, re-shipment and
final delivery, about their assigned shipments. 
 Products and Design Products.The Group manufactures a wide range of leather- and
fabric-upholstered furniture products, which are produced in four different
styles: traditional, transitional, contemporary and modern and fall
within five broad categories: stationary furniture (sofas, loveseats and
armchairs), sectional furniture, motion furniture, sofa beds and occasional
chairs (including recliners and body massage chairs (launched in 2001)). The
Group offers its products in 346 different models, 9 leather grades, 27 leather
finishes and 177 colors. Each of the Groups models is generally offered in
various forms (e.g., sofa, loveseat, armchair, ottoman, sectional components,
motion mechanism and body massage chairs). Each model is offered at prices that
vary depending principally on the quality and finish of the leather (including
whether it is top grain only leather or top grain with split) and the quality
of the cushions (including whether they are foam, polyester fiber or feather). In October 2000, the Company announced the launch of the Italsofa
Collection, with the aim of entering new markets by means of providing a
collection of a lower-priced furniture identified by a distinctive brand
associated with Italian quality and style. In 2003, the Italsofa Collection
included 52 sofa models, in a choice of 39 colors made of three categories of
leather, and in 19 colors made of two categories of microfiber. Design.The ability to design and offer new products on a regular basis
is an important element of the marketing strategy of the Group. The Groups
designers generally design new models to be manufactured for sale at specified
price points, on the basis of the Groups analysis of the market, and
occasionally on the basis of requests from larger customers for new models. 
 Markets The Group markets its products internationally as well as in Italy.
Outside Italy, the Group sells its leather furniture principally on a wholesale
basis to major retailers and furniture stores. Since 1990, the Group has sold
its leather-upholstered products in Italy principally through franchised Divani
& Divani by Natuzzi furniture stores. 15




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While continuing to increase its net sales in each of the geographic
markets in which it operates, the Group has gradually achieved a more balanced
exposure to different geographic markets. Whereas in 1987, the United States
and the Americas accounted for approximately 92% of the Groups
leather-upholstered furniture net sales, in 2003 the Group derived 47.5% of its
leather- and fabric-upholstered furniture net sales from the United States and
the Americas, 46.5% from Europe and 6.0% from the rest of the world (mainly
Australia and Japan). See    Strategy. The following tables show the leather- and fabric-upholstered furniture
net sales and unit sales (in seats) of the Group broken down by geographic
market for each of the years indicated: Leather- and Fabric-Upholstered Furniture Net Sales2003
    
    2002
    
    2001
    
    2000
    
    1999(millions of euro)U.S. and the
Americas(1)
    
    
    320.1
    
    
    
    47.5
    %
    
    
    366.4
    
    
    
    49.9
    %
    
    
    356.4
    
    
    
    49.9
    %
    
    
    318.8
    
    
    
    50.6
    %
    
    
    246.0
    
    
    
    46.9
    %Europe
    
    
    313.5
    
    
    
    46.5
    %
    
    
    326.5
    
    
    
    44.4
    %
    
    
    317.9
    
    
    
    44.5
    %
    
    
    272.3
    
    
    
    43.3
    %
    
    
    238.7
    
    
    
    45.6
    %Rest of the World
    
    
    40.4
    
    
    
    6.0
    %
    
    
    41.8
    
    
    
    5.7
    %
    
    
    39.7
    
    
    
    5.6
    %
    
    
    38.2
    
    
    
    6.1
    %
    
    
    39.4
    
    
    
    7.5
    %Total
    
    
    674.0
    
    
    
    100.0
    %
    
    
    734.7
    
    
    
    100.0
    %
    
    
    714.0
    
    
    
    100.0
    %
    
    
    629.3
    
    
    
    100.0
    %
    
    
    524.1
    
    
    
    100.0
    %
 Leather- and Fabric-Upholstered Furniture Net Sales (in seats)(2)2003
    
    2002
    
    2001
    
    2000
    
    1999U.S. and the
Americas(1)
    
    
    1,699,160
    
    
    
    55.6
    %
    
    
    1,572,879
    
    
    
    52.0
    %
    
    
    1,376,818
    
    
    
    47.9
    %
    
    
    1,229,159
    
    
    
    47.7
    %
    
    
    1,048,981
    
    
    
    45.8
    %Europe
    
    
    1,181,566
    
    
    
    38,6
    %
    
    
    1,278,296
    
    
    
    42.2
    %
    
    
    1,323,736
    
    
    
    46.0
    %
    
    
    1,188,989
    
    
    
    46.1
    %
    
    
    1,068,922
    
    
    
    46.7
    %Rest of the World
    
    
    178,109
    
    
    
    5.8
    %
    
    
    176,483
    
    
    
    5.8
    %
    
    
    175,704
    
    
    
    6.1
    %
    
    
    159,175
    
    
    
    6.2
    %
    
    
    172,589
    
    
    
    7.5
    %Total
    
    
    3,058,835
    
    
    
    100.0
    %
    
    
    3,027,658
    
    
    
    100.0
    %
    
    
    2,876,258
    
    
    
    100.0
    %
    
    
    2,577,323
    
    
    
    100.0
    %
    
    
    2,290,492
    
    
    
    100.0
    %
   (1)
    
    Outside the United States, the Group also sells its products to customers
in Canada and Central and South America (collectively, the Americas).(2)
    
    Includes seats produced at Group-owned facilities and by subcontractors.
Seats are a unit measurement. A sofa is counted as three seats, a chair as
one seat. United States and the Americas.In 2003, net sales of leather- and
fabric-upholstered furniture in the United States and the Americas decreased
12.6% to  320.1 million, compared to  366.4 million in 2002, and the number
of seats sold in the two principal markets of this region, the United States
and Canada, rose 6.8% and 25.0%, respectively. The decrease of net sales was
due to the conversion of U.S. sales into euro at an exchange rate that was
unfavorable compared to the exchange rate available in 2002. The Groups sales in the United States and the Americas are handled by
Natuzzi Americas, the Groups distribution subsidiary for North and Latin
America, which maintains offices in High Point, North Carolina, the heart of
the most important furniture manufacturing and distributing region in the
United States. The staff at High Point provides customer service, marketing and
logistics, handles finance and collections, and generally acts as the
customers contact for the Group. As at December 31, 2003, the High Point
operation had 67 employees. Natuzzi Americas has 55 independent sales representatives and sub-reps in
the United States and the Americas. They are supervised by four regional sales
and marketing managers, one for each of the U.S. Eastern Region, U.S.
Midwestern Region, U.S. Western Region/Latin America and Canada. The Groups principal customers are major retailers. The Group advertises
its products to retailers and, recently, to consumers in the United States and
the Americas directly and through the use of various marketing tools. The Group
also relies on its network of sales representatives and on the furniture fairs
held at High Point each April and October to promote its products. Many of the
Groups larger 16




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##### Table of Contents



customers review part of the new offering of models during an informal
pre-market period one month prior to each High Point fair. Europe. In 2003, net sales of leather- and fabric-upholstered furniture in
Europe (excluding Italy) decreased 3.3% to  242.2 million, compared to 
250.4 million in 2002, due to difficult economic conditions throughout Europe. Furniture retailers are generally smaller in Europe than in the United
States. In Europe (outside Italy), the Group generally deals with cooperatives
and chains representing 50 to 100 retailers, as well as with independent
retailers. While the cooperatives place the orders, thereby obtaining the
benefits of purchasing in volume, the Group delivers the products directly to
the particular members of the cooperatives on whose behalf the orders were
placed. In some cases, the Group invoices the cooperative. In others, the Group
invoices the member of the cooperative to whom the products are delivered. As in the United States, the Group advertises its products in Europe
(outside Italy) to consumers and to retailers directly and through the use of
various marketing tools. The Group also promotes its products in Europe through
three recently established subsidiaries in Benelux, Scandinavia and Germany, as
well as through a network of sales agents. The Group also participates in
furniture fairs in the most important markets. As at December 31, 2003, the
Group had 28 sales agents and sub-agents in Europe. These sales agents are paid
on a commission basis. Outside Italy, the Company uses franchised or directly owned stores to
penetrate markets and implement brand strategies. As at December 31, 2003, 41
franchised single-brand stores were operating in Europe (outside Italy): 27
under the Divani & Divani by Natuzzi name (14 in Greece, 13 in Portugal) and 24
under the Natuzzi name (14 in France, 2 in Hungary, 2 in Malta and one in each
of Switzerland, Cyprus, Slovenia, Croatia, Bosnia and Iceland). As at December
31 2003, there were 27 directly owned stores in Europe (outside Italy): 10 in
Switzerland and 17 in Spain. In October 2001, the Group acquired Divania Madrid S.A. (renamed Natuzzi
Iberica S.A.), the exclusive dealer for the Madrid area, in order to qualify
and support the development of the Natuzzi chain in Spain. As of December 31,
2003 the Company owned 17 stores in Spain and plans to increase its retail
network in Spain in the future. In December 2001, the Group acquired 60% of
Sofaworld AG, the exclusive dealer for German-speaking Switzerland. As of
December 31, 2003, the Group has increased its ownership of Sofaworld AG to
97%, and has renamed it Natuzzi (Switzerland) AG/SA. The Group currently owns
10 Natuzzi Stores in Switzerland, and plans to further develop the chain in the
Swiss market. In May 2003, the Group acquired Kingdom of Leather, a leading UK
upholstered furniture chain with a network of 13 stores, mainly locate in
England. Italy. In 2003, sales of leather- and fabric-upholstered furniture in
Italy decreased 6.3% to  71.3 million, compared to  76.1 million in 2002. Since 1990, the Group has sold its upholstered products within Italy
principally through franchised Divani & Divani furniture stores (now Divani &
Divani by Natuzzi). In July 2003, the first Divani & Divani outlet opened in
Rome. As of March 31, 2004, 137 Divani & Divani by Natuzzi stores were located
in Italy. Asia-Pacific.Overall sales in Asia-Pacific remained stable in 2003 as
compared to 2002 in terms of seats but declined by 3.5 % in terms of net sales.
This was mainly due to the depreciation of the local currencies against the
euro. In 2003 as compared to 2002, sales in the Groups main Asia-Pacific
markets, Australia and Japan, increased by 16.4 % and 17.2%, respectively,
mainly due to the opening of new stores and galleries. During 2003, the Group
opened four new Natuzzi Stores in Australia, bringing 17




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##### Table of Contents



the total to nine stores (two in Queensland, three in New South Wales,
three in Victoria and one in Western Australia), and seven Natuzzi Galleries in
David Jones department stores, also located in Australia, bringing the David
Jones Natuzzi galleries to a total of twelve. Three new Natuzzi stores were
also open in China. Sales in strategic markets, such as New Zealand, increased
in 2003 as compared to 2002 by 7.5 %, while sales in the other Asian markets
generally decreased. The Group manages its Asia-Pacific sales through its Hong Kong subsidiary
and through four agencies located in Australia, Japan, Korea and New Zealand. Customer Credit Management.The Group maintains an active credit
management program. The Group evaluates the creditworthiness of its customers
on a case-by-case basis according to each customers credit history and
information available to the Group. Throughout the world, the Group utilizes
open terms in 76% of its sales and obtains credit insurance for 79% of this
amount; 20 % of the Groups remaining sales are commonly made to customers on a
cash against documents and cash on delivery basis; and lastly 4% of the
Groups sales are supported by a letter of credit or payment in advance. Advertising.Advertising is made through all major media (print, radio,
television and billboards). Advertising expenses varied depending on the degree
of market development in the various countries in which the Group operates.
The Company intends to increase its investments in advertising to support the
Natuzzi brand. 
 Incentive Programs and Tax Benefits Historically, the Group has derived benefits from the Italian Governments
investment incentive program for under-industrialized regions in Southern Italy
(the Mezzogiorno Program), which includes the area that serves as the center
of the Groups operations. The Mezzogiorno Program provided tax benefits,
capital grants and subsidized loans. In particular, a substantial portion of
the Groups earnings before taxes and minority interest from 1994 to 2003 was
derived from companies entitled to some extent to such tax exemptions. All tax
exemptions expired between 1996 and 2003. The last tax exemption was related to
the subsidiary Style & Comfort S.r.l. and expired on December 27, 2003. In 1992, the Italian Parliament instructed the government to replace the
Mezzogiorno Program with a new investment incentive program in favor of all
under-industrialized regions of Italy. In 1993, the government confirmed the
expiration of the Mezzogiorno Program by legislative decree and disclosed the
broad outlines of the new program, to be defined by subsequent government
resolutions. The Parliament has provided the government with certain funds to
honor existing commitments under the Mezzogiorno Program relating to capital
grants and subsidized loans. There can be no assurance, however, that the Group
will be able to obtain all the capital grant or subsidy benefits to which it
may be entitled under such Program. The government resolutions adopted thus far to implement the new
investment incentive program state that companies making investments in the
construction, enlargement, restructuring, conversion, reactivation or
relocation of industrial plants may receive a grant based on the total cost of
the project. The grant (calculated in terms of the Equivalente Sovvenzione
Nettoformula) will be approximately 40% of the investment cost for the
Mezzogiorno areas in which Natuzzi currently operates and 10% of the investment
cost for the Quarrata (Pistoia) area where Spagnesi is located. The program
also provides for research and development benefits which may not exceed 60% of
the investment cost (calculated in terms of the Equivalente Sovvenzione Lordo
formula). In December, 1996, the Company and the Contract Planning Service of the
Italian Ministry of the Budget signed a Program Agreement with respect to the
Natuzzi 2000 project. In connection with this project, the Group planned a
multi-faceted program of industrial investments for the production 18




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##### Table of Contents



of upholstered furniture in Italy. Investments, initially projected to
amount to approximately  232.2 million, are currently expected to amount to
approximately  69.8 million. Such reduction resulted from significant changes
in the competitive scenario that resulted in a revision of the Groups
production strategies. According to the revised agreement, which is currently
subject to the approval of the Cipe (Comitato Interministeriale Programmazione
Economica) expected to occur during the summer of 2004, the Italian Government
will contribute  35.6 million. Receipt of the Italian Governments funds is
contingent upon, among other things, the Group constructing facilities in
accordance with certain specifications and maintaining a minimum number of
employees. During 1997 the Group was granted and received under the
aforementioned project capital grants of  24.2 million. The capital grants are
secured by surety bonds issued by San Paolo Banco di Napoli, an Italian bank,
in the amount of  26.0 million. A final release of such funds is subject to
approval of a Control Committee appointed by the Italian Government, which is
expected to occur before year-end. Capital expenditures under the Natuzzi 2000
project amounted to approximately  70.8 million through December 31, 2003. Tax Benefits. The Company is currently eligible for and claims the benefits available
pursuant to Law no. 388 of December 23, 2000, entailing the grant of a tax
credit amounting, in 2003, to 29.75% of the value of certain newly-made
investments. This regime will be available in connection with any such
investments made prior to January 1, 2007; however, the amount of the tax
credit may vary in future years. Certain
 foreign subsidiaries, including Italsofa (Shanghai) Ltd, Italsofa
Bahia Ltda. and Italsofa Romania S.r.l., enjoy significant tax
benefits, such as corporate income tax exemptions or reductions of
the corporate income tax rates effectively applicable. 
 Management of Exchange Rate Risk The Group is subject to currency exchange rate risk in the ordinary course
of its business to the extent that its costs are denominated in currencies
other than those in which it earns revenues. Exchange rate fluctuations also
affect the Groups operating results because it recognizes revenues and costs
in currencies other than euro but publishes its financial statements in euro.
The Groups sales and results may be materially affected by exchange rate
fluctuations. For more information, see Item 11, Quantitative and Qualitative
Disclosures about Market Risk. 
 Trademarks and Patents The Groups products are sold under the Natuzzi and Italsofa names.
These names and certain other trademarks, such as Divani & Divani by Natuzzi,
have been registered as such in Italy, in the United States and elsewhere. In
order to protect its investments in new product development, the Group has also
undertaken a practice of registering certain new designs in most of the
countries in which such designs are sold. The Group currently has more than
1,000 design patents and patents pending. Applications are made with respect to
new product introductions which the Group believes will enjoy commercial
success and have a high likelihood of being copied. 
 Non-United States Regulation The Company is incorporated under the laws of the Republic of Italy. The
principal laws and regulations that apply to the operations of the Company 
those of Italy and the European Union  are different from those of the United
States. Such non-United States laws and regulations may be subject to varying
interpretations or may be changed, and new laws and regulations may be adopted,
from time to time. Legislative Decree No. 6 of 2003 has introduced new rules
for Italian companies that are effective from January 1, 2004 and require each
company to comply with them before September 30, 2004. While management
believes that the Group is currently in compliance in all material respects
with such laws and regulations (including with respect to environmental
matters), there can be no assurance that any subsequent official interpretation
of such laws or regulations by the relevant governmental authorities that
differs from that of the Company, or any such change or adoption, would not
have an adverse effect on 19




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##### Table of Contents



the results of operations of the Group or the rights of holders of the
Ordinary Shares or the owners of the Companys ADSs. See    Environmental
Regulatory Compliance, Item 10, Additional Information  Exchange Controls
and Item 10, Additional Information  Taxation. 
 Environmental Regulatory Compliance The Group operates a leather dyeing and finishing facility near Udine and
a polyurethane foam production plant near Naples. The operation of each of
these facilities is subject to both Italian governmental law and European Union
regulations. The Group believes that it has operated and continues to operate
these and other facilities in compliance with all applicable laws and
regulations. 
 Insurance The Group maintains insurance against a number of risks. The Group insures
against loss or damage to its facilities, loss or damage to its products while
in transit to customers, failure to recover receivables, certain potential
environmental liabilities and product liability claims. While the Group does
not cover 100% of these risks, management believes that the Groups present
level of insurance is adequate in light of past experience. 
 Description of Properties The location, approximate size and function of the principal physical
properties used by the Group as at December 31, 2003 are set forth below: Size(approximatesquareLocation
    
    meters)
    
    FunctionSanteramo (Bari), Italy
    
    
    27,000
    
    
    Headquarters, manufacturing of wooden frames,
showroom, sewing and product assembly (Owned)Matera La Martella, Italy
    
    
    38,000
    
    
    Fabric cutting, sewing and product assembly (Owned)Santeramo, Iesce (Bari), Italy
    
    
    27,500
    
    
    Leather cutting, sewing and product assembly (Owned)Pozzuolo del Friuli (Udine),
Italy
    
    
    18,000
    
    
    Leather dyeing and finishing (Owned)Matera, Iesce, Italy
    
    
    12,500
    
    
    Leather cutting, sewing and product assembly (Owned)Qualiano (Naples), Italy
    
    
    12,000
    
    
    Polyurethane foam production (Owned)Quarrata (Pistoia), Italy
    
    
    8,000
    
    
    Office, leather cutting, sewing and product assembly
(Owned)Altamura (Bari), Italy
    
    
    13,600
    
    
    Leather cutting, sewing and product assembly (Owned)Montebello (Vicenza), Italy
    
    
    5,500
    
    
    Leather warehouse (Leased)Altamura (Bari), Italy
    
    
    5,800
    
    
    Leather cutting, sewing and product assembly (Owned)Altamura (Bari), Italy
    
    
    2,500
    
    
    Employee training facility (Owned)Ginosa (Ta), Italy
    
    
    14,500
    
    
    Leather cutting, sewing and product assembly (Owned)Laterza (Ta), Italy
    
    
    10,000
    
    
    Leather cutting, sewing and product assembly (Owned)
 20




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##### Table of Contents



Size(approximatesquareLocation
    
    meters)
    
    FunctionLaterza (Ta), Italy
    
    
    10,000
    
    
    Leather warehouse, leather cutting (Owned)Laterza (Ta), Italy
    
    
    20,000
    
    
    Finished products warehouse (Owned)High Point, North Carolina, USA
    
    
    10,000
    
    
    Office and showroom for Natuzzi Americas (Owned)Baia Mare, Romania
    
    
    59,000
    
    
    Leather cutting, sewing and product assembly,
manufacturing of wooden frames, Polyurethane foam
shaping, Fiberfill and down cushion production , saw
mills, other wooden product (Owned)Shanghai, China
    
    
    14,000
    
    
    Leather cutting, sewing and product assembly (Leased)Salvador (Bahia), Brazil
    
    
    26,000
    
    
    Leather cutting, sewing and product assembly,
manufacturing of wooden frames, Polyurethane foam
shaping, Fiberfill and down cushion production
(Owned)
 The Group believes that its production facilities are suitable for its
production needs and are well maintained. The Groups production facilities
are operated utilizing close to 100% of their production capacity. Operations
at all of the Groups production facilities are normally conducted Monday
through Friday with two eight-hour shifts per day. In 2003, the Group
continued to utilize subcontractors to meet demand. 
 Capital Expenditures The following table sets forth the Groups capital expenditures for each
year in the three-year period ended December 31, 2003: Year ending December 31,(millions of Euro)2003
    
    2002
    
    2001Land and plants
    
    
    11.3
    
    
    
    28.6
    
    
    
    36.1Equipment
    
    
    12.8
    
    
    
    18.1
    
    
    
    16.3Other
    
    
    23.2
    
    
    
    24.3
    
    
    
    15.9
 Capital expenditures during the last three years were primarily made in
the areas of construction and maintenance, as well as improvements to property,
plant and equipment. In 2003, capital expenditures were primarily made to
purchase land and build new factories in Baia Mare (Romania), Bahia (Brazil)
and Shanghai (China) as well as to make improvements at existing facilities in
order to increase productivity and production capacity, which included the
purchase of equipment. The Company expects that capital expenditures in 2004
will be approximately  40.0 million. 21




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##### Table of Contents



Item 5. Operating and Financial Review and Prospects The following discussion of the Groups results of operations, liquidity
and capital resources is based on information derived from the Companys
audited Consolidated Financial Statements and the notes thereto included in
Item 18 of this annual report. These financial statements have been prepared in
accordance with Italian GAAP, which differ in certain respects from U.S. GAAP.
For a discussion of the principal differences between Italian GAAP and U.S.
GAAP as they relate to the Companys consolidated net earnings and
shareholders equity, see Note 26 to the Consolidated Financial Statements
included in Item 18 of this annual report. 
 Critical Accounting Policies The Groups critical accounting policies, the judgments and other
uncertainties affecting application of those policies and the sensitivity of
reported results to changes in conditions and assumptions are factors to be
considered in reviewing the Groups Consolidated Financial Statements and the
notes thereto and the discussion below in Results of Operations. The Groups
significant accounting policies are described in Note 3 to the Consolidated
Financial Statements included in Item 18 of this annual report. The Groups
financial condition and results of operations are sensitive to accounting
methods, assumptions and estimates that underlie the preparation of the
Consolidated Financial Statements. In particular, the following policies
involve assumptions and estimates that may affect our financial condition and
results of operations. Use of Estimates.The preparation of financial statements in conformity
with Italian GAAP and U.S. GAAP requires management to make judgments,
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Certain accounting
principles require subjective and complex judgments used in the preparation of
financial statements. Accordingly, a different financial presentation could result depending on
the judgments, estimates or assumptions that are used. Such estimates and
assumptions, include, but are not specifically limited to: sales returns and
discounts, product warranties, depreciation and amortization, impairment
losses, income taxes (current and deferred), contingent liabilities and impact
of new accounting standards. Actual results could materially differ from these
estimates or assumptions. Recoverability of Long-lived Assets.The Group periodically reviews the
carrying value of the long-lived assets held and used and that of assets to be
disposed of, including goodwill and other intangible assets, when events and
circumstances warrant such a review. If the carrying value of a long-lived
asset is considered impaired, an impairment charge is recorded for the amount
by which the carrying value of the long-lived asset exceeds its estimated
recovery value, in relation to its use or realization, as determined by
reference to the most recent corporate plans. Management believes that the
estimates of these recovery values are reasonable; however, changes in
estimates of such recovery values could affect the relevant valuations. The
analysis of each long-lived asset is unique and requires that management use
estimates and assumptions that are deemed prudent and reasonable for a
particular set of circumstances. Revenue Recognition.Under Italian GAAP, the Group recognizes sales
revenue, and accrues costs associated with the sales revenue, at the time
products are shipped from its manufacturing facilities located in Italy and
abroad. Revenues are recognized when there is persuasive evidence of an
arrangement to purchase the Companys goods, the price to the buyer has been
fixed and determined, and the collection of the payment for the sale is
reasonably assured. A significant part of the products are shipped from
factories directly to customers under terms that risks and ownership are
transferred to the customer when the customer takes possession of the goods.
These terms are delivered duty paid, delivered duty, 22




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##### Table of Contents



unpaid, delivered ex quay and delivered at customer factory. Delivery to the
customer generally occurs within one to six weeks from the time of shipment. Under U.S. GAAP, revenue should not be recognized until it is realized or
realizable and earned, which is generally at the time delivery to the customer
occurs and the risks of ownership pass to the customer. Accordingly, revenue
recognition under Italian GAAP is at variance with U.S. GAAP. The principal
effects of this variance is indicated in Note 26 (e) to the Consolidated
Financial Statements included in Item 18 of this annual report. Allowances for Sales.Revenues are recorded net of returns, warranties and
discounts. Sales returns, warranty costs and discounts are estimated and
provided for in the year of sales. Such allowances are made based on historical
trends. The Company has the ability to make reasonable estimates of such
allowances due to the large volumes of homogeneous transactions and historical
experience. However, the reader should be cautioned that actual costs for
returns, discounts and warranties may differ significantly from the Companys
estimates if factors such as economic conditions, customer preferences or
changes in product quality are different than the Companys assumptions. Allowance for Doubtful Accounts.Allowances for doubtful accounts are
recorded based on the use of estimates and judgments regarding risk exposure
and collectibility. The Group estimates losses for bad debt using consistent
and appropriate methods under Italian GAAP. Changes to assumptions relating to
these estimates could affect actual results. The reader should be cautioned
that actual results may differ significantly from the Groups estimates if
factors such as general economic conditions and the credit worthiness of its
customers are different from the Groups assumptions. 
 Results of Operations Summary In 2003, the strong appreciation of the euro against other major
currencies, particularly the U.S. dollar, and the persisting stagnant European
economy resulted in a decrease of net sales of 4.4% compared to 2002. Units
sold, on the contrary, increased slightly, by 1.0%, due to the satisfactory
performance of the Company in the United States. Italsofa, the Companys
promotional brand represented a growing percentage of the Companys total seats
sold, 30.5% of total seats sold in 2003 compared to 23.6% in 2002. The Companys net income compared to 2002 decreased  54.1 million to 
37.3 million in 2003. On a per Ordinary Share, or ADS basis, the Company
reported net earnings of  0.68 in 2003, a decrease of  0.99 from 2002. The
decrease was primarily caused by the appreciation of the euro relative to other
currencies, in particular the U.S. dollar, and increased marketing expenses in
connection with the opening of new retail stores and galleries and advertising
to increase the awareness of the Natuzzi brand in the worldwide furniture
market. The following table sets forth certain income statement data expressed as
a percentage of net sales for the years indicated: 23




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##### Table of Contents



Year Ended December 31,2003
    
    2002
    
    2001Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    66.1
    
    
    
    64.3
    
    
    
    66.2Gross profit
    
    
    33.9
    
    
    
    35.7
    
    
    
    33.8Selling expenses
    
    
    23.3
    
    
    
    18.1
    
    
    
    17.2General and administrative expenses
    
    
    5.1
    
    
    
    5.0
    
    
    
    4.2Operating income
    
    
    5.5
    
    
    
    12.6
    
    
    
    12.4Other income (expense), net
    
    
    0.5
    
    
    
    1.9
    
    
    
    0.0Income taxes
    
    
    1.1
    
    
    
    3.1
    
    
    
    2.8Net earnings
    
    
    4.9
    
    
    
    11.4
    
    
    
    9.6
 See Item 4, Information on the Company  Markets, for tables setting
forth the Groups net leather- and fabric-upholstered furniture sales and unit
sales, which are broken down by geographic market, for the years ended December
31, 1999 through 2003. 2003 Compared to 2002 Net sales for 2003, including sales of leather- and fabric-upholstered
furniture and other sales (principally polyurethane foam and leather sold to
third parties, as well as accessories), decreased 4.4% to  769.6 million
compared to 2002. Net sales for 2003 of leather- and fabric-upholstered furniture decreased
8.3% to  674.0 million compared to 2002. The decrease was due primarily to the
strong appreciation of the euro against other major currencies, particularly
the U.S. dollar, and to a lesser degree to a decrease in units sold in Europe
as a result of the stagnant European economy and a change in the mix of
products sold toward lower-priced products. Net sales for 2003 of
leather-upholstered furniture decreased 11.8% to  550.0 million compared to
2002, while net sales for 2003 of fabric-upholstered furniture net sales
increased 11.7% to  124.0 million compared to 2002. In the Americas, net sales for 2003 of upholstered furniture decreased
12.6% to  320.1 million compared to 2002 because of the unfavorable conversion
of US sales made in dollars to euro following the strong appreciation of the
European currency. In Europe, net sales for 2003 of upholstered furniture
decreased 4.0% to  313.5 million compared to 2002. In the rest of the world,
net sales for 2003 of upholstered furniture decreased 3.6% to  40.3 million
compared to 2002. Net sales for 2003 of Natuzzi-branded furniture decreased 12.5% to  533.0
compared to 2002. During the same period, net sales of the lower-priced
Italsofa furniture increased 12.5% to  140.9 million compared to 2002. The
growth of Italsofa was due to consumer price sensitivity resulting from
sluggish economic conditions worldwide and the ability of the Company to offer
a product at an attractive price while maintaining the Companys rigorous
quality standards. The Company believes that the growing percentage of sales
from the lower-priced Italsofa furniture relative to the higher-priced Natuzzi
brand furniture should be counterbalanced in the medium term by the increasing
penetration of the Natuzzi brand in the medium-high end of the upholstery
market as a result of the marketing initiatives adopted by the Company. Total net sales of Divani & Divani by Natuzzi, Natuzzi Stores and Kingdom
of Leather increased 10.3% in 2003 to  106.0 million compared to 2002. In 2003, total seats sold increased 1.0% to 3,058,835 from 3,027,658 sold
in 2002. The slight increase was due to an increase of 8% in the Americas
(1,699,160 seats) and a 0.9% increase in the rest of the world (excluding
Europe) (178,109 seats), which almost completely offset a 7.6% decrease
reported in Europe (1,181,566 seats). The negative performance suffered in Europe reflects the difficult
economic conditions reported in many countries: Germany (-24.2%), France
(-5.1%), Belgium (-5.6%), Holland (-13.3%), 24




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##### Table of Contents



Norway (-16.3%), Sweden (-27.5%), and Ireland (-43.7%). These reductions
in sales were only partially offset by the increases in sales in the United
Kingdom (+13.6%), mainly due to the acquisition of the Kingdom of Leather
group; in Greece (+17.7%); and in Spain (+24.4%). Seats sold in the United States and Canada in 2003 increased 6.8% and
25.0%, respectively. Growth in the United States and Canada was mainly the
result of the growing success of the Groups promotional brand, Italsofa. In the rest of the world, seats sold increased from 176,483 in 2002 to
178,109 in 2003. The rise included increases in Australia (+10.5%), Japan
(+25.0%), New Zealand (+3.8%) and China (+6.6%), which were partially offset by
lower sales in Israel (-19.1%), Korea (-33.8%) and Singapore (-38.9%). In 2003, total leather-upholstered seats sold decreased 5.1% to 2,310,121
from 2,433,509 seats sold in 2002, while total fabric-upholstered seats sold
increased 26.0% to 748,714 from 594,149 seats sold in 2002. The Natuzzi brand sold 2,126,403 seats in 2003, 8.1% less than in 2002,
while sales of Italsofa seats increased 30.5% to 932,432 compared to 2002. Other net sales increased 35.8% to  95.6 million compared to 2002. The
increase is due to the upgrade of the distribution channel dedicated to the
Natuzzi brand and an increase in sales of accessories. Cost of goods sold as a percentage of net sales increased from 64.3% in
2002 to 66.1% in 2003. When expressed at constant exchange rates, cost of sales
as a percentage of net sales decreased slightly in 2003. The improvement of
the margin at a constant exchange basis was due to a decrease in the cost of
leather and savings resulting from efficiencies achieved in manufacturing
operations. The Groups gross profit decreased 9.3% in 2003 to  260.8 million
compared to 2002, as a result of the factors described above. Selling expenses for 2003 increased 23.3% to  179.3 million compared to
2002, and as a percentage of net sales increased from 18.1% in 2002 to 23.3% in
2003, mainly due to higher marketing expenses. General and administrative expenses for 2003 decreased 3.2% to  39.2
million compared to 2002, and as a percentage of net sales increased from 5.0%
in 2002 to 5.1% in 2003. Operating income for 2003 decreased 58.4% to  42.3 million compared to 
101.8 million reported in 2002. Other income (expense), net decreased to  3.6 million in 2003 from  14.6
million in 2002. Net interest income, included in other income(expense), net,
in 2003 was  0.5 million, compared to  1.6 million in 2002. Foreign exchange transactions, net, also included in other income
(expense), net, resulted in a gain of  6.3 million in 2003, compared to a gain
of  9.3 million in 2002. The gain in 2003 was mainly due to the following:  
    
    An actual gain of  25.4 million in 2003 (compared to a gain
of  10.9 million in 2002), due to the difference between the
forward rate of the domestic currency swaps used to protect against
any potential unfavorable effect of the foreign currency at which
the 25




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##### Table of Contents



company sets its price list and the spot rate at which the domestic
currency swaps were closed;
    
    An actual loss of  7.6 million in 2003 (compared to a loss
of  8.8 million in 2002), from the difference between the invoice
exchange rate and the collection/payment exchange rate;
    
    An unrealized loss of  1.1 million (compared to a loss of 
0.6 million in 2002) recorded in the consolidated statement of
earnings from the conversion of non-euro financial statements of the
Companys subsidiaries;
    
    An unrealized loss of  16.6 million in 2003 (compared to an
unrealized gain of  5.8 million in 2002) on accounts receivable and
payable; and
    
    An unrealized gain of  6.2 million in 2003 (compared to an
unrealized gain of  2.0 million in 2002), from the mark-to-market
of domestic currency swaps. The Group also recorded other expense in 2003 of  3.2 million compared to
other income of  3.7 million reported in 2002. The amount of  3.2 million
reported for other expense in 2003 included an extraordinary loss of  4.3
million deriving from the impairment of fixed assets. The Groups effective income tax rate for 2003 was 18.5%, compared to
21.5% in 2002. The lower rate was due to consolidated pre-tax earnings received
from domestic and foreign companies that are entitled to tax exemptions. Net earnings decreased from  91.4 million in 2002 to  37.3 million in
2003. On a per Ordinary Share, or ADS basis, net earnings decreased from  1.67
in 2002 to  0.68 in 2003. As a percentage of net sales, net earnings decreased
from 11.4% in 2002 to 4.9% in 2003. As disclosed in Note 26 to the Consolidated Financial Statements included
in Item 18 of this annual report, established accounting principles in Italy
vary in certain significant respects from generally accepted accounting
principles in the United States. Net earnings under U.S. GAAP for the years
ended December 31, 2003, 2002 and 2001 would have been  38.0 million,  92.0
million and  71.1 million, respectively, compared to net earnings under
Italian GAAP for the same periods of  37.3 million,  91.4 million and  75.6
million, respectively. 2002 Compared to 2001 Net sales for 2002, including sales of leather- and fabric-upholstered
furniture and other sales (principally polyurethane foam and leather sold to
third parties, as well as accessories), increased 2.4% to  805.1 million
compared to 2001. Net sales for 2002 of leather- and fabric-upholstered furniture increased
2.9% to  734.7 million compared to 2001. The increase was due to a 5.3%
increase in units sold and a 0.7% increase resulting from a change in the mix
of products sold, which more than offset a 3.1% decrease stemming from the
appreciation of the euro against the U.S. dollar. Net leather- and fabric-upholstered furniture sales in 2002 reflected
substantially the same geographic distribution as reported in 2001: Europe
(44.4% in 2002, compared to 44.5% in 2001); Americas (49.9% in both 2002 and
2001); and the rest of the world (5.7% in 2002, compared to 5.6% in 2001). Net sales for 2002 of leather-upholstered furniture decreased 0.1% to 
623.7 million compared to 2001, while net sales for 2002 of fabric-upholstered
furniture increased 23.9% to  111.0 million compared to 2001. 26




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##### Table of Contents



In the Americas, net sales for 2002 of upholstered furniture increased
2.8% to  366.4 million compared to 2001. In Europe, net sales for 2002 of
upholstered furniture increased 2.7% to  326.5 million compared to 2001. In
the rest of the world, net sales for 2002 of upholstered furniture increased
5.3% to  41.8 million compared to 2001. Net sales for 2002 of Natuzzi-branded furniture decreased 7.2% to  609.4
million compared to 2001. During the same period, net sales of Italsofa
furniture increased 119.8% to  125.3 million compared to 2001. Total net
sales of Divani & Divani by Natuzzi and Natuzzi Stores increased 15.2% in 2002
to  96.2 million compared to 2001. In 2002, total seats sold increased 5.3% to 3,027,658 from 2,876,258 sold
in 2001. The increase was due to an increase of 14.2% in the Americas
(1,572,879 seats) and a 0.4% increase in the rest of the world (excluding
Europe) (176,483 seats), which more than offset a 3.4% decrease in Europe
(1,278,296 seats). The performance in some European countries in 2002 was strong: France
(+19.4%), Ireland (+21.0%), Sweden (+16.3%), Greece (+9.9%) and the United
Kingdom (+5.4%). However, the performance in other countries was
disappointing: Germany (-8.8%), Belgium (-19.0%), the Netherlands (-29.6%),
Austria (-21.6%) and Portugal (-10.1%). Seats sold in the United States and Canada in 2002 increased 15.7% and
0.8%, respectively. Growth in the United States was mainly the result of the
growing success of the Groups promotional brand, Italsofa. In the rest of the world, seats sold increased from 175,704 in 2001 to
176,483 in 2002. The rise included an increase in Australia (+1.8%), Korea
(+65.3%), the United Arab Emirates (+81.7%) and Taiwan (+15.6%). This increase
was partially offset by declines in Japan (-9.0%), Israel (-7.4%), New Zealand
(-13.2%) and China (-5.6%). In 2002, total leather-upholstered seats sold increased 0.9% to 2,433,509
from 2,410,630 seats sold in 2001, while total fabric-upholstered seats sold
increased 27.6% to 594,149 from 465,628 seats sold in 2001. The Natuzzi brand sold 2,313,186 seats in 2002, 10.0% less than in 2001,
while sales of Italsofa seats increased 133.1% to 714,472 compared to 2001. Other net sales decreased 2.4% to  70.4 million compared to 2001. Cost of goods sold as a percentage of net sales decreased from 66.2% in
2001 to 64.3% in 2002. This decrease was principally due to a decrease in the
cost of leather, expressed at constant exchange rates. The prices of other
principal raw materials, such as polyurethane foam, polyester fibers and
chemicals remained substantially unchanged. The Groups gross profit increased 8.2% in 2002 to  287.7 million
compared to 2001, as a result of the factors described above. Selling expenses for 2002 increased 7.9% to  145.4 million compared to
2001, and as a percentage of net sales increased from 17.2% in 2001 to 18.1% in
2002, mainly due to higher marketing expenses and exhibition costs. This
increase was partially offset by lower transportation costs. General and administrative expenses for 2002 increased 20.9% to  40.5
million compared to 2001, and as a percentage of net sales increased from 4.2%
in 2001 to 5.0% in 2002, mainly due to higher 27




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##### Table of Contents



headcounts and to the Groups expansion of activities internationally,
which have required the incurrence of greater business travel expenses. Operating income for 2002 increased 4.2% to  101.8 million compared to
2001. Other income (expense), net increased to  14.5 million in 2002 from a
negative  0.2 million in 2001. Net interest income in 2002 was  1.5 million,
compared to  2.3 million in 2001. Foreign exchange transactions, which are included in other income
(expense), net, resulted in a gain of  9.3 million in 2002, compared to a loss
of  6.1 million in 2001. The gain in 2002 was mainly due to the following:  
    
    An actual gain of  10.9 million in 2002 (compared to a loss
of  12.2 million in 2001), due to the difference between the
forward rate of the domestic currency swaps used to protect against
any potential unfavorable effect of the foreign currency at which
the company sets its price list and the spot rate at which the
domestic currency swaps were closed;
    
    An actual loss of  8.8 million in 2002 (compared to a loss
of  1.5 million in 2001), from the difference between the invoice
exchange rate and the collection/payment exchange rate;
    
    An unrealized loss of  0.6 million (compared to nil in 2001)
recorded in the consolidated statement of earnings from the
conversion of non-euro financial statements of the Companys
subsidiaries;
    
    An unrealized gain of  5.8 million in 2002 (compared to an
unrealized gain of  8.5 million in 2001) on accounts receivable and
payable; and
    
    An unrealized gain of  2.0 million in 2002 (compared to an
unrealized loss of  0.9 million in 2001), from the mark-to-market
of domestic currency swaps. The Group also recorded other income in 2002 of  3.7 million compared to
 3.6 million reported in 2001. The Groups effective income tax rate for 2002 was 21.5%, compared to
22.5% in 2001. The lower rate was due to a greater portion of consolidated
pre-tax earnings received from member companies that are entitled to tax
exemptions. Net earnings increased from  75.6 million in 2001 to  91.4 million in
2002. On a per Ordinary Share, or ADS basis, net earnings increased from  1.37
in 2001 to  1.67 in 2002. As a percentage of net sales, net earnings increased
from 9.6% in 2001 to 11.4% in 2002. As disclosed in Note 26 to the Consolidated Financial Statements included
in Item 18 of this annual report, established accounting principles in Italy
vary in certain significant respects from generally accepted accounting
principles in the United States. Net earnings under U.S. GAAP for the years
ended December 31, 2002, 2001 and 2000 would have been  92.0 million,  71.1
million and  81.7 million, respectively, compared to net earnings under
Italian GAAP for the same periods of  91.4 million,  75.6 million and  79.2
million, respectively. Effect of Inflation Management believes that the impact of inflation was not material to the
Groups net sales or operating income in the three years ended December 31,
2003. 28




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##### Table of Contents



Liquidity and Capital Resources Cash flows from operations were  38.2 million in 2003, compared to  97.6
million in 2002. The decrease resulted principally from lower net earnings and
an increase in working capital. Cash and cash equivalents decreased  33.1
million from  96.7 million in 2002 to  63.6 in 2003 due to lower cash flow
from operations. Cash used for investing activities in 2003 totaled  49.8 million versus 
58.5 million in the previous year. Capital expenditures were  47.3 million and
 68.6 million in 2003 and 2002, respectively. In 2003, the Group received
capital grants of  3.1 million (compared to  10.0 million in 2002) through
the Italian Governments Investment Incentive Program, which provided capital
grants equal to a percentage of the aggregate investment made by the Group in
the construction of new manufacturing facilities, or in the improvement of
existing facilities, in designated areas of the country. In 2003, the Group
continued to invest in Baia Mare (Romania), Salvador de Bahia (Brazil) and
Shanghai (China). Other investments were made in Italy to increase overall
efficiency and productivity. A significant portion of investment were made to
realize retail gallery and stores furnishings. In addition the Group made a
final payment of  7.4 million for the purchase of a new aircraft. Cash used for financing activities in 2003 totaled  17.5 million versus 
149.3 million in the previous year. In 2003 net cash used for the reimbursement
of short-term borrowings was  0.3 million, compared to  134.3 million in
2002. Dividends paid to shareholders were  18.0 million and  15.7 million in
2003 and 2002, respectively. As at December 31, 2003, the Group had available credit facilities
totaling  209.1 million. The unused portion of these facilities amounted to
approximately  204.3 million (see Note 11 to the Consolidated Financial
Statements included in Item 18 of this annual report). The Groups long-term
debt represented less than 1% of shareholders equity at December 31, 2003 and
2002 (see Note 16 to the Consolidated Financial Statements included in Item 18
of this annual report). Management believes that the Groups working capital is sufficient for its
present requirements. The Companys principal source of funds is expected to be
cash flows generated from operating activities, cash on hand and amounts
available under its credit facilities. The Companys principal use of funds is
expected to be the payment of operating expenses, working capital requirements
and capital expenditures. 29




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##### Table of Contents



Contractual Obligations and Commercial Commitments The following tables set forth the contractual obligations and commercial
commitments of the Group as at December 31, 2003: Payments Due by Period (in euro thousands)Less than
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    4-5 years
    
    yearsLong-Term Debt
    
    
    5,509
    
    
    
    1,291
    
    
    
    2,244
    
    
    
    400
    
    
    
    1,574Operating Leases(1)
    
    
    88,877
    
    
    
    10,165
    
    
    
    19,768
    
    
    
    20,955
    
    
    
    37,989Total Contractual Cash Obligations
    
    
    94,386
    
    
    
    11,456
    
    
    
    22,012
    
    
    
    21,355
    
    
    
    39,563
   (1)
    
    The leases relate to the leasing by several companies of the Group of
manufacturing facilities and stores under lease agreements. 30




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##### Table of Contents



Amount of Commitment Expiration Per Period(in euro thousands)Total
    
    LessAmounts
    
    than
    
    
    
    
    
    
    
    
    
    After 5Other Commercial Commitments
    
    Committed
    
    1 year
    
    1-3 years
    
    4-5 years
    
    yearsLines of Credit(1)
    
    
    4,720
    
    
    
    4,720
    
    
    
    
    
    
    
    
    
    
    
    Standby Letters of Credit(2)
    
    
    2,980
    
    
    
    250
    
    
    
    1,022
    
    
    
    1,752
    
    
    
    Guarantees(3)
    
    
    26,041
    
    
    
    26,041
    (2)
    
    
    
    
    
    
    
    
    
    
    Total Commercial Commitments
    
    
    33,741
    
    
    
    33,741
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    The lines of credit are primarily used by the Company for purchases of
materials from suppliers.(2)
    
    The letters of credit are primarily issued by the Company in support of
purchases of materials from suppliers.(3)
    
    The guarantees are primarily comprised of surety bonds provided by
certain financial institutions in connection with the Natuzzi 2000
project. The Company, in turn, directly provides guarantees in an
equivalent amount to such financial institutions. The surety bonds will
expire when the Italian Ministry of Budget releases the final approvals of
all investments already made in connection with the Natuzzi 2000 project. 
 Related Party Transactions Please refer to Item 7, Major Shareholders and Related Party
Transactions of this annual report. 
 Research and Development Research and development is a strategic activity for the Group. The
Groups research and development efforts are concentrated on the design of new
products and on improvements to the manufacturing process. See Item 4,
Information on the Company  Manufacturing and Item 4, Information on the
Company  Products and Design. During 2003, the Groups investment in research
and development activities was approximately  8 million. Approximately 130
highly qualified people work in these activities, and more than 100 new
products are generally introduced each year. In September 2001, the Company opened a new design center in the province
of Milan where experienced craftsmen develop and test the highest range of
models. Following the ISO 9001, in November 2001 Natuzzi obtained the ISO
14001 certification that underlines the Company attention towards the
environment. Natuzzis tannery is certified as well. 
 New Accounting Standards under Italian and U.S. GAAP Italian GAAP.In January 2002, the Italian Accounting Profession approved
an accounting standard on interim financial statements. The Company has adopted
this new standard. U.S. GAAP.The new accounting standards under U.S. GAAP are outlined
below: SFAS No. 143: 31




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##### Table of Contents



In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143
requires the Company to record the fair value of an asset retirement obligation
as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development and/or normal use of the assets. The
Company also records a corresponding asset which is depreciated over the life
of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. The Company adopted SFAS No. 143 on January 1, 2003.
Application of this statement did not have an impact on the consolidated
financial statements of the Company. SFAS No. 145: In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not have an effect on the
consolidated financial statements of the Company. SFAS No. 146: In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 did not have an effect on the consolidated
financial statements of the Company. SFAS No. 149: In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Adoption of SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Adoption of SFAS No. 149 will not
have a material impact on the consolidated financial statements of the Company. SFAS No. 150: On May 15, 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
This Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The statement also includes required disclosure for financial
instruments within its scope. For the Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 32




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##### Table of Contents



and otherwise will be effective as of January 1, 2004, except for
mandatorily redeemable financial instruments. For certain mandatorily
redeemable financial instruments, the Statement will be effective for the
Company on January 1, 2005. The effective date has been deferred indefinitely
for certain other types of mandatorily redeemable financial instruments. The
Company currently does not have any financial instruments that are within the
scope of this Statement. FASB interpretation No. 46: In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The Company does not believe that it
has any VIE for consolidation. 33




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##### Table of Contents



Item 6. Directors, Senior Management and Employees The directors, executive officers and officers of the Company at March 31, 2004
were as follows: Name
    
    Age
    
    Position with the CompanyPasquale Natuzzi
    
    
    64
    
    
    Chief Executive Officer, Chairman of the
Board of DirectorsGiuseppe Desantis
    
    
    42
    
    
    General Manager, Vice Chairman of the Board
of DirectorsGiambattista Massaro
    
    
    42
    
    
    General Manager of Purchasing, Logistics
and Overseas Operations, Member of the
Board of DirectorsGianluca Monteleone
    
    
    37
    
    
    Marketing and Communication Director,
Member of the Board of DirectorsGiuseppe Russo Corvace
    
    
    54
    
    
    Managing Director for Accounting and FinanceArmando Bianchini
    
    
    59
    
    
    Outside DirectorStelio Campanale
    
    
    42
    
    
    Outside DirectorPietro Gennaro
    
    
    82
    
    
    Outside DirectorEnrico Vitali
    
    
    43
    
    
    Outside DirectorAntonello Bracalello
    
    
    39
    
    
    South West Europe-Asia Pacific Sales and
Marketing Director.Enrico Carta
    
    
    56
    
    
    Human Resources and Organization DirectorGiovanni Costantino
    
    
    40
    
    
    Research and Development DirectorAnnunziata Natuzzi
    
    
    40
    
    
    Internal Relations and Overseas Human
Resources ManagerEnrico Raggi De Marini
    
    
    41
    
    
    North East Europe, Middle East and Africa
Sales and Marketing DirectorSteve Bailey
    
    
    47
    
    
    Marketing and Retail Development Manager of
Natuzzi Americas Inc.Francesco Basile
    
    
    36
    
    
    Human Resources Manager for Staff and Sales
Depts.Anna Beccari
    
    
    48
    
    
    Consumer Communication ManagerAmedeo Buzzacchino
    
    
    52
    
    
    Provider Planning ManagerVito Arcangelo R. Castoro
    
    
    48
    
    
    Production DirectorGiuseppe Catalano
    
    
    37
    
    
    General CounselFrancesco Cornacchia
    
    
    40
    
    
    Production Manager of Italsofa Bahia LtdNicola Coropulis
    
    
    38
    
    
    South West Europe and Asia-Pacific Sales
Operations & Development ManagerVito Dagostino
    
    
    41
    
    
    Purchasing DirectorGaetano De Cataldo
    
    
    40
    
    
    Executive Vice President of Finance and
Operations of Natuzzi Americas, Inc.Nicola
V.M. DellEdera
    
    
    42
    
    
    Finance DirectorMichele DErcole
    
    
    42
    
    
    Managing Director of Natco S.p.A.Giuseppe Firrao
    
    
    46
    
    
    Trade Communication ManagerPietro Gallotta
    
    
    42
    
    
    Information Systems DirectorCarl Grierson
    
    
    37
    
    
    Director of the Board of Directors of
Castlegate 170 Ltd (renamed Natuzzi United
Kingdom Ltd)Sylvain Grisé
    
    
    41
    
    
    Spain and Portugal Country ManagerLars Hovang
    
    
    37
    
    
    North East Europe, Middle East and Africa
Marketing Manager
 34




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##### Table of Contents



Name
    
    Age
    
    Position with the CompanyCesare Laberinti
    
    
    71
    
    
    Chairman and Managing Director of IMPE S.p.AValeria Maria Lanzilotta
    
    
    38
    
    
    Asia-Pacific Sales ManagerBo Lippert-Larsen
    
    
    42
    
    
    Nordic Region Country ManagerGuglielmo Lo Savio
    
    
    58
    
    
    Exhibition ManagerLoredana Mariani
    
    
    42
    
    
    South West Europe and Asia-Pacific
Marketing ManagerNicola Masotina
    
    
    45
    
    
    Italy Retail Country ManagerJan Mentens
    
    
    37
    
    
    Benelux Country ManagerGiovanni Mercadante
    
    
    47
    
    
    Accounting DirectorOttavio Milano
    
    
    38
    
    
    Control and Internal Auditing ManagerFilippo Vito Petrera
    
    
    40
    
    
    Product Development, Quality and
Environment ManagerJohn Phillips
    
    
    56
    
    
    Executive Vice President of Sales of
Natuzzi Americas Inc.Claudia Piccirilli
    
    
    38
    
    
    Retail Design and Engineering ManagerSalvatore Ragazzo
    
    
    38
    
    
    Chairman and Managing Director of Spagnesi
S.p.A.Dave Riches
    
    
    44
    
    
    Finance Director of Castlegate 170 Ltd
(renamed Natuzzi United Kingdom Ltd)Stefano Sette
    
    
    36
    
    
    Global Product & Style Center ManagerGiuseppe Vito Stano
    
    
    45
    
    
    Sales Administration DirectorFredrick Starr
    
    
    72
    
    
    President and Chief Executive Officer of
Natuzzi Americas Inc.Francesco Stasolla
    
    
    38
    
    
    Managing Director of Italsofa Romania S.r.l.Richard Tan
    
    
    44
    
    
    Chairman and Managing Director of Italsofa
Shanghai Co. LtdVito Testini
    
    
    50
    
    
    Managing Director of Minuano Nordeste S.AGiuseppe Trevissoi
    
    
    42
    
    
    Logistics DirectorGiacomo Ventolone
    
    
    37
    
    
    Public Relations ManagerAntonio Ventricelli
    
    
    50
    
    
    Production Manager and Director of Italsofa
(Shanghai) LtdMarco Siro Verucchi
    
    
    35
    
    
    Asset Protection ManagerFernando R. Vitale
    
    
    38
    
    
    Director of Italsofa Bahia Ltda.Luigi Vitolo
    
    
    58
    
    
    Technical Dept. DirectorRino Zinco
    
    
    49
    
    
    Switzerland Country Manager
 Pasquale Natuzzi, who serves as Chief Executive Officer, founded the
Company in 1959 and has since acted as its principal executive officer. Mr.
Natuzzi held the title of Sole Director of the Company from its incorporation
in 1972 until 1991, when he became the Chairman of the Board of Directors. Giuseppe Desantis is General Manager, Vice Chairman of the Board of
Directors, and also acts as the Companys principal financial officer. He
became Vice Chairman of the Company in 1991. From 1988 to 1991, he was
Assistant to Mr. Natuzzi. In 1987, he managed the Companys pricing and costing
department. From 1984, when he joined the Company, to 1986 he worked in the
Companys accounting department. Giambattista Massaro is General Manager of Purchasing, Logistics and
Overseas Operations and member of the Board of Directors. From 1992 to 1993 he
was assistant to Mr. Natuzzi and from 1990 to 1992 he was Pricing and Costs
Manager. He joined the Company in 1987 as a buyer. He is also Chairman of Natco
S.p.A and of Natuzzi Trade Service S.r.l. as well as Director of Italsofa Bahia
Ltda., 35




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##### Table of Contents



Italsofa Romania S.r.l. and Natuzzi Asia Ltd. Gianluca Monteleone is Marketing and Communication Director and member of
the Board of Directors. He joined the Company and became a Director in 1999. He
was previously a brand manager at Johnson & Johnson, Italy and Marketing
Manager at Sara Lee International. Giuseppe Russo Corvace acts as Managing Director for Accounting and
Finance. He is a partner of Vitali, Romagnoli, Piccardi e Associati (formerly
Tremonti e Associati), a law and tax consulting firm serving the Company and
other major domestic and multinational companies. He has also served as a
consultant to non-profit organizations. He serves as member of the Board of
Auditors of a number of other Italian companies. He is delegated by the Board
to supervise all activities related to domestic and international tax issues. Armando Branchini has been an Outside Director of the Company since 2001.
He founded InterCorporate  Strategie e Impresa, a consultancy firm specialized
in business strategies and strategic marketing. He is a professor of Strategic
Marketing of Luxury Goods at the IULM University in Milan. From 1973 through
1987, he was responsible for establishing and implementing a marketing program
aimed at supporting the entrance and development of Italian fashion in
principal international markets. Stelio Campanale is an Outside Director of the Company and has been a
member of the Board of Directors since 1991. He was Legal Counsel of the
Company from 1991 to 1997, and then served as a consultant of the Company. He
was previously a senior consultant at Praxi S.p.A., a corporate consulting
company, from 1988 to 1990. Pietro Gennaro has been an Outside Director of the Company since 1993. He
is the founder of Gennaro-Boston Associati, an Italian management consulting
firm that is a subsidiary of the Boston Consulting Group. He is currently a
professor at the University of Pavia and at ISTUD, a senior management business
school. Mr. Gennaro is also a management consultant to major companies in
Italy, serving as Chief Executive Officer of PGA  Strategia e Organizzazione,
a management consultancy. Previously, he has also served as President of Waste
Management Italia. Enrico Vitali has been an Outside Director of the Company since 1994. He
is a Certified Public Accountant and a partner of Vitali, Romagnoli, Piccardi e
Associati (formerly Tremonti e Associati), a law and tax consulting firm
serving the Company and other major domestic and multinational companies. Mr.
Vitali also serves as a member of the Boards of Statutory Auditors and the
Boards of Directors of a number of other Italian companies. Antonello Bracalello is South West Europe & Asia-Pacific Sales and
Marketing Director. He is also Chairman of Natuzzi Ibérica S.A. and member of
the Board of Directors of Kingdom of Leather Ltd and Castlegate 170
Ltd. (renamed Natuzzi United Kingdom Ltd). He
joined the Company in September 2001. Previously, he was Sales Manager for both
Blu S.p.A., a telecommunications company, and Computer Discount, a company
specializing in retail PC sales in Italy. Enrico Carta joined the Company in February 2002 as Human Resources and
Organization Director. He is also Director of Spagnesi S.p.A. He has served as
a human resources manager over several years for some of the most important
Italian industrial and consulting firms. Giovanni Costantino has served as Research and Development Director of the
Group since 1999. He was previously a consultant for furnishings and was in
charge of developing the Companys Decorator program. Annunziata Natuzzi is Internal Relations and Overseas Human Resources
Manager. She joined the Company in 1981. She started working in the Production
Department and, in two years, 36




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##### Table of Contents



worked briefly in all of the departments of the Group. She has extensive
experience in the Italian Sales Department and in the International Sales
Administration Department. She has worked in the Personnel Department since
1990. Enrico Raggi De Marini is North East Europe, Middle East and Africa Sales
and Marketing Director. He is also Chairman of Natuzzi Benelux N.V., managing
Director of Natuzzi Germany GmbH and Director of Natuzzi Nordic ApS. He joined
the Company in March 2003. He previously worked for Salvatore Ferragamo Italia,
CISA Group and Cirio-Bertolli-De Rica. Steve Bailey is Marketing and Retail Development Manager of Natuzzi
Americas Inc. He joined the Company in October 2000. Prior to that, he was
Director of Retail Advertising at Bassett Furniture. Francesco Basile is Human Resources Manager for Staff and Sales Depts. He
joined the Company in 1997 as Selection and Training Manager. Previously he
worked in SIEMENS Nixdorf Information system AG Group as HR manager and was in
charge of trade union relations. Anna Beccari is Consumer Communication Manager. She joined the Company in
June 2002. She previously worked at Leo Burnett Italia for 20 years, most
recently as Client Service Director, working with clients as Coca Cola Italia,
Ariston Europe, Gordons Gin Pampero Rum, Johnnie Walker and several banks. Amedeo Buzzacchino is Provider Planning Manager. He joined the Company in
January 1988 as an employee in the Logistics Department. Vito Arcangelo R. Castoro is Production Director of the Company. He joined
the Group in 1989 as an employee in the Logistics Department. In 1999, he
managed one of the Italian factories and subsequently managed several
factories. Previously he worked for Calabrese S.p.A, a producer of industrial
vehicles. Giuseppe Catalano is the Companys General Counsel. He joined Natuzzi in
September 2000. Previously, he worked for 4 years as a lawyer in private
practice and for 5 years at Sanpaolo IMI Banking Group in Luxembourg and Milan. Francesco Cornacchia is Production Manager and Director of Italsofa Bahia
Ltda., a Brazilian subsidiary of the Company. He started in Natuzzi in 1992 as
an employee in the Logistics Department. In 1999, he managed the Production
Administration in one of the Italian factories. Nicola Coropulis is South West Europe & Asia-Pacific Sales Operations and
Development Manager. He joined the Company in 1992 as an employee in the Sales
Administration Department. He is also Chairman of Natuzzi (Switzerland) AG and
Director of Natuzzi Ibérica S.A. Vito Dagostino is Purchasing Director. He is also Director of the Romanian
subsidiary, Italsofa Romania S.r.l. He joined the Company in 1988 and has
previously served as a buyer. Gaetano De Cataldo is Executive Vice President of Finance and Operations
of Natuzzi Americas, Inc. He previously served the Company as Sales Manager for
Latin America. From 1995 to 1997, he was International Franchisee Operations
Manager, and from 1993 to 1995 he was Assistant Sales Administration Manager.
He joined the Company in 1990 as a customer service representative. Nicola
Vittorio Maria DellEdera is Finance Director. He joined the Company in 1999. From
1997 to 1999, he was head of the Financial Analysis Department in the New York
branch of Banca di Roma, an Italian bank. He previously worked in Banca di
Romas branches in Rome and Bari. 37




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##### Table of Contents



Michele DErcole is Managing Director of Natco S.p.A., the Companys
subsidiary engaged in leather and dyeing operations. He joined the Company in
1989 and has previously served as a buyer and later as Purchasing Director. Giuseppe Firrao is Trade Communication Manager. He joined the Company in
1996. From 1992 to 1996, he was Account Director at Dorland Wilkens, Italy, an
advertising agency network. Pietro Gallotta is Information Systems Director. He joined the Company in
February 2004. Previously, he worked for important consulting firms specialized
in Business Innovation, Information Systems Management and Reorganization. Carl
Grierson is Director of Castlegate 170 Ltd (renamed Natuzzi United
Kingdom Ltd). Previously he was General Manager for Buying, Merchandising and
Logistics of Kingdom of Leather Ltd. He joined Kingdom of Leather Ltd in 1992
and rapidly progressed through the company, holding management positions in
Scotland regional management, exhibition coordination and buying and
merchandising. Sylvain Grisé is Spain and Portugal Country Manager. He is Managing
Director of Natuzzi Iberica S.A., the Companys subsidiary responsible for
sales operations in Spain and Portugal. He joined the Group in May 2002.
Previously, he worked for KA International. Lars Hovang is North East Europe, Middle East and Africa Marketing Manager
and Director of Natuzzi Nordic ApS. He joined the Company in January 2002,
after working for Bang & Olufsen. Cesare Laberinti is Chairman and Managing Director of IMPE S.p.A., the
subsidiary engaged in polyurethane foam operations. Valeria Maria Lanzilotta is Sales Manager of Asia-Pacific. She is Director
of Natuzzi Asia Ltd, the Companys Hong Kong subsidiary. She joined the parent
company in 1996. Prior to 1996, she held positions which involved extensive
travel throughout China. She is fluent in Mandarin. Bo Lippert-Larsen is Nordic Region Country Manager. He is Managing
Director of Natuzzi Nordic ApS, the Copenhagen-based subsidiary of the Group.
He joined Natuzzi in December 2002. Guglielmo Lo Savio is Exhibition Manager. He joined the Company in 1981,
and has previously served as Sales Administration Manager. Before joining the
Company, was employed by Calcestruzzi S.p.A. for 11 years. Loredana
Mariani is South East Europe and Asia-Pacific Marketing Manager.
She joined the Company in 2002. Previously, she worked for such major companies
as Estée Lauder Italia, Reckitt & Colman Italia and Alivar. Nicola Masotina is Italy Retail Country Manager. He joined the Company in
1994 as Sales Manager for Divani & Divani franchised stores in Italy.
Previously, he was Area Manager for Southern Italy for the franchised stores of
GIG, an Italian group which distributes toys. Jan Mentens has been Belgium Country Manager since April 2003. He is
Managing Director 38




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##### Table of Contents



of Natuzzi Benelux NV. Giovanni Mercadante is Accounting Director. He joined the Company in 1983. Ottavio Milano is Control and Internal Auditing Manager. He joined the
Company in May 1992. Filippo Vito Petrera is Product Development, Quality and Environment
Manager. He joined the Group in March 1995. He was previously in charge of the
Technical Office. John Phillips is Executive Vice President of Sales of Natuzzi Americas,
Inc., responsible for sales strategy and planning throughout North and South
America. He was previously Vice President of the Upholstery Division at Bedford
Furniture, Canada, and then worked as Sales Manager of National Accounts for
Spring Air Canada. He joined the Company in August 1999 as Vice President of
Sales and Marketing, Canada. Claudia Piccirilli is Retail Design and Engineering Manager. She joined
the Company in July 2003. She previously worked for New Trading Company S.p.A.,
a company specialized in engineering and design of new clothing shops. Salvatore Ragazzo is Chairman and Managing Director of Spagnesi S.p.A.,
the subsidiary engaged in Wood Trim Products manufacturing operations. He
joined the Group in 1989 as an analyst programmer. David Riches is Finance Director for Castlegate 170 Ltd (renamed Natuzzi
United Kingdom Ltd). He joined the Group in January 2002. Previously he held
the position of Finance Director for Hi-Tec Sports International Ltd (a wholly
owned subsidary of Hi-Tec Sports PLC) and prior to that he worked for Amstrad
PLC for ten years in various finance positions culminating in being Financial
Controller and Company Secretary. Stefano Sette is Global Product and Style Center Manager. He joined
Natuzzi in 1990, starting in the Sales Administration and Accounting
Department. Giuseppe Vito Stano has been Sales Administration Director of the Company
since 1991. He is also Sole Director of Natuzzi Americas, Inc. From 1986 to
1991, he was Executive Vice President of Natuzzi Upholstery Inc. (currently
Natuzzi Americas, Inc.) in the United States. Prior to that, he was Assistant
Vice President of Natuzzi Upholstery Inc. He joined the Group in 1980, as a
staff member of the Companys Export Department. Fredrick Starr is President and CEO of Natuzzi Americas, Inc. He joined
the Company in October 2001. Since retiring in 1998 from Thomasville Furniture
Industries, where he served as President for 16 years, he has been involved in
several business and civic efforts. Most recently, he has worked with Style
Craft Metal Beds as part owner and adviser. Additionally, he was appointed by
Governor Hunt to lead an effort to bring Major League Baseball to North
Carolina, has served as President of Piedmont Triad Partnership and is
currently on the North Carolina Environmental Management Commission. Francesco Stasolla is Chairman and Managing Director of Italsofa Romania
S.r.l.. He started at Natuzzi in January 1988 as a buyer. Richard Tan is Chairman and Managing director of Italsofa (Shanghai) Ltd.
He has been in the upholstery business for 17 years. In November 2000, he
began cooperation with Natuzzi Asia Ltd for the start-up of the Chinese
production operations. He was appointed as Chairman of Italsofa Shanghai Co.
Ltd on October 2002. 39




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##### Table of Contents



Vito Testini is Managing Director of Minuano Nordeste S.A., a Brazilian
subsidiary of the Group, and Director of Italsofa Bahia Ltda. He joined the
Company in 1985. After a period work in production, he has been Quality Manager
of the Group since 2000. From 2000 since 2003 he was Production Director of
Italsofa Bahia Ltda. Giuseppe Trevissoi is Logistics Director. He joined the Company in 1999.
He previously worked in R&D at Alenia, was the Purchasing Manager at Allied
Signal and Logistics Manager at SKF and Bosch. Giacomo Ventolone is Public Relations Manager of
the Group. From 1995 to 1997 he worked at De Agostini DL, Publishing House
based in Rome. In 1997, he started working for Natuzzi Communications
Department. He has been managing external communications initiatives
for the Group at a national and international level by coordinating a network
of PR Agencies in 12 countries. Antonio Ventricelli is Production Manager and Director of Italsofa
(Shanghai) Ltd. He started at Natuzzi in July 1990. He has worked as a
sofa-prototypist at the Company for ten years. He has previously worked as an
upholster at other manufacturing firms. Marco Siro Verucchi joined the Company in August 2003 as Asset Protection
Manager. Previously, he was captain in the Guardia di Finanza (Military Corp
of Economic and Financial Policy) where he was in charge of, among other
things, activity against terrorism, organized crime and economic and financial
crimes. Fernando R. Vitale is Managing Director of the Brazilian subsidiary
Italsofa Bahia Ltda. Previously, he worked for 15 years at Curtume Touro Ltda.,
a Brazilian leather tannery. Luigi Vitolo is Technical Department Director. Previously was
Industrialization Manager. He joined the Company in October 2001. Prior to
that, he was a teacher in a technical school and acted as a project consultant
for industrial planning and building renovations. Rino Zinco is Switzerland Country Manager. He joined the Company in
2003. He is General Manager of the Swiss subsidiary Natuzzi (Switzerland)
AG/SA. Annunziata Natuzzi is the daughter of Pasquale Natuzzi. There are no other
family relationships among the directors and executive officers of the Company. Directors are elected for three-year terms. The next election of Directors
will take place in April 2007. See Item 10, Additional Information  By-laws 
Board of Directors. 
 Compensation of Directors and Officers Aggregate compensation paid by the Group to the directors and officers
named above was approximately  9.0 million in 2003. 
 Share Ownership Mr. Pasquale Natuzzi owns 47.7% of the issued and outstanding Ordinary
Shares. As of December 16, 2003, Mr. Natuzzi holds his entire beneficial
ownership of Natuzzi S.p.A. shares (other than 196 ADSs) through INVEST 2003 S.r.l., an Italian holding company
(having its registered office at Via Gobetti 8, Taranto, Italy) wholly-owned by
Pasquale Natuzzi. Each of Annunziata Natuzzi and Anna Maria Natuzzi owns 2.4%
of the issued and outstanding Ordinary Shares. None of the Companys other
directors and officers listed above owns one percent or more of the Ordinary
Shares. See Item 7, Major Shareholders and Related Party Transactions  Major
Shareholders. 40




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##### Table of Contents



Statutory Auditors The following table sets forth the names of the three members of the board
of statutory auditors of the Company and the two alternate statutory auditors
and their respective positions, as of the date of this annual report. The
current board of statutory auditors was elected for a three-year term on April
30, 2004. Name
    
    PositionFrancesco Venturelli
    
    ChairmanCataldo Sferra
    
    MemberCostante Leone
    
    MemberGiuseppe Pio Macario
    
    AlternateVittorio Boscia
    
    Alternate
 During 2003, our statutory auditors received in the aggregate
approximately  108,000 in compensation for their services to the Company and
its Italian subsidiaries. 
 External Auditors On April 30, 2004, at the annual general shareholders meeting, KPMG
S.p.A., with offices in Bari, Italy, was appointed as the Companys external
auditors for a three-year period. 
 Employees As at December 31, 2003, the Group had 6,230 employees (3,983 in Italy and
2,247 abroad), as compared to 5,742 and 4,643 on December 31, 2002 and 2001,
respectively. As at December 31, 2003, the average age of the Groups employees
was approximately 30 years. Historically, there has been very little turnover
among the Groups employees and management believes that the Groups relations
with its workers are good. The Group maintains a company intranet and, as a
major employer in the Bari/Santeramo area, is, in the view of management, an
important participant in community life. Italian law provides that, upon termination of employment for whatever
reason, employees are entitled to receive certain indemnity payments based on
length of employment. As at December 31, 2003, the Company had  27.6 million
reserved for such termination indemnities, such reserves being equal to the
amounts, calculated on a percentage basis, required by Italian law. During certain years, the Group receives benefits from the Italian
Government and from the European Union for hiring and training employees.
During 2001, the Company received  2.3 million in employment incentives, while
in 2002 and 2003 the Company did not receive any significant employment
incentives. Under the Italian Governments youth employment program, since 2003, the
Group has been entitled to hire workers under age 32 for its plants in the
Mezzogiorno as temporary employees under short-term contracts of 24 months.
This program enables Italian employers to reduce the required social security contributions payable with respect to such employees. In
addition, the Italian Government 41




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##### Table of Contents



provides for reduced social security
contributions payable by employers in the Mezzogiorno with respect to its
permanent employees. Pursuant to an agreement with the European Union in early
1995, however, such reductions and incentives are being gradually phased out. Currently, most of the Groups benefits are derived from a European Union
plan providing incentives for the hiring of new permanent employees. The
European Social Fund (a European Union organization), acting through the
European Regions covered by the plan, provides employment incentives in the
form of grants and subsidizes social security contributions paid for new
permanent employees hired during the last three years, upon fulfilment of the
plans specific requirements. 42




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions 
 Major Shareholders Mr. Pasquale Natuzzi, who founded the Company and is currently Chairman of
the Board of Directors and Chief Executive Officer, owns 47.7% of the issued
and outstanding Ordinary Shares of the Company (52.8% of the Ordinary Shares if
the Ordinary Shares owned by members of Mr. Natuzzis immediate family (the
Natuzzi Family) are aggregated) and controls the Company, including its
management and the selection of its Board of Directors. As of December 16,
2003, Mr. Natuzzi holds his entire beneficial ownership of Natuzzi S.p.A.
shares (other than 196 ADSs) through INVEST 2003 S.r.l., an Italian holding
company (having its registered office at Via Gobetti 8, Taranto, Italy)
wholly-owned by Pasquale Natuzzi. The following table sets forth information, as reflected in the records of
the Company as at March 31, 2004, with respect to each person who owns more
than 5% of the Companys Ordinary Shares or ADSs. Number of Shares
    
    PercentOwned
    
    OwnedPasquale Natuzzi(1)
    
    
    26,064,906
    
    
    
    47.7
    %Royce & Associates LLC
    
    
    4,147,600
    
    
    
    7.6
    %Marathon Asset Management Ltd
    
    
    3,146,358
    
    
    
    5.6
    %
   (1)
    
    If Mr. Natuzzis Ordinary Shares are aggregated with those held by
members of the Natuzzi Family, the amount owned would have been 28,864,906
and the percentage ownership of Ordinary Shares would have been 52.8%. In addition, the Natuzzi Family has a right of first refusal to purchase
all the rights, warrants or other instruments which The Bank of New York, as
Depositary under the Deposit Agreement, determines may not lawfully or feasibly
be made available to owners of ADSs in connection with each rights offering, if
any, made to holders of Ordinary Shares. None of the shares held by the above
shareholders have any special voting rights. As of May 28, 2004, 54,681,628 Ordinary Shares were outstanding. As of
the same date, there were 25,814,497 ADSs (equivalent to 25,814,497 Ordinary
Shares) outstanding. The share equivalent to outstanding ADSs was equal to
47.2% of the total number of outstanding Natuzzi Ordinary Shares. Since certain of the shares and ADSs were held by brokers or other
nominees, the number of direct record holders in the United States may not be
fully indicative of the number of direct beneficial owners in the United States
or of where the direct beneficial owners of such shares are resident. 
 Related Party Transactions No member of the board of directors or board of statutory auditors and no
senior officer (including close members of any such persons families) nor any
enterprise over which any such person is able to exercise a significant
influence has had any interest in any transactions that are or were unusual in
their nature or conditions or are or were material to the Company, and that
were either effected since December 31, 1999 or that were effected during an
earlier period and remain in any respect outstanding or 43




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unperformed. The Company has not provided any loans or guarantees to or
for the benefit of any such person since December 31, 1999 or that remain
outstanding or unperformed. 
 Item 8. Financial Information 
 Consolidated Financial Statements Please refer to Item 18, Financial Statements of this annual report. 
 Export Sales Export sales from Italy totaled approximately  651 million in 2003, as
compared with  659 million in 2002, which represented 88.6% of the Companys
2002 net leather- and fabric-upholstered furniture sales (89.7% in 2002). 
 Legal Proceedings Neither the Company nor any of its subsidiaries is a party to any legal or
governmental proceeding that is pending or, to the Companys knowledge,
threatened or contemplated against Natuzzi or any such subsidiary that, if
determined adversely to Natuzzi or any such subsidiary, would have a materially
adverse effect, either individually or in the aggregate, on the business,
financial condition or results of operations of the Group. 
 Dividends Payment of dividends of  0.14 per Ordinary Share in respect of the year
ended December 31, 2003 was approved at the Companys Annual General Meeting
held on April 30, 2004 and will be paid starting from July 14, 2004 to the
shareholders of record as of May 28, 2004. No further dividends in respect of
the year ended December 31, 2003 are expected to be approved or paid. The table below sets forth the cash dividends paid per Ordinary Share in
respect of each of the years indicated, and translated into dollars per ADS
(each representing one Ordinary Share) at the Noon Buying Rate on the date or
dates the respective dividends were first payable or, in the case of the
dividend in respect of the year ended December 31, 2003, the Noon Buying Rate
on December 31, 2003. Dividends per Ordinary
    
    Translated intoYear ended December 31,
    
    Share
    
    dollars per ADS2003
    


    0.1366
    
    
    $
    0.152002
    


    0.3300
    
    
    $
    0.352001
    


    0.2872
    
    
    $
    0.262000
    


    0.2892
    
    
    $
    0.251999(1)
    


    1.6351
    
    
    $
    1.54
   (1)
    
    Includes a special dividend of  1.1155 per Ordinary Share. Although the Company currently expects to continue to pay an annual
year-end dividend, the payment of future dividends will depend upon the
Companys earnings and financial condition, capital requirements, governmental
regulations and policies and other factors. Accordingly, there can be no
assurance that dividends in future years will be paid at a rate similar to
dividends paid in past years. Dividends paid to owners of ADSs or Ordinary Shares who are United States
residents qualifying under the Income Tax Convention will generally be subject
to Italian withholding tax at a 44




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##### Table of Contents



maximum rate of 15%, provided that certain certifications are timely given.
Such withholding tax will be treated as a foreign income tax which U.S. owners
may elect to deduct in computing their taxable income, or, subject to the
limitations on foreign tax credits generally, credit against their United
States federal income tax liability. See Item 10, Additional Information 
Taxation  Taxation of Dividends. 45




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Item 9. The Offer and Listing 
 Trading Markets and Share Prices Natuzzis Ordinary Shares are listed on the New York Stock Exchange (the
NYSE) in the form of ADSs under the symbol NTZ. Neither the Companys
Ordinary Shares nor its ADSs are listed on a securities exchange outside the
United States. The Bank of New York is the Companys Depositary for purposes of
issuing the ADRs evidencing ADSs. Trading in the ADSs on the NYSE commenced on May 13, 1993. The following
table sets forth, for the periods indicated, the high and low closing prices
per ADS as reported by the NYSE.(1) Price Range of ADSsHigh
    
    Low1999:First Quarter
    
    
    24.500
    
    
    
    16.375Second Quarter
    
    
    19.875
    
    
    
    16.625Third Quarter
    
    
    20.125
    
    
    
    16.375Fourth Quarter
    
    
    20.000
    
    
    
    12.5002000:First Quarter
    
    
    13.000
    
    
    
    9.688Second Quarter
    
    
    12.813
    
    
    
    9.875Third Quarter
    
    
    12.190
    
    
    
    9.750Fourth Quarter
    
    
    13.063
    
    
    
    11.3752001:First Quarter
    
    
    14.050
    
    
    
    12.125Second Quarter
    
    
    14.150
    
    
    
    11.500Third Quarter
    
    
    14.000
    
    
    
    10.150Fourth Quarter
    
    
    14.640
    
    
    
    10.8602002:First Quarter
    
    
    15.700
    
    
    
    13.910Second Quarter
    
    
    16.100
    
    
    
    13.350Third Quarter
    
    
    15.040
    
    
    
    10.920Fourth Quarter
    
    
    10.970
    
    
    
    9.1202003:First Quarter
    
    
    10.050
    
    
    
    7.240Second Quarter
    
    
    9.600
    
    
    
    7.990Third Quarter
    
    
    10.390
    
    
    
    7.820Fourth Quarter
    
    
    11.000
    
    
    
    9.4602004:First Quarter
    
    
    11.550
    
    
    
    10.150Monthly Data:November 2003
    
    
    11.000
    
    
    
    9.710December 2003
    
    
    10.100
    
    
    
    9.460January 2004
    
    
    11.170
    
    
    
    10.150February 2004
    
    
    11.350
    
    
    
    10.480March 2004
    
    
    11.550
    
    
    
    10.500April 2004
    
    
    11.550
    
    
    
    10.710May 2004
    
    
    10.970
    
    
    
    10.150June 2004 (through June 25)
    
    
    10.800
    
    
    
    10.450
   (1)
    
    Starting on January 1, 2001, the NYSE changed its practice of reporting
stock quotes from a fractional to a decimal system. All stock quotes prior
to this date, originally reported in fractions, were restated into
decimals for ease of comparison. 46




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Item 10. Additional Information 
 By-laws The following is a summary of certain information concerning the Companys
shares and By-laws (Statuto) and of Italian law applicable to Italian stock
corporations whose shares are not listed in a regulated market in the European
Union, as in effect at the date of this annual report. The summary contains all
the information that the Company considers to be material regarding the shares
but does not purport to be complete and is qualified in its entirety by
reference to the By-laws or Italian law, as the case may be. In January 2003, the Italian government approved a wide-ranging reform of
the corporate law provisions of the Italian Civil Code (Civil Code), which
came into force on January 1, 2004. The following summary takes into account
the 2003 corporate law reform. General The Companys By-laws are not yet in compliance with the 2003 corporate
law reform. The deadline for adopting the necessary amendments is September
30, 2004. Accordingly, a meeting of the Companys shareholders has been
convened on July 22, 2004 to adopt such amendments. The issued share capital of the Company consists of 54,681,628 Ordinary
Shares, par value  1 per share. All the issued shares are fully paid,
non-assessable and in registered form. The Company is registered with the Companies Registry of Bari at n.
19551, with its registered office at 51 Corso Cavour, Bari, Italy and its
principal executive offices at 47, Via Iazzitiello, Santeramo in Colle, Bari,
Italy. As set forth in Article 5 of the By-laws, the Companys corporate purpose
is the production, marketing and sale of sofas, armchairs, furniture in general
and raw materials used for their production. The Company is generally
authorized to take any actions necessary or useful to achieve its corporate
purpose. Authorization of Shares Additional shares may be authorized in connection with capital increases
approved by the Companys shareholders in an extraordinary meeting, but this
authorization would generally be given only after recommendation by the
Companys board of directors. Form and Transfer of Shares The Companys Ordinary Shares are in certificated form and are
transferable by endorsement of the share certificate by or on behalf of the
registered holder, with such endorsement either authenticated by a notary in
Italy or elsewhere or by a broker-dealer or a bank in Italy. The transferee
must request that the Company enter his name in the register of shareholders in
order to establish his rights as a shareholder as against the Company. Dividend Rights 47




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Payment by the Company of any annual dividend is proposed by the board of
directors and is subject to the approval of the shareholders at the annual
shareholders meeting. Before dividends may be paid out of the Companys
unconsolidated net income in any year, an amount at least equal to 5.0% of such
net income must be allocated to the Companys legal reserve until such reserve
is at least equal to one-fifth of the par value of the Companys issued share
capital. If the Companys capital is reduced as a result of accumulated
losses, dividends may not be paid until the capital is reconstituted or reduced
by the amount of such losses. The Company may pay dividends out of available
retained earnings from prior years, provided that, after such payment, the
Company will have a legal reserve at least equal to the legally required
minimum. No interim dividends may be approved or paid. Dividends will be paid in the manner and on the date specified in the
shareholders resolution approving their payment (usually within 30 days of the
annual general meeting). Dividends which are not collected within five years of
the date on which they become payable are forfeited to the benefit of the
Company. Holders of ADSs will be entitled to receive payments in respect of
dividends on the underlying shares through The Bank of New York, as ADR
depositary, in accordance with the deposit agreement relating to the ADRs. Voting Rights Registered holders of the Companys Ordinary Shares are entitled to one
vote per Ordinary Share. As a registered shareholder, the Depositary (or its nominee) will be
entitled to vote the Ordinary Shares underlying the ADSs. The Deposit
Agreement requires the Depositary (or its nominee) to accept voting
instructions from holders of ADSs and to execute such instructions to the
extent permitted by law. Neither Italian law nor the Companys By-laws limit
the right of non-resident or foreign owners to hold or vote shares of the
Company. Board of Directors Pursuant to the Companys By-laws, its board of directors must consist of
seven to eleven individuals. The board of directors is elected at a
shareholders meeting for three fiscal years. The directors, who may but are
not required to be shareholders of the Company, may be re-appointed for
successive terms. The board of directors has complete power of ordinary and
extraordinary administration of the Company and in particular may perform all
acts it deems advisable for the achievement of the Companys corporate
purposes, except for the actions reserved by applicable law or the By-laws to a
vote of the shareholders at an ordinary or extraordinary shareholders meeting.
See also Meetings of Shareholders. The board of directors must appoint a chairman (presidente) and may
appoint a vice-chairman. The chairman of the board of directors and the
vice-chairman and the managing directors, if any, are severally the legal
representatives of the Company. The board of directors may delegate certain
powers to one or more managing directors (amministratori delegati), determine
the nature and scope of the delegated powers of each director and revoke such
delegation at any time. The managing directors must ensure, under the
supervision of the board of directors, that the Companys organizational and
accounting structure is appropriate for its business and must report to the
board of directors and board of statutory auditors at least every six months on
the Companys business and the main transactions carried out by the Company or
by its subsidiaries. The board of directors may not delegate certain responsibilities,
including the preparation and approval of the draft financial statements, the
approval of merger and de-merger plans to be presented to 48




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shareholders meetings, increases in the amount of the Companys share
capital or the issuance of convertible debentures (if any such power has been
delegated to the board of directors by vote of the extraordinary shareholders
meeting) and the fulfillment of the formalities required when the Companys
capital has to be reduced as a result of accumulated losses that reduce the
Companys stated capital by more than one-third. See also Meetings of
Shareholders. The board of directors may also appoint a general manager (direttore
generale) and one or more senior managers (direttori), who report directly to
the board, and confer powers for single acts or categories of acts to employees
of the Company or persons unaffiliated with the Company. Meetings of the board of directors are called seven days in advance by
registered letter or three days in advance by telegram, by the chairman on his
own initiative and must be called upon the request of any director or statutory
auditor. Meetings may be held in person, or by video-conference or
tele-conference, in any member state of the European Union, the United States,
Switzerland, Australia or Japan. The quorum for meetings of the board of
directors is a majority of the directors in office. Resolutions are adopted by
the vote of a majority of the directors present at the meeting. In case of a
tie, the chairman has the deciding vote. Pursuant to the 2003 reform, directors having any interest in a proposed
transaction must disclose their interest to the board, even if such interest is
not in conflict with the interest of the company in the same transaction. The
interested director is not required to abstain from voting on the resolution
approving the transaction, but the resolution must state explicitly the reasons
for, and the benefit to the company of, the approved transaction. In the event
that these provisions are not complied with, or that the transaction would not
have been approved without the vote of the interested director, the resolution
may be challenged by a director or by the board of statutory auditors if the
approved transaction may be prejudicial to the Company. A managing director
having any such interest in a proposed transaction within the scope of his
powers must solicit prior board approval of such transaction. The interested
director may be held liable for damages to the Company resulting from a
resolution adopted in breach of the above rules. Finally, directors may be
held liable for damages to the Company if they illicitly profit from insider
information or corporate opportunities. Under Italian law, directors may be removed from office at any time by the
vote of shareholders at an ordinary shareholders meeting. However, if removed
in circumstances where there was no just cause, such directors may have a claim
for indemnification against the Company. Directors may resign at any time by
written notice to the board of directors and to the chairman of the board of
statutory auditors. The board of directors must appoint substitute directors
to fill vacancies arising from removals or resignations, subject to the
approval of the board of statutory auditors, to serve until the next ordinary
shareholders meeting. If at any time more than half of the members of the
board of directors appointed at a shareholders meeting resign or otherwise
cease to be directors, the remaining members of the board of directors (or the
board of statutory auditors if all the members of the board of directors have
resigned or ceased to be directors) must promptly call an ordinary
shareholders meeting to appoint the new directors. The remuneration of directors is determined by shareholders at ordinary
shareholders meetings. The board of directors, after consultation with the
board of statutory auditors, may determine the remuneration of directors that
perform management or other special services for the Company, such as the
managing director. Directors are entitled to reimbursement for expenses
reasonably incurred in connection with their functions. With effect from January 1, 2004, an Italian stock corporation may adopt
one of two different corporate governance models as an alternative to the
current model based on a board of directors and a board of statutory auditors.
Stock corporations may opt for (i) a one-tier model with a single board of 49




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directors, including an audit committee composed of independent
non-executive directors, or (ii) a two-tier model, including a management
board, which is entrusted with management responsibilities, and a supervisory
board which is entrusted mainly with control and supervisory responsibilities
and, among other functions, appoints and removes the members of the management
board and approves the companys annual financial statements. The adoption of
one of the new corporate governance models requires an extraordinary
shareholders meeting resolution. The Company has no plans to change its
current governance structure. Statutory Auditors In addition to electing the board of directors, the Companys shareholders
elect a board of statutory auditors (Collegio Sindacale), appoint its chairman
and set the compensation of its members. At ordinary shareholders meetings of
the Company, the statutory auditors are elected for a term of three fiscal
years, may be re-elected for successive terms and may be removed only for cause
and with the approval of a competent court. Membership of the board of
statutory auditors is subject to certain good standing, independence and
professional requirements. In particular, at least one member must be a
certified auditor. The Companys By-laws currently provide that the board of statutory
auditors shall consist of three statutory auditors and two alternate statutory
auditors (who are automatically substituted for a statutory auditor who resigns
or is otherwise unable to serve). The Companys board of statutory auditors is required, among other things,
to verify that the Company (i) complies with applicable laws and its By-laws,
(ii) respects principles of good governance, and (iii) maintains adequate
organizational structure, internal controls and administrative and accounting
systems. The board of statutory auditors reports to the annual shareholders
meeting on the results of its activity and the results of the Companys
operations. The Companys board of statutory auditors is required to meet at least
once every ninety days. In addition, the statutory auditors of the Company must
be present at meetings of the Companys board of directors and shareholders
meetings. The statutory auditors may decide to call a meeting of the
shareholders or the board of directors, ask the directors information about the
management of the Company, carry out inspections and verifications at the
Company and exchange information with the Companys external auditors. Any
shareholder may submit a complaint to the board of statutory auditors regarding
facts that such shareholder believes should be subject to scrutiny by the board
of statutory auditors, which must take any complaint into account in its report
to the shareholders meeting. If shareholders collectively representing 5% of
the Companys share capital submit such a complaint, the board of statutory
auditors must promptly undertake an investigation and present its findings and
any recommendations to a shareholders meeting (which must be convened
immediately if the complaint appears to have a reasonable basis and there is an
urgent need to take action). The board of statutory auditors may report to the
competent court serious breaches of directors duties. As mentioned in the preceding section, starting from January 1, 2004,
Italian stock corporations may depart from the traditional Italian model of
corporate governance structure and opt for two alternative models, neither of
which includes a board of statutory auditors. External Auditor The 2003 corporate law reform requires companies to appoint an external
auditor or a firm of external auditors, each of them qualified to act in such
capacity under Italian law, that shall verify (i) during the fiscal year, that
the companys accounting records are correctly kept and accurately reflect the
companys activities, and (ii) that the financial statements correspond to the
accounting records and the 50




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verifications conducted by the external auditors and comply with
applicable rules. The external auditor or the firm of external auditors
express their opinion on the financial statements in a report that may be
consulted by the shareholders prior to the annual shareholders meeting. The external auditor or the firm of external auditors is appointed for a
three-year term and its compensation is determined by a vote at an ordinary
shareholders meeting, having heard the board of statutory auditors, may be
re-elected for two further consecutive terms, and may be removed only for cause
by a vote of the shareholders meeting and with the approval of a competent
court. On April 30, 2004, the Companys shareholders appointed KPMG S.p.A., with
legal offices at Via Vittor Pisani, 25, 20124 Milano, Italy, as its external
auditors for a fifth consecutive three-year term. Meetings of Shareholders Shareholders are entitled to attend and vote at ordinary and extraordinary
shareholders meetings. Votes may be cast personally or by proxy. Shareholder
meetings may be called by the Companys board of directors (or the board of
statutory auditors) and must be called if requested by holders of at least 10%
of the issued shares. If a shareholders meeting is not called despite the
request by shareholders and such refusal is unjustified, a competent court may
call the meeting. Shareholders are not entitled to request that a meeting of
shareholders be convened to vote on matters which, as a matter of law, shall be
resolved on the basis of a proposal, plan or report by the Companys board of
directors. The Company may hold general meetings of shareholders at its registered
office in Bari, at its executive offices in Santeramo or elsewhere within Italy
or at locations outside Italy, as specified in the By-laws (any member state of
the European Union, the United States, Switzerland, Australia or Japan)
following publication of notice of the meeting in Italys Official Gazzette at
least 15 days before the date fixed for the meeting. The Depositary will mail
to all record holders of ADSs a notice containing a summary of all information
contained in any notice of a shareholders meeting received by the Depositary. Shareholders meetings must be convened at least once a year. The
Companys annual stand-alone financial statements are prepared by the board of
directors and submitted for approval to the ordinary shareholders meeting
which must be convened within 120 days after the end of the fiscal year to
which such financial statements relate. This term may be extended to up to 180
days after the end of the fiscal year, as long as we continue to be bound by
law to draw up consolidated financial statements or if particular circumstances
concerning its structure or its purposes so require. At ordinary shareholders
meetings, shareholders also appoint the external auditors, approve the
distribution of dividends, appoint the board of directors and statutory
auditors, determine their remuneration and vote on any matter the resolution or
authorization of which is entrusted to them by law. Extraordinary shareholders meetings may be called to vote on proposed
amendments to the By-laws, issuance of convertible debentures, mergers and
de-mergers, capital increases and reductions, when such resolutions may not be
taken by the board of directors pursuant to the 2003 corporate law reform. In
particular, the board of directors may transfer the Companys registered office
within Italy or make other amendments to the Companys By-laws when these
amendments are required by law, approve mergers by absorption into the Company
of any subsidiary in which the Company holds at least 90% of the issued share
capital and reductions of the Companys share capital in case of withdrawal of
a shareholder. The board of directors may also approve the issuance of shares
or convertible debentures if such powers have been previously delegated to the
board of directors by vote of the extraordinary 51




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shareholders meeting. Liquidation of the Company must be resolved upon
by an extraordinary shareholders meeting. The notice of a shareholders meeting may specify up to two meeting dates
for an ordinary or extraordinary shareholders meeting; such meeting dates are
generally referred to as calls. The quorum for an ordinary meeting of shareholders is 50% of the Ordinary
Shares, and resolutions are carried by the majority of Ordinary Shares present
or represented. At an adjourned ordinary meeting, no quorum is required, and
the resolutions are carried by the majority of Ordinary Shares present or
represented. Certain matters, such as amendments to the By-laws, the issuance
of shares, the issuance of convertible debentures and mergers and de-mergers
may only be effected at an extraordinary meeting, at which special voting rules
apply. Resolutions at an extraordinary meeting of the Company are carried by a
majority of the shares. An adjourned extraordinary meeting is validly held
with a quorum of one-third of the issued shares and its resolutions are carried
by a majority of at least two-thirds of the holders of shares present or
represented at such meeting. In addition, certain matters (such as a change in
purpose or corporate form of the company, the transfer of its registered office
outside Italy, its liquidation prior to the term set forth in its By-laws, the
extension of the term and the issuance of preferred shares) must be carried by
the holders of more than one-third of the shares and more than two-thirds of
the shares present and represented at such meeting. Prior to 2004, to attend any shareholders meeting, at least five days
prior to the date fixed for the meeting, shareholders had to lodge their share
certificates at the offices of the Company or with such banks as may be
specified in the notice of meeting, in exchange for an admission ticket.
Starting from January 1, 2004, the law no longer requires that share
certificates be deposited prior to the shareholders meeting. However, a
resolution adopted by an extraordinary shareholders meeting may introduce a
prior-deposit requirement in the Companys By-laws. Owners of ADRs may make
special arrangements with the Depositary for the beneficial owners of such ADRs
to attend shareholders meetings, but not to vote at or formally address such
meetings. The procedures for making such arrangements will be specified in the
notice of such meeting to be mailed by the Depositary to the owners of ADRs. Shareholders may appoint proxies by delivering in writing an appropriate
instrument of appointment to the Company. Directors, auditors and employees of
the Company or of any of its subsidiaries may not be proxies and any one proxy
cannot represent more than 20 shareholders. Preemptive Rights Pursuant to Italian law, holders of Ordinary Shares are entitled to
subscribe for the issuance of shares, debentures convertible into shares and
rights to subscribe for shares, in proportion to their holdings, unless such
issues are for non-cash consideration or preemptive rights are waived or
limited by an extraordinary resolution adopted by the affirmative vote of
holders of more than 50% of the Ordinary Shares (whether at an extraordinary or
adjourned extraordinary meeting) and such waiver or limitation is required in
the interest of the Company. There can be no assurance that the holders of
ADSs may be able to exercise fully any preemptive rights pertaining to Ordinary
Shares. Preference Shares; Other Securities Italian companies are permitted in accordance with Italian law to issue
preference shares with limited voting rights, to issue other classes of equity
securities with different economic and voting rights, to issue so-called
participation certificates with limited voting rights, as well as so-called
tracking stock, if their by-laws permit such issuances. The Companys By-laws
currently do not provide for any of such issuances and would need to be amended
at an extraordinary shareholders meeting to allow the Company to issue those
classes of shares and/or securities. 52




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The power to issue debt securities not convertible into its shares is
vested by law in the board of directors. Segregation of Assets and Proceeds Pursuant to the 2003 corporate law reform, effective January 1, 2004, the
board of directors of an Italian company may approve the segregation of a
companys assets into one or more separate pools. Such pools of assets may
have an aggregate value not exceeding 10% of the shareholders equity of the
company. Each pool of assets must be used exclusively for the carrying out of
a specific business and may not be attached by the general creditors of the
company. Similarly, creditors with respect to such specific business may only
attach those assets of the company that are included in the corresponding pool.
Tort creditors, on the other hand, may always attach any assets of the
Company. The board of directors may issue securities carrying economic and
administrative rights relating to a pool. In addition, financing agreements
relating to the funding of a specific business may provide that the proceeds of
such business be used exclusively to repay the financing. Such proceeds may be
attached only by the financing party and such financing party would have no
recourse against other assets of the company. The Company has no present intention to enter into any such transaction
and none is currently in effect. Liquidation Rights Pursuant to Italian law and subject to the satisfaction of the claims of
all other creditors, shareholders are entitled to a distribution in liquidation
that is equal to the nominal value of their shares (to the extent available out
of the net assets of the Company). Holders of preferred shares, if any such
shares are issued in the future by the Company, may be entitled to a priority
right to any such distribution from liquidation up to their par value.
Thereafter, all shareholders would rank equally in their claims to the
distribution or surplus assets, if any. Ordinary Shares rank pari passu among
themselves in liquidation. Purchase of Shares by the Company The Company is permitted to purchase shares, subject to certain conditions
and limitations provided for by Italian law. Shares may only be purchased out
of profits available for dividends or out of distributable reserves, in each
case as appearing on the latest shareholder  approved stand-alone financial
statements. Further, the Company may only repurchase fully paid-in shares.
Such purchases must be authorized by an ordinary shareholders meeting. The
number of shares to be acquired, together with any shares previously acquired
by the Company or any of its subsidiaries, may not (except in limited
circumstances) exceed in the aggregate 10% of the total number of shares then
issued and the aggregate purchase price of such shares may not exceed the
earnings reserve specifically approved by shareholders. Shares held in excess
of such 10% limit must be sold within one year of the date of purchase.
Similar limitations apply with respect to purchases of the Companys shares by
its subsidiaries. A corresponding reserve equal to the purchase price of such shares must be
created in the balance sheet, and such reserve is not available for
distribution, unless such shares are sold or cancelled. Shares purchased and
held by the Company may be resold only pursuant to a resolution adopted at an
ordinary shareholders meeting. The voting rights attaching to the shares held
by the Company or its subsidiaries cannot be exercised, but the shares can be
counted for quorum purposes in shareholders meetings. Dividends and other
rights, including pre-emptive rights, attaching to such shares will accrue to
the benefit of other shareholders. 53




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In July 2000, the shareholders of the Company approved a share repurchase
program to buy-back up to 4 million shares or  51.6 million during a period
of up to 18 months. The Company spent  23.2 million in 2000 and  14.6
million in 2001 to repurchase shares. The Company repurchased 1,782,700 shares
in 2000 at an average cost of US$ 11.3 per share and 1,061,200 shares in 2001
at an average cost of US$ 12.3 per share. The repurchase program is no longer
in effect. At an extraordinary meeting held in November 2003 the shareholders
approved the cancellation of all the treasury shares. Such treasury shares were
cancelled effective on February 21, 2004. Notification of the Acquisition of Shares In accordance with Italian antitrust laws, the Italian Antitrust Authority
is required to prohibit the acquisition of control in a company which would
thereby create or strengthen a dominant position in the domestic market or a
significant part thereof and which would result in the elimination or
substantial reduction, on a lasting basis, of competition, provided that
certain turnover thresholds are exceeded. However, if the turnover of the
acquiring party and the company to be acquired exceed certain other monetary
thresholds, the antitrust review of the acquisition falls within the exclusive
jurisdiction of the European Commission. Minority Shareholders Rights; Withdrawal Rights Shareholders resolutions which are not adopted in conformity with
applicable law or the Companys By-laws may be challenged (with certain
limitations and exceptions) within ninety days by absent, dissenting or
abstaining shareholders representing individually or in the aggregate at least
5% of Companys share capital (as well as by the board of directors or the
board of statutory auditors). Shareholders not reaching this threshold or
shareholders not entitled to vote at Companys meetings may only claim damages
deriving from the resolution. Dissenting or absent shareholders may require the Company to buy back
their shares as a result of shareholders resolutions approving, among others
things, material modifications of the Companys corporate purpose or of the
voting rights of its shares, the transformation of the Company from a stock
corporation into a different legal entity, or the transfer of the Companys
registered office outside Italy. According to the reform, the buy-back would
occur at a price established by the board of directors, upon consultation with
the board of statutory auditors and the Companys external auditor, having
regard to the net assets value of the Company, its prospective earnings and the
market value of its shares, if any. The Companys By-laws may set forth
different criteria to determine the consideration to be paid to dissenting
shareholders in such buy-backs. Each shareholder may bring to the attention of the board of statutory
auditors facts or actions which are deemed wrongful. If such shareholders
represent more than 5% of the share capital of the Company, the board of
statutory auditors must investigate without delay and report its findings and
recommendations to the shareholders meeting. Shareholders representing more
than 10% of its share capital have the right to report to the competent court
serious breaches of the duties of the directors which may be prejudicial to us
or to its subsidiaries. In addition, shareholders representing at least 20% of
the Companys share capital may commence derivative suits before the competent
court against its directors, statutory auditors and general managers. The
Company may waive or settle the suit unless shareholders holding at least 20%
of the shares vote against such waiver or settlement. The Company will
reimburse the legal costs of such action in the event that the claim of such
shareholders is successful and the court does not award such costs against the
relevant directors, statutory auditors or general managers. 54




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Liability for Mismanagement of Subsidiaries Pursuant to the 2003 corporate law reform, companies and other legal
entities that, acting in their own interest or the interest of third parties,
mismanage a company subject to their direction and coordination powers are
liable to such companys shareholders and creditors for ensuing damages. Said
liability is excluded if (i) the ensuing damage is fully eliminated, including
through subsequent transactions, or (ii) the damage is effectively offset by
the global benefits deriving in general to the company from the continuing
exercise of such direction and coordination powers. Direction and coordination
powers are presumed to exist, among other things, with respect to consolidated
subsidiaries. The Company is subject to the direction and coordination of
INVEST 2003 S.r.l. 55




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Certain Contracts As of December 31, 2003, the Group entrusted approximately 20% of its
production needs (in particular assembly) to various subcontractors, all
located within a 20-mile radius of Santeramo. See Item 4, Information on the
Company  Manufacturing for a brief description of these arrangements. 
 Exchange Controls Currently, there are no Italian exchange controls that would affect the
payment of dividends or other remittances to holders of the ADSs or Ordinary
Shares who reside outside Italy. The Company is not aware of any plans by the
Italian Government to institute any exchange controls that would affect the
payment of dividends or other remittances to holders of ADSs or Ordinary Shares
who reside outside Italy. Neither Italian law nor the Companys By-laws limits
the right of non-resident or foreign owners to hold or vote the Ordinary Shares
or the ADSs. However, Italian resident and non-resident investors who transfer,
directly or indirectly (through banks or other intermediaries) into or out of
Italy, cash, investments or other securities in excess of  12,500.00 must
report all such transfers to the Italian Exchange Office (Ufficio Italiano
Cambi or UIC). In the case of indirect transfers, banks or other
intermediaries are required to maintain records of all such transfers for five
years for inspection by Italian tax and judicial authorities. Non-compliance
with these reporting and record-keeping requirements may result in
administrative fines or, in the case of false reporting or in certain cases of
incomplete reporting, criminal penalties. The UIC is required to maintain
reports for a period of ten years and may use such reports, directly or through
other government offices, to police money laundering, tax evasion and any other
crime or violation. 56




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Individuals, non-profit entities and partnerships that are residents of
Italy must disclose on their annual tax returns all investments and financial
assets held outside Italy, as well as the total amount of transfers to, from,
within and between countries other than Italy relating to such foreign
investments or financial assets, even if at the end of the taxable period
foreign investments or financial assets are no longer owned. No such tax
disclosure is required if: (i) the foreign investments or financial assets are
exempt from income tax; or (ii) the total value of the foreign investments or
financial assets at the end of the taxable period or the total amount of the
transfers effected during the fiscal year does not exceed  12,500.00.
Corporate residents of Italy are exempt from these tax disclosure requirements
with respect to their annual tax returns because this information is required
to be discussed in their financial statements. The Company cannot assure you that the present regulatory environment in
or outside Italy will continue or that particular policies presently in effect
will be maintained, although Italy is required to maintain certain regulations
and policies by virtue of its membership of the European Union and other
international organizations and its adherence to various bilateral and
multilateral international agreements. 
 Taxation The following is a summary of certain U.S. federal and Italian tax
matters. The summary is not a comprehensive description of all of the tax
considerations that may be relevant to a decision to purchase or hold Ordinary
Shares or ADSs. In particular, the summary deals only with beneficial owners
who will hold Ordinary Shares or ADSs as capital assets and does not address
the tax treatment of a beneficial owner who owns 10% or more of the voting
shares of the Company. The summary does not discuss the treatment of Ordinary
Shares or ADSs that are held in connection with a permanent establishment or
fixed base through which a non-resident beneficial owner carries on business or
performs personal services in Italy. The summary is based upon tax laws and practice of the United States and
Italy in effect on the date of this annual report, which are subject to change.
Investors and prospective investors in Ordinary Shares or ADSs should consult
their own advisors as to the U.S., Italian or other tax consequences of the
purchase, beneficial ownership and disposition of ADSs, including, in
particular, the effect of any state or local tax laws. For purposes of the summary, beneficial owners of ADSs who are considered
residents of the United States for purposes of the current income tax
convention between the United States and Italy (the Income Tax Convention),
and are not subject to an anti-treaty shopping provision that applies in
limited circumstances, are referred to as U.S. owners. Beneficial owners who
are citizens or residents of the United States, corporations organized under
U.S. law, and U.S. partnerships, estates or trusts (to the extent their income
is subject to U.S. tax either directly or in the hands of partners or
beneficiaries) generally will be considered to be residents of the United
States under the Income Tax Convention. Special rules apply to U.S. owners who
are also residents of Italy. A new tax treaty to replace the current Income Tax
Convention was signed on August 25, 1999, but has not yet been ratified. The
new treaty would not change significantly the provisions of the Income Tax
Convention that are discussed below (except that it would clarify the
availability of benefits to certain tax-exempt organizations). These laws are
subject to change, possibly on a retroactive basis. For the purpose of the Income Tax Convention and the United States
Internal Revenue Code of 1986, beneficial owners of ADRs evidencing ADSs will
be treated as the beneficial owners of the Ordinary Shares represented by those
ADSs. 57




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Taxation of Dividends Italian Tax Considerations Italian laws provide for the withholding of income tax at a 27% rate on
dividends paid by Italian companies to shareholders who are not residents of
Italy for tax purposes. Italian laws provide a mechanism under which
non-resident shareholders can claim a refund of up to four-ninths of Italian
withholding taxes on dividend income by establishing to the Italian tax
authorities that the dividend income was subject to income tax in another
jurisdiction in an amount at least equal to the total refund claimed. U.S.
owners should consult their own tax advisers concerning the possible
availability of this refund, which traditionally has been payable only after
extensive delays. Alternatively, reduced rates (normally 15%) may apply to
non-resident shareholders who are entitled to, and comply with procedures for
claiming, benefits under an income tax convention. Under the Income Tax Convention, dividends derived and beneficially owned
by U.S. owners are subject to an Italian withholding tax at a reduced rate of 15%. However, the amount initially made
available to the Depositary for payment to U.S. owners will reflect withholding
at the 27% rate. U.S. owners who comply with the certification procedures
described below may then claim an additional payment of 12% of the dividend
(representing the difference between the 27% rate and the 15% rate, and
referred to herein as a treaty refund). The certification procedure will
require U.S. owners (i) to obtain from the U.S. Internal Revenue Service a form
of certification required by the Italian tax authorities with respect to each
dividend payment (Form 6166), unless a previously filed certification will be
effective on the dividend payment date (such certificates are effective until
March 31 of the year following submission), (ii) to produce a statement whereby
the U.S. owner represents to be a U.S. owner individual or corporation and does
not maintain a permanent establishment in Italy, and (iii) to set forth other
required information. The time for processing requests for certification by the
Internal Revenue Service normally is six to eight weeks. Accordingly, in order
to be eligible for the procedure described below, U.S. owners should begin the
process of obtaining certificates as soon as possible after receiving
instructions from the Depositary on how to claim a treaty refund. The Depositarys instructions will specify certain deadlines for
delivering to the Depositary the documentation required to obtain a treaty
refund, including the certification that the U.S. owners must obtain from the
U.S. Internal Revenue Service. In the case of ADSs held by U.S. owners through
a broker or other financial intermediary, the required documentation should be
delivered to such financial intermediary for transmission to the Depositary. In
all other cases, the U.S. owners should deliver the required documentation
directly to the Depositary. The Company and the Depositary have agreed that if
the required documentation is received by the Depositary on or within 30 days
after the dividend payment date and, in the reasonable judgment of the Company,
such documentation satisfies the requirements for a refund by the Company of
Italian withholding tax under the Convention and applicable law, the Company
will within 45 days thereafter pay the treaty refund to the Depositary for the
benefit of the U.S. owners entitled thereto. If the Depositary does not receive a U.S. owners required documentation
within 30 days after the dividend payment date, such U.S. owner may for a short
grace period (specified in the Depositarys instructions) continue to claim a
treaty refund by delivering the required documentation (either through the U.S.
owners financial intermediary or directly, as the case may be) to the
Depositary. However, after this grace period, the treaty refund must be claimed
directly from the Italian tax authorities rather than through the Depositary.
Expenses and extensive delays have been encountered by U.S. owners seeking
refunds from the Italian tax authorities. Distributions of profits in kind will be subject to withholding tax. In
that case, prior to receiving the distribution, the holder will be required to
provide the Company with the funds to pay the 58




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relevant withholding tax. Distributions of additional shares to beneficial
owners with respect to their ADSs that are made as part of a pro rata
distribution to all shareholders of the Company generally will not be subject
to Italian tax. However, such additional shares will reduce the tax basis of
each single share for the calculation of the capital gains tax. United States Tax Considerations The gross amount of any dividends (that is, the amount before reduction
for Italian withholding tax) paid to a U.S. owner generally will be subject to
U.S. federal income taxation as foreign source dividend income and will not be
eligible for the dividends-received deduction allowed to domestic corporations.
Dividends paid in euro will be includable in the income of such U.S. owners in
a dollar amount calculated by reference to the exchange rate in effect on the
day the dividends are received by the Depositary or its agent. If the euro are
converted into dollars on the day the Depositary or its agent receives them,
U.S. owners generally should not be required to recognize foreign currency gain
or loss in respect of the dividend income. U.S. owners who receive a treaty
refund may be required to recognize foreign currency gain or loss to the extent
the amount of the treaty refund (in dollars) received by the U.S. owner differs
from the U.S. dollar equivalent of the euro amount of the treaty refund on the
date the dividends were received by the Depositary or its agent. Italian
withholding tax at the 15% rate will be treated as a foreign income tax which
U.S. owners may elect to deduct in computing their taxable income or, subject
to the limitations on foreign tax credits generally, credit against their U.S.
federal income tax liability. Dividends will generally constitute
foreign-source passive income or financial services income for U.S. tax
purposes. Subject to certain exceptions for short-term and hedged positions, the
U.S. dollar amount of dividends received by an individual prior to January 1,
2009 with respect to the Companys shares or ADSs will be subject to taxation
at a maximum rate of 15% if the dividends are qualified dividends. Dividends
paid on the ADSs will be treated as qualified dividends if the Company was not,
in the year prior to the year in which the dividend was paid, and is not, in
the year in which the dividend is paid, a passive foreign investment company
(PFIC), foreign personal holding company (FPHC) or foreign investment
company (FIC). Based on the Companys audited financial statements and
relevant market and shareholder data, the Company believes that it was not
treated as a PFIC, FPHC or FIC for U.S. federal income tax purposes with
respect to its 2003 taxable year. In addition, based on the Companys audited
financial statements and its current expectations regarding the value and
nature of its assets, the sources and nature of its income, and relevant market
and shareholder data, the Company does not anticipate becoming a PFIC, FPHC or
FIC for its 2004 taxable year. The U.S. Treasury has announced its intention
to promulgate rules pursuant to which holders of ADSs or common stock and
intermediaries though whom such securities are held will be permitted to rely
on certifications from issuers to treat dividends as qualified for tax
reporting purposes. Because such procedures have not yet been issued, it is
not clear whether the Company will be able to comply with the procedures.
Holders of the Companys shares and ADSs should consult their own tax advisers
regarding the availability of the reduced dividend tax rate in the light of the
considerations discussed above and their own particular circumstances. Distributions of additional shares to U.S. owners with respect to their
ADSs that are made as part of a pro rata distribution to all shareholders of
the Company generally will not be subject to U.S. federal income tax. A beneficial owner of Ordinary Shares or ADSs who is, with respect to the
United States, a foreign corporation or a nonresident alien individual
generally will not be subject to U.S. federal income tax on dividends received
on Ordinary Shares or ADSs, unless such income is effectively connected with
the conduct by the beneficial owner of a trade or business in the United
States. 59




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Taxation of Capital Gains Italian Tax Considerations As of January 1, 2004, capital gains realized by non-resident shareholders
on the disposal of a qualified shareholding held as a capital asset and not
in connection with a permanent establishment or fixed base through which such
shareholders carry on or perform business services in Italy are no longer
subject to Italian capital gain tax (CGT) but to personal or corporate income
tax, for an amount equal to 40% of the overall gain. Losses can be offset
against taxable gains for a corresponding amount and, if in excess, can be
carried forward up to four years. A qualified shareholding is constituted by
ordinary shares or ADSs and/or rights representing more than 5% of a listed
companys total share capital or more than 2% of its share capital voting in
the ordinary shareholders meeting. A disposal of a qualified shareholding
occurs if in any 12-month period immediately following the date when a
shareholding meets one of the thresholds illustrated above, the shareholder
engages in disposals of shares or ADSs that, individually or in aggregate,
constitute a qualified shareholding. The taxable gain realized by a
non-resident shareholder who is an individual would be subject to progressive
personal income tax rates (currently, the marginal tax rate is equal to 45%,
plus a surcharge of up to 1.4%, depending on the municipality in which the
shareholder resides). The taxable gain realized by a non-resident corporate
shareholder would be subject to corporate income tax, currently levied at a
rate of 33%. Generally, CGT, levied at a rate of 12.5%, is imposed on gains realized
upon the transfer or sale of non-qualified shareholdings whether held within
or outside Italy. A non-qualified shareholding is constituted by an interest
in Natuzzi which does not reach the thresholds described above. However, under
domestic law, an exemption applies to gains realized on the disposal of
non-qualified shareholdings in an Italian company the shares of which are
listed on a regulated market, such as the Natuzzi shares, even when such
shareholdings are held in Italy. Furthermore, pursuant to the Income Tax Convention, a U.S. owner will not
be subject to Italian CGT unless such U.S. owner has a permanent establishment
or fixed base in Italy to which Ordinary Shares or ADSs are effectively
connected. To this end, U.S. residents selling Ordinary Shares or ADSs and
claiming benefits under the Income Tax Convention may be required to produce
appropriate documentation establishing that the above-mentioned conditions have
been met. Other countries have executed income tax conventions with Italy
providing for similar treatment of Italian CGT. No CGT will be imposed on the
deposit or withdrawal of shares in return for ADSs. United States Tax Considerations Gain or loss realized by a U.S. owner on the sale or other disposition of
Ordinary Shares or ADSs will be subject to U.S. federal income taxation as
capital gain or loss in an amount equal to the difference between the U.S.
owners basis in the Ordinary Shares or the ADSs and the amount realized on the
disposition (or its dollar equivalent, determined at the spot rate on the date
of disposition, if the amount realized is denominated in a foreign currency).
Such gain or loss will generally be long-term capital gain or loss if the U.S.
owner holds the Ordinary Shares or ADSs for more than one year. The net amount
of long-term capital gain recognized by a U.S. owner that is an individual
holder before January 1, 2009 generally is subject to taxation at a maximum
rate of 15%. Deposits and withdrawals of Ordinary Shares by U.S. owners in
exchange for ADSs will not result in the realization of gain or loss for U.S.
federal income tax purposes. A beneficial owner of Ordinary Shares or ADSs who is, with respect to the
United States, a foreign corporation or a nonresident alien individual will not
be subject to U.S. federal income tax on gain realized on the sale of Ordinary
Shares or ADSs, unless (i) such gain is effectively connected with the conduct
by the beneficial owner of a trade or business in the United States or (ii), in
the case of gain 60




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realized by an individual beneficial owner, the beneficial owner is
present in the United States for 183 days or more in the taxable year of the
sale and certain other conditions are met. Other Italian Taxes Estate and Gift Tax.As of October 25, 2001, the Italian estate and gift
tax has been abolished and consequently any transfer of shares or ADSs
occurring by reason of death or gift as of that date is no longer subject to
any Italian estate and gift tax. However, should a gift of ordinary shares or ADSs for a value exceeding
 180,759.91 (the Threshold) occur and the relationship between the donor
and the beneficiary not qualify for the exemption regime applicable to gifts
made in favor of certain family members (e.g., spouse, parents, children,
grandchildren), a registration tax of  129.11 would be due insofar as the
gift agreement is either executed or registered in Italy. The materiality
threshold is increased to  516,456.91 in case the beneficiary is either
underage (i.e., younger than 18) or a person with a handicap recognized
pursuant to applicable law. Transfer Tax.An Italian transfer tax is normally payable on the transfer
of shares in an Italian company, unless (i) the contract is concluded on a
regulated market, or (ii) the shares are transferred to or from a non-Italian
resident, on the one hand, and banks or other investment services companies, on
the other hand. As a result, the transfer tax concluded either on a regulated
market or with the intervention of a bank or an investment service company will
not be payable with respect to any transfers of Ordinary Shares or ADSs
involving non-Italian residents. 
 Documents on Display The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the Exchange
Act) applicable to foreign private issuers. In accordance therewith,
Natuzzi is required to file reports, including annual reports on Form 20-F, and
other information with the U.S. Securities and Exchange Commission. These
materials, including this annual report on Form 20-F, are available for
inspection and copying at the SECs Public Reference Room at 450 Fifth Street
N.W., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. As a foreign private issuer,
we were not required to make filings with the SEC by electronic means prior to
November 4, 2002. Any filings we make electronically will be available to the
public over the Internet at the SECs website at http://www.sec.gov. The Form
20-F and reports and other information filed by the Company with the Commission
will also be available for inspection by ADS holders at the Corporate Trust
Office of The Bank of New York at 101 Barclay Street, New York, New York 10286. 
 Item 11. Quantitative and Qualitative Disclosures About Market Risk The following discussion of the Groups risk management activities include
forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward looking
statements. See Item 3, Key Information  Forward Looking Information. Market Risks The Group is exposed to the economic transaction and conversion risk
principally from fluctuations in the exchange rates between the euro and other
currencies, including in particular the U.S. dollar. 61




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Exchange Rate Risks The Groups foreign exchange rate risks in 2003 arose principally in
connection with U.S. dollars, British pounds, Canadian dollars, Australian
dollars, Swiss francs and Japanese yen. As at December 31, 2003 and 2002, the Group had outstanding trade
receivables denominated in foreign currencies totaling  80.5 million and
 87.3 million respectively, of which 61.9% and 76.0%, respectively, were
denominated in U.S. dollars. On those same dates, the Group had  20.7
million and  26.1 million, respectively, of trade payables denominated in
foreign currencies, principally U.S. dollars. See Notes 6 and 12 to the
Consolidated Financial Statements included in Item 18 of this annual report. As at December 31, 2003, the Company was a party to a number of domestic
currency swap contracts designed to hedge future sales denominated in U.S.
dollars and other currencies. At such date, the contractual amounts of such
domestic currency swaps aggregated  116.2 million (compared to  169.9
million at December 31, 2002), consisting of domestic currency swap contracts
for U.S. $ 35.0 million, Canadian $ 30.0 million, Swiss francs 5.4 million,
Australian $ 19.0 million, Japanese yen 440.0 million and U.K. pounds sterling
32.5 million. Such contracts had various maturities extending through December
2003. See Note 24 to the Consolidated Financial Statements included in Item 18
of this annual report. The table below summarizes in thousands of euro equivalent the contractual
amounts of domestic currency swap contracts designed to hedge future cash flows
from accounts receivable and sales orders at December 31, 2003 and 2002: Sales
    
    2003
    
    2002U.S. dollars
    
    
    32,942
    
    
    
    117,050British pounds
    
    
    46,267
    
    
    
    22,650Canadian dollars
    
    
    19,044
    
    
    
    14,937Australian dollars
    
    
    10,796
    
    
    
    9,579Japanese yen
    
    
    3,532
    
    
    
    2,863Swiss francs
    
    
    3,629
    
    
    
    2,844Total
    
    
    116,210
    
    
    
    169,923
 As at December 31, 2003, these forward exchange contracts had a net
unrealized gain of  6.3 million. The Company recorded this amount in other
income (expense), net in its Consolidated Financial Statements. At December 31, 2002, these forward exchange contracts had a net
unrealized gain of  14.3 million, of which  9.3 million related to
accounts receivable,  3.0 million related to existing sales commitments and
 2.0 million related to anticipated commitments at year end. The Company
recorded these amounts within other income (expense), net in its Consolidated
Financial Statements, except for the  3.0 million related to existing sales
commitments that were deferred. The following table presents information regarding the contract amount in
thousands of euro equivalent and the estimated fair value of all of the Groups
forward exchange contracts. Contracts with unrealized gains are presented as
assets and contracts with unrealized losses are presented as liabilities. 62




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2003
    
    2002Contract
    
    Fair
    
    Contract
    
    FairAmount
    
    Value
    
    Amount
    
    ValueAssets
    
    
    104,206
    
    
    
    6,544
    
    
    
    156,983
    
    
    
    14,880Liabilities
    
    
    12,004
    
    
    
    (268
    )
    
    
    12,940
    
    
    
    (588
    )Total
    
    
    116,210
    
    
    
    6,276
    
    
    
    169,923
    
    
    
    14,292
 The Groups domestic currency swap contracts as at December 31, 2003 had
maturities of maximum 12 months. The potential loss in fair value of the
Groups domestic currency swap contracts at December 31, 2003 that would have
resulted from a hypothetical, instantaneous and unfavorable 10% change in
currency exchange rates would have been approximately  -6.0 million. This
sensitivity analysis assumes an instantaneous unfavorable 10% fluctuation in
exchange rates affecting the foreign currencies of the Groups domestic
currency swap contracts other than currencies that have been replaced by the
euro. For the accounting of transactions entered into in an effort to reduce the
Groups exchange rate risks, see Notes 3, 24 and 25 to the Consolidated
Financial Statements included in Item 18 of this annual report. Interest Rate Risks To a significantly lesser extent, the Group is also exposed to interest
rate risk. At December 31, 2003, the Group had  10.3 million (representing
1.5% of the Groups total assets as of that date) in debt outstanding
(short-term borrowings and long-term debt, including the current portion of
such debt). Of the Groups outstanding debt as of December 31, 2003
approximately 59.0% was due within a year. See Notes 11 and 16 to the
Consolidated Financial Statements included in Item 18 of this annual report. In the normal course of business, the Group also faces risks that are
either non-financial or non-quantifiable. Such risks principally include
country risk, credit risk and legal risk. 63




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Item 12. Description of Securities Other than Equity Securities Not applicable. 
 PART II 
 Item 13. Defaults, Dividend Arrearages and Delinquencies None. 
 Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds None. 
 Item 15. Controls and Procedures The Company carried out an evaluation under the supervision and with the
participation of the Companys management, including the Chief Executive
Officer and the General Manager, who acts as the Companys principal financial
officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of December 31, 2003. There are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon the Companys evaluation, the
Chief Executive Officer and General Manager concluded that the disclosure
controls and procedures as of December 31, 2003 were effective to provide
reasonable assurance that information required to be disclosed in the reports
the Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required. There has been no change in the
Companys internal control over financial reporting during 2003 that has
materially affected, or is reasonably likely to materially affect the Companys
internal control over financial reporting. 
 Item 16. [Reserved] 
 Item 16.A Audit committee financial expert The Company has determined that, because of the existence and nature of
its board of statutory auditors, it will qualify for an exemption provided by
Exchange Act Rule 10A-3(c)(3) from many of the Rule 10A-3(c)(3) audit committee
requirements, which become applicable to foreign private issuers on July 31,
2005. The board of statutory
auditors has determined that each of its members is an audit committee
financial expert as defined in Item 16A of Form 20-F. For the names of the
members of the board of statutory auditors, see Item 6. Directors, Senior
Management and Employees  Statutory Auditors. 
 Item 16.B Code of Ethics The Company is in the process of adopting a code of ethics, as defined in
Item 16B of Form 20-F under the Exchange Act but has been unable to complete
its formal adoption process in a timely manner.
The Company expects that, when adopted, this code of ethics will be
applicable, among others, to the 64




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Companys Chief Executive Officer, General
Manager, who acts as the Companys principal financial officer, and principal
accounting officer. 
 Item 16.C Principal Accountant Fees and Services The following table sets forth the aggregate fees billed to the Company by
its independent auditors, KPMG in Italy and abroad during the fiscal years
ended December 31, 2002 and 2003, for audit fees, audit  related fees, tax
fees and all other fees. Year ended December 31,2002
    
    2003(in millions of euros)Audit fees
    
    
    342,057.00
    
    
    
    336,852.00Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    82,213.00
    
    
    
    1,477.00Other fees
    
    
    39,328.00
    
    
    
    3,517.00Total fees
    
    
    465,098.00
    
    
    
    341,846.00
 Audit fees in the above table are the aggregate fees billed by KPMG in
connection with the audit of the Companys annual financial statements and the
review of our interim financial statements. Tax fees in the above table are fees billed by KPMG for services like tax
compliance. Other fees in the above table are fees billed by KPMG primarily related to
consultation regarding legal and fiscal requirements required by local laws in
connection with the incorporation of some foreign subsidiaries. The Companys audit committee has not established pre-approval policies
and procedures for the engagement of our independent auditors for services.
The Companys audit committee expressly approves on a case-by-case basis any
engagement of our independent auditors for audit and non-audit services
provided to our subsidiaries or to us. 
 PART III 
 Item 17. Financial Statements Not applicable. 
 Item 18. Financial Statements See pages F-1 through F-39, incorporated herein by reference. Index to Consolidated Financial Statements PageReport of Independent Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of December 31, 2003 and 2002 and 2000
    
    
    F-2Consolidated Statements of Earnings for the Years Ended December 31,
2003, 2002 and 2001
    
    
    F-3Consolidated Statements of Changes in Shareholders Equity for the
Years Ended December 31, 2003, 2002 and 2001
    
    
    F-4
 65




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PageConsolidated Statements of Cash Flows for the Years Ended December
31, 2003, 2002 and 2001
    
    
    F-5Notes to the Consolidated Financial Statements
    
    
    F-7
 66




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Item 19. Exhibits  1.1
    
    English translation of the by-laws (Statuto) of the Company, as amended
and restated as of November 21, 2003.2.1
    
    Deposit Agreement dated as of May 15, 1993, as amended and restated as of
December 31, 2001, among the Company, The Bank of New York, as Depositary,
and owners and beneficial owners of ADRs (incorporated by reference to the
Form 20-F filed by Natuzzi S.p.A. with the Securities and Exchange
Commission on July 1, 2002, file number 1-11854).8.1
    
    List of Significant Subsidiaries.12.1
    
    Chief Executive Officer Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.12.2
    
    General Manager (principal financial officer) Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.99.1
    
    Certifications pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. 67




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Report of Independent Public Accounting Firm To the Shareholders
Natuzzi S.p.A. We have audited the accompanying consolidated balance sheets of Natuzzi S.p.A.
and subsidiaries (the Natuzzi Group) as of December 31, 2003 and 2002 and the
related consolidated statements of earnings, changes in shareholders equity
and cash flows for each of the years in the three-year period ended December
31, 2003. These consolidated financial statements are the responsibility of the
management of Natuzzi S.p.A.. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the Republic of Italy and in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Natuzzi Group
as of December 31, 2003 and 2002 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2003,
in conformity with established accounting principles in the Republic of Italy. Established accounting principles in the Republic of Italy vary in certain
significant respects from generally accepted accounting principles in the
United States of America. Information relating to the nature and effect of such
differences is presented in note 26 to the consolidated financial statements. KPMG S.p.A. Bari, Italy
March 26, 2004 F-1




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Natuzzi S.p.A. and Subsidiaries
Consolidated Balance Sheets
December 31, 2003 and 2002
(Expressed in thousands of euros) December 31, 2003
    
    December 31, 2002ASSETSCurrent assets:Cash and cash equivalents (note 4)
    
    
    63,565
    
    
    
    96,695Marketable debt securities (note 5)
    
    
    5
    
    
    
    26Trade receivables, net (note 6)
    
    
    154,501
    
    
    
    158,398Other receivables (note 7)
    
    
    58,157
    
    
    
    58,337Inventories (note 8)
    
    
    97,518
    
    
    
    84,081Unrealized foreign exchange gains (note 24)
    
    
    6,276
    
    
    
    2,021Prepaid expenses and accrued income
    
    
    2,143
    
    
    
    1,240Deferred income taxes (note 14)
    
    
    955
    
    
    
    1,822Total current assets
    
    
    383,120
    
    
    
    402,620Non current assets:Property plant and equipment (note 9 and 21)
    
    
    360,846
    
    
    
    310,253Less accumulated depreciation (note 9 and 21)
    
    
    (106,653
    )
    
    
    (81,361
    )Net property, plant and equipment
    
    
    254,193
    
    
    
    228,892Treasury shares (note 19)
    
    
    37,828
    
    
    
    37,828Other assets (note 10)
    
    
    17,087
    
    
    
    5,052Deferred income taxes (note 14)
    
    
    166
    
    
    
    93Total assets
    
    
    692,394
    
    
    
    674,485LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings (note 11)
    
    
    4,770
    
    
    
    162Current portion of long-term debt (note 16)
    
    
    1,291
    
    
    
    1,437Accounts payable-trade (note 12)
    
    
    80,913
    
    
    
    87,551Accounts payable-other (note 13)
    
    
    17,858
    
    
    
    15,658Income taxes (note 14)
    
    
    4,258
    
    
    
    9,195Salaries, wages and related liabilities (note 15)
    
    
    16,091
    
    
    
    14,708Total current liabilities
    
    
    125,181
    
    
    
    128,711Long-term liabilities:Employees leaving entitlement (note 3 (n))
    
    
    27,587
    
    
    
    25,577Long-term debt (note 16)
    
    
    4,218
    
    
    
    3,574Deferred income taxes (note 14)
    
    
    376
    
    
    
    371Deferred income for capital grants (note3 (m))
    
    
    13,359
    
    
    
    14,229Other liabilities (note 17)
    
    
    5,716
    
    
    
    5,716Minority interest (note 18)
    
    
    894
    
    
    
    499Shareholders equity (note 19) :Share capital
    
    
    57,526
    
    
    
    57,526Reserves
    
    
    80,236
    
    
    
    73,071Additional paid-in capital
    
    
    8,282
    
    
    
    8,282Retained earnings
    
    
    369,019
    
    
    
    356,929Total shareholders equity
    
    
    515,063
    
    
    
    495,808Commitments and contingent liabilities (notes 20 and 24)
    
    
    
    
    
    
    Total liabilities and shareholders equity
    
    
    692,394
    
    
    
    674,485
 See accompanying notes to consolidated financial statements F-2




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Natuzzi S.p.A. and Subsidiaries
Consolidated Statements of Earnings
Years ended December 31, 2003, 2002, and 2001
(Expressed in thousands of euros except per share data) 2003
    
    2002
    
    2001Net sales (note 21)
    
    
    769,579
    
    
    
    805,143
    
    
    
    786,148Cost of sales (note 22)
    
    
    (508,764
    )
    
    
    (517,423
    )
    
    
    (520,089
    )Gross profit
    
    
    260,815
    
    
    
    287,720
    
    
    
    266,059Selling expenses
    
    
    (179,282
    )
    
    
    (145,378
    )
    
    
    (134,840
    )General and administrative expenses
    
    
    (39,205
    )
    
    
    (40,532
    )
    
    
    (33,456
    )Operating income
    
    
    42,328
    
    
    
    101,810
    
    
    
    97,763Other income (expense), net (note 23)
    
    
    3,631
    
    
    
    14,551
    
    
    
    (225
    )Earnings before taxes and minority interest
    
    
    45,959
    
    
    
    116,361
    
    
    
    97,538Income taxes (note 14)
    
    
    (8,501
    )
    
    
    (24,997
    )
    
    
    (21,901
    )Earnings before minority interest
    
    
    37,458
    
    
    
    91,364
    
    
    
    75,637Minority interest
    
    
    (158
    )
    
    
    74
    
    
    
    20Net earnings
    
    
    37,300
    
    
    
    91,438
    
    
    
    75,657Basic and diluted earnings per share (note 3(u))
    
    
    0.68
    
    
    
    1.67
    
    
    
    1.37
 See accompanying notes to consolidated financial statements F-3




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Natuzzi S.p.A. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity
Years ended December 31, 2003, 2002 and 2001
(Expressed in thousands of euros except number of ordinary shares) Share capital
    
    
    
    
    
    AdditionalNumber of
    
    
    
    
    
    
    
    
    
    paid-in
    
    RetainedOrdinary shares
    
    Amount
    
    Reserves
    
    capital
    
    earnings
    
    TotalBalances at December 31, 2000
    
    
    55,742,828
    
    
    
    3,714
    
    
    
    55,876
    
    
    
    8,282
    
    
    
    298,580
    
    
    
    366,452Dividends distributed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,894
    )
    
    
    (15,894
    )Exchange difference on translation
of financial statements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,247
    
    
    
    2,247Treasury shares acquired (note 19)
    
    
    (1,061,200
    )
    
    
    
    
    
    
    14,594
    
    
    
    
    
    
    
    (14,594
    )
    
    
    Increase of share capital (note 19)
    
    
    
    
    
    
    53,812
    
    
    
    
    
    
    
    
    
    
    
    (53,812
    )
    
    
    Other transfers
    
    
    
    
    
    
    
    
    
    
    (113
    )
    
    
    
    
    
    
    113
    
    
    
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,657
    
    
    
    75,657Balances at December 31, 2001
    
    
    54,681,628
    
    
    
    57,526
    
    
    
    70,357
    
    
    
    8,282
    
    
    
    292,297
    
    
    
    428,462Dividends distributed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,705
    )
    
    
    (15,705
    )Exchange difference on translation
of financial statements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,387
    )
    
    
    (8,387
    )Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    2,714
    
    
    
    
    
    
    
    (2,714
    )
    
    
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,438
    
    
    
    91,438Balances at December 31, 2002
    
    
    54,681,628
    
    
    
    57,526
    
    
    
    73,071
    
    
    
    8,282
    
    
    
    356,929
    
    
    
    495,808Dividends distributed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,045
    )
    
    
    (18,045
    )Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    7,375
    
    
    
    
    
    
    
    (7,375
    )
    
    
    Transfer for liquidation of subsidiary
    
    
    
    
    
    
    
    
    
    
    (210
    )
    
    
    
    
    
    
    210
    
    
    
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,300
    
    
    
    37,300Balances at December 31, 2003
    
    
    54,681,628
    
    
    
    57,526
    
    
    
    80,236
    
    
    
    8,282
    
    
    
    369,019
    
    
    
    515,063
 See accompanying notes to consolidated financial statements F-4




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
(Expressed in thousands of euros) 2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings
    
    
    37,300
    
    
    
    91,438
    
    
    
    75,657Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    27,221
    
    
    
    16,867
    
    
    
    13,292Employees leaving entitlement
    
    
    6,776
    
    
    
    7,091
    
    
    
    6,293Deferred income taxes
    
    
    799
    
    
    
    401
    
    
    
    (310
    )Minority interest
    
    
    158
    
    
    
    (38
    )
    
    
    (20
    )(Gain) loss on disposal of assets
    
    
    814
    
    
    
    30
    
    
    
    (101
    )Unrealized foreign exchange losses and gains
    
    
    (264
    )
    
    
    (2,923
    )
    
    
    3,003Deferred income for capital grants
    
    
    (870
    )
    
    
    194
    
    
    
    3,993Change in assets and liabilities:Receivables, net
    
    
    5,096
    
    
    
    (23,898
    )
    
    
    (11,538
    )Inventories
    
    
    (7,251
    )
    
    
    3,814
    
    
    
    (14,252
    )Prepaid expenses and accrued income
    
    
    (903
    )
    
    
    (322
    )
    
    
    (632
    )Other assets
    
    
    (2,122
    )
    
    
    (2,524
    )
    
    
    (1,373
    )Accounts payable
    
    
    (18,370
    )
    
    
    5,565
    
    
    
    893Income taxes
    
    
    (5,041
    )
    
    
    3,563
    
    
    
    1,837Salaries, wages and related liabilities
    
    
    1,383
    
    
    
    1,114
    
    
    
    2,423Other liabilities
    
    
    (1,719
    )
    
    
    1,024
    
    
    
    443Employees leaving entitlement
    
    
    (4,766
    )
    
    
    (3,781
    )
    
    
    (3,878
    )Total adjustments
    
    
    941
    
    
    
    6,177
    
    
    
    73Net cash provided by operating activities
    
    
    38,241
    
    
    
    97,615
    
    
    
    75,730Cash flows from investing activities:Property, plant and equipment:Additions
    
    
    (47,259
    )
    
    
    (68,653
    )
    
    
    (69,146
    )Disposals
    
    
    762
    
    
    
    242
    
    
    
    558Government grants received
    
    
    3,119
    
    
    
    10,042
    
    
    
    396Marketable debt securities:Purchases
    
    
    
    
    
    
    
    
    
    
    (1
    )Proceeds from sales
    
    
    21
    
    
    
    1
    
    
    
    Purchase of business and assets
    
    
    (6,482
    )
    
    
    
    
    
    
    (60
    )Purchase of minority interest
    
    
    
    
    
    
    (123
    )
    
    
    (33
    )
 F-5




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##### Table of Contents



2003
    
    2002
    
    2001Net cash used in investing activities
    
    
    (49,839
    )
    
    
    (58,491
    )
    
    
    (68,286
    )Cash flows from financing activities:Long-term debt:Proceeds
    
    
    1,970
    
    
    
    2,166
    
    
    
    4,022Repayments
    
    
    (1,739
    )
    
    
    (1,421
    )
    
    
    (333
    )Short-term borrowings
    
    
    299
    
    
    
    (134,315
    )
    
    
    131,769Purchase of treasury shares
    
    
    
    
    
    
    
    
    
    
    (14,594
    )Dividends paid to shareholders
    
    
    (18,045
    )
    
    
    (15,705
    )
    
    
    (15,894
    )Dividends paid to minority interests
    
    
    (26
    )

    
    
    
    
    
    
    Capital contribution of minority interest
    
    
    
    
    
    
    
    
    
    
    576Net cash provided by (used in) financing activities
    
    
    (17,541
    )
    
    
    (149,275
    )
    
    
    105,546Effect of translation adjustments on cash
    
    
    (3,991
    )
    
    
    (1,354
    )
    
    
    609Increase (decrease) in cash and cash equivalents
    
    
    (33,130
    )
    
    
    (111,505
    )
    
    
    113,599Cash and cash equivalents, beginning of the year
    
    
    96,695
    
    
    
    208,200
    
    
    
    94,601Cash and cash equivalents, end of the year
    
    
    63,565
    
    
    
    96,695
    
    
    
    208,200Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    
    606
    
    
    
    3,588
    
    
    
    3,199Cash paid during the year for income taxes
    
    
    24,955
    
    
    
    20,188
    
    
    
    24,343
 See accompanying notes to consolidated financial statements F-6




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  1.
    
    Description of business and Group compositionThe consolidated financial statements include the accounts of Natuzzi
S.p.A. (Natuzzi or the Company) and of its subsidiaries (together
with the Company, the Group). The Groups primary activity is the
design, manufacture and marketing of contemporary and traditional
leather and fabric upholstered furniture.The subsidiaries included in the consolidation at December 31, 2003,
together with the related percentages of ownership, are as follows: F-7




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) Percentage ofName
    
    ownership
    
    Registered office
    
    ActivitySpagnesi SpA
    
    
    99.95
    
    
    Quarrata, Italy
    
    (1)Italsofa Bahia Ltda
    
    
    97.99
    
    
    Bahia, Brazil
    
    (1)Italsofa (Shanghai)
Ltd
    
    
    100.00
    
    
    Shanghai, China
    
    (1)Italsofa Romania Srl
    
    
    100.00
    
    
    Baia Mare, Romania
    
    (1)Minuano Nordeste
S.A.
    
    
    100.00
    
    
    Pojuca, Brazil
    
    (1)Natco SpA
    
    
    99.99
    
    
    Santeramo in Colle, Italy
    
    (2)I.M.P.E. SpA
    
    
    90.83
    
    
    Qualiano, Italy
    
    (3)Natuzzi Americas,
Inc
    
    
    100.00
    
    
    High Point, NC, U.S.A.
    
    (4)Natuzzi Asia Ltd
    
    
    100.00
    
    
    Hong Kong, China
    
    (4)Natuzzi Ibérica S.A.
    
    
    100.00
    
    
    Madrid, Spain
    
    (4)Natuzzi
(Switzerland) AG
    
    
    97.00
    
    
    Dietikon, Switzerland
    
    (4)Natuzzi Nordic A/S
    
    
    100.00
    
    
    Copenhagen, Denmark
    
    (5)Natuzzi Benelux NV
    
    
    100.00
    
    
    Herentals, Belgium
    
    (5)Natuzzi Germany GmbH
    
    
    100.00
    
    
    Düsseldorf, Germany
    
    (5)Castlegate 170 Ltd
    
    
    100.00
    
    
    West Thurrock, U.K.
    
    (6)Esmeralda Holdings
Ltd
    
    
    100.00
    
    
    West Thurrock, U.K.
    
    (4)Kingdom of Leather
Ltd
    
    
    100.00
    
    
    West Thurrock, U.K.
    
    (4)Natuzzi Trade
Service Srl
    
    
    100.00
    
    
    Bari, Italy
    
    (7)Natuzzi Netherlands
Holding BV
    
    
    100.00
    
    
    Amsterdam, Netherlands
    
    (6)
   (1)
    
    Manufacture and distribution(2)
    
    Intragroup leather dyeing and finishing(3)
    
    Production and distribution of polyurethane foam(4)
    
    Distribution(5)
    
    Commercial and marketing services(6)
    
    Investment holding(7)
    
    Services F-8




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  In January 2003 the Company incorporated a new subsidiary, Natuzzi
Benelux S.A., which provides sales support for the Group in Belgium,
Holland and Luxembourg.On May 7, 2003 the Company acquired 100% of the outstanding common shares
of Castlegate 170 Ltd, based in London, ultimate parent company
of the Kingdom of Leather Group (KOL or KOL Group), a leading UK
upholstered furniture specialist with a network of 15 stores, mainly
located in England. The primary reason for this acquisition was the
opportunity to increase market share in the United Kingdom. The factors
that contributed to the determination of the price are the presence of
stores in key geographic locations and the presence of a well-placed
sales force. The acquisition was accounted for using the purchase method
and it resulted in a goodwill of 9,179, which represents the excess of
purchase price over fair value of net liabilities assumed. The following
table summarizes the estimated fair value of the assets acquired and the
liabilities assumed at date of acquisition. Current assets
    
    
    10,324Goodwill
    
    
    9,179Other non current assets
    
    
    3,008Current liabilities
    
    
    (17,911
    )Non current liabilities
    
    
    (267
    )Purchase price
    
    
    4,333
  In addition, the following table summarizes the consolidated statements
of earnings of the KOL Group for the years ended December 31, 2003 and
2002. 2003
    
    2002Net sales
    
    
    40,483
    
    
    
    47,615Cost of sales
    
    
    (21,730
    )
    
    
    (23,552
    )Gross profit
    
    
    18,753
    
    
    
    24,063Selling expenses
    
    
    (19,770
    )
    
    
    (19,938
    )General and administrative expenses
    
    
    (4,957
    )
    
    
    (4,869
    )Operating loss
    
    
    (5,974
    )
    
    
    (744
    )Other income, net
    
    
    1,828
    
    
    
    (711
    )Loss before taxes
    
    
    (4,146
    )
    
    
    (1,455
    )Income taxes
    
    
    
    
    
    
    Net loss
    
    
    (4,146
    )
    
    
    (1,455
    )
  On October 6, 2003 the Company acquired 100% of the shares of Minuano
Nordeste SA (Minuano), at a price of 4,298, of which 2,149 was paid in
cash, with the balance to be paid in installments before the end of
2006. At December 31, 2003 this payable is included in other liabilities
(see notes 13 and 17). The main reason of the acquisition is that the
enterprise acquired signed an agreement with the Brazilian government
whereby it will enjoy certain F-9




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  export incentives until 2015. At the time
of the acquisition the subsidiary was dormant. During the first few
months of 2004 the subsidiary has started to build new facilities for
the production of leather upholstery furniture labelled Italsofa. The
acquisition resulted in a goodwill of 4,053, which represents the excess
of purchase price over fair value of acquired net assets. The fair value
of assets acquired and liabilities assumed were as follows: Current and non current assets
    
    
    253Goodwill
    
    
    4,053Current and non current liabilities
    
    
    (8
    )Purchase price
    
    
    4,298
  In an effort to maximize the efficiency of the Groups organizational
structure, at an extraordinary general meeting held on July 15, 2002,
the Companys shareholders approved the merger of Creazioni Ellelle
S.p.A., Divani e Poltrone Italia S.r.l., Expan Italia S.r.l., Nagest
S.r.l., Softaly S.r.l., Soft Cover S.r.l. and Spagnesi International
S.r.l. into the Company (the
Company owned 100% of the share capital of all these companies prior to
the merger). The merger became effective on January 1, 2003.During 2003 the subsidiaries Italsofa Hong-Kong Ltd, D.L.S. S.r.l.,
Natuzzi Argentina, Finat Ltd and Natex S.r.l. were wound up.During 2002, the Company set up a subsidiary in Denmark, Natuzzi Nordic,
which is engaged in the distribution of the Companys products in the
Scandinavian countries.During 2002, the Company acquired part of minority interest (20%) of
Natuzzi Switzerland AG for a consideration of 123 in cash. Goodwill
arising from that acquisition amounted to 97.During 2001, the Company acquired all the minority interest of Divani e
Poltrone Italia S.r.l. (0.02%) and Expan S.r.l. (1%) for a consideration
of 33 in cash.During 2001, the Company acquired 100% of Natuzzi Iberica S.A. and 60%
of Natuzzi Switzerland AG, for cash consideration of 60. Goodwill
arising from that acquisition amounted to 431.In 2001 and 2000 the Company incorporated subsidiaries in Romania,
Brazil and China. At December 31, 2003 these subsidiaries are engaged in
the production of leather upholstery furniture labelled Italsofa.2.
    
    Basis of preparation and principles of consolidationThe financial statements utilized for the consolidation are the
statutory financial statements of each Group company at December 31,
2003, 2002 and 2001. The 2002 and 2001 financial statements have been
approved by the respective shareholders of the relevant companies. The
2003 financial statements have been approved only by the directors of
the respective companies.The financial statements of subsidiaries are adjusted, where necessary,
to conform to Natuzzis accounting principles and policies, which are
consistent with Italian legal requirements governing financial
statements considered in conjunction with established accounting
principles promulgated by the Italian Accounting Profession and, in
their absence, by the International F-10




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  Financial Reporting Standards issued
by the International Accounting Standards Board (IASB). The consolidated
financial statements are classified in accordance with the presentations
generally used in international practice.Established accounting principles in the Republic of Italy vary in
certain significant respects from generally accepted accounting
principles in the United States of America. Information relating to the
nature and effect of such differences is presented in note 26 to the
consolidated financial statements.The consolidated financial statements include all affiliates and
companies that Natuzzi directly or indirectly controls, either through
majority ownership or otherwise. Control is presumed to exist where more
than one-half of a subsidiarys voting power is controlled by the
Company or the Company is able to govern the financial and operating
policies of a subsidiary or control the removal or appointment of a
majority of a subsidiarys board of directors. Where an entity either
began or ceased to be controlled during the year, the results of
operations are included only from the date control commenced or up to
the date control ceased.The assets and liabilities of subsidiaries are consolidated on a
line-by-line basis and the carrying value of intercompany investments
held is eliminated against the related shareholders equity accounts.
The minority interests of consolidated subsidiaries are separately
classified in the consolidated balance sheets and statements of
earnings. All intercompany balances and transactions are eliminated in
consolidation.On January 1, 2002, the Company adopted the euro as its reporting
currency and therefore the accompanying consolidated balance sheet as of
December 31, 2003 and 2002, consolidated statement of earnings,
consolidated statements of changes in shareholders equity and
consolidated statement of cash flows for the years ended December 31,
2003, 2002 are
presented in euros. All consolidated financial statements for each
period presented prior to January 1, 2002 have been restated into euros
using the official lira-euro exchange rate fixed as of January 1, 1999
(euro 1 is equal to lire 1,936.27). Due to the fixed lira-euro exchange
rate, Companys restated consolidated financial statements will depict
the same trends as would have been presented if it had continued to
present its consolidated financial statements in Italian lire. Natuzzi
consolidated financial statements, however, will not be comparable to
the euro consolidated financial statements of other companies that
previously reported their financial statements in a currency other than
lira because of currency fluctuations between the lira and other
currencies.3.
    
    Summary of significant accounting policiesThe significant accounting policies followed in the preparation of the
consolidated financial statements are outlined below.  a)
    
    Foreign currency transactions  Foreign currency transactions are recorded at the exchange rates
applicable at the transaction dates. Assets and liabilities denominated
in foreign currency are remeasured at year-end exchange rates. Foreign
exchange gains and losses resulting from the remeasurement of these F-11




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  assets and liabilities are included in other income (expense), net, in
the consolidated statements of earnings.Until December 31, 2002 receivables being hedged by forward exchange
contracts were remeasured using the related forward exchange rate.
Foreign exchange gains and losses resulting from the remeasurement of
hedged receivables were recognized in other income (expense), net, in
the consolidated statements of earnings.  b)
    
    Forward exchange contracts  The Group enters into forward exchange contracts (known in Italian
financial markets as domestic currency swaps) to manage its exposure to
foreign currency risks. As from January 1, 2003 the Company adopted a
close interpretation of methods for documenting all relationships
between its hedging instruments (domestic currency swaps) and its hedged
items. As a consequence of this, effective January 1, 2003 forward
exchange contracts are not used to hedge any on  or off-balance sheet
items. Therefore, at December 31, 2003 all unrealized gains or losses on
such contracts are recorded in other income (expense), net, in the
consolidated statements of earnings.Until December 31, 2002, the accounting for forward exchange contracts,
depending on their use, was as follows:  §
    
    Forward exchange contracts used to hedge accounts
receivable were considered when remeasuring the related balance
sheet item at the contract rate. Foreign exchange gains and losses
from the remeasurement of the accounts receivable at contract rate
were recorded within other income (expense), net, in the
consolidated statements of earnings.§
    
    Forward exchange contracts were used to hedge future sales
if the sales were supported by sales orders and customers
indications of future purchases as of the balance sheet date which
were confirmed by sales orders received within the earlier of four
months after the year-end or the issuance of the consolidated
financial statements. Unrealized gains and losses on these forward
contracts were deferred.§
    
    Unrealized gains and losses on forward exchange contracts
not hedging any on-or off-balance sheet items were recorded in
other income (expense), net, in the consolidated statements of
earnings.  The change in the application of this accounting principle had an
immaterial impact on the consolidated statement of earnings for the year
ended December 31, 2003.  c)
    
    Financial statements of foreign operations  The Groups foreign subsidiaries are considered an integral part of the
Company due to various factors including significant intercompany
transactions, financing, and cash flow indicators. Therefore, the
functional currency for these foreign subsidiaries is the functional
currency of the parent, namely the euro. As a result all monetary assets
and liabilities are remeasured, at the end of each reporting period,
using euro and the resulting gain or loss is recognized in the F-12




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  consolidated statements of earnings. For all non monetary assets and
liabilities, share capital and retained earnings historical exchange
rates are used. The average exchange rates during the year is used for
revenues and expenses, except for those revenues and expenses related to
assets and liabilities translated at historical exchange rates.  d)
    
    Cash and cash equivalents  The Company classifies as cash and cash equivalents cash on hand,
amounts on deposit and on account in banks and cash invested temporarily
in various instruments with maturities of three months or less at time
of purchase.  e)
    
    Marketable debt securities  Marketable debt securities are valued at the lower of cost or market
value determined on an individual security basis. A valuation allowance
is established and recorded as a charge to other income (expense), net,
for unrealized losses on securities. Unrealized gains are not recorded
until realized. Recoveries in the value of securities are recorded as
part of other expense, net, but only to the extent of previously
recognized unrealized losses.Gains and losses realized on the sale of marketable debt securities were
computed based on a weighted-average cost of the specific securities
being sold.Realized gains and losses are charged to other income (expense), net.  f)
    
    Accounts receivable and payable  Receivables are stated at nominal value net of an allowance for doubtful
accounts. Payables are stated at face value.  g)
    
    Inventories  Raw materials are stated at the lower of cost (determined under the
specific cost method for leather hides and under the weighted-average
method for other raw materials) and replacement cost. Goods in process
and finished goods are valued at the lower of production cost and net
realizable value.  h)
    
    Property, plant and equipment  Property, plant and equipment is stated at historical cost, except for
certain buildings which were revalued in 1983, 1991 and 2000 according
to Italian revaluation laws. Maintenance and repairs are expensed;
significant improvements are capitalized and depreciated over the useful
life of the related assets. The cost or valuation of fixed assets is
depreciated on the straight-line method over the estimated useful lives
of the assets (refer to note 9). The related deprecation expense is
allocated to cost of goods sold, selling expenses and general and
administrative expenses based on the usage of the assets. F-13




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)    i)
    
    Treasury shares  Treasury shares are accounted for as a non-current assets and an amount
equal to the cost of shares acquired is reclassified from retained
earnings to an undistributed treasury shares reserve (see note 19).
Treasury shares are stated at cost and when a permanent impairment loss
exists at
the balance sheet date a valuation allowance is established and recorded
as a charge to other income (expense), net.  j)
    
    Other assets  Other assets in the consolidated financial statements primarily include
trademarks and patents, goodwill and certain deferred costs. These
assets are stated at the lower of amortized cost or recoverable amount.
The carrying amount of other assets are reviewed to determine if they
are in excess of their recoverable amount, based on undiscounted cash
flows, at the consolidated balance sheet date. If the carrying amount
exceeds the recoverable amount, the asset is written down to the
recoverable amount.Trademarks, patents and goodwill are amortized on a straight-line basis
over a period of five years.  k)
    
    Impairment of long-lived assets and long-lived assets to be
disposed of  The Company reviews long-lived assets, including intangible assets, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Estimated fair value
is generally based on either appraised value or measured by discounted
estimated future cash flows. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.  l)
    
    Income taxes  Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss. Deferred tax assets are reduced by a
valuation allowance to an amount that is more likely than not to be
realized. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. F-14




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)    m)
    
    Government grants  Capital grants compensate the Group for the partial cost of an asset and
are part of the Italian governments investment incentive program, under
which the Group receives amounts generally equal to a percentage of the
aggregate investment made by the Group in the construction of new
manufacturing facilities, or in the improvement of existing facilities,
in designated areas of the country.Capital grants from government agencies are recorded when there is
reasonable assurance that the grants will be received and that the Group
will comply with the conditions applying to them.Until December 31, 2000 capital grants were recorded, net of tax, within
reserves in shareholders equity. As from January 1, 2001 all new
capital grants are recorded in the consolidated balance sheet initially
as deferred income and subsequently recognized in the consolidated
statement of earnings as revenue on a systematic basis over the useful
life of the related asset. At December 31, 2003 and 2002 the deferred
income for capital grants amounts to 13,359 and 14,229, respectively.Cost reimbursement grants relating to training and other personnel costs
are credited to income when received from government agencies.  n)
    
    Employees leaving entitlement  Leaving entitlements represent amounts accrued for each Italian employee
that are due and payable upon termination of employment determined in
accordance with applicable labour laws. The Group accrues the full
amount of employees vested benefit obligation as determined by such
laws for leaving entitlements.The expense recorded for the leaving entitlement for the years ended
December 31, 2003, 2002 and 2001 was 6,776, 7,091 and 6,293,
respectively.The number of workers employed by the Group totalled 6,230 and 5,742 at
December 31, 2003 and 2002, respectively.  o)
    
    Net sales  The Company recognizes revenue on sales at the time products are shipped
from the manufacturing facilities, and when the following criteria are
met: persuasive evidence of an arrangement exists; the price to the
buyer is fixed and determinable; and collectibility of the sales price
is reasonably assured.Revenues are recorded net of returns and discounts. Sales returns are
estimated and provided for in the year of sales. Such allowances are
made based on historical trends. The Company has the ability to make a
reasonable estimate of future returns due to large volumes of
homogeneous transactions and historical experience. F-15




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)    p)
    
    Shipping and handling costs  Shipping and handling costs incurred to transport products to customers
are included in selling expenses. Shipping and handling expenses
recorded for the years ended December 31, 2003, 2002 and 2001 were
68,194, 65,338 and 66,114, respectively.  q)
    
    Advertising costs  Advertising costs are expensed in the periods incurred. Advertising
expenses recorded for the years ended December 31, 2003, 2002 and 2001
were 32,114, 23,578 and 19,597, respectively.  r)
    
    Commission expense  Commissions payable to sales representatives and the related expenses
are recorded at the time shipments are made by the Group to customers.
Commissions are not paid until payment for the related sales invoice is
remitted to the Group by the customer.  s)
    
    Contingencies  Liabilities for loss contingencies are recorded when it is probable that
an asset has been impaired or a liability has been incurred and the
amount of the loss can be reasonably estimated.  t)
    
    Use of estimates  The preparation of financial statements in conformity with established
accounting policies requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.  u)
    
    Earnings per share  Basic earnings per share is calculated by dividing net earnings
attributable to ordinary shareholders by the weighted-average number of
ordinary shares outstanding during the period after considering the
effect of outstanding treasury shares. The Company does not have any
dilutive instruments (such as stock options). Therefore, basic earnings
per share is equal to diluted earnings per share. The following table
provides the amounts used in the calculation of earnings per share: 2003
    
    2002
    
    2001Net earnings attributable to
ordinary shareholders
    
    
    37,300
    
    
    
    91,438
    
    
    
    75,657Weighted-average number of ordinary
shares outstanding during the year
    
    
    54,681,628
    
    
    
    54,681,628
    
    
    
    55,027,496
 F-16




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  4.
    
    Cash and cash equivalentsCash and cash equivalents are analyzed as follows: 2003
    
    2002Cash on hand
    
    
    503
    
    
    
    59Bank accounts in Euro
    
    
    6,217
    
    
    
    32,308Bank accounts in foreign currency
    
    
    56,524
    
    
    
    63,687Money market instruments
    
    
    321
    
    
    
    641Total
    
    
    63,565
    
    
    
    96,695
  5.
    
    Marketable debt securitiesDetails regarding marketable debt securities are as follows: 2003
    
    2002Foreign corporate bonds
    
    
    5
    
    
    
    6Italian government bonds
    
    
    
    
    
    
    20Total
    
    
    5
    
    
    
    26
  Further information regarding the Groups investments in marketable debt
securities is as follows: Gross unrealizedFair2003
    
    Cost
    
    Gains
    
    Losses
    
    valueForeign corporate bonds
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Italian government bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5
 Gross unrealizedFair2003
    
    Cost
    
    Gains
    
    Losses
    
    valueForeign corporate bonds
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Italian government bonds
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Total
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26
 F-17




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) 2003
    
    2002
    
    2001Proceeds from sales
    
    
    21
    
    
    
    
    
    
    
    Realized gains
    
    
    
    
    
    
    
    
    
    
    Realized losses
    
    
    
    
    
    
    
    
    
    
    
  The contractual maturity of the Groups marketable debt securities at
December 31, 2003 is between 1  5 years.6.
    
    Trade receivables, netTrade receivables are analyzed as follows: 2003
    
    2002North American customers
    
    
    57,730
    
    
    
    63,169Other foreign customers
    
    
    52,472
    
    
    
    57,854Domestic customers
    
    
    45,723
    
    
    
    38,241Trade bills receivable
    
    
    4,238
    
    
    
    3,861Total
    
    
    160,163
    
    
    
    163,125Allowance for doubtful accounts
    
    
    (5,662
    )
    
    
    (4,727
    )Total trade receivables, net
    
    
    154,501
    
    
    
    158,398
  Trade receivables are due primarily from major retailers who sell
directly to customers.No single customer accounted for more than 5% of the companys sales in
2003, 2002 and 2001 or accounts receivable at December 31, 2003 and
2002. The Company insures its collection risk in respect of a
significant portion of accounts receivable outstanding balances and,
estimates an allowance for doubtful accounts based on the insurance in
place, the credit worthiness of its customers as well as general
economic conditions.The following table provides the movements in the allowance for doubtful accounts: 2003
    
    2002
    
    2001Balance, beginning of year
    
    
    4,727
    
    
    
    5,469
    
    
    
    4,451Charges-bad debt expense
    
    
    1,441
    
    
    
    97
    
    
    
    1,398Reductions-write off
of uncollectible accounts
    
    
    (506
    )
    
    
    (839
    )
    
    
    (380
    )Balance, end of year
    
    
    5,662
    
    
    
    4,727
    
    
    
    5,469
  Trade receivables denominated in foreign currencies at December 31, 2003
and 2002 and, where applicable, translated at the rate of the related
domestic currency swaps, totalled 80,528 (80,528 translated at year-end
exchange rates) and 87,264 (78,013 translated at year-end exchange
rates), respectively. These receivables consist of the following: F-18




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) 2003
    
    2002U.S. dollars
    
    
    49,887
    
    
    
    66,382Canadian dollars
    
    
    9,174
    
    
    
    5,500British pounds
    
    
    9,015
    
    
    
    6,563Australian dollars
    
    
    6,685
    
    
    
    3,678Other currencies
    
    
    5,767
    
    
    
    5,141Total
    
    
    80,528
    
    
    
    87,264
  7.
    
    Other receivablesOther receivables are analyzed as follows: 2003
    
    2002VAT
    
    
    25,214
    
    
    
    35,990Receivable from tax authorities
    
    
    18,692
    
    
    
    7,951Government capital grants
    
    
    4,957
    
    
    
    8,076Advances to suppliers
    
    
    4,633
    
    
    
    2,213Other
    
    
    4,661
    
    
    
    4,107Total
    
    
    58,157
    
    
    
    58,337
  The VAT receivable includes value added taxes and interest thereon
reimbursable to various companies of the Group. While currently due at
the balance sheet date, the collection of the VAT receivable may extend
over a maximum period of up to two years.
The receivable from the tax authorities represents principally advance
taxes paid in excess of the amounts due and interest thereon.8.
    
    InventoriesInventories are analyzed as follows: 2003
    
    2002Leather and other raw materials
    
    
    58,830
    
    
    
    59,260Goods in process
    
    
    15,213
    
    
    
    12,714Finished products
    
    
    23,475
    
    
    
    12,107Total
    
    
    97,518
    
    
    
    84,081
 F-19




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  9.
    
    Property, plant and equipment and accumulated depreciationFixed assets are listed below together with accumulated depreciation. Cost or
    
    Accumulated
    
    Annual rate of2003
    
    valuation
    
    depreciation
    
    depreciationLand
    
    
    9,916
    
    
    
    
    
    
    
    Industrial buildings
    
    
    158,286
    
    
    
    26,417
    
    
    
    3-10
    %Machinery and equipment
    
    
    102,469
    
    
    
    52,530
    
    
    
    11.5-25
    %Airplane
    
    
    36,800
    
    
    
    6,923
    
    
    
    6
    %Office furniture and equipment
    
    
    21,203
    
    
    
    14,016
    
    
    
    12-20
    %Retail gallery and stores furnishings
    
    
    12,289
    
    
    
    2,114
    
    
    
    25-35
    %Transportation equipment
    
    
    5,646
    
    
    
    3,570
    
    
    
    20-25
    %Leasehold improvements
    
    
    2,388
    
    
    
    1,083
    
    
    
    10-20
    %Construction in progress
    
    
    11,276
    
    
    
    
    
    
    
    Advances to suppliers
    
    
    573
    
    
    
    
    
    
    
    Total
    
    
    360,846
    
    
    
    106,653
 Cost or
    
    Accumulated
    
    Annual rate of2002
    
    valuation
    
    depreciation
    
    depreciationLand
    
    
    9,979
    
    
    
    
    
    
    
    Industrial buildings
    
    
    133,707
    
    
    
    21,410
    
    
    
    3-10
    %Machinery and equipment
    
    
    84,539
    
    
    
    41,665
    
    
    
    11,5-25
    %Airplane
    
    
    12,725
    
    
    
    1,527
    
    
    
    6
    %Office furniture and equipment
    
    
    20,132
    
    
    
    12,444
    
    
    
    12-20
    %Retail gallery and stores furnishings
    
    
    2,036
    
    
    
    106
    
    
    
    25-35
    %Transportation equipment
    
    
    5,003
    
    
    
    2,879
    
    
    
    20-25
    %Leasehold improvements
    
    
    4,111
    
    
    
    1,330
    
    
    
    10-20
    %Construction in progress
    
    
    20,747
    
    
    
    
    
    
    
    Advances to suppliers
    
    
    17,274
    
    
    
    
    
    
    
    Total
    
    
    310,253
    
    
    
    81,361
  Construction in progress relates principally to manufacturing
facilities.10.
    
    Other assetsOther assets consist of the following: F-20




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) 2003
    
    2002Goodwill
    
    
    14,338
    
    
    
    1,106Trademarks and patents
    
    
    10,826
    
    
    
    10,744Others
    
    
    10,743
    
    
    
    8,822Total, gross
    
    
    35,907
    
    
    
    20,672Less impairment losses
    
    
    (232
    )
    
    
    Less accumulated amortization
    
    
    (18,588
    )
    
    
    (15,620
    )Total, net
    
    
    17,087
    
    
    
    5,052
  At December 31, 2003 and 2002 the net book value of goodwill may be analyzed as follows: 2003
    
    2002Gross carrying amount
    
    
    14,338
    
    
    
    1,106Less impairment losses
    
    
    (232
    )
    
    
    Less accumulated depreciation
    
    
    (1,982
    )
    
    
    (538
    )Net book value
    
    
    12,124
    
    
    
    568
  At December 31, 2003 and 2002 the net book value of goodwill arising
from business acquisitions completed after July 1, 2001 amounts to
12,008 and 337, respectively.11.
    
    Short-term borrowingsShort-term borrowings consist of the following: 2003
    
    2002Bank borrowings
    
    
    3,547
    
    
    
    Bank overdrafts
    
    
    1,223
    
    
    
    1624,770
    
    
    
    162
  While bank overdrafts are payable on demand, bank borrowings consist of
unsecured line of credit agreements with banks and have various short
maturities.At December 31, 2003 the short-term borrowings included 4,362
denominated in foreign currencies.The weighted average interest rates on the above-listed short-term
borrowings at December 31, 2003 and 2002 are as follows: 2003
    
    2002Bank borrowings
    
    
    2.28
    %
    
    
    3.17
    %Bank overdrafts
    
    
    2.42
    %
    
    
    4.10
    %
  Credit facilities available to the Group, including amounts guaranteed
under surety bonds, amounted to 209,102 and 171,880 at December 31, 2003
and 2002, respectively. The unused portion of these facilities amounted
to 204,332 and 171,760 at December 31, 2003 and 2002, respectively. F-21




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  12.
    
    Accounts payable-tradeAccounts payable-trade totalling 80,913 and 87,551 at December 31, 2003
and 2002, respectively, represent principally amounts payable for
purchases of goods and services in Italy and abroad, and includes 20,782
and 26,069 at December 31, 2003 and 2002, respectively, denominated in
foreign currencies.13.
    
    Accounts payable-otherAccounts payable-other are analyzed as follows: 2003
    
    2002Payable to customers
    
    
    4,884
    
    
    
    1,098Cooperative advertising and quantity discount
    
    
    3,705
    
    
    
    4,041Withholding taxes on payroll and on other
    
    
    3,516
    
    
    
    3,445Provision for returns and other discounts
    
    
    3,363
    
    
    
    4,530Payable to minority interest for dividends
    
    
    620
    
    
    
    732Payable to third parties for business acquisition
    
    
    430
    
    
    
    Other
    
    
    1,340
    
    
    
    1,812Total
    
    
    17,858
    
    
    
    15,658
  14.
    
    Taxes on income  Italian companies are subject to two income taxes at the following rates: 2003
    
    2002
    
    2001IRPEG (state tax)
    
    
    34.00
    %
    
    
    36.00
    %
    
    
    36.00
    %IRAP (regional tax)
    
    
    4.25
    %
    
    
    4.25
    %
    
    
    4.25
    %
  IRPEG is a state tax and is calculated on the taxable income determined
on the income before taxes modified to reflect all temporary and
permanent differences regulated by the tax law. In 1997 dual income tax
was introduced for the purpose of encouraging companies to use equity
rather than debt finance. A first portion of the taxpayers taxable
income is calculated by applying an interest rate percentage (based on
the return on government and private sector bonds) to the net increase
in shareholders equity of such taxpayer, subject to certain
restrictions. This portion is subject to IRPEG at the reduced rate of
19.00%. The remaining profit will be subject to tax at the ordinary
IRPEG tax rate (at present 34.00%).On December 12, 2003, the Italian Government approved the legislative
decree n. 344 which enacted certain changes in the fiscal legislation
for fiscal years beginning on or after January 1, 2004. The principal
change made was the introduction of the new state income tax IRES which
will replace IRPEG, with the simultaneous elimination of the dual income
tax system. The enacted IRES tax rate for 2004 is 33% of taxable income.As a result of these new tax rules, the Company adjusted the effect of
changes in IRPEG tax rates on net deferred tax assets during the year
ended December 31, 2003, as it includes the F-22




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  enactment date. These changes in tax rates resulted in a decrease of net
deferred tax assets by 55 as of December 31, 2003.Such tax law did not modify the existing IRAP regime. IRAP is a regional
tax and each Italian region has the power to increase the current rate
of 4.25% by a maximum of 1.00%. In general, the taxable base of IRAP is
a form of gross profit determined as the difference between gross
revenues (excluding interest and dividend income) and direct production
costs (excluding labour costs, interest expenses and other financial
costs).Under Italian investment incentive schemes for under-industrialized
regions, certain of the Groups operating entities have been entitled to
enjoy a full exemption from IRPEG and a significant part of IRAP for ten
years. A very significant portion of the Groups consolidated earnings
before minority interest in 2003, 2002 and 2001 is derived from
companies entitled to some extent to the aforementioned exemptions, the
most significant of which expired in 2003. The table below describes the
effect of such exemptions on the Groups 2003, 2002 and 2001 income tax
charge. The Company is currently eligible for certain tax benefits,
available subject to an investment program being initiated pursuant to
Law no. 388 of December 23, 2000. This regime entails tax deductions
amounting, in 2003, to 29.75% of the value of the newly-made investments
and will be available in connection with any such investments made prior
to January 1, 2007; however, the amount of the tax credit may vary in
future years. Certain foreign subsidiaries enjoy significant tax
benefits, such as corporate income tax exemptions or reductions of the
corporate income tax rates effectively applicable.Approximately 57.2%, 88,8% and 88.7% respectively, of the Groups
consolidated earnings before taxes were generated by these domestic
Italian operations, which have benefited from the above mentioned
beneficial tax regimes in 2003, 2002 and 2001.Consolidated earnings before taxes are analyzed as follows: 2003
    
    2002
    
    2001Domestic
    
    
    26,319
    
    
    
    103,370
    
    
    
    86,534Foreign
    
    
    19,640
    
    
    
    12,991
    
    
    
    11,004Total
    
    
    45,959
    
    
    
    116,361
    
    
    
    97,538
  The effective income tax rates for the years ended December 31, 2003,
2002 and 2001 were 18.5%, 21.5% and 22.5%, respectively. The actual
income tax expense differs from the expected income tax expense
(computed by applying the state tax, which is 34% for 2003 and 36% for
2002 and 2001, to income before income taxes and minority interest) as
follows: F-23




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) 2003
    
    2002
    
    2001Expected income tax charge at full tax rates
    
    
    15,626
    
    
    
    41,890
    
    
    
    35,114Effects of:§
    
    Tax exempt income
    
    
    (19,080
    )
    
    
    (25,079
    )
    
    
    (20,784
    )§
    
    Aggregate effect of different tax
rates in foreign jurisdictions
    
    
    (863
    )
    
    
    (1,806
    )
    
    
    (1,083
    )§
    
    Tax effect of change in tax rates
    
    
    55
    
    
    
    121
    
    
    
    §
    
    Effect of net change in valuation allowance
established against deferred tax assets
    
    
    3,180
    
    
    
    1,725
    
    
    
    650§
    
    Non-deductible expenses
    
    
    3,764
    
    
    
    1,097
    
    
    
    1,201§
    
    Italian regional tax
    
    
    5,819
    
    
    
    7,049
    
    
    
    6,803Actual tax charge
    
    
    8,501
    
    
    
    24,997
    
    
    
    21,901
  Total taxes for the years ended December 31, 2003, 2002 and 2001 relate
to earnings from operations.Total income taxes for the years ended December 31, 2003, 2002 and 2001
were allocated as follows: 2003
    
    2002
    
    2001Current:Italian
    
    
    2,812
    
    
    
    22,104
    
    
    
    18,100Foreign
    
    
    4,890
    
    
    
    2,492
    
    
    
    4,111Total (a)
    
    
    7,702
    
    
    
    24,596
    
    
    
    22,211Deferred:Italian
    
    
    393
    
    
    
    112
    
    
    
    331Foreign
    
    
    406
    
    
    
    289
    
    
    
    (641
    )Total (b)
    
    
    799
    
    
    
    401
    
    
    
    (310
    )Total (a + b)
    
    
    8,501
    
    
    
    24,997
    
    
    
    21,901
  The tax years from January 1, 1998 for the majority of the Italian
companies are open to assessment for additional taxes.The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2003 and 2002 are presented below: 2003
    
    2002Deferred tax assets:§
    
    Tax loss carryforwards
    
    
    4,497
    
    
    
    2,272§
    
    Allowance for doubtful accounts
    
    
    1,387
    
    
    
    1,621§
    
    Impairment of fixed assets
    
    
    1,428
    
    
    
    11§
    
    Provision for sales representatives
    
    
    1,051
    
    
    
    1,175§
    
    Provision for returns and discounts
    
    
    381
    
    
    
    732§
    
    Provision for contingent liabilities
    
    
    368
    
    
    
    763§
    
    Other temporary differences
    
    
    810
    
    
    
    624
 F-24




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) 2003
    
    2002Total gross deferred tax assets
    
    
    9,922
    
    
    
    7,198§
    
    Less valuation allowance
    
    
    (8,060
    )
    
    
    (4,562
    )Net deferred tax assets
    
    
    1,862
    
    
    
    2,636Deferred tax liabilities:§
    
    Government grants related to
capital expenditures
    
    
    (851
    )
    
    
    (894
    )§
    
    Other temporary differences
    
    
    (266
    )
    
    
    (198
    )Total deferred tax liabilities
    
    
    (1,117
    )
    
    
    (1,092
    )Net deferred tax assets
    
    
    745
    
    
    
    1,544
  A valuation allowance has been established principally for the tax loss
carryforwards, allowance for doubtful accounts, impairment of fixed
assets and for provision for termination indemnities of sales
representatives.The valuation allowance for deferred tax assets as of December 31, 2003
and 2002 was 8,060 and 4,562, respectively. The net change in the total
valuation allowance for the years ended December 31, 2003 and 2002 was
an increase of 3,498 and 1,542, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and the tax planning strategies in
making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods during
which the deferred tax assets are deductible, management believes it is
more likely than not that the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances at
December 31, 2003. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.Net deferred income tax assets are included in the consolidated balance sheets as follows: 2003
    
    Current
    
    Non current
    
    TotalGross deferred tax assets
    
    
    7,888
    
    
    
    2,034
    
    
    
    9,922Valuation allowance
    
    
    (6,641
    )
    
    
    (1,419
    )
    
    
    (8,060
    )Net deferred tax assets
    
    
    1,247
    
    
    
    615
    
    
    
    1,862Deferred tax liabilities
    
    
    (292
    )
    
    
    (825
    )
    
    
    (1,117
    )Net deferred tax assets (liabilities)
    
    
    955
    
    
    
    (210
    )
    
    
    745
 2002
    
    Current
    
    Non current
    
    TotalGross deferred tax assets
    
    
    4,864
    
    
    
    2,334
    
    
    
    7,198Valuation allowance
    
    
    (3,008
    )
    
    
    (1,554
    )
    
    
    (4,562
    )Net deferred tax assets
    
    
    1,856
    
    
    
    780
    
    
    
    2,636Deferred tax liabilities
    
    
    (34
    )
    
    
    (1,058
    )
    
    
    (1,092
    )Net deferred tax assets (liabilities)
    
    
    1,822
    
    
    
    (278
    )
    
    
    1,544
 F-25




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  The tax loss carryforwards of the Group total 15,000 and expire as follows: 2006
    
    
    5712007
    
    
    2,2712008
    
    
    3,797Indefinite
    
    
    8,361Total
    
    
    15,000
  15.
    
    Salaries, wages and related liabilitiesSalaries, wages and related liabilities are analyzed as follows: 2003
    
    2002Salaries and wages
    
    
    8,180
    
    
    
    7,641Social security contributions
    
    
    6,130
    
    
    
    5,352Vacation accrual
    
    
    1,781
    
    
    
    1,715Total
    
    
    16,091
    
    
    
    14,708
  16.
    
    Long-term debtLong-term debt is secured by mortages on the Groups properties for a
total of nil (2,169 at December 31, 2002). Long-term debt at December
31, 2003 and 2002 consists of the following: F-26




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) 2003
    
    20022.25% long-term debt payable in annual installments
with final payment due May 30, 2015
    
    
    2,166
    
    
    
    2,1663.0% long-term debt payable in semi-annual
installments with final payment due December 2006
    
    
    1,970
    
    
    
    3.5% long-term debt payable in semi-annual
installments with final payment due August 24, 2004
    
    
    1,106
    
    
    
    2,7624.0% long-term debt payable in quarterly instalments
with final payment due in September 2005
    
    
    267
    
    
    
    3.7% long-term debt payable in semi-annual
installments with final payment due June 30, 2003
    
    
    
    
    
    
    83Total long-term debt
    
    
    5,509
    
    
    
    5,011Less current installments
    
    
    (1,291
    )
    
    
    (1,437
    )Long-term debt, excluding current installments
    
    
    4,218
    
    
    
    3,574
  Loan maturities after 2004 are summarized below: 2005
    
    
    1502006
    
    
    2,0942007
    
    
    1972008
    
    
    203Thereafter
    
    
    1,574Total
    
    
    4,218
  At December 31, 2003 long-term debt denominated in foreign currencies
amounts to 3,343 (2,762 at December 31, 2002).Interest expense related to long-term debt for the years ended December
31, 2003, 2002 and 2001 was 155, 202 and 162 respectively.17.
    
    Other liabilitiesOther liabilities consist of: 2003
    
    2002Termination indemnities for sales agents
    
    
    2,822
    
    
    
    2,245Payable to third parties for business acquisition
    
    
    1,719
    
    
    
    Provision for contingent liabilities
    
    
    1,175
    
    
    
    3,471Total
    
    
    5,716
    
    
    
    5,716
 F-27




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  18.
    
    Minority interestMinority interest shown in the accompanying consolidated balance sheet
at December 31, 2003 of 894 (499 at December 31, 2002).19.
    
    Shareholders equityThe share capital is owned as follows: 2003
    
    2002Mr. Pasquale Natuzzi
    
    
    45.3
    %
    
    
    45.3
    %Miss Anna Maria Natuzzi
    
    
    2.4
    %
    
    
    2.4
    %Mrs. Annunziata Natuzzi
    
    
    2.4
    %
    
    
    2.4
    %Public investors
    
    
    45.0
    %
    
    
    45.0
    %Treasury shares
    
    
    4.9
    %
    
    
    4.9
    %100.0
    %
    
    
    100.0
    %
  An analysis of the reserves is as follows: 2003
    
    2002Treasury shares reserve
    
    
    37,828
    
    
    
    37,828Legal reserve
    
    
    11,199
    
    
    
    3,824Monetary revaluation reserve
    
    
    1,344
    
    
    
    1,344Government capital grants reserve
    
    
    29,865
    
    
    
    30,075Total
    
    
    80,236
    
    
    
    73,071
  The number of ordinary shares issued at December 31, 2003 and 2002 is
57,525,528, respectively. The par value of one ordinary share is euro 1.In July 2000, the shareholders of the Company approved a share
repurchase program to buy-back up to 4 million shares or 51,646. The
Company spent 23,234 in 2000 and 14,594 in 2001 to repurchase shares.
The Company repurchased 1,782,700 shares in 2000 at an average cost of
US$ 11.3 per share and 1,061,200 shares in 2001 at an average cost of
US$ 12.3 per share. As of December 31, 2003 the repurchase program is
expired. Under Italian GAAP, the purchase of shares is accounted for as
a non-current asset and an amount equal to the cost of shares acquired
was reclassified from retained earnings to an undistributed treasury
 shares reserve.During an extraordinary general meeting on November 21, 2003
shareholders approved the cancellation of all treasury shares. On the
basis of the Italian civil code this decision became effective on
February 21, 2004.Italian law requires that 5% of net income of the parent company and
each of its consolidated Italian subsidiaries be retained as a legal
reserve, until this reserve is equal to 20% of the issued share capital
of each respective company. The legal reserve may be utilized to cover
losses; any portion which exceeds 20% of the issued share capital is
distributable as dividends. The combined legal reserves totalled 13,281
and 6,737 at December 31, 2003 and 2002, respectively.As of December 31, 2003, taxes that would be due on distribution of the
portion of shareholders equity equal to unremitted earnings of foreign
subsidiaries is approximately 1,170 (450 at F-28




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  December 31, 2002). The Group has not provided for such taxes as the
likelihood of distribution is remote and such earnings are deemed to be
permanently reinvested.No taxes would be payable on the distribution of the monetary
revaluation reserve and government capital grants reserve.20.
    
    Commitments and contingent liabilitiesSeveral companies of the Group lease manufacturing facilities and stores
under non-cancellable lease agreements with expiry dates through 2024.
Rental expense recorded for the years ended December 31, 2003, 2002 and
2001 was 11,046, 2,384 and 2,057, respectively. As of December 31, 2003,
the minimum annual rental commitments are as follows: 2004
    
    
    10,1652005
    
    
    9,6472006
    
    
    10,1212007
    
    
    10,3892008
    
    
    10,566Thereafter
    
    
    37,989Total
    
    
    88,877
  Certain banks have provided guarantees at December 31, 2003 to secure
payments to third parties amounting to 3,658 (4,408 at December 31,
2002). These guarantees are unsecured and have various maturities
extending through December 31, 2004.VAT reimbursed by tax authorities in prior years is secured by surety
bonds for 117 (117 at December 31, 2002) from certain financial
institutions. These surety bonds are unsecured and will expire after a
maximum period of up to two years or when the tax authorities perform
the final review of the VAT claim requests.In December, 1996, the Company and the Contract Planning Service of
the Italian Ministry of the Budget signed a Program Agreement with
respect to the Natuzzi 2000 project. In connection with this project,
the Natuzzi Group has prepared a multi-faceted program of industrial
investments for the production of upholstered furniture. Investments are
projected to total approximately 69,772. According to the revised agreement,
which is currently subject to approval of the CIPE (Comitato
Interministeriale Programmazione Economica) expected to occur during
the summer of 2004, the Italian government will contribute approximately 35,614. Receipt of the Italian
governments funds is based upon, among other things, the Group
constructing facilities in accordance with certain specifications and
maintaining a minimum number of employees.During 1997 the Group received under the aforementioned project capital
grants for 24,209 (included in the aforementioned total contribution
of 35,614). Capital expenditures under the Natuzzi 2000 project
amounted to approximately 70,755 at December 31, 2003. The capital grants are secured by surety bonds for
26,041 from a bank. These surety bonds are unsecured and will expire
when the Italian Ministry of Budget releases the final approvals of all
investments made.The Group is also involved in a number of claims (including tax claims)
and legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate F-29




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  disposition of these matters, after considering amounts accrued, will
not have a material adverse effect on the Groups consolidated financial
position or results of operations.21.
    
    Segmental and geographical informationThe Group operates in a single industry segment, that is, the design,
manufacture and marketing of contemporary and traditional leather and
fabric upholstered furniture. It offers a wide range of upholstered
furniture for sale, manufactured in production facilities located in
Italy and abroad (Romania, Brazil and China).Net sales of upholstered furniture analyzed by coverings are as follows: 2003
    
    2002
    
    2001Leather upholstered furniture
    
    
    550,029
    
    
    
    623,755
    
    
    
    624,411Fabric upholstered furniture
    
    
    123,921
    
    
    
    110,997
    
    
    
    89,628Total
    
    
    673,950
    
    
    
    734,752
    
    
    
    714,039
  Within leather and fabric upholstered furniture, the Company offers
furniture in the following categories: stationary furniture (sofas,
loveseats and armchairs), sectional furniture, motion furniture, sofa
beds and occasional chairs, including recliners and massage chairs.The following tables provide information upon the net sales of
upholstered furniture and of long-lived assets by geographical location.
Net sales are attributed to countries based on the location of
customers. Long-lived assets consist of property, plant and equipment. F-30




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) Sales of upholstered furniture
    
    2003
    
    2002
    
    2001United States
    
    
    280,770
    
    
    
    330,575
    
    
    
    317,927England
    
    
    80,409
    
    
    
    56,196
    
    
    
    51,457Italy
    
    
    71,277
    
    
    
    76,145
    
    
    
    72,623Canada
    
    
    37,910
    
    
    
    32,586
    
    
    
    35,581Germany
    
    
    25,392
    
    
    
    37,936
    
    
    
    39,985France
    
    
    23,393
    
    
    
    24,370
    
    
    
    19,077Belgium
    
    
    15,959
    
    
    
    17,354
    
    
    
    21,060Australia
    
    
    15,356
    
    
    
    13,186
    
    
    
    12,054Spain
    
    
    14,045
    
    
    
    11,475
    
    
    
    11,962Holland
    
    
    14,004
    
    
    
    16,858
    
    
    
    23,294Norway
    
    
    10,084
    
    
    
    13,281
    
    
    
    12,048Ireland
    
    
    7,760
    
    
    
    16,816
    
    
    
    11,509Other countries (none greater than 2%)
    
    
    77,591
    
    
    
    87,974
    
    
    
    85,462673,950
    
    
    
    734,752
    
    
    
    714,039
 Long lived assets
    
    2003
    
    2002Italy
    
    
    161,292
    
    
    
    164,042Romania
    
    
    33,277
    
    
    
    21,159United States of America
    
    
    27,902
    
    
    
    22,576Brazil
    
    
    14,610
    
    
    
    12,380China
    
    
    8,454
    
    
    
    6,348Spain
    
    
    3,375
    
    
    
    1,214Switzerland
    
    
    2,298
    
    
    
    999England
    
    
    2,158
    
    
    
    Other countries
    
    
    827
    
    
    
    174Total
    
    
    254,193
    
    
    
    228,892
  In addition, the Group also sells minor volumes of excess polyurethane
foam, leather by-products and certain pieces of furniture (coffee table,
lamps and rugs) which, for 2003, 2002 and 2001 totalled 95,629, 70,391
and 72,109, respectively.No single customer accounted for more than 5% of net sales in 2003, 2002
or 2001.22.
    
    Cost of salesCost of sales is analyzed as follows: F-31




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) 2003
    
    2002
    
    2001Opening inventories
    
    
    84,081
    
    
    
    87,895
    
    
    
    73,644Purchases
    
    
    355,867
    
    
    
    338,484
    
    
    
    366,398Labor
    
    
    104,495
    
    
    
    106,954
    
    
    
    98,102Third party manufacturers
    
    
    32,859
    
    
    
    38,572
    
    
    
    44,656Other manufacturing costs
    
    
    28,980
    
    
    
    29,599
    
    
    
    25,184Closing inventories
    
    
    (97,518
    )
    
    
    (84,081
    )
    
    
    (87,895
    )Total
    
    
    508,764
    
    
    
    517,423
    
    
    
    520,089
  23.
    
    Other income (expense), netOther income (expense), net is analyzed as follows: 2003
    
    2002
    
    2001Interest income
    
    
    1,701
    
    
    
    5,423
    
    
    
    5,987Interest expense and bank commissions
    
    
    (1,317
    )
    
    
    (3,870
    )
    
    
    (3,701
    )Interest income, net
    
    
    384
    
    
    
    1,553
    
    
    
    2,286Gains (losses) on foreign exchange, net
    
    
    64
    
    
    
    7,254
    
    
    
    (5,311
    )Unrealized exchange
gains (losses) on domestic currency swaps
    
    
    6,276
    
    
    
    2,021
    
    
    
    (902
    )Gains (losses) on foreign exchange
    
    
    6,340
    
    
    
    9,275
    
    
    
    (6,213
    )Gains (losses) on securities, net
    
    
    (754
    )
    
    
    
    
    
    
    79Other, net
    
    
    (2,339
    )
    
    
    3,723
    
    
    
    3,623Total
    
    
    3,631
    
    
    
    14,551
    
    
    
    (225
    )
  Gains (losses) on foreign exchange are related to the following: 2003
    
    2002
    
    2001Net realized gains (losses) on
domestic currency swaps
    
    
    25,369
    
    
    
    10,930
    
    
    
    (12,239
    )Net realized gains (losses) on accounts
receivable and payables
    
    
    (7,585
    )
    
    
    (8,835
    )
    
    
    (1,545
    )Net unrealized gains (losses) on
accounts receivable and payable
    
    
    (16,584
    )
    
    
    5,796
    
    
    
    8,473Exchange difference loss on translation
of foreign financial statements
    
    
    (1,136
    )
    
    
    (637
    )
    
    
    Total
    
    
    64
    
    
    
    7,254
    
    
    
    (5,311
    )
 F-32




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  Other, net consists of the following: 2003
    
    2002
    
    2001Impairment loss on fixed assets
    
    
    (4,292
    )
    
    
    
    
    
    
    Pre-acquisition loss of KOL
    
    
    1,694
    
    
    
    
    
    
    
    Tax liabilities settlements
    
    
    
    
    
    
    (481
    )
    
    
    Tax refund
    
    
    
    
    
    
    1,314
    
    
    
    Employment incentive grants
    
    
    
    
    
    
    
    
    
    
    2,259Other, net
    
    
    259
    
    
    
    2,890
    
    
    
    1,364Total
    
    
    (2,339
    )
    
    
    3,723
    
    
    
    3,623
  Impairment loss on fixed assetsThe Company has evaluated the impairment of long lived assets in
accordance with its accounting policy (wherever the event or changes in
circumstances indicate that the carrying amount of an asset may be not
recoverable). Based on such analysis the Company recorded an impairment
loss of 4,292.Pre-acquisition loss for KOL GroupThe pre-acquisition loss related to the KOL acquisition has been
eliminated in the consolidated statement of earnings for the year ended
at December 31, 2003 (see also note 26 (g)).Tax liabilities settlementDuring 2002 the Group settled certain of the tax claims made by the
authorities.Tax refundDuring 2002, the Company obtained from the tax authorities a refund of
1,314 for taxes not due on a portion of income related to 1993. As these
amounts were not recorded previously due to uncertainty, the Company
recorded such amounts in the consolidated statement of earnings for that
year.Employment incentive grantsIn prior years Company and certain subsidiaries, on the basis of
regional laws, received employment incentive from the regional agencies
in the form of grants for new permanent employees and subsidies of up to
100% of the cost of training courses for permanent and temporary
employees. The incentives received related to prior years. For the year
ended December 31, 2001 these incentives amounted to 2,259.24.
    
    Financial instruments and risk managementA significant portion of the Groups net sales, but only approximately
40% of its costs, are denominated in currencies other than the euro, in
particular the U.S. dollar. The remaining costs F-33




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  of the Group are denominated principally in euros. Consequently, a
significant portion of the Groups net revenues are exposed to
fluctuations in the exchange rates between the euro and such other
currencies. The Group uses forward exchange contracts (known in Italy as
domestic currency swaps) to reduce its exposure to the risks of
short-term declines in the value of its foreign currency-denominated
revenues. The Group uses such domestic currency swaps to protect the
value of its foreign-currency denominated revenues, and not for
speculative or trading purposes.The Group is exposed to credit risk in the event that the counterparties
to the domestic currency swaps fail to perform according to the terms of
the contracts. The contract amounts of the domestic currency swaps
described below do not represent amounts exchanged by the parties and,
thus, are not a measure of the exposure of the Group through its use of
those financial instruments. The amounts exchanged are calculated on the
basis of the contract amounts and the terms of the financial
instruments, which relate primarily to exchange rates. The immediate
credit risk of the Groups domestic currency swaps is represented by the
unrealized gains or losses on the contracts. Management of the Group
enters into contracts with creditworthy counter-parties and believes
that the risk of material loss from such credit risk to be remote. The
table below summarizes in euro equivalent the contractual amounts of
forward exchange contracts used to hedge principally future cash flows
from accounts receivable and sales orders at December 31, 2003 and 2002: 2003
    
    2002U.S. dollars
    
    
    32,942
    
    
    
    117,050British pounds
    
    
    46,267
    
    
    
    22,650Canadian dollars
    
    
    19,044
    
    
    
    14,937Australian dollars
    
    
    10,796
    
    
    
    9,579Swiss francs
    
    
    3,629
    
    
    
    2,844Japanese yen
    
    
    3,532
    
    
    
    2,863Total
    
    
    116,210
    
    
    
    169,923
  The following table presents information regarding the contract amount
in euro equivalent amounts and the estimated fair value of all of the
Groups forward exchange contracts. Contracts with unrealized gains are
presented as assets and contracts with unrealized losses are presented
as liabilities. F-34




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) 2003
    
    2002Contract
    
    Unrealized
    
    Contract
    
    Unrealizedamount
    
    gains (losses)
    
    amount
    
    gains (losses)Assets
    
    
    104,206
    
    
    
    6,544
    
    
    
    156,983
    
    
    
    14,880Liabilities
    
    
    12,004
    
    
    
    (268
    )
    
    
    12,940
    
    
    
    (588
    )116,210
    
    
    
    6,276
    
    
    
    169,923
    
    
    
    14,292
  At December 31, 2003, the forward exchange contracts had a net
unrealized gain of 6,276. This gain is recorded in other income
(expense), net in the consolidated statements of earnings.At December 31, 2002, the forward exchange contracts had a net
unrealized gain of 14,292, of which 9,251 related to accounts
receivable, 3,020 related to existing sales commitments and 2,021
related to anticipated commitments at year-end. The Company recorded all
these amounts, except for 3,020 relating to existing sales commitments.The carrying value of forward exchange contracts is determined based on
the unrealized loss and gain of such contracts recorded in the
consolidated financial statements. Unrealized gains (losses) on forward
exchange contracts is determined by using residual maturity rate.Refer to notes 3 (a) and (b) for the Groups accounting policy on
forward exchange contracts.25.
    
    Fair value of financial instrumentsThe following table summarizes the carrying value and the estimated fair
value of the Groups other financial instruments: 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    Fairvalue
    
    value
    
    value
    
    valueAssets:- Marketable debts securities
    
    
    5
    
    
    
    5
    
    
    
    26
    
    
    
    26- Treasury shares
    
    
    37,828
    
    
    
    22,697
    
    
    
    37,828
    
    
    
    27,552Liabilities:- Long-term debt
    
    
    5,509
    
    
    
    4,400
    
    
    
    5,011
    
    
    
    4,100
  Cash and cash equivalents, receivables, payables and short-term
borrowings approximate fair value because of the short maturity of these
instruments.Market value for quoted marketable debt securities is represented by the
securities exchange prices at year-end. Market value for unquoted
securities is represented by the prices of comparable securities, taking
into consideration interest rates, duration and credit standing of the
issuer.Fair value of the long-term debt is estimated based on cash flows
discounted using current rates available to the Company for borrowings
with similar maturities. F-35




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  26.
    
    Application of generally accepted accounting principles in the United
States of AmericaThe established accounting policies followed in the preparation of the
consolidated financial statements (Italian GAAP) vary in certain
significant respects from those generally accepted in the United States
of America (US GAAP).Those differences which have a material effect on net earnings and/or
shareholders equity are as follows:  (a)
    
    Certain property, plant and equipment have been revalued in
accordance with Italian laws. The revalued amounts are depreciated
for Italian GAAP purposes. US GAAP does not allow for such
revaluations, and depreciation is based on historical costs. The
revaluation primarily relates to industrial buildings.(b)
    
    Under US GAAP, SFAS 133 established comprehensive
accounting and reporting standards for derivative instruments and
hedging activities. SFAS 133 requires that an entity record all
derivatives, freestanding and certain embedded derivatives, as
either assets or liabilities in the statement of financial
position. This statement also defines and allows companies to apply
hedge accounting to its designated derivatives under certain
instances, provided an entity meets the strict documentation
criteria of SFAS 133. It also requires that all derivatives be
marked to market on an ongoing basis. Along with the derivatives,
in the case of qualifying hedges, the underlying hedges items, are
also to be marked to market. These market value adjustments are to
be included either in the income statement or other comprehensive
income, depending on the nature of the hedged transaction.The Company does not currently qualify for hedge criteria under SFAS
133 and has not used hedge accounting for Italian GAAP in 2003 (see
note 3(a) and (b)). In particular, the Company does not formally
document all relationships between its hedging instruments (forward
exchange contracts known in Italian financial markets as domestic
currency swaps) and its hedged items which includes linking all
derivatives that are designated as foreign-currency hedges to
specific accounts receivable on the balance sheet or to specific firm
committents or forecasted transactions. The Company also does not
formally assess, both at the hedges inception and on an ongoing
basis, whether the derivatives that are used in hedging its
transactions are highly effective in offsetting changes in fair
values of its hedged items.As a result under Italian GAAP at December 31, 2003 and US GAAP, at
December 31, 2003, 2002 and 2001 the Company accounted for all its
derivative financial instruments at their fair value and all its
accounts receivable in foreign currency were remeasured at year end
exchange rates. All mark to market adjustments were recorded in the
income statement.(c)
    
    Until December 31, 2000 government grants related to
capital expenditures were recorded, net of tax, within reserves in
shareholders equity (note 3 (m)). For US GAAP purposes, such
grants would be classified either as a reduction of the cost of the
related fixed asset or as a deferred credit and amortized to income
over the estimated useful lives of the assets. The adjustments to
net income represent the annual amortization of the capital grants
based on the estimated useful life of the related fixed assets. The
adjustments to shareholders F-36




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  equity are to reverse the amounts of capital grants credited directly
to equity for Italian GAAP purposes, net of the amounts of
amortization of such grants for US GAAP purposes. In 1995 and 1997,
the Group received certain grants relating to fixed assets acquired
between 1989 and 1997 with various useful lives. For US GAAP
purposes, the Group is amortizing such grants over the remaining
useful lives of the assets to which the grants relate.(d)
    
    As indicated in note 19, during 2001 and 2000 the Company
repurchased its common shares for a cash consideration of 37,828.
Under Italian GAAP, the purchase of these shares was accounted for
as non-current assets; under US GAAP, the cost of the acquired
 shares is reflected as a reduction in shareholders equity.(e)
    
    Under Italian GAAP, the Group recognizes sales revenue, and
accrued costs associated with the sales revenue, at the time
products are shipped from its manufacturing facilities located in
Italy and abroad. A significant part of the products are shipped
from factories directly to customers under terms that risks and
ownership are transferred to the customer when the customer takes
possession of the goods. These terms are delivered duty paid,
delivered duty unpaid, delivered ex quay and delivered at
customer factory. Delivery to the customer generally occurs within
one to six weeks from the time of shipment.US GAAP requires that revenue should not be recognized until it is
realized or realizable and earned, which is generally at the time
delivery to the customer occurs and the risks of ownership pass to
the customer. Accordingly, the Italian GAAP for revenue recognition
is at variance with US GAAP. The principal effects of this variance
on the accompanying consolidated balance sheet as of December 31,
2003 and 2002 and related consolidated statement of earnings for each
of the years in the three-year period ended December 31, 2003 are
indicated below: F-37




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) 2003
    
    2002Effects
    
    Effects
    
    VariationIncrease
    
    Increase
    
    forConsolidated balance sheet
    
    (Decrease)
    
    (Decrease)
    
    2003Trade receivables, net
    
    
    (47,263
    )
    
    
    (48,004
    )
    
    
    741Inventories
    
    
    31,194
    
    
    
    30,867
    
    
    
    327Total effect on current assets (a)
    
    
    (16,069
    )
    
    
    (17,137
    )
    
    
    1,068Accounts payable-trade
    
    
    (6,654
    )
    
    
    (6,240
    )
    
    
    (414
    )Income taxes
    
    
    (1,723
    )
    
    
    (2,288
    )
    
    
    565Total effect on current liabilities (b)
    
    
    (8,377
    )
    
    
    (8,528
    )
    
    
    151Total effect on shareholders equity (a-b)
    
    
    (7,692
    )
    
    
    (8,609
    )
    
    
    917
 2003
    
    2002
    
    2001Effects
    
    Effects
    
    EffectsIncrease
    
    Increase
    
    IncreaseConsolidated statement of earnings
    
    (Decrease)
    
    (Decrease)
    
    (Decrease)Net sales
    
    
    (741
    )
    
    
    (13,547
    )
    
    
    (34,457
    )Cost of sales
    
    
    327
    
    
    
    8,057
    
    
    
    22,810Gross profit
    
    
    (1,068
    )
    
    
    (5,490
    )
    
    
    (11,647
    )Selling expenses
    
    
    (414
    )
    
    
    (1,625
    )
    
    
    (4,615
    )Operating income
    
    
    (1,482
    )
    
    
    (3,865
    )
    
    
    (7,032
    )Income taxes
    
    
    (565
    )
    
    
    (741
    )
    
    
    (1,547
    )Total effect on net earnings
    
    
    (917
    )
    
    
    (3,124
    )
    
    
    (5,485
    )
  (f)
    
    In 2001, the Company translated the financial statements of
a foreign subsidiary which operates in a highly inflationary
economy at (i) year-end exchange rate for assets and liabilities,
(ii) historical exchange rates for share capital and retained
earnings, and (iii) average exchange rates during the year for the
statement of earnings. The resulting exchange differences on
translation were recorded as a direct adjustment to consolidated
shareholders equity. A highly inflationary economy is one that has
cumulative inflation of approximately 100 percent or more over a
3-year period. Under US GAAP the financial statements of this
subsidiary should be translated at (a) year-end exchange rate for
monetary assets and liabilities (b) historical exchange rates for
non monetary assets and liabilities (for example fixed assets or
long term debt) as well as for share capital, reserves and retained
earnings (c) average exchange rates during the year for revenues
and expenses recorded in the statement of earnings. The resulting
exchange differences on translation should be recorded in the
statement of earnings. Therefore for US GAAP purposes, in 2001 the
Company recorded a net gain of 307 in earnings.(g)
    
    During 2003 (see note 1) the Company acquired a 100%
interest in each of the following two entities: KOL Group and
Minuano Nordeste SA. Both acquisitions were accounted for F-38




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  as business combinations under Italian GAAP. The Company believes
that the KOL Group acquisition qualifies as a business combination
under US GAAP in accordance with the provisions of SFAS 141. However,
in accordance with EITF 98-3 the acquisition of 100% interest in
Minuano Nordeste SA does not qualified as an acquisition of a
business. Therefore, under the Italian GAAP the Minuano acquisition
was considered to be a business acquisition, while under US GAAP the
same has been accounted as an asset acquisition which does not result
in goodwill. The management has determined that the difference
between purchase price and the fair value of the net tangible assets
acquired is due to export incentive benefit that this entity is
entitled to upon completion of its manufacturing facilities and
export of the furniture manufactured in Brazil. The export incentive
is available until 2015. The related deferred tax liabilities is
established by using simultaneous method. The allocation of the
purchase price is as follows: US GAAP
    
    IT GAAP
    
    DifferenceCurrent and non current assets
    
    
    253
    
    
    
    253
    
    
    
    Intangible assets
    
    
    6,141
    
    
    
    
    
    
    
    6,141Goodwill
    
    
    
    
    
    
    4,053
    
    
    
    (4,053
    )Current and non current liabilities
    
    
    (8
    )
    
    
    (8
    )
    
    
    Deferred tax liabilities
    
    
    (2,088
    )
    
    
    
    
    
    
    (2,088
    )Purchase price
    
    
    4,298
    
    
    
    4,298
    
    
    
    
  Also under Italian GAAP the pre-acquisition results of an acquired
entity can be reflected in the operating results of the acquiring
entity provided the acquisition was completed within 6 months of the
beginning of the acquiring entitys fiscal year. Although, the
pre-acquisition results may be included in the statement of earning
of the acquiring company the resulting pre-acquisition income or loss
is not considered for the net earnings, but is considered for the
purpose of computing goodwill. The following pre-acquisition amounts
of KOL are included in the Italian GAAP consolidated statement of
earning for the year ended December 31, 2003: Net sales
    
    
    11,945Cost of sales
    
    
    (5,798
    )Gross profit
    
    
    6,147Selling expenses
    
    
    (7,066
    )General and administrative expense
    
    
    (1,113
    )Operating loss
    
    
    (2,032
    )Other income, net
    
    
    1,481Loss before taxes
    
    
    (551
    )Income taxes
    
    
    551Net loss
    
    
    
  (h)
    
    Under Italian GAAP, the Company amortizes the goodwill
arising from business acquisitions on straight-line basis over a
period of five years. US GAAP states that goodwill F-39




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  acquired in a purchase business combination completed after July 1,
2001 is not amortized, but instead tested for impairment at least
annually in accordance with provisions of SFAS N. 142.In addition, under Italian GAAP, the Company has allocated certain
intangible assets, having definite lives and arising from a business
acquisition, under the caption goodwill. Under US GAAP the Company
would have classified such as intangible assets, would have amortized
these over their estimated useful lives to their residual values, and
would have reviewed these for impairment in accordance with SFAF No.
144.The changes in the carrying amount of goodwill, intangibles assets
and deferred tax liabilities arising from business acquisitions
completed after July 1, 2001, are as follows: Goodwill
    
    Intangibles
    
    Deferred taxesUS
    
    Italian
    
    US
    
    Italian
    
    US
    
    Italian
    
    DifferenceBalance at December 31, 2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of business
    
    
    431
    
    
    
    431
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    (86
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86Balance at December 31, 2001
    
    
    431
    
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86Acquisition of minority interest
    
    
    97
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    (105
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Balance at December 31, 2002
    
    
    528
    
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191Acquisition of KOL
    
    
    9,179
    
    
    
    9,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of Minuano
    
    
    
    
    
    
    4,053
    
    
    
    6,141
    
    
    
    
    
    
    
    (2,088
    )
    
    
    
    
    
    
    Amortization
    
    
    
    
    

    
    (1,329
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,329Impairment Losses
    
    
    (528
    )
    
    
    (232
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (296
    )Balance at December 31, 2003
    
    
    9,179
    
    
    
    12,008
    
    
    
    6,141
    
    
    
    
    
    
    
    (2,088
    )
    
    
    
    
    
    
    1,224
  Management has evaluated the carrying value of goodwill for
impairment purposes in accordance with the provisions of SFAS 142.
Based on that evaluation, on a reporting unit basis, goodwill to the
extent of 528 is impaired.Reported net earnings and basic and diluted earnings per share
excluding the impact of the amortization of goodwill, for all periods
presented would have been as follows: F-40




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated) Net earnings
    
    2003
    
    2002
    
    2001Net earnings under US GAAP, as reported
    
    
    38,027
    
    
    
    91,994
    
    
    
    71,057Add back: amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    116Net earnings under US GAAP, adjusted
    
    
    38,027
    
    
    
    91,994
    
    
    
    71,173Basic and diluted earning per shareNet earnings under US GAAP, as reported
    
    
    0,700
    
    
    
    1,680
    
    
    
    1,290Add back: amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    0,001Net earnings under US GAAP, adjusted
    
    
    0,700
    
    
    
    1,680
    
    
    
    1,291
  (i)
    
    During 2003 the Company under Italian GAAP has recognized
impairment losses on fixed assets of 4,292 as part of non operating
income. Under US GAAP such impairment charge would be included as
part of operating income.(j)
    
    Under Italian GAAP certain costs paid to resellers are
reflected as part of selling expenses. Under US GAAP, in accordance
with EITF 01-09, these cost should be recorded as a reduction of
net sales. Such expenses include advertising contributions paid to
resellers which amounted at December 31, 2003, 2002 to 2001 at
3,284, 2,432 and 2,330, respectively.  The calculation of net earnings and shareholders equity in conformity
with US GAAP is as follows:Reconciliation of net earnings: 2003
    
    2002
    
    2001Net earnings under Italian GAAP
    
    
    37,300
    
    
    
    91,438
    
    
    
    75,657Adjustments to reported income:(a) Revaluation of property,
plant and equipment
    
    
    27
    
    
    
    44
    
    
    
    53(b) Derivative and hedging activities
    
    
    (2,713
    )
    
    
    3,783
    
    
    
    (947
    )(c) Government grants
    
    
    673
    
    
    
    1,269
    
    
    
    1,269(e) Revenue recognition
    
    
    1,482
    
    
    
    (3,865
    )
    
    
    (7,032
    )(f) Highly inflationary economy
    
    
    
    
    
    
    
    
    
    
    307(g) Goodwill and intangible assets
    
    
    1,033
    
    
    
    105
    
    
    
    86Effect of minority interests on
US GAAP adjustments
    
    
    
    
    
    
    
    
    
    
    (2
    )Tax effect of US GAAP adjustments
    
    
    225
    
    
    
    (780
    )
    
    
    1,666Net earnings in conformity with US GAAP
    
    
    38,027
    
    
    
    91,994
    
    
    
    71,057Basic and diluted earnings per share in
conformity with US GAAP
    
    
    0,70
    
    
    
    1,68
    
    
    
    1,29
 F-41




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  Reconciliation of shareholders equity: 2003
    
    2002Shareholders equity under Italian GAAP
    
    
    515,063
    
    
    
    495,808(a) Revaluation of property, plant and equipment
    
    
    (671
    )
    
    
    (698
    )(b) Derivative and hedging activities
    
    
    
    
    
    
    2,713(c) Government grants
    
    
    (19,220
    )
    
    
    (19,893
    )(d) Treasury shares
    
    
    (37,828
    )
    
    
    (37,828
    )(e) Revenue recognition
    
    
    (9,415
    )
    
    
    (10,897
    )(g) Goodwill and intangible assets
    
    
    1,224
    
    
    
    191Tax effect of US GAAP adjustments
    
    
    3,144
    
    
    
    2,919Shareholders equity in conformity with US GAAP
    
    
    452,297
    
    
    
    432,315
  Comprehensive IncomeThe Company has adopted SFAS No. 130, Reporting Comprehensive Income,
which established standards for the reporting and presentation of
comprehensive income and its components in a full set of financial
statements. Comprehensive income/(loss) generally encompasses all
changes in shareholders equity (except those arising from transactions
with owners). The Companys comprehensive income does not differ from
net income.Goodwill and Other Intangible AssetsGoodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets,as of January 1, 2002. Goodwill
and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed
for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets.In connection with SFAS No. 142s transitional goodwill impairment
evaluation, the Statement required the Company to perform an assessment
of whether there was an indication that goodwill is impaired as of the
date of adoption. To accomplish this, the Company was required to
identify its reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of
January 1, 2002. The Company was required to determine the fair value of
each reporting unit and compare it to the carrying amount of the
reporting unit within six months of January 1, 2002. To the extent the
carrying amount of a reporting unit exceeded the fair value of the
reporting unit, the Company would be required to perform the second step
of the transitional impairment test, as this is an indication that the
reporting unit goodwill may be impaired. The second step was required
for one reporting unit. In this step, the Company compared the implied
fair value of the reporting unit goodwill with the carrying amount of
the reporting unit goodwill, both of which were measured as of the date
of adoption. The implied fair value of goodwill was determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in a
manner similar F-42




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  to a purchase price allocation, in accordance with SFAS No. 141,
Business Combinations. The residual fair value after this allocation was
the implied fair value of the reporting unit goodwill. The implied fair
value of this reporting unit goodwill exceeded its carrying amount and
the Company was not required to recognize an impairment loss.  Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally
5 years, and assessed for recoverability by determining whether the
goodwill balance could be recovered through undiscounted future
operating cash flows of the acquired operation. All other intangible
assets were amortized on a straight-line basis over a period of 5 years.
The amount of goodwill and other intangible asset impairment, if any,
was measured based on projected discounted future operating cash flows
using a discount rate reflecting the Companys average cost of funds.  SFAS No. 143:  In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the Company
to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development and/or normal use of the assets.
The Company also records a corresponding asset which is depreciated over
the life of the asset. Subsequent to the initial measurement of the
asset retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Company
adopted SFAS No. 143 on January 1, 2003. Application of this statement
did not have an impact on the consolidated financial statements of the
Company.  SFAS No. 145:  In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 amends existing guidance on
reporting gains and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, as the use of such
extinguishments have become part of the risk management strategy of many
companies. SFAS No. 145 also amends SFAS No. 13 to require
sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions
of the Statement related to the rescission of Statement No. 4 is applied
in fiscal years beginning after May 15, 2002. Earlier application of
these provisions is encouraged. The provisions of the Statement related
to Statement No. 13 were effective for transactions occurring after May
15, 2002, with early application encouraged. The adoption of SFAS No.
145 did not have an effect on the consolidated financial statements of
the Company.  SFAS No. 146:  In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. The provisions of this
Statement are effective for exit or disposal activities that are F-43




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 did not have effect on the consolidated
financial statements of the Company.  SFAS No. 149:  In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities. SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. Adoption of
SFAS No. 149 did not have a material impact on the consolidated
financial statements of the Company.  SFAS No. 150:  FASB Statements No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, was issued in May
2003. This statement established standards for the classification and
measurement of certain financial instruments with characteristics of
both liabilities and equity. The statement also includes required
disclosures for financial instruments within its scope. For the Company,
the statement was effective for instruments entered into or modified
after May 31, 2003 and otherwise will be effective as of January 1,
2004, except for mandatorily redeemable financial instruments. For
certain mandatorily redeemable financial statements, the statement will
be effective for the Company on January 1, 2005. The effective date has
been deferred indefinitely for certain other types of mandatorily
redeemable financial statements. The Company currently does not have any
financial instruments that are within the scope of this statement. F-44




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Natuzzi S.p.A. and Subsidiaries Notes to the consolidated financial statements
(Expressed in thousands of euros except as otherwise indicated)  FASB interpretation No. 46:  In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. FIN 46R
replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, which was issued in January 2003. The Company will be required
to apply FIN 46R to variable interests in VIEs created after December
31, 2003. For variable interests in VIEs created before January 1, 2004,
the Interpretation will be applied beginning on January 1, 2005. For any
VIEs that must be consolidated under FIN 46R that were created before
January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any
previously recognized interest being recognized as the cumulative effect
of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to
measure the assets, liabilities and noncontrolling interest of the VIE.
The Company does not believe that it has any VIE for consolidation. F-45




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SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized. NATUZZI S.p.A.
(REGISTRANT)By
    
    /s/ Pasquale NatuzziPasquale NatuzziChairman of the Board of Directors andChief Executive Officer
 Date: June 30, 2004




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Exhibit Index  1.1
    
    English translation of the by-laws (Statuto) of the Company, as amended and restated as of
November 21, 2003.2.1
    
    Deposit Agreement dated as of May 15, 1993, as amended and restated as of
December 31, 2001, among the Company, The Bank of New York, as Depositary,
and owners and beneficial owners of ADRs (incorporated by reference to the
Form 20-F filed by Natuzzi S.p.A. with the Securities and Exchange
Commission on July 1, 2002, file number 1-11854).8.1
    
    List of Significant Subsidiaries.12.1
    
    Chief Executive Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.12.2
    
    General Manager (chief financial officer) Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.99.1
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.