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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
 þ
    
    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)  
 Securities registered or to be registered pursuant to Section 12(b) of the Act: Name of each exchangeName of each class
    
    on which registeredAmerican Depositary Shares
    
    New York Stock ExchangeOrdinary Shares with a par value of 1.0 each
    
    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, 2004: 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 þ       No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o       Item 18 þ * Not for trading, but only in connection with the registration of the American Depositary
Shares




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TABLE OF CONTENTS PagePART 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
    
    
    7Introduction
    
    
    7Organizational Structure
    
    
    8Strategy
    
    
    9Manufacturing
    
    
    10Products and Design
    
    
    15Markets
    
    
    16Incentive Programs and Tax Benefits
    
    
    19Management of Exchange Rate Risk
    
    
    21Trademarks and Patents
    
    
    21Regulation
    
    
    21Environmental Regulatory Compliance
    
    
    21Insurance
    
    
    22Description of Properties
    
    
    22Capital Expenditures
    
    
    23Item 5. Operating and Financial Review and Prospects
    
    
    23Critical Accounting Policies
    
    
    23Results of Operations
    
    
    25Liquidity and Capital Resources
    
    
    31Contractual Obligations and Commercial Commitments
    
    
    32Related Party Transactions
    
    
    33Research and Development
    
    
    33Trend Information
    
    
    33New Accounting Standards under Italian and U.S. GAAP
    
    
    34




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TABLE OF CONTENTS
(continued) PageItem 6. Directors, Senior Management and Employees
    
    
    36Compensation of Directors and Officers
    
    
    43Share Ownership
    
    
    43Statutory Auditors
    
    
    43External Auditors
    
    
    43Employees
    
    
    44Item 7. Major Shareholders and Related Party Transactions
    
    
    45Major Shareholders
    
    
    45Related Party Transactions
    
    
    45Item 8. Financial Information
    
    
    46Consolidated Financial Statements
    
    
    46Export Sales
    
    
    46Legal and Governmental Proceedings
    
    
    46Dividends
    
    
    46Item 9. The Offer and Listing
    
    
    47Trading Markets and Share Prices
    
    
    47Item 10. Additional Information
    
    
    49By-laws
    
    
    49Certain Contracts
    
    
    57Exchange Controls
    
    
    57Taxation
    
    
    58Documents on Display
    
    
    63Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    63Item 12. Description of Securities Other than Equity Securities
    
    
    65PART II
    
    
    65Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    65Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    65Item 15. Controls and Procedures
    
    
    65Item 16. [Reserved]
    
    
    66Item 16.A Audit committee financial expert
    
    
    66
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TABLE OF CONTENTS
(continued) PageItem 16.B Code of Ethics
    
    
    66Item 16.C Principal Accountant Fees and Services
    
    
    66Item 16.E Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    67PART III
    
    
    67Item 17. Financial Statements
    
    
    67Item 18. Financial Statements
    
    
    67Item 19. Exhibits
    
    
    67EX-1.1: ENGLISH TRANSLATION OF BY-LAWSEX-8.1: SUBSIDIARIESEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONS
 iii




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PRESENTATION OF FINANCIAL AND OTHER INFORMATION Beginning with the fiscal year ended December 31, 2002, Natuzzi S.p.A. (the Company and,
together with its consolidated subsidiaries, the Group) has 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 audited Consolidated Financial Statements were published 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, 2004 of U.S.$ 1.3538 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 and when applicable) 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 27 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 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 Consolidated Financial
Statements. 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 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 Groups consolidated net earnings and shareholders equity, see
Note 27 to the Consolidated Financial Statements included in Item 18 of this annual report. 2




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Year Ended/At December 31,2004
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(millions ofdollars, exceptper Ordinary
    
    
    (millions of euro, except for Ordinary Share and ADS amounts)(1)Share and ADSamounts)(2)Income Statement Data:Amounts in accordance with Italian GAAP :Net sales:Leather- and fabric-upholstered
furniture
    
    $
    901.0
    
    
    
    665.5
    
    
    
    674.0
    
    
    
    734.7
    
    
    
    714.0
    
    
    
    629.3Other(3)
    
    
    119.0
    
    
    
    87.9
    
    
    
    95.6
    
    
    
    70.4
    
    
    
    72.1
    
    
    
    59.2Total net sales
    
    
    1,020.0
    
    
    
    753.4
    
    
    
    769.6
    
    
    
    805.1
    
    
    
    786.1
    
    
    
    688.5Cost of sales
    
    
    (655.9
    )
    
    
    (484.5
    )
    
    
    (508.8
    )
    
    
    (517.4
    )
    
    
    (520.1
    )
    
    
    (426.3
    )Gross profit
    
    
    364.1
    
    
    
    268.9
    
    
    
    260.8
    
    
    
    287.7
    
    
    
    266.0
    
    
    
    262.2Selling expenses
    
    
    (254.8
    )
    
    
    (188.2
    )
    
    
    (179.3
    )
    
    
    (145.4
    )
    
    
    (134.8
    )
    
    
    (109.0
    )General and administrative expenses
    
    
    (55.1
    )
    
    
    (40.7
    )
    
    
    (39.2
    )
    
    
    (40.5
    )
    
    
    (33.5
    )
    
    
    (26.7
    )Operating income
    
    
    54.2
    
    
    
    40.0
    
    
    
    42.3
    
    
    
    101.8
    
    
    
    97.7
    
    
    
    126.5Other income (expense), net(4)
    
    
    (5.3
    )
    
    
    (3.9
    )
    
    
    3.7
    
    
    
    14.5
    
    
    
    (0.2
    )
    
    
    (21.8
    )Earnings before taxes and minority
interests
    
    
    48.9
    
    
    
    36.1
    
    
    
    46.0
    
    
    
    116.3
    
    
    
    97.5
    
    
    
    104.7Income taxes
    
    
    (23.9
    )
    
    
    (17.6
    )
    
    
    (8.5
    )
    
    
    (25.0
    )
    
    
    (21.9
    )
    
    
    (25.5
    )Earnings before minority interests
    
    
    25.0
    
    
    
    18.5
    
    
    
    37.5
    
    
    
    91.3
    
    
    
    75.6
    
    
    
    79.2Minority interests
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    
    
    
    
    Net earnings
    
    
    24.9
    
    
    
    18.4
    
    
    
    37.3
    
    
    
    91.4
    
    
    
    75.6
    
    
    
    79.2Net earnings per Ordinary Share and
ADS
    
    
    0.46
    
    
    
    0.34
    
    
    
    0.68
    
    
    
    1.67
    
    
    
    1.37
    
    
    
    1.39Amounts in accordance with U.S. GAAP :Net earnings
    
    
    25.5
    
    
    
    18.8
    
    
    
    38.0
    
    
    
    92.0
    
    
    
    71.1
    
    
    
    81.7Net earnings per Ordinary Share and
ADS (basic and diluted)
    
    $
    0.46
    
    
    
    0.34
    
    
    
    0.70
    
    
    
    1.68
    
    
    
    1.29
    
    
    
    1.43Cash dividend per Ordinary Share and
ADS
    
    $
    0.09
    
    
    
    0.07
    
    
    
    0.14
    
    
    
    0.33
    
    
    
    0.29
    
    
    
    0.29Weighted average number of Ordinary
Shares and ADSs
Outstanding
    
    
    54,681,628
    
    
    
    54,681,628
    
    
    
    54,681,628
    
    
    
    54,681,628
    
    
    
    55,027,496
    
    
    
    57,087,391Balance Sheet Data :Amounts in accordance with Italian GAAP :Current assets
    
    $
    527.2
    
    
    
    389.4
    
    
    
    383.1
    
    
    
    402.6
    
    
    
    491.9
    
    
    
    354.2Non-current assets
    
    
    384.2
    
    
    
    283.8
    
    
    
    309.3
    
    
    
    271.9
    
    
    
    224.9
    
    
    
    151.7Total assets
    
    
    911.4
    
    
    
    673.2
    
    
    
    692.4
    
    
    
    674.5
    
    
    
    716.8
    
    
    
    505.9Current liabilities
    
    
    178.0
    
    
    
    131.5
    
    
    
    125.2
    
    
    
    128.7
    
    
    
    252.5
    
    
    
    114.0Long-term debt
    
    
    6.8
    
    
    
    5.0
    
    
    
    4.2
    
    
    
    3.6
    
    
    
    3.3
    
    
    
    0.2Minority interest
    
    
    1.2
    
    
    
    0.9
    
    
    
    0.9
    
    
    
    0.5
    
    
    
    1.5
    
    
    
    0.8Shareholders equity
    
    
    660.5
    
    
    
    487.9
    
    
    
    515.1
    
    
    
    495.8
    
    
    
    428.5
    
    
    
    366.5Amounts in accordance with U.S. GAAP :Shareholders equity
    
    $
    628.8
    
    
    
    464.5
    
    
    
    452.3
    
    
    
    432.3
    
    
    
    364.4
    
    
    
    321.9
 
 (1)
    
    All amounts in the 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 Consolidated Financial Statements reported in euro depict the same trends as would
have been presented if the Group 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, 2004 of U.S.$ 1.3538 per
euro.(3)
    
    Sales included under Other principally consist of sales of polyurethane foam, living room
accessories 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 Group in an effort to reduce its
exposure to exchange rate risks. See Item 5, Operating and Financial Review and Prospects 
Results of Operations  2004 Compared to 2003, Item 11, Quantitative and Qualitative
Disclosures about Market Risk and Notes 3, 24 and 25 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  2004 Compared to 2003 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. At PeriodYear:
    
    Average(1)
    
    
    End2000
    
    
    0.9207
    
    
    
    0.93882001
    
    
    0.8909
    
    
    
    0.89012002
    
    
    0.9495
    
    
    
    1.04852003
    
    
    1.1411
    
    
    
    1.25972004
    
    
    1.2478
    
    
    
    1.3538
 Month ending:
    
    High
    
    
    LowDecember 31, 2004

    
    
    1.3625
    
    
    
    1.3224January 31, 2005
    
    
    1.3476
    
    
    
    1.2954February 28, 2005
    
    
    1.3274
    
    
    
    1.2773March 31, 2005
    
    
    1.3465
    
    
    
    1.2877April 30, 2005
    
    
    1.3093
    
    
    
    1.2819May 31, 2005
    
    
    1.2936
    
    
    
    1.2349
 
 (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 24, 2005 was 1.2088. 
 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 4




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furniture purchases 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 2004, the Group derived 42.0% of its leather- and fabric-upholstered furniture net sales
from the United States and the Americas, and 51.1% 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 82.3% of net
sales of upholstered furniture in 2004 being derived from the sale of leather-upholstered
furniture. Leather-upholstered furniture 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
countries with lower manufacturing costs 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 are
larger than the Group. Other competitors focused on the promotional or lower-priced segment of the
market are located in countries, such as China or countries in Eastern Europe or South America,
with lower manufacturing costs. The upholstered furniture market in Europe is highly fragmented. 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. The price of the Groups principal raw material is difficult to predict Leather is used in approximately 76% of the Groups upholstered furniture production, 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 5




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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 with a
new investment incentive program for all under-industrialized regions in Italy, which is currently
being implemented through grants, research and development benefits and tax credits. There can be
no assurance that the Group will continue to be eligible for such grants, benefits or tax credits
for 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. Since December 16, 2003, Mr. Natuzzi has
held 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. 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 6




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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. 
 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 2004). In 2000, the Company launched Italsofa, a new promotional brand aimed
at the lower-priced segment 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 65% of its products in Italy. Production outside
of Italy is solely for the Italsofa brand. Within Italy, the Group sells its 7




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furniture principally
through franchised Divani & Divani by Natuzzi furniture stores. As at April 30, 2005, 138 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
128 Natuzzi and Divani & Divani by Natuzzi stores. The Group also sells furniture through six
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 8820-111. The Companys distribution subsidiary in the United States is Natuzzi
Americas, Inc. (Natuzzi Americas), located at 130 West Commerce Avenue, High Point, North
Carolina 27260 (telephone number +1 336 888-0351). 
 Organizational Structure As at April 30, 2005, the Companys principal operating subsidiaries are: 8




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##### Table of Contents



Percentage ofName
    
    ownership
    
    
    Registered office
    
    ActivityItalsofa Bahia Ltda
    
    
    97.99
    
    
    Bahia, Brazil
    
    
    (1
    )Italsofa (Shanghai) Co., Ltd
    
    
    100.00
    
    
    Shanghai, China
    
    
    (1
    )SC Italsofa Romania S.r.l.
    
    
    100.00
    
    
    Baia Mare, Romania
    
    
    (1
    )Minuano Nordeste S.A.
    
    
    100.00
    
    
    Pojuca, Brazil
    
    
    (1
    )Softaly Shanghai, Ltd
    
    
    100.00
    
    
    Shanghai, China
    
    
    (1
    )Natco S.p.A.
    
    
    99.99
    
    
    Bari, Italy
    
    
    (2
    )I.M.P.E. S.p.A.
    
    
    90.83
    
    
    Qualiano, Italy
    
    
    (3
    )Divani Due S.r.l.
    
    
    100.00
    
    
    Verona, Italy
    
    
    (4
    )Natuzzi Americas, Inc.
    
    
    100.00
    
    
    High Point, NC, U.S.A.
    
    
    (4
    )Natuzzi Ibérica S.A.
    
    
    100.00
    
    
    Madrid, Spain
    
    
    (4
    )Natuzzi (Switzerland) AG
    
    
    97.00
    
    
    Dietikon, Switzerland
    
    
    (4
    )Natuzzi Nordic ApS
    
    
    100.00
    
    
    Copenhagen, Denmark
    
    
    (4
    )Natuzzi Benelux NV
    
    
    100.00
    
    
    Geel, Belgium
    
    
    (4
    )Natuzzi Germany GmbH
    
    
    100.00
    
    
    Düsseldorf, Germany
    
    
    (4
    )Kingdom of Leather Limited
    
    
    100.00
    
    
    London, U.K.
    
    
    (4
    )La Galleria, Ltd
    
    
    100.00
    
    
    London, U.K.
    
    
    (4
    )Nacon S.p.A.
    
    
    100.00
    
    
    Bari, Italy
    
    
    (5
    )Italholding S.r.l.
    
    
    100.00
    
    
    Bari, Italy
    
    
    (5
    )Natuzzi Netherlands Holding
B.V.
    
    
    100.00
    
    
    Amsterdam, Holland
    
    
    (5
    )Natuzzi United Kingdom,
Limited
    
    
    100.00
    
    
    London, U.K.
    
    
    (5
    )Natuzzi Trade Service S.r.l
    
    
    100.00
    
    
    Bari, Italy
    
    
    (6
    )Kingdom of Leather Trustees
Limited
    
    
    100.00
    
    
    London, U.K.
    
    
    (7
    )Natuzzi Asia, Ltd
    
    
    100.00
    
    
    Hong Kong, China
    
    
    (7
    )
 
 (1)
    
    Manufacture and distribution(2)
    
    Intragroup leather dyeing and finishing(3)
    
    Production and distribution of polyurethane foam(4)
    
    Distribution(5)
    
    Investment holding(6)
    
    Transportation Services(7)
    
    Non-operative See Note 1 to the Consolidated Financial Statements for further information on the Companys
subsidiaries. 
 Strategy The Groups primary objective is to expand and strengthen its presence in the global
upholstered furniture market in terms of sales and production, while at the same time increasing
the Groups profit. To achieve these objectives, the Groups principle strategic objectives
include: Geographical expansion. The Group first targeted the United States market in 1983 and
subsequently began diversifying its geographic markets, particularly in the highly fragmented
European markets (outside of Italy). According to the most recent data available referring to year
2004 (source CSIL, an Italian market research firm), the Group is the leader in the
leather- 9




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upholstered furniture segment in the United States, with a 9.6% market share, and in
Europe, with 8.5%. The Group continues to focus on sales and to expand its retail presence outside of its
core markets. Product diversification. The Group has taken a number of steps to broaden its product lines,
including the development of new models, such as motion furniture, and the introduction of new
materials and colors, including select fabrics and microfibers. See ManufacturingRaw Materials
The Group also strives to expand and add value to its product offerings through its Decorator
concept, which provides customers with total look room package solutions. See  Products and
DesignProducts. The Group believes that this approach will also strengthen its relationships
with the worlds leading distribution chains, which are interested in offering branded
propositions. The Group has invested in Natuzzi Syle Centers in Sateramo and Milan to serve as a
creative hub for the Groups design activities. Expansion in all price segments. The Group is expanding in all price segments of the leather
and non-leather upholstered furniture market. The Italsofa lower-priced brand, launched in October
2000, competes in the lower end of the upholstered furniture market and represented about 35% of
total seats sold by the Group in 2004. Faced with increased competition in this price range, the
Group has increased its production capacity and efficiency by investing in production facilities in
Brazil, China and Romania, while continuing to emphasize the style and quality associated with the
Natuzzi brand. The Pasquale Natuzzi Collection competes in the higher end of the upholstered
furniture market and offers customers products that are of the highest quality and distinctive in
terms of design, materials and project development. Retail program and brand development. The Group has made significant investments to improve
its existing distribution network and strengthen its brand, primarily through the establishment of
new distribution subsidiaries and the increase of the number of Natuzzi stores and Natuzzi
Galleries worldwide. As of April 30, 2005, there were 272 Natuzzi stores worldwide, including
Divani and Divani by Natuzzi stores, Kingdom of Leather stores, and one La Galleria store. The
Natuzzi Galleries program was launched in 2002 and the number of galleries worldwide reached 541 as
at April 30, 2005. By using the same creative concepts and internal decorations in Natuzzi stores
and Natuzzi Galleries, the Group has created a coherent identity for the Natuzzi brand. The Group
plans to open additional stores and Natuzzi Galleries in strategic geographical locations and is
committed to making the marketing investments necessary to increase brand recognition in these
markets. Improving efficiency and reducing operating costs.Due to persisting unfavorable currency
conditions, pricing pressure in the U.S. and general economic conditions that have negatively
affected order flows for our Natuzzi-branded products, and in consideration of the ongoing efforts
of the Group to become more efficient and competitive, on May 18, 2005, the Board approved a
restructuring plan. The restructuring plan includes a temporary work force reduction (cassa
integrazione) of 1,320 positions, by the end of 2005, in all departments across the Group, with a
focus on reducing manufacturing costs in Italy, increasing overall efficiencies and improving
productivity. 
 Manufacturing As
at April 30, 2005, the Group manufactured its products in 12 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 2,941 workers, 34.0% of which are not directly involved in
production. Ten of these assembly facilities are located in or within a 25 mile radius of
Santeramo, where the Company has its headquarters. 10




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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 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. 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 306 workers as at April 30, 2005. 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 warehouse 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 28 workers
as at April 30, 2005. 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, 10 grades of leather in approximately 40
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 leather is used, in varying
quantities, in the manufacture of all Natuzzi-branded leather products, while split leather is used
in addition to top grain leather in some of the Groups lower priced products). The hides are then
colored with dyes and treated with fat liquors to soften and smooth 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, as at April 30,
2005, employed 61 workers, is engaged in the production of flexible polyurethane foam and, because
the facilitys production capacity is in excess of the Groups needs, also usually 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. A material specially designed for mattresses is also produced
and sold under the GreenflexTM trade name. The Group owns the land and buildings for its principal assembly facilities located in
Santeramo, Matera and Altamura, its leather dyeing and finishing facility located near Udine, its
foam-production facility located near Naples and its facilities located in Ginosa, Laterza, Brazil,
Romania and the new plant in China (for the use of which the land is franchised by the Government
for 50 years), 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 11




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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. In 2000, the Group announced the launch of a new, lower-priced upholstered furniture
collection, known as Italsofa. The Group currently manufactures the Italsofa Collection outside
Italy at plants located in Brazil, China and Romania; if orders exceed production capacity at these
other plants, Italsofa products are also manufactured in the Companys Italian plants. Historically, the Group has entrusted some of its production work relating to the assembly of
finished products from raw materials and finished parts to subcontractors located within a 20-mile
radius of Santeramo (about 20% of Natuzzis production as at December 31, 2004). The Groups
contracts with these subcontractors provide that the Group will supply to each subcontractor
product designs, finished leather, pre-cut cushions, wooden frames and other assembly materials.
The subcontractors are required to assemble these materials into finished products under the
supervision of the Groups technicians, who are responsible for quality control. The furniture is
assembled at a fixed cost per unit that is set to increase annually in line with inflation. These
contracts have an indefinite term, subject to termination by either party with prior notice
(generally two months). The Group recently sent a notice of termination to all of these
subcontractors. The Groups decision to terminate these contracts is a result of the reduction in
orders for Natuzzi-branded products. All such contracts are expected to be terminated by the end
of September 2005. 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, 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, Uruguay, 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 20
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 inspected overseas by
technicians of the Group, delivered to an Italian port and then sent by the Group 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 at an 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. 12




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During 2004, notwithstanding the unstable market for cattle hides, the price paid by the Group
decreased slightly due to the Groups purchasing policy, which is focused on finding quality hides
in easily-accessible markets and aimed at establishing strong relationships with suppliers. The
factors influencing availability and prices of leather in recent periods were, besides the
uncertain worldwide economic trend, a reduction in red meat consumption and the exchange rate of
the currencies in the markets where we operate. The Group believes that these same conditions will
continue to influence price of cattle hides in 2005. During 2004 and the first quarter of 2005,
worldwide levels of red meat consumption have been mostly flat (source: United States Department of
Agriculture). The Group also purchases fibers and microfibers for use in coverings. Both kinds of coverings
are divided into several price categories: most fabrics are in the highest price categories, while
the most inexpensive of the microfibers are in the lowest price categories. Fabrics are purchased
exclusively in Italy from six suppliers who provide the product at the finished stage. Microfibers
are purchased in Italy, South Korea, Taiwan and Japan from four suppliers who provide them at the
finished stage. Microfibers purchased from the Groups Italian supplier are in some cases imported
by the supplier at the greige or semi-finished stage and then finished (dyed and bonded) in Italy.
The microfibers purchased from the Groups Japanese supplier are the only microfibers the Group
purchases in the highest price category. Fabrics and microfibers are generally purchased from the
suppliers pursuant to orders given every week specifying the quantity (in linear meters) and the
delivery date. The price is determined before the fiber or microfiber is introduced into the
collection. Fabrics and microfibers purchased by the Italian suppliers are delivered directly by the
suppliers to the Groups facility in Matera, while those purchased overseas are delivered to an
Italian port and then sent to the Matera facility. Only fabrics and microfibers purchased in
Taiwan and South Korea are delivered directly by the suppliers to Chinese and Brazilian ports and
then sent to the Shanghai, Salvador de Bahia and Pojuca facilities. The Group is able to purchase
such products at reasonable prices as a result of the volume of its orders. The Group continuously
searches for alternative supply sources in order to obtain always the best product at the best
price. Price performance of fabrics is quite different from that of microfibers. Because fabrics are
purchased exclusively in Italy and are composed of natural fibers, their prices are influenced by
the cost of labor and the quality of the product. During 2004, fabric prices went unchanged, due
to long-term relationships with suppliers and the large volumes purchased by the Group, despite the
increases in the cost of raw materials and oil. Microfiber prices have decreased due to the
introduction of new suppliers and the renegotiation of prices with current suppliers. The price of
microfibers is mainly influenced by the international availability of high-quality products and raw
materials at low costs especially from Asian markets. 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, 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 through its plants located in
Romania, the Group began directly engaging in the cutting and transformation of wood from Romanian
forests. 13




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##### Table of Contents



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 Organization.In order to speed up the processing of information and material, the Group has
set up a new organization. Starting in June 2004, all functions of the supply chain have been
aggregated in the HQ Logistics Department according to modern models of Supply Chain Organizations.
This type of organization assures that information and material flows are organized, synchronized
and efficient, and consequently improves customer service as well. Planning (order management, production, procurement).The Group schedules its manufacture and
procurement of raw materials and components on demand. This system allows the Group to manage a
high number of product combinations (in terms of number of models, versions and covering codes)
that are offered to customers around the world while maintaining a high level of customer service
and low inventory. On demand planning reduces the risk of obsolescence even if the products have
short lifetimes. The Groups material flow policies, which are defined by the Groups Logistics
Director, have reduced all lead times (except those due to orderbooking backlog, a process that is
not managed by the Groups Logistics Department) to five weeks (average of all orders). Special
programs with three-week lead times are provided for a limited number of customers and limited
collections and product combinations. The lead times can be longer than described above when an
unusually high level of orders are made. The time required for the delivery to the customer varies
depending on where the customer is located (transport lead times vary widely depending on the
distance between the final destination and the production units). All planning activities (finished goods load optimization, customer order acknowledgement,
production and suppliers 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 as well as 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, thus 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. In order
to improve and adapt the above mentioned software to Natuzzi needs, a new research project has been
launched in cooperation with the University of Bari and University of Copenhagen. The expected
result is a reduction in transportation costs in the medium- to long-term horizon. 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 14




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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
(also for demand planning forecast). Transportation.The Group delivers goods to customers by common carriers. Those goods
destined for the Americas and other markets outside Europe are transported by sea in 40
high cube containers, while those produced for the European market are generally delivered by
truck and, in some cases, by railway. In 2004, the Group shipped 15,863 containers (40hc) to
overseas countries and approximately 7,224 full load mega-trailer trucks to European destinations.
In order to guarantee the best price and quality of transportation services, the Group deals
directly with shipping companies and logistic operators without resorting to the use of
intermediaries. 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 Group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. Some 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. Since September 2003 the Group has operated an on-line Transportation Portal to enable
transportation suppliers to provide the Group and its sales force, as well as some customers with
all relevant information (order status report), 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 three different styles reflecting the different feelings and lifestyles of
our customers: Casual, Urban and Vintage. The Casual style conveys the importance of comfort,
freedom and informal living. The Urban style is directed at the cosmopolitan customer,
reflecting culture and sophistication and an appreciation for large spaces full of refined and
voluminous objects. The Vintage style is a classic style revisited and reinterpreted according
to Natuzzis fresh and untraditional style. The Pasquale Natuzzi Collection spans the three styles described above and is characterized by
an extremely elegant design and premium materials. Our product range falls 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 417
different models, 10 leather grades, 31 leather finishes and 231 colors; 7 fabric grades, 13 fabric
finishes and 92 colors; 4 microfiber grades, 4 microfiber finishes and 63 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). 15




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The Groups successful Italsofa Collection, launched in October 2000, provides a collection of
lower-priced furniture identified by a distinctive brand associated with Italian quality and style.
The collection contains 90 sofa models, which are available in leather (76 colors, 4 grades and 14
finishes) and in microfibers (21 colors, a single grade and 2 finishes). The Group also offers a design concept, the Decorator, to provide customers with total look
living room package solutions: armchairs and sofas (in different styles and coverings) are
coordinated 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. Design. The marketing strategy of the Group is based on the ability to create and offer new models and
products on a regular basis. When creating new models, the Groups designers are dedicated to
studying market trends and outlining innovative designs, while carefully considering price points
revealed in market analyses conducted by the Group. Occasionally the Groups designers design new
models on the basis of requests from larger customers. 
 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 and abroad
through franchised Divani & Divani by Natuzzi and Natuzzi furniture stores. In 2004 the Group derived 42.0% of its leather- and fabric-upholstered furniture net sales
from the United States and the Americas, 51.1% from Europe and 6.9% 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 Sales2004
    
    2003
    
    2002
    
    2001
    
    2000(millions of euro)U.S. and the
Americas
(1)
    
    
    279.4
    
    
    
    42.0
    %
    
    
    320.1
    
    
    
    47.5
    %
    
    
    366.4
    
    
    
    49.9
    %
    
    
    356.4
    
    
    
    49.9
    %
    
    
    318.8
    
    
    
    50.6
    %Europe
    
    
    340.1
    
    
    
    51.1
    %
    
    
    313.5
    
    
    
    46.5
    %
    
    
    326.5
    
    
    
    44.4
    %
    
    
    317.9
    
    
    
    44.5
    %
    
    
    272.3
    
    
    
    43.3
    %Rest of the World
    
    
    46.0
    
    
    
    6.9
    %
    
    
    40.4
    
    
    
    6.0
    %
    
    
    41.8
    
    
    
    5.7
    %
    
    
    39.7
    
    
    
    5.6
    %
    
    
    38.2
    
    
    
    6.1
    %Total
    
    
    665.5
    
    
    
    100.0
    %
    
    
    674.0
    
    
    
    100.0
    %
    
    
    734.7
    
    
    
    100.0
    %
    
    
    714.0
    
    
    
    100.0
    %
    
    
    629.3
    
    
    
    100.0
    %
 16




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##### Table of Contents



Leather- and Fabric-Upholstered Furniture Net Sales (in seats)(2)2004
    
    2003
    
    2002
    
    2001
    
    2000U.S. and the
Americas
(1)
    
    
    1,564,901
    
    
    
    51.0
    %
    
    
    1,699,160
    
    
    
    55.6
    %
    
    
    1,572,879
    
    
    
    52.0
    %
    
    
    1,376,818
    
    
    
    47.9
    %
    
    
    1,229,159
    
    
    
    47.7
    %Europe
    
    
    1,319,740
    
    
    
    43.0
    %
    
    
    1,181,566
    
    
    
    38.6
    %
    
    
    1,278,296
    
    
    
    42.2
    %
    
    
    1,323
    
    
    
    46.0
    %
    
    
    1,188,989
    
    
    
    46.1
    %Rest of the World
    
    
    186,330
    
    
    
    6.0
    %
    
    
    178,109
    
    
    
    5.8
    %
    
    
    176,483
    
    
    
    5.8
    %
    
    
    175,704
    
    
    
    6.1
    %
    
    
    159,175
    
    
    
    6.2

    %Total
    
    
    3,070,971
    
    
    
    100.0
    %
    
    
    3,058,835
    
    
    
    100.0
    %
    
    
    3,027,658
    
    
    
    100.0
    %
    
    
    1,553,845
    
    
    
    100.0
    %
    
    
    2,577,323
    
    
    
    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 consists of three seats; an armchair of one. United States and the Americas.In 2004, net sales of leather- and fabric-upholstered
furniture in the United States and the Americas decreased 12.7% to 279.4 million, compared to
320.1 million in 2003, and the number of seats sold decreased 7.9% to 1,564,901, compared to
1,699,160 in 2003. The negative performance is mainly attributable to persistent pricing pressure
from low-cost U.S.-based producers and to the appreciation of the euro against the dollar,
affecting our products competitiveness. 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
April 30, 2004, the High Point operation had 72 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 customers review part of the new offering of models during an informal
pre-market period one month prior to each High Point fair. The Group also sells its products through Natuzzi Stores and Natuzzi Galleries. As of April
30, 2005, in the United States there were two Natuzzi Stores, one of which is owned by the Group
and located in New York, NY, and 212 Natuzzi Galleries. Europe. In 2004, notwithstanding difficult economic conditions throughout Europe, net sales
of leather- and fabric-upholstered furniture in Europe (excluding Italy) increased 10.3% to 17




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267.1
million, compared to 242.2 million in 2003, as a result of the Groups retail and marketing
program and the strong performance of Italsofa. Furniture retailers are generally smaller in Europe than in the United States. In Europe
(outside Italy), the Group generally deals with buying groups and chains representing 50 to 100
retailers, as well as with independent retailers. While the buying groups place the orders,
thereby obtaining the benefits of volume-driven commercial conditions, the Group delivers the
products directly to the particular members of the buying groups on whose behalf the orders are
placed. In some cases, the Group invoices the buying group. In others, the Group invoices the
individual member 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 six subsidiaries in Benelux, Scandinavia, Germany, United
Kingdom, Switzerland and Spain, 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, 2004, the Group
had 26 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 of April 30, 2005, 52 franchised single-brand stores were operating
in southwest Europe (outside Italy): 30 under the Divani & Divani by Natuzzi name (15 in Greece, 15
in Portugal) and 22 under the Natuzzi name (16 in France, 2 in Malta, 2 in Cyprus and one in each
of the United Kingdom and Iceland). As of April 30, 2005, there were 46 directly owned stores in
southwest Europe (outside Italy): 9 in Switzerland, 25 in Spain and 12 in United Kingdom (six under
the Kingdom of Leather name, five under the Natuzzi name, and one under the La Galleria name). In
the United Kingdom, the Group also operated a concession (store-in-store) inside Selfridges
Department Store  London. 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 April 30, 2005, the Group owned 25 stores in Spain. In December 2001,
the Group acquired 60% of Sofaworld AG, the exclusive dealer for German-speaking Switzerland. As of
December 31, 2003, the Group increased its ownership of Sofaworld AG to 97%, and has renamed it
Natuzzi (Switzerland) AG. As of April 30, 2005, the Group owned 9 Natuzzi Stores in Switzerland. In May 2003, the Group acquired Kingdom of Leather, a leading UK upholstered furniture chain
with a network of 14 stores, mainly locate in England. Since November 2004, the Group has renamed
five Kingdom of Leather stores and begun operating them under the Natuzzi name. As of April 30,
2005, there were 13 stores in the United Kingdom. Italy. In 2004, sales of leather- and fabric-upholstered furniture in Italy increased 2.4% to
73.0 million, compared to 71.3 million in 2003. Since 1990, the Group has sold its upholstered products within Italy principally through
franchised Divani & Divani furniture stores (now Divani & Divani by Natuzzi). As of April 30,
2005, 138 Divani & Divani by Natuzzi stores were located in Italy. In November 2004, the Company
acquired 100% of Divani Due S.r.l., based in Verona, which has a network of five stores, located in
northern Italy. Asia-Pacific.Overall sales in Asia-Pacific increased 17.1% to 37.1 million in 2004,
compared to 31.7 million in 2003, as a result of the implementation of the Natuzzi Gallery concept
in Australia, an increase in sales at the stores opened during 2003, and the increase in the
Italsofa 18




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business. In 2004, as compared to 2003, sales in the Groups main Asia-Pacific markets,
Australia and Japan, increased by 26.4% and decreased 1.7%, respectively. The increase in
Australia was mainly due to the opening of new galleries and stores. At February 2004, the Group
opened 17 Natuzzi Galleries in David Jones department stores located in Australia, bringing the
David Jones Natuzzi Galleries to a total of 29. As of April 30, 2005, 20 franchised single-brand stores
were operating in Asia Pacific (9 in Australia, 10 in China and one in New Zealand). The Group manages its Asia-Pacific sales 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 80% of its sales and obtains credit insurance for
almost 95% 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 2% of the Groups sales are supported by a letter of credit or payment in
advance. Advertising. The Group uses the Natuzzi brand for its medium- to higher-priced product line. In January 2002, during the Cologne Furniture Fair, the Group launched the new Natuzzi visual
identity, through which the brand name has taken on a new aesthetic and strategic meaning. The Natuzzi Communication System was developed to regulate all methods used in each market to
advertise the brand name and operates transversally on different levels: the brand-building level
establishes the brands philosophy, while the traffic-building level aims to attract consumers to
points of sale using various kinds of initiatives, such as presentations of new collections, new
store openings and promotional activities. Advertising in the galleries is carried out with the help of the Retail Advertising Kit, a
collection of templates that enable advertising the Natuzzi brand in conjunction with the
retailers brand. 
 Incentive Programs and Tax Benefits Historically, the Group 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 19




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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. 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
Industrial Activities 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 of upholstered furniture in Italy, which were projected to be approximately
232.2 million. These projected investments were subsequently revised to approximately 69.8
million as a result of significant changes in the competitive nature of the upholstered furniture
market in Italy that caused the Group to revise its production strategies. The Group presented a
revised version of the Program Agreement to the Ministry of Industrial Activities and the Cipe
(Comitato Interministeriale per la Programmazione Economica) approved 35.0 million in capital
grants (as published on April 13, 2005, in the Italian Official Gazette (Gazzetta Ufficiale della
Repubblica Italiana), n° 85). Receipt of these grants is contingent upon, among other things, the
Group constructing facilities in accordance with certain specifications and maintaining a minimum
number of employees. In 1997, the Group received capital grants of 24.2 million under the Natuzzi
2000 Project, which are secured by surety bonds issued by San Paolo Banco di Napoli, an Italian
bank, in the amount of 26.0 million. All the planned industrial investments have been completed,
and San Paolo Banco di Napoli has certified the relevant technical and accounting documentation of
the expenses incurred and has sent the final report to the Italian Ministry of Industrial
Activities. A committee has been appointed by the Ministry of Industrial Activities to prepare the
final technical report for the disbursement of the remaining capital grants of approximately 10.8
million. On April 27, 2004, the Technical-Scientific Committee of the Italian Education, University and
Research Ministry approved a four-year research project presented by the Company in February 2002
related to improvement and development in leather manufacturing and processing. The Committee has
approved a maximum capital grant of 2.4 million and a 10-year subsidized loan for a maximum amount
of 3.7 million at a subsidized interest rate of 0.5% to be used in connection with industrial
research expenses and prototype developments (as published on August 20, 2004, in the Italian
Official Gazette (Gazzetta Ufficiale della Repubblica Italiana, n° 195). Industrial research and
prototype developments are already underway thanks to the collaborative efforts of specialized
in-house personnel and university researchers. Three companies of the Group, Natuzzi S.p.A., NATCO S.p.A and IMPE S.p.A., developed and
presented a project for innovation and computerization in sofa manufacturing to the Italian
Industrial Ministry under the Technological Innovation Incentive Program, as provided for by the
Italian law 46/82. The Italian Industrial Ministry appointed a committee that, in May 2004,
carried out a final evaluation to determine the admissibility of the project to the Technological
Innovation Funds. This committee has verified that the expenses incurred, equal to 7.7 million,
are 20




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consistent with the programs criteria and has approved a subsidized credit of 2.7 million.
The Group has already received 2.2 million. Certain foreign subsidiaries, including Italsofa (Shanghai) Co. Ltd, Italsofa Bahia Ltda,
Minuano Nordeste S.A. and SC 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 European Union, 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. 
 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. While management believes that the Group is currently in compliance in all
material respects with such laws and regulations (including Italian Legislative Decree no. 6 of
2003 and rules 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 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
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. 21




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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 April 30, 2005 are set forth below: Size(approximateLocation
    
    square meters)
    
    FunctionSanteramo in Colle (BA)  Italy
    
    
    29,000
    
    
    Headquarters, prototyping, manufacturing of wooden frames, leather cutting, sewing and product assembly, showroom (Owned)Matera  Italy
    
    
    38,000
    
    
    Fabric cutting, sewing and product assembly (Owned)Santeramo in Colle (BA)  Italy
    
    
    27,500
    
    
    Leather cutting, sewing and product assembly (Owned)Pozzuolo del Friuli (UD)  Italy
    
    
    20,000
    
    
    Leather dyeing and finishing (Owned)Matera  Italy
    
    
    12,500
    
    
    Leather cutting, sewing and product assembly (Owned)Qualiano (NA)  Italy
    
    
    12,000
    
    
    Polyurethane foam production (Owned)Altamura (BA)  Italy
    
    
    8,500
    
    
    Product assembly (Owned)Altamura (BA)  Italy
    
    
    7,000
    
    
    Leather cutting, sewing and product assembly (Owned)Montebello (VI)  Italy
    
    
    5,500
    
    
    Leather warehouse (Leased)Altamura (BA)  Italy
    
    
    5,800
    
    
    Leather cutting, sewing and product assembly (Owned)Altamura (BA)  Italy
    
    
    2,500
    
    
    Leather cutting, sewing and product assembly (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)Laterza (TA)  Italy
    
    
    10,000
    
    
    Leather cutting, leather warehouse (Owned)Laterza (TA)  Italy
    
    
    20,000
    
    
    Finished products warehouse (Owned)Matera  Italy
    
    
    3,500
    
    
    Complements warehouse (Leased)Santeramo in Colle (BA)  Italy
    
    
    1,000
    
    
    Complements warehouse (Leased)Bovisio Masciago (MI)  Italy
    
    
    1,000
    
    
    Prototyping (Leased)Altamura (BA)  Italy
    
    
    3,500
    
    
    Complements warehouse (Owned)High Point  North Carolina  U.S.A.
    
    
    10,000
    
    
    Office and showroom for Natuzzi Americas (Owned)Baia Mare  Romania
    
    
    70,200
    
    
    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
    
    
    42,000
    
    
    Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill and down cushion
production (Owned)Shanghai  China
    
    
    14,000
    
    
    Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill and down cushion
production (Leased)Salvador de Bahia (Bahia)  Brazil
    
    
    26,000
    
    
    Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill and down cushion
production (Owned)Pojuca (Bahia)  Brazil
    
    
    29,000
    
    
    Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill and down cushion
production (Owned)
 22




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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 2004, 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, 2004: Year ending December 31,(millions of Euro)2004
    
    
    2003
    
    
    2002Land and plants
    
    
    9.5
    
    
    
    11.3
    
    
    
    28.6Equipment
    
    
    17.7
    
    
    
    12.8
    
    
    
    18.1Other
    
    
    27.2
    
    
    
    23.2
    
    
    
    24.3Total
    
    
    54.4
    
    
    
    47.3
    
    
    
    71.0
 Capital expenditures during the last three years were primarily made in the areas of
construction, as well as improvements to property, plant and equipment. In 2004, capital
expenditures were primarily made to build new factories in Shanghai (China) and Pojuca-Bahia
(Brazil) as well as to make improvements at existing facilities in order to increase productivity
and production capacity, which included the purchase of equipment. The Group expects that capital
expenditures in 2005, to be financed with cash from operations or through locally-subsidized loans,
will be approximately 40.0 million, and will be used for the construction of a new tannery in
Pojuca, Brazil (approximately 20.0 million), and improvements of existing plants (approximately
5.0 million), and the remainder on the opening of the new Natuzzi stores and galleries. 
 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 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 Groups
consolidated net earnings and shareholders equity, see Note 27 to the Consolidated Financial
Statements included in Item 18 of this annual report. 
 Critical Accounting Policies Use of Estimates The significant accounting policies used by the Group to prepare its financial statements are
described in Note 3 to the Consolidated Financial Statements included in Item 18 of this annual
report. The application of these policies requires management to make estimates, judgments and
assumptions that are subjective and complex and 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 23




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reporting period. The Groups financial presentation could be materially
different if different estimates, judgements or assumptions were used. The following discussion
addresses the estimates, judgements and assumptions that the Group considers most material based on
the degree of uncertainty and the likelihood of a material impact if a different estimate,
judgement or assumption were used. 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. During
2004, the Company recorded an impairment loss for goodwill of
6.1 million related
to the Natuzzi U.K. Group (former KOL Group, see note 1 and 24 to the Consolidated Financial
Statements included in item 18 of this annual report). Natuzzi U.K. Group revised its growth
strategy as a consequence of the actual and forecasted critical situation in the United Kingdom
market, and the decision of the Company to redesign its distribution strategy in this country. As a
result of this revision, the carrying value of the goodwill related to such reporting unit as of
December 31, 2004 resulted impaired. The fair value of such reporting unit as of December 31, 2004
was determined on the basis of the methodology so called Unlevered Discounted Cash Flow. The
comparison of the fair value with carrying value of this reporting unit resulted in the
determination of an impairment in value of
6.1 million. Allowances for Returns, Warranties and Discounts.The Group records revenues net of returns,
warranties and discounts. The Group estimates sales returns, warranty costs and discounts and
creates an allowance for them in the year of the related sales. The Group makes estimates in
connection with such allowances based on its experience and historical trends in its large volumes
of homogeneous transactions. However, actual costs for returns, discounts and warranties may
differ significantly from these estimates if factors such as economic conditions, customer
preferences or changes in product quality differ from those used by the Group in making these
estimates. Allowance for Doubtful Accounts.The Group makes estimates and judgments relating to the
collectibility of its accounts receivable and maintains an allowance for doubtful accounts based on
losses it may experience as a result of failure by its customers to pay amounts owed. The Group
estimates these losses using consistent methods that take into consideration, in particular,
insurance coverage in place, the credit worthiness of its customers and general economic
conditions. 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. 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. 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 24




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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. The Groups revenue recognition under Italian GAAP is at
variance with U.S. GAAP. For a discussion of revenue recognition under U.S. GAAP, see Note 27(e)
to the Consolidated Financial Statements included in Item 18 of this annual report. 
 Results of Operations Summary In 2004, the appreciation of the euro against other major currencies, price pressure from
competitors in countries able to produce goods at lower costs and modest economic growth in many of
our markets, contributed to a decrease of net sales of 2.1% compared to 2003. Units sold increased
slightly, by 0.4%, due to the Groups satisfactory performance in Europe, which was partially
offset by negative results in the United States. Italsofa, the Groups lower-priced brand
continued to represent a growing percentage of the Groups total seats sold, 35.3% of total seats
sold in 2004 compared to 33.1% in 2003. The Groups net income compared to 2003 decreased 18.9 million to 18.4 million in 2004. On a
per Ordinary Share, or ADS basis, the Company reported net earnings of 0.34 in 2004, a decrease of
0.34 from 2003. The decrease was primarily caused by higher marketing expenses in connection with
the opening of new retail stores and galleries and advertising to increase awareness of the Natuzzi
brand in the worldwide furniture market, as well as the appreciation of the euro relative to other
currencies, in particular the U.S. dollar. The appreciation of the euro affected the translation
of sales of the Groups subsidiaries operating in countries with currencies other than the euro, in
particular the U.S. dollar, into the Groups consolidated results and the competitiveness of the
Groups products. Other factors that caused a decrease in 2004 net earnings were the considerable
increase in other expenses, net, and income taxes. The following table sets forth certain income statement data expressed as a percentage of net
sales for the years indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    64.3
    
    
    
    66.1
    
    
    
    64.3Gross profit
    
    
    35.7
    
    
    
    33.9
    
    
    
    35.7Selling expenses
    
    
    25.0
    
    
    
    23.3
    
    
    
    18.1General and administrative expenses
    
    
    5.4
    
    
    
    5.1
    
    
    
    5.0Operating income
    
    
    5.3
    
    
    
    5.5
    
    
    
    12.6Other income (expense), net
    
    
    (0.5
    )
    
    
    0.5
    
    
    
    1.9Income taxes
    
    
    2.4
    
    
    
    1.1
    
    
    
    3.1Net earnings
    
    
    2.4
    
    
    
    4.9
    
    
    
    11.4
 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, 2000 through 2004. 25




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##### Table of Contents



2004 Compared to 2003 Net sales for 2004, including sales of leather- and fabric-upholstered furniture and other
sales (principally polyurethane foam, leather sold to third parties and accessories), decreased
2.1% to 753.4 million compared to 2003. Net sales for 2004 of leather- and fabric-upholstered furniture decreased 1.3% to 665.5
million compared to 2003. The 1.3% decrease was due to a 4.3% appreciation of the euro against
the major currencies, particularly the U.S. dollar, to a 0.4% increase in units sold and to a
2.6% increase in the mix of products and product prices. Net sales for 2004 of Natuzzi-branded
furniture decreased 2.4%, while net sales of Italsofa-branded furniture increased 2.6% compared to
2003. Net sales for 2004 of leather-upholstered furniture decreased 0.4% to 547.9 million
compared to 2003, and net sales for 2004 of fabric-upholstered furniture decreased 5.2% to 117.6
million compared to 2003. In the Americas, net sales for 2004 of upholstered furniture decreased 12.7% to 279.4 million
compared to 2003 because of the unfavorable conversion of sales made in dollars to euro, and
because of persistent pricing pressure in the U.S. market, both contributing to a decrease in units
sold (-7.9%). In Europe, net sales for 2004 of upholstered furniture increased 8.5% to 340.1
million compared to 2003 due to a marked growth in net sales of Italsofa-branded furniture (35.2%).
In the rest of the world, net sales for 2004 of upholstered furniture increased 13.9% to 46.0
million compared to 2003. Net sales for 2004 of Natuzzi-branded furniture decreased 2.4% to 507.0 million compared to
2003. During the same period, net sales of the lower-priced Italsofa furniture increased 2.6% to
158.5 million compared to 2003. The continued growth of Italsofa was due to consumer price
sensitivity resulting from sluggish economic conditions worldwide and the Groups ability to offer
Italsofa products at attractive prices. The Group currently believes that the impact on our sales
from the growing percentage of sales from the lower-priced Italsofa furniture relative to the
higher-priced Natuzzi brand furniture will be counterbalanced in the medium- to long-term (three to
five years) by the increasing penetration of the Natuzzi brand in the medium-high end of the
upholstery market expected by the Group as a result of the marketing initiatives adopted. However,
we can give no assurance that we will achieve our objectives, since our expectations are subject to
inherent risks and uncertainties. See Item 3 Forward Looking Information. Total net sales of Divani & Divani by Natuzzi, Natuzzi Stores and Kingdom of Leather stores
increased 21.0% in 2004 to 128.6 million compared to 2003. In 2004, total seats sold increased 0.4% to 3,070,971 from 3,058,835 sold in 2003. The slight
increase was due to an increase of 11.7% in Europe (1,319,740 seats) and a 4.6% increase in the
rest of the world (excluding Europe) (186,330 seats), which together offset a 7.9% decrease
reported in Americas (1,564,900 seats). The negative performance of Natuzzi products in the Americas was caused by our decreased
ability to offer competitive prices in the United States resulting from the appreciation of the
euro against the U.S. dollar and the growing presence in that market of imported products from
countries, such as China, with lower manufacturing costs. In the Americas, seats sold in 2004 by
the higher priced Natuzzi brand decreased 8.0%, and seats sold by the lower priced Italsofa brand
decreased 7.7% compared to 2003. In particular, the decrease in units sold in the Americas
included a decrease in the United States of 10.2% partially offset by higher sales in Canada
(+8.4%) and other minor markets (+70.3). 26




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##### Table of Contents



Seats sold in Europe increased from 1,181,566 in 2003 to 1,319,740 in 2004. The positive
performance achieved in Europe reflects the success of the Groups lower-priced brand, Italsofa.
Units sold for Italsofa brand increased by 37.6% from 317,925 in 2003 to 437,558 in 2004, while
units sold for Natuzzi brand slightly increased from 863,641 in 2003 to 882,182 in 2004. Positive
results were reported in many countries: United Kingdom (+12.5%), Spain (58,4%), France (12.0%),
Belgium (31.6%), Norway (49.9%), Switzerland (8.3%), Sweden (12.5%), and Portugal (43.3%).
Negative performances were suffered in Germany (-13.7%), Holland (-5.9%), Eire
(-13.1%) and Greece (-8.9%). In the rest of the world, seats sold increased from 178,109 in 2003 to 186,330 in 2004. The
rise included increases in Australia (+17.1%), Korea (+28%), China (23.2%), Turkey (+41.9%), Taiwan
(+49.0%), which were partially offset by lower sales in Japan (-5.5%), New Zealand
(-18.9%) and Israel (-23.4%). In 2004, total leather-upholstered seats sold increased 1.5% to 2,345,044 from 2,310,121 seats
sold in 2003, while total fabric-upholstered seats sold decreased 3.0% to 725,927 from 748,714
seats sold in 2003. The Natuzzi brand sold 1,986,461 seats in 2004, 2.9% less than in 2003, while sales of
Italsofa seats increased 7.0% to 1,084,510 compared to 2003. Other net sales decreased 8.1% to 87.9 million compared to 2003. The decrease is mainly
attributable to the lower sales of living room accessories (15.5% decrease compared to 2003),
polyurethane foam (3.1% decrease compared to 2003) and raw materials sold to
third parties (8.8% decrease compared to 2003). Cost of goods sold decreased by 4.8% to 484.5 million or 64.3% of net sales in 2004, from
508.8 million or 66.1% of net sales in 2003. The decrease in cost of sales was attributable
primarily to a decrease in the quantity of leather purchased as a result of a decrease in order
flows for leather upholstery compared to 2003, as well as to a decrease in the average price of
leather due to the Groups purchasing policies and, to a lesser extent, to savings resulting from
efficiencies achieved in manufacturing operations. The Groups gross profit increased 3.1% in 2004 to 268.9 million compared to 2003, as a
result of the factors described above. Selling expenses for 2004 increased 5.0% to 188.2 million compared to 2003, and as a
percentage of net sales increased from 23.3% in 2003 to 25.0% in 2004. This increase was caused
primarily by our continued investment in the Natuzzi Galleries and Natuzzi Stores program,
which resulted in higher marketing expenses (5.5% increase compared
to 2003), store rent (27.0%
increase compared to 2003) and depreciation costs (41.2% increase compared to 2003), and to a
lesser degree, by increased transportation costs (3.1% increase compared to 2003), which were due
to higher oil prices. General and administrative expenses for 2004 increased 3.8% to 40.7 million compared to 2003,
and as a percentage of net sales increased slightly from 5.1% in 2003 to 5.4% in 2004. Operating
income for 2004 decreased 5.4% to 40.0 million compared to 42.3 million reported
in 2003, as a results of the factors described above. 27




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##### Table of Contents



Other income (expense), net decreased to (3.9) million in 2004 from a net income of 3.6
million in 2003. Net interest income (expense), included in other income (expense), net, in 2004
was (0.6) million, compared to 0.5 million in 2003. Foreign exchange gains, net, also included in other income (expense), net, were 2.3 million
in 2004, compared to 6.3 million in 2003. The gain in 2004 was mainly due to the following:  
    
    A net realized gain of 5.0 million in 2004 (compared to a gain of 25.4 million
in 2003) on the domestic currency swaps due to the difference between the forward
rate of the domestic currency swaps and the spot rate at which the domestic
currency swaps were closed (the Company uses the forward rate to protect its price
risks against unfavorable exchange variations);
    
    A net realized loss of 1.0 million in 2004 (compared to a loss of 7.6 million in
2003), from the difference between the invoice exchange rate and the
collection/payment exchange rate;
    
    A gain of 1.4 million (compared to a loss of 1.2 million in 2003) recorded in
the consolidated statement of earnings from the conversion of non-euro financial
statements of the Companys subsidiaries;
    
    A net unrealized loss of 10.2 million in 2004 (compared to an unrealized loss of
16.6 million in 2003) on accounts receivable and payable; and
    
    An unrealized gain of 7.1 million in 2004 (compared to an unrealized gain of 6.3
million in 2003), from the mark-to-market of domestic currency swaps. The Group also recorded other expense in 2004 of 5.6 million compared to other expense of
3.1 million reported in 2003. The loss in 2004 was mainly due to the following:  
    
    A loss of 6.1 million in 2004 due to the impairment of goodwill related to the
Groups operations and expectations in the United Kingdom;
    
    A gain of 3.4 million in 2004 realized from the by disposal of the subsidiary
Spagnesi S.p.A.;
    
    An expense net of 1.3 million deriving from the write-off of fixed assets;
    
    Other expense, net of 1.5 million in 2004. Since 2003, the Company does not follow hedge accounting, and records all fair hedge
accounting, and records all fair value changes of its domestic currency swaps in the income
statement. The Groups effective income tax rate for 2004 was 48.8%, compared to 18.5% in 2003. The
higher rate was due to the expiring, on December 27, 2003, of the last domestic tax exemption and
to the negative impact of certain other expenses, recorded in the consolidated statement of
earnings, that are not fiscally deductible. Net earnings decreased from 37.3 million in 2003 to 18.4 million in 2004. On a per Ordinary
Share, or ADS basis, net earnings decreased from 0.68 in 2003 to 0.34 in 2004. As a percentage
of net sales, net earnings decreased from 4.9% in 2003 to 2.4% in 2004. As disclosed in Note 27 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, 2004, 2003 and 2002 would have been 18.8 million, 38.0 million 28




---



##### Table of Contents



and
92.0 million, respectively, compared to net earnings under Italian GAAP for the same periods of
18.4 million, 37.3 million and 91.4 million, respectively. 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 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 11.3% to 519.4 million compared to
2002. During the same period, net sales of the lower-priced Italsofa furniture increased 3.7% to
154.6 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 Group. Total net sales of Divani & Divani by Natuzzi, Natuzzi Stores and Kingdom of Leather stores
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%), 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
lower-priced 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 29




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##### Table of Contents



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 2,044,908 seats in 2003, 6.6% less than in 2002, while sales of
Italsofa seats increased 21.0% to 1,013,927 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. The improvement of the margin 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 gains, 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 2004 was mainly
due to the following:  
    
    A net realized gain of 25.4 million in 2003 (compared to a gain of 10.9 million
in 2002) on the domestic currency swaps due to the difference between the forward
rate of the domestic currency swaps and the spot rate at which the domestic currency
swaps were closed (the Company uses the forward rate to protect its price risks
against unfavorable exchange variations);
    
    A net realized 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;
    
    A loss of 1.2 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; 30




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##### Table of Contents




    
    A net 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 27 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. 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, 2004. 
 Liquidity and Capital Resources Cash flows from operations were 68.3 million in 2004, compared to 38.2 million in 2003. The
increase in cash flows from operations of 30.1 million from 2003 to 2004 resulted principally from
more efficient credit collection, more favorable payment terms granted by the Groups suppliers, as
well as the receipt of tax credits. The increase was partially offset by lower net earnings, 18.4
million in 2004 compared to 37.3 million in 2003, as well as higher inventories, mainly
attributable to the provision of raw materials (leather, in particular) by the Groups foreign
industrial plants. Cash and cash equivalents increased 23.7 million from 63.6 million in 2003 to
87.3 million in 2004. Cash flows from investment activities in 2004 decreased 12.7 million to 37.1 million net
cash used in investment activities compared to net cash used in investment activities in the
previous year of 49.8 million. Capital expenditures were 51.9 million and 47.3 million in 2004
and 2003, respectively. In 2004, the Group continued to invest in its foreign plants: in
particular, approximately 2.8 million in Baia Mare (Romania) for maintenance and improvements of
the existing plant, 10.3 million in Pojuca-Bahia (Brazil) for the construction of a plant and
17.3 million in Shanghai (China) for construction of one more plant. See Item 4. Information on
the Company  Capital Expenditures for a description of the Groups planned capital expenditures.
Other investments were made in Italy to increase overall efficiency and productivity. Significant
investments were made to furnish retail galleries and stores. Capital expenditures were financed
primarily with funds from operations. 31




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##### Table of Contents



In 2004, cash from investing activities was positively affected, amounting to 9.4 million
compared to 0.8 million in 2003, by the disposal of fixed assets, including an airplane,
machinery, equipment and buildings, and the sale of Spagnesi S.p.A. in December 2004 for cash
consideration of 5.5 million (see Note 1 to the Consolidated Financial Statements included in Item
19 of this annual report). Cash used for financing activities in 2004 totaled 6.0 million versus 17.5 million in the
previous year. This decrease primarily reflects lower dividends paid to shareholders, 7.7 million
in 2004 compared to 18.0 million in 2003. As at December 31, 2004, the Group had available lines of credit for cash disbursements
totaling 109.0 million. The unused portion of these lines of credit amounted to approximately
103.4 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, 2004 and 2003 (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 Groups principal source of funds is expected to be cash flows generated from
operating activities, cash on hand and amounts available under its lines of credit. The Groups
principal use of funds is expected to be the payment of operating expenses, working capital
requirements and capital expenditures. 
 Contractual Obligations and Commitments The following tables set forth the contractual obligations and commercial commitments of the
Group as at December 31, 2004: Payments Due by Period (in euro thousands)Less than
    
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    yearsLong-Term Debt(1)
    
    
    5,569
    
    
    
    571
    
    
    
    3,221
    
    
    
    410
    
    
    
    1,367Operating Leases(2)
    
    
    82,089
    
    
    
    14,711
    
    
    
    32,370
    
    
    
    32,048
    
    
    
    2,960Total Contractual Cash
Obligations
    
    
    87,658
    
    
    
    15,282
    
    
    
    35,591
    
    
    
    32,458
    
    
    
    4,327
 
 (1)
    
    Please see Note 16 to the Consolidated Financial Statements included in this annual report
for more information on the Groups long-term debt.(2)
    
    The leases relate to the leasing of the Group of manufacturing facilities and stores under
lease agreements by several of the Groups companies. Amount of Commitment Expiration Per Period(in euro thousands)TotalAmounts
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    After 5Other Commitments
    
    Committed
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    yearsStandby Letters of Credit (1)
    
    
    3,170
    
    
    
    529
    
    
    
    2,641
    
    
    
    
    
    
    
    Guarantees(2)
    
    
    26,005
    
    
    
    26,005
    
    
    
    
    
    
    
    
    
    
    
    Total Commitments
    
    
    29,175
    
    
    
    26,534
    
    
    
    2,641
    
    
    
    
    
    
    
    
 32




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##### Table of Contents



(1)
    
    Letters of Credit are released by primary Italian Banks on behalf of Natuzzi S.p.A. in
favor of its foreign subsidiaries obligations and commitments.(2)
    
    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 Innovation is a strategic activity for the Group. Research and development efforts concentrate
on the design of new products and improvements in the manufacturing process. See Item 4,
Information on the CompanyManufacturing and Item 4, Information on the CompanyProducts and
Design. During 2003 and 2004, the Groups investments in research and development activities were
approximately 8.0 million and 10.0 million, respectively. Approximately 150 highly qualified
people work in these activities, and more than 100 new products are generally introduced each year.
The Group conducts its research and innovation efforts at its headquarters in Santeramo and its
design center in the province of Milan. The Group conducts all of its activities in accordance with stringent quality standards and
has earned the ISO 9001 certification for quality and the ISO 14001 certification for low
environment impact production. The ISO 14001 certification applies also to Natuzzis tannery
subsidiary, Natco S.p.A. 
 Trend Information During the first quarter of 2005, the markets in which the Group operates continued to be
negatively affected by the same mix of unfavorable factors that were present in 2004, including:
unfavorable currency conditions, the pricing pressure affecting the U.S. market and modest economic
growth in Europe. Consequently, during recent months, demand for furniture has weakened, causing our order flows
to decrease, and consumers preferences have shifted progressively toward lower-priced products.
Our first quarter results showed a decrease in net upholstery sales of 13.6% to 146.4 million
versus the same period in 2004. The first quarter results also showed a decrease in sales of
Natuzzi-branded upholstered furniture of 17.9% and substantially flat sales of Italsofa compared to
the first quarter of 2004. Total units sold decreased 13.1% compared to the same period in 2004,
comprised of a 20.9% decrease in units sold of Natuzzi-branded furniture and a 1.8% increase in
units sold of the Italsofa brand. In response to the market conditions and operating results described above, in particular the
decreasing order flows for Natuzzi-branded products made in Italy, and in connection with the
Groups efforts to become more efficient in its production process and more competitive in the
upholstered furniture market, the Board of Directors approved a restructuring plan on May 18, 2005.
The restructuring plan includes a temporary work force reduction (cassa integrazione) of 1,320
positions, by the end of 2005, in all departments across the Group, and other measures to reduce
manufacturing costs in Italy, increase overall efficiency and improve productivity. 33




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New Accounting Standards under Italian and U.S. GAAP Process of Transition to International Accounting Standards Following the entry into force of European Regulation No. 1606 of July 2002, EU companies
whose securities are traded on regulated markets in the EU are required to adopt International
Financial Reporting Standards (IFRS), formerly known as IAS, in the preparation of their 2005
consolidated financial statements. Given that the Companys securities are only traded on the
NYSE, the Company is not subject to this requirement and continues to report its financial results
in accordance with Italian GAAP and to provide the required reconciliation of certain items to U.S.
GAAP in the Companys annual reports in Form 20-F. The Company will be required to adopt IFRS for
the preparation of its financial statements starting from January 1, 2007. Italian GAAP. In January 2002, the Italian Accounting Profession approved an accounting standard for interim
financial statements. The Company applies this standard. U.S. GAAP. The new accounting standards under U.S. GAAP are outlined below: i) SFAS No. 150: On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for the
classification and measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 also includes required disclosure for financial instruments
within its scope. For the Company, SFAS No. 150 was effective for instruments entered into or
modified after May 31, 2003 and is otherwise effective as of January 1, 2004, except for
mandatorily redeemable financial instruments. For certain mandatorily redeemable financial
instruments, SFAS No. 150 is effective for the Company as of January 1, 2005. The effective date
has been deferred indefinitely for certain other types of mandatorily redeemable financial
instruments. The Company does not currently have any financial instruments that fall within the scope of
SFAS No. 150. ii) SFAS No. 151: In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which amends Accounting
Research Bulletin No. 43, Inventory Pricing. SFAS No. 151 clarifies that abnormal amounts of idle
facility expenses, freight, handling costs and wasted materials (spoilage) should be recognized as
current period charges. The provisions of SFAS No. 151 are effective for inventory costs incurred
beginning January 1, 2006, and are applied on a prospective basis. The Company does not expect the adoption of SFAS No. 151 to have a significant impact on the
Companys Consolidated Financial Statements. iii) SFAS No. 153: In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, which
eliminates an exception in APB 29 for non-monetary exchanges of similar productive 34




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assets, and
replaces it with a general exception for exchanges of non-monetary assets that do not have
commercial substance. SFAS No. 153 will be effective for the Company for non-monetary asset
exchanges occurring on or after January 1, 2006. Application of
this statement is not expected to have an
impact on the consolidated financial statements of the Company. iv) SFAS No. 123(R): In December 2004, the FASB issued SFAS No.123(R) (revised 2004), Share-Based Payment, which
revised SFAS No.123, Accounting for Stock-Based Compensation. SFAS No.123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No.123(R) is similar to the approach described in SFAS No. 123.
However, SFAS No.123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. Also, SFAS
No.123(R) provides significant additional guidance regarding the valuation of employee stock
options. While SFAS No.123(R) does not require the use of a specific option-pricing model, it
indicates that lattice models will usually provide a better estimate of fair value of an employee
stock option. The Company currently prepares the pro forma disclosures required under SFAS No.123 using a
binomial model. SFAS No.123(R) must be adopted no later than January 1, 2006. Early adoption is permitted in
periods in which financial statements have not yet been issued. SFAS No.123(R) permits public
companies to adopt its requirements using one of two methods:  
    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No.123(R) for all share-based
payments granted or modified after the effective date, and (b) based on the requirements
of SFAS No.123 for all awards granted to employees prior to the effective date of SFAS
No.123(R) that remain unvested on the effective date.
    
    A modified retrospective method that includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No.123 for purposes of pro forma disclosures of
either (a) all prior periods presented, or (b) prior interim periods of the year of
adoption. As permitted by SFAS No.123, the Company currently accounts for share-based payments to
employees using the APB Opinion No. 25 intrinsic-value method. Accordingly, the adoption of the
SFAS No.123(R) fair value method will affect the Companys
results of operations. The Company has not yet determined the impact,
if any, that the adoption of SFAS No.123(R) will have on the
Companys consolidated financial statements. v) FASB Interpretation No. 46: In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (FIN
46(R)), Consolidation of Variable Interest Entities, which addresses how a business enterprise
should evaluate whether it has a controlling financial interest in an entity other than a
controlling financial interest based on voting rights, and accordingly whether it should
consolidate 35




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the entity. FIN 46(R) replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46(R) to variable interests in VIEs created after
December 31, 2003. For variable interests in VIEs created before January 1, 2004, FIN 46(R) will
be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46(R)
that were created before January 1, 2004, the assets, liabilities and non-controlling 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 46(R) first applies may be used to measure the assets, liabilities and
non-controlling interest of the VIE. The Company does not have any VIE for consolidation. vi) FASB Interpretation No. 47: In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations, (FIN 47) which clarifies that a liability (at fair value) must be
recognized for asset retirement obligations when it has been incurred if the amount can be
reasonably estimated, even if settlement of the liability is conditional on a future event. FIN 47
is effective as of December 31, 2005. The Company currently does not have any asset retirement
obligations. 
 Item 6. Directors, Senior Management and Employees The directors, executive officers and officers of the Company at April 30, 2005 were as
follows: Name
    
    Age
    
    Position with the CompanyPasquale Natuzzi
    
    
    65
    
    
    Chief Executive Officer, Chairman of the Board of DirectorsGiuseppe Desantis
    
    
    42
    
    
    General Manager, Vice Chairman of the Board of DirectorsDaniele Tranchini
    
    
    46
    
    
    Chief Sales & Marketing OfficerGiambattista Massaro
    
    
    43
    
    
    General Manager of Purchasing, Logistics and Overseas
Operations, Member of the Board of DirectorsGianluca Monteleone
    
    
    38
    
    
    Marketing and Communication Director, Member of the Board
of DirectorsGiuseppe Russo Corvace
    
    
    55
    
    
    Managing Director for Accounting and Finance, Member of the
Board of DirectorsArmando Branchini
    
    
    60
    
    
    Outside DirectorStelio Campanale
    
    
    43
    
    
    Outside DirectorPietro Gennaro
    
    
    83
    
    
    Outside DirectorEnrico Vitali
    
    
    44
    
    
    Outside DirectorAntonello Bracalello
    
    
    40
    
    
    South West Europe-Asia Pacific Sales and Marketing Director.Enrico Carta
    
    
    57
    
    
    Human Resources and Organization DirectorPiero Cordero
    
    
    52
    
    
    Chief Financial OfficerGiovanni Costantino
    
    
    41
    
    
    Research and Development DirectorAnnunziata Natuzzi
    
    
    41
    
    
    Internal Relations and Overseas Human Resources ManagerFrancesco Basile
    
    
    37
    
    
    Human Resources Manager for Staff and Sales Depts.Anna Beccari
    
    
    49
    
    
    Consumer Communication ManagerAmedeo Buzzacchino
    
    
    53
    
    
    Provider Planning ManagerAntonio Carrieri
    
    
    51
    
    
    Retail Design and Engineering ManagerVito Arcangelo R. Castoro
    
    
    49
    
    
    Production Director (Italy)
 36




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Name
    
    Age
    
    Position with the CompanyGiuseppe Catalano
    
    
    38
    
    
    General CounselFrancesco Cornacchia
    
    
    41
    
    
    Production Manager of Italsofa Bahia LtdNicola Coropulis
    
    
    39
    
    
    South West Europe and Asia-Pacific Sales & Development
ManagerVito Dagostino
    
    
    42
    
    
    Purchasing DirectorGaetano De Cataldo
    
    
    41
    
    
    Executive Vice President of Finance and Operations of
Natuzzi Americas, Inc.Nicola V.M. DellEdera
    
    
    43
    
    
    Finance DirectorMichele DErcole
    
    
    43
    
    
    Managing Director of Natco S.p.A.Lyle Finlay
    
    
    42
    
    
    Managing Director of Natuzzi United Kingdom LdtGiuseppe Firrao
    
    
    47
    
    
    Trade Communication ManagerPietro Gallotta
    
    
    43
    
    
    Information Systems DirectorGary Greenbaum
    
    
    49
    
    
    Marketing and Retail Development Manager of Natuzzi
Americas Inc.José Manuel Gulias Roo
    
    
    47
    
    
    Spain and Portugal Country ManagerLars Hovang
    
    
    38
    
    
    North East Europe, Middle East and Africa Marketing ManagerCesare Laberinti
    
    
    72
    
    
    Chairman and Managing Director of IMPE S.p.AValeria Maria Lanzilotta
    
    
    39
    
    
    Asia-Pacific Sales ManagerBo Lippert-Larsen
    
    
    43
    
    
    Nordic Region Country ManagerGuglielmo Lo Savio
    
    
    59
    
    
    Exhibition ManagerLoredana Mariani
    
    
    43
    
    
    South West Europe and Asia-Pacific Marketing ManagerMassimo Margareci
    
    
    42
    
    
    North East Europe, Middle East and Africa sales and
Development ManagerNicola Masotina
    
    
    46
    
    
    Italy Retail Country ManagerJan Mentens
    
    
    38
    
    
    Benelux Country ManagerGiovanni Mercadante
    
    
    48
    
    
    Accounting DirectorOttavio Milano
    
    
    39
    
    
    Control and Internal Auditing DirectorFilippo Vito Petrera
    
    
    41
    
    
    Product Development, Quality and Environment ManagerJohn Phillips
    
    
    57
    
    
    Executive Vice President of Sales of Natuzzi Americas Inc.Dave Riches
    
    
    45
    
    
    Finance Director of Natuzzi United Kingdom LtdFernando Rizzo
    
    
    40
    
    
    Human Resources Manager for Italian PlantsBodo Rupp
    
    
    46
    
    
    Germany and Austria Country ManagerStefano Sette
    
    
    37
    
    
    Global Product & Style Centre ManagerGiuseppe Vito Stano
    
    
    46
    
    
    Europe, Middle East and Africa Italsofa & Marketing DirectorFredrick Starr
    
    
    73
    
    
    President and Chief Executive Officer of Natuzzi Americas
Inc.Francesco Stasolla
    
    
    39
    
    
    Chairman and Managing Director of Italsofa Romania S.r.l.Richard Tan
    
    
    45
    
    
    Chairman and Managing Director of Italsofa (Shanghai) LtdVito Testini
    
    
    51
    
    
    Managing Director of Minuano Nordeste S.AGiuseppe Trevissoi
    
    
    43
    
    
    Logistics DirectorGiacomo Ventolone
    
    
    38
    
    
    Public Relations ManagerAntonio Ventricelli
    
    
    51
    
    
    Production Manager and Director of Italsofa (Shanghai) LtdMarco Siro Verucchi
    
    
    36
    
    
    Asset Protection ManagerFernando R. Vitale
    
    
    39
    
    
    Director of Italsofa Bahia Ltda.Luigi Vitolo
    
    
    59
    
    
    Technical Dept. DirectorRino Zinco
    
    
    50
    
    
    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. 37




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Giuseppe Desantis is General Manager and Vice Chairman of the Board of Directors. 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. Daniele Tranchini is the Chief Sales and Marketing Officer. He joined the Company in June
2004 after studying Marketing and Business Administration in the United States. He was previously
the Managing Director of J.Walter Thompson. 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 , Nacon S.p.A. and Natuzzi Trade Service S.r.l. as well as Director of
Italsofa Bahia Ltda., 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 and is a member of
the Board of Directors. He is a partner of Vitali, Romagnoli, Piccardi e Associati, a major
Italian 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, a major Italian 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 38




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Kingdom of Leather
Ltd and Natuzzi United Kingdom Ltd. He joined the Group 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 has served as human resources manager over several years for some of the most important Italian
industrial and consulting firms. Piero Cordero has been the Chief Financial Officer of the Company since September 2004. He
has over thirty years experience in administration, finance and audit and has worked with such
multinationals as Fiat, Electrolux and LOréal. Mr. Cordero was previously the CFO Europe of
Johnson Electric Gate S.p.A., listed at the Hong Kong stock exchange. 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, 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. Francesco Basile is Human Resources Manager for Staff and Sales Depts. He joined the Company
in 1997 as Recruiting and Training Manager. Previously, he worked for 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. Antonio Carrieri is Retail Design and Engineering Manager. He joined the Company in March
2005. Previously he was a manager in a water treatment company. 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. He is also member of the Board of Directors of Nacon S.p.A.
and sole director of Italholding S.r.l. Francesco Cornacchia is Production Manager and Director of Italsofa Bahia Ltda., a Brazilian
subsidiary of the Company. He joined 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 and Development 39




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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. 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. Lyle Finlay is Director of Natuzzi United Kingdom Ltd as well as Kingdom of Leather Ltd. He
joined the Group in April 2004 in the United Kingdom. Previously, he worked for Claires
Accessories, Nike and Olympus Sport. 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. Gary Greenbaum is Vice President of Marketing and Retail Development of Natuzzi Americas,
Inc.. He joined the company in June 2002. He was previously Senior Vice President of Sales and
Marketing for Sherrill Furniture. From 1998 to 2000 he served as President of Wayside Furniture, a
high-end retailer running 11 stores in Connecticut and New York. José Manuel Gulias Roo has been Managing Director of the subsidiary Natuzzi Ibérica since June
2004. He joined the Group in June 2004. Previously, Mr. Gulias Roo worked for HL-Display, a
world-leading supplier of the retail industry. 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. 40




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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. Massimo Margareci is North East Europe, Middle East and Africa Sales and Development Manager.
He joined the Company in 2004. Previously he was Managing Director of the Emerging Markets
Business Unit in the Office Equipment arena with the Italian firm Olivetti, and Sales and
Development Manager in the Consumer Electronics business with Expert International. 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 Benelux Country Manager since April 2003. He is Managing Director 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. David Riches is Finance Director for 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 subsidiary of Hi-Tec Sports PLC) and prior to that he worked for Amstrad PLC
for 10 years in various finance positions culminating in being Financial Controller and Company
Secretary. Fernando Rizzo is the Human Resources Manager for Italian Plants and has been directly
managing the personnel of the plants in Altamura, Ginosa, Laterza and Iesce Santeramo. He joined
the Company in 1991. Bodo Rupp has been leading Natuzzi Germany since December 2004, after a long period at Nike
USA. He manages the development of business. Stefano Sette is Global Product and Style Center Manager. He joined Natuzzi in 1990, 41




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starting in the Sales Administration and Accounting Department. Giuseppe Vito Stano has recently become Europe, Middle East and Africa Italsofa Sales and
Marketing Director after being 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. as well as Softaly
(Shanghai) Limited. 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) Limited on October 2002. 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 10 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 42




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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 Group 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 9.8 million in 2004. 
 Share Ownership Mr. Pasquale Natuzzi owns 47.7% of the issued and outstanding Ordinary Shares. As from
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. To our
knowledge, 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. 
 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 2004, our statutory auditors received in the aggregate approximately 150,000 in
compensation for their services to the Company and its Italian subsidiaries. Rule 10A-3
of the Securities Exchange Act of 1934, as amended, becomes
applicable to us, as a foreign private issuer subject to NYSE listing
standards, on July 31, 2005. According to Rule 10A-3,
companies must establish an audit committee meeting specific
requirements. In particular, all members of this committee must be
independent and the committee must adopt
a written charter. The committees prescribed responsibilities
include (i) the appointment, compensation, retention and
oversight of the external auditors; (ii) establishing procedures
for the handling of whistle blower complaints;
(iii) discussion of financial reporting and internal control
issues and critical accounting policies (including through executive sessions
with the external auditors); (iv) the approval of audit and
non-audit services performed by the external auditors; and
(v) the adoption of an annual performance evaluation. A company
must also have an internal audit function, which may be outsourced,
except to the independent auditor. Rule 10A-3
provides an exemption from these audit committee requirements for
foreign private issuers with a board of statutory auditors
established in accordance with local law or listing requirements and
meeting specified requirements with regard to independence and
responsibilities (including the performance of most of the specific
tasks assigned to audit committees by the rule, to the extent
permitted by local law). 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. 
 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. 43




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Employees As at December 31, 2004, the Group had 6,832 employees (3,773 in Italy and 3,059 abroad), as
compared to 6,230 and 5,742 on December 31, 2003 and 2002, respectively. As at April 30, 2005, the
Group had 7,345 employees (3,778 in Italy and 3,567 abroad). As at April 30, 2005, the average age
of the Groups employees was approximately 30 years. Historically, there has been very little
turnover among the Groups employees. 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
located in Italy are entitled to receive certain indemnity payments based on length of employment.
As at March 31, 2005, the Company had 30.3 million reserved for such termination indemnities, such
reserves being equal to the amounts, calculated on a percentage basis, required by Italian law. The Group has expanded its presence overseas thanks to the new production plants in Brazil,
Romania and China and the establishment of some new distribution subsidiaries. The corporate
structure has been reinforced by the hiring of new skilled and experienced employees. The Italian Governments new employment program, begun in 2004 following the Biagi Reform,
has entitled the Group to adopt new, highly flexible employment contracts. One such contract is
the project work contract, an innovative employment agreement that has enabled the Group to hire
employees for the limited purpose of completing a particular project during a predetermined period.
These new employment contracts have enhanced the Groups ability to recruit and hire workers
quickly and to do so with a high degree of flexibility. Also during 2004, the Group has exercised diligence in training activities, both due to the
need to hire highly skilled workers (for Italian and foreign plants) and the Groups commitment to
improve knowledge, as well as to the desire to develop new tools and methodologies to face the
competition. The Group has significantly increased the training activities for employees involved
in Italian and foreign businesses. During 2004, the Groups compensation philosophy has been focused on rewarding management and
employees for the achievement of specified performance goals and for growth in the Companys share
price. The Group recently launched the Stock Incentive Plan (the SIP) for key management
employees. The purpose of the SIP is to provide designated employees of the Group with incentives
and rewards to motivate them to increase the Groups value and to encourage them to continue in the
employ of the Group. The SIP was approved by the shareholders of Natuzzi at Natuzzis
Extraordinary Meeting of Shareholders on July 23, 2004. At that meeting, the shareholders approved
the issuance of up to 3,000,000 shares under the SIP, of which 500,000 may be issued upon
settlement of restricted stock units. Under the SIP, employees of the Group selected by a
committee of the Board of Directors were offered the opportunity to convert a portion of their 2004
and 2005 MBO Cash Awards into options to purchase ordinary shares of Natuzzi, and grants of
restricted stock units, each of which vest or become exercisable only on the achievement of certain
designated performance targets. See Note 20 to the Consolidated Financial Statements of this
annual report for a more detailed description of the operation of the SIP. 44




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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, 2005, with respect to each person who owns more than 5% of the Companys Ordinary Shares
or ADSs. Number ofShares
    
    
    PercentOwned
    
    
    OwnedPasquale Natuzzi(1)
    
    
    26,064,906
    
    
    
    47.7
    %Royce & Associates LLC
    
    
    5,090,300
    
    
    
    9.3
    %Tweedy, Browne Company, L.L.C.
    
    
    4,949,607
    
    
    
    9.1
    %
 
 (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 31, 2005, 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 ADSs represented
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 45




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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 January 1, 2002 or that were effected during an earlier period and
remain in any respect outstanding or unperformed. The Company has not provided any loans or
guarantees to or for the benefit of any such person since January 1, 2002 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 434.6 million in 2004, down 5.8% compared with
2003. That figure represented 65.0% of the Groups 2004 net leather- and fabric-upholstered
furniture sales. 
 Legal and Governmental Proceedings In early 2005, the National Institute for Social Security (INPS  Istituto Nazionale di
Previdenza Sociale) requested that the Company repay approximately 16.3 million of social security
contributions that it had not paid from November 1995 to May 2001. The Company did not pay these
contributions because it benefited from certain exemptions granted by the Italian government in
connection with personnel employed under Training and Work Experience contracts (Contratti di
formazione e lavoro). In 2004, the European Court of Justice ruled that such exemptions constitute
State financial aid, and thus conflict with European Union laws and regulations on free
competition, and the European Commission ordered the Italian government to collect all social
security contributions not paid in reliance on these exemptions. The Company believes that it
complied with the law in force at the time it took the exemptions and that the request from INPS
should be barred by the statute of limitations up to February 2000 in accordance with Italian Law
335/1995. As such, the Company has set aside only 457,000 to cover the social security
contributions in connection with employees hired after March 2000. See note 21 to the Consolidated Financial Statements included
in item 18 of this annual report. Apart from the proceeding described above, 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 0.07 per Ordinary Share in respect of the year ended December
31, 2005 was approved at the Companys Annual General Meeting held on April 30, 2004 and will be
paid starting from July 5, 2005 to the shareholders of record as of May 31, 2005. 46




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No further dividends in respect of the year ended December 31, 2004 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, 2004, the Noon Buying Rate on
December 31, 2004. Dividends per Ordinary
    
    
    Translated intoYear ended December 31,
    
    Share
    
    
    dollars per ADS2004
    
    
    0.0673
    
    
    $
    0.092003
    
    
    0.1366
    
    
    $
    0.152002
    
    
    0.3300
    
    
    $
    0.352001
    
    
    0.2872
    
    
    $
    0.26
 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 or at all. 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 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. 
 Item 9. The Offer and Listing 
 Trading Markets and Share Prices Natuzzis Ordinary Shares are listed on the New York Stock Exchange (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)   (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. 47




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New York StockExchangePrice per ADSHigh
    
    
    Low(in U.S. dollars)2000First Quarter
    
    
    13.000
    
    
    
    9.688Second Quarter
    
    
    12.813
    
    
    
    9.875Third Quarter
    
    
    12.190
    
    
    
    9.750Fourth Quarter
    
    
    13.063
    
    
    
    11.3752001First Quarter
    
    
    14.050
    
    
    
    12.125Second Quarter
    
    
    14.150
    
    
    
    11.500Third Quarter
    
    
    14.000
    
    
    
    10.150Fourth Quarter
    
    
    14.640
    
    
    
    10.8602002First Quarter
    
    
    15.700
    
    
    
    13.910Second Quarter
    
    
    16.100
    
    
    
    13.350Third Quarter
    
    
    15.040
    
    
    
    10.920Fourth Quarter
    
    
    10.970
    
    
    
    9.1202003First Quarter
    
    
    10.050
    
    
    
    7.240Second Quarter
    
    
    9.600
    
    
    
    7.990Third Quarter
    
    
    10.390
    
    
    
    7.820Fourth Quarter
    
    

    11.000
    
    
    
    9.4602004First Quarter
    
    
    11.550
    
    
    
    10.150Second Quarter
    
    
    11.550
    
    
    
    10.150Third Quarter
    
    
    10.800
    
    
    
    9.230Fourth Quarter
    
    
    11.170
    
    
    
    10.0102005First Quarter
    
    
    11.650
    
    
    
    10.290Monthly Data:December 2004
    
    
    11.170
    
    
    
    10.540January 2005
    
    
    10.800
    
    
    
    10.290February 2005
    
    
    11.130
    
    
    
    10.440March 2005
    
    
    11.650
    
    
    
    10.390April 2005
    
    
    10.270
    
    
    
    9.110May 2005
    
    
    9.270
    
    
    
    8.850June 2005 (through June 24)
    
    
    9.020
    
    
    
    8.120
 48




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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. Italian companies whose shares are not listed on a regulated market of the European Union are
governed by the rules of the Italian civil code as modified by the reform of the corporate law
provisions of the Italian civil code, which took effect on January 1, 2004. On July 23, 2004 the Companys shareholders approved a number of amendments to the Companys
By-laws dictated or made possible by the so-called corporate law reform. The following summary
takes into account the corporate law reform and the consequent amendments to the Companys By-laws. General The issued share capital of the Company consists of 54,681,628 Ordinary Shares, par value
1.0 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 in Bari, Italy. As set forth in Article 3 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 The extraordinary meeting of the Companys shareholders held on July 23, 2004 authorized the
Companys board of directors to carry out a free capital increase of up to 500,000.00, and a
capital increase against payment of up to 3.0 million to be issued, in connection with the
grant of stock options to employees of the Company. Form and Transfer of Shares The Companys Ordinary Shares are in certificated form and are freely 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 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 49




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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, the Company may be run by a sole director or by a board of
directors, consisting of seven to eleven individuals. The Company is currently run by a board of
directors composed by nine individuals, and the description below will refer to such system. The
board of directors is elected at a shareholders meeting, for the period established at the time of
election but in no case for longer than three fiscal years. A director, who may be but is not
required to be a shareholder 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 after
specific authorization in the cases requested by the law 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 is the legal representative 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 50




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plans to be presented to 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 of directors 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 no less than five days in advance by registered
letter or three days in advance by fax, telegram or e-mail 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 the location indicated in the notice
convening the meeting, or in any other destination, each time that the chairman may consider
necessary. 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. Directors having any interest in a proposed transaction must disclose their interest to the
board and to the statutory auditors, 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. 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, set up and eliminate
secondary offices, 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 so authorized by the shareholders meeting. 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, such resign is
ineffective until the majority of the new board of directors has been appointed. In such a case,
the 51




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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. Shareholders determine the remuneration of directors at ordinary shareholders meeting
appointing them. 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, within a maximum amount established by the
shareholders. Directors are entitled to reimbursement for expenses reasonably incurred in
connection with their functions. 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. Expiration of their office will have no effect
until a new board is appointed. 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 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 Companys board of statutory auditors is required to
meet at least once every ninety days. 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.
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. External Auditor The 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 52




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records and the 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, and may be removed only for just 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. For the entire duration of their office the external auditors or the firm of external auditors
must meet certain requirements provided for by law. 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, following
publication of notice of the meeting in any of the following Italian newspapers: il Sole 24 ore,
Corriere della Sera or la Repubblica at least 15 days before the date fixed for the meeting. 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 the Company continues 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. 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. 53




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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, on first call, by a majority of the Ordinary
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 issued
shares and more than two-thirds of the shares present and represented at such meeting. According to the By-laws, in order to attend any shareholders meeting, shareholders, at least
five days prior to the date fixed for the meeting, must deposit 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. 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 or of debentures convertible into shares,
if any, 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 The Companys By-laws allow the Company 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. The power to issue such financial instruments is attributed to the extraordinary meeting of
shareholders. The Company, by resolution of the board of directors, may issue debt securities
non-convertible into shares, while it may issue debt securities convertible into shares through a
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Segregation of Assets and Proceeds The Company, by means of an extraordinary shareholders meeting resolution, may approve the
segregation of certain 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 Company 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 attaching to such shares will accrue to the benefit
of other shareholders; pre-emptive rights attaching to such shares will accrue to the benefit of
other shareholders, unless the shareholders meeting authorizes the Company to exercise, in whole
or in part, the pre-emptive rights thereof. 55




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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 the Companys share capital have the right to
report to the competent court serious breaches of the duties of the directors, which may be
prejudicial to the Company 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. 56




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Any dispute arising out of or in connection with the By-Laws that may arise between the
Company and its shareholders, directors, liquidators shall fall under the exclusive jurisdiction of
the Tribunal of Bari. Liability for Mismanagement of Subsidiaries Under Italian law, 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. This 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. 
 Certain Contracts As of December 31, 2004, the Group entrusted approximately 20% of its production needs,
primarily relating to the assembly of raw materials and finished parts into finished products, to
subcontractors in the Santeramo area. The Group recently exercised its right of termination under
all of these contracts and expects them to terminate by the end of September 2005. 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. 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 57




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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
contains a description of the principal United States federal and Italian tax consequences of the
purchase, ownership and disposition of Ordinary Shares or ADSs by a holder who is a citizen or
resident of the United States or a U.S. corporation or who otherwise will be subject to United
States federal income tax on a net income basis in respect of the Ordinary Shares or ADSs. 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 or who
may be subject to special tax rules, such as banks, tax-exempt entities, insurance companies or
dealers in securities or currencies, or persons that will hold Ordinary Shares or ADSs as a
position in a straddle for tax purposes or as part of a constructive sale or a conversion
transaction or other integrated investment comprised of Ordinary Shares or ADSs and one or more
other investments. The summary does not discuss the treatment of Ordinary Shares or ADSs that are
held in connection with a permanent establishment 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 Ordinary Shares or ADSs,
including, in particular, the effect of any state or local tax laws. For purposes of the summary, beneficial owners of Ordinary Shares or 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 by Italy. 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. 58




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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. 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 (IRS) 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. IRS Form 6166
may be obtained by filing a request for certification on IRS Form 8802. (Additional information,
including IRS Form 8802, can be obtained from the IRS website at www.irs.gov. Information appearing
on the IRS website is not incorporated by reference into this document.) The time for processing
requests for certification by the IRS 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 IRS. 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 59




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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 relevant withholding 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 (i) the Company
is eligible for the benefits of a comprehensive income tax treaty with the United States that the
IRS has approved for the purposes of the qualified dividend rules and (ii) 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) a passive foreign investment company (PFIC) or (b) for dividends paid prior
to the 2005 tax year, a foreign personal holding company (FPHC) or foreign investment company
(FIC). The Income Tax Convention has been approved for the purposes of the qualified dividend
rules. 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 or 2004 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 for its 2005 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. 60




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Foreign tax credits may not be allowed for withholding taxes imposed in respect of certain
short-term or hedged positions in securities or in respect of arrangements in which a U.S. owners
expected economic profit is insubstantial. U.S. owners should consult their own advisers
concerning the implications of these rules in light of their 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. Taxation of Capital Gains Italian Tax Considerations 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 through
which such shareholders carry on or perform business services in Italy are subject to Italian
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 the 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 43%, plus a surcharge generally of up to 1.9%,
depending on the municipality in which such non-resident shareholder earns the highest
Italian-source income). 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, a capital gains tax (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 tax on any realized gains unless such U.S. owner has a permanent establishment 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 tax on capital gains. No tax on capital gains will be imposed on the deposit or withdrawal
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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 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. Taxation of Distributions from Capital Reserves Italian Tax Considerations Special rules apply to the distribution of capital reserves. Under certain circumstances,
such a distribution may be considered as taxable income in the hands of the recipient depending on
the reserves of the distributing company outstanding at the time of distribution and the actual
nature of the reserves distributed. The application of such rules may also have an impact on the
tax basis in the Ordinary Shares or ADSs held and/or the characterization of any taxable income
received and the tax regime applicable to it. Non-resident shareholders may be subject to
withholding tax and CGT as a result of such rules. You should consult your tax advisor in
connection with any distribution of capital reserves. 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 168.0 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 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 62




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market or with 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 room. 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. A 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 Group is exposed to market risks principally from fluctuations in the exchange rates
between the euro and other currencies, including in particular the U.S. dollar, and to a
significantly lesser extent, from variations in interest rates. Exchange Rate Risks The Groups foreign exchange rate risks in 2004 arose principally in connection with U.S.
dollars, British pounds, Canadian dollars, Australian dollars, Swiss francs, Swedish kroner,
Norwegian kroner, Danish kroner and Japanese yen. As at December 31, 2004 and 2003, the Group had outstanding trade receivables denominated in
foreign currencies totaling 66.3 million and 80.5 million, respectively, of which 54.8% and
61.9%, respectively, were denominated in U.S. dollars. On those same dates, the Group had 25.9
million and 20.7 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, 2004, the Company was a party to a number of forward exchange contracts
(known in Italy as domestic currency swaps) designed to hedge future sales denominated in U.S.
dollars and other currencies. The Group does not use foreign exchange contracts for speculative
trading purposes. At such date, the notional amounts of such forward exchange contracts aggregated
147.4 million (compared to 116.2 million at December 31, 2003), consisting of forward
exchange contracts with notional amounts of U.S. dollar 51.0 million, Canadian dollar 29.5 million, Swiss franc 3.4 million, Australian dollar 28.5 million, Japanese yen 360.0
million, 63




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##### Table of Contents



British pound 35.7 million, Swedish kroner 54.0 million, Danish kroner 7.0 million, and
Norwegian kroner 72.0 million. Such contracts had various maturities extending through December
2004. See Note 25 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 forward
exchange contracts designed to hedge future cash flows from accounts receivable and sales orders at
December 31, 2004 and 2003: December 31,Sales
    
    2004
    
    
    2003U.S. dollars
    
    
    66,108
    
    
    
    32,942British pounds
    
    
    51,451
    
    
    
    46,267Canadian dollars
    
    
    18,629
    
    
    
    19,044Australian dollars
    
    
    16,173
    
    
    
    10,796Norwegian kroner
    
    
    8,774
    
    
    
    Swedish kroner
    
    
    5,932
    
    
    
    Japanese yen
    
    
    2,740
    
    
    
    3,532Swiss francs
    
    
    2,240
    
    
    
    3,629Danish kroner
    
    
    940
    
    
    
    Total
    
    
    172,987
    
    
    
    116,210
 As at December 31, 2004, these forward exchange contracts had a net unrealized gain of 7.1
million, versus 6.3 million in 2003. The Group recorded this amount in other income (expense),
net in its Consolidated Financial Statements. See Note 24 to the Consolidated Financial Statements
included in Item 18 of this annual report. 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. December 31, 2004
    
    
    December 31, 2003Contract
    
    
    Fair
    
    
    Contract
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueAssets
    
    
    159,584
    
    
    
    7,191
    
    
    
    104,206
    
    
    
    6,544Liabilities
    
    
    13,403
    
    
    
    (90
    )
    
    
    12,004
    
    
    
    (268
    )Total
    
    
    172,987
    
    
    
    7,101
    
    
    
    116,210
    
    
    
    6,276
 The Groups forward exchange contracts as at December 31, 2004 had maturities of maximum 12
months. The potential loss in fair value of the Groups forward exchange contracts at December 31,
2004 that would have resulted from a hypothetical, instantaneous and unfavorable 10% change in
currency exchange rates would have been approximately negative
9.4 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. 64




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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, 2004, the Group had 11.1 million (representing 1.7% 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, 2004 approximately 55.1% 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. 
 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 Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of
December 31, 2004. 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 Chief Financial Officer concluded that
the disclosure controls and procedures as of December 31, 2004 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 2004 that has materially affected, or is reasonably likely to materially affect
the Companys internal control over financial reporting. 65




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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 has adopted a code of ethics, as defined in Item 16B of Form 20-F under the
Exchange Act. This code of ethics applies, among others, to the Companys Chief Executive Officer
and Chief Financial Officer. The Companys code of ethics is available on its website at
www.natuzzi.com/codeofethics/. If the Company amends the provisions of its code of ethics that
apply to the Companys Chief Executive Officer and Chief Financial Officer, or if the Company
grants any waiver of such provisions, it will disclose such amendment or waiver on its website at
the same address. 
 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, 2004 and 2003, for
audit fees, audit-related fees, tax fees and all other fees. 2004
    
    
    2003(in euros)Audit fees
    
    
    463,317.00
    
    
    
    336,852.00Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    1,477.00Other fees
    
    
    
    
    
    
    3,517.00Total fees
    
    
    463,317.00
    
    
    
    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 tax compliance services. 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 66




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##### Table of Contents



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. 
 Item 16.E Purchases of Equity Securities by the Issuer and Affiliated Purchasers From January 1, 2004, to December 31, 2004, no purchases were made by or on behalf of the
Company or any affiliated purchaser of the Companys Ordinary Shares or ADSs. 
 PART III 
 Item 17. Financial Statements Not applicable. 
 Item 18. Financial Statements PageReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    F-2Consolidated Statements of Earnings for the Years Ended December 31,
2004, 2003 and 2002
    
    F-3Consolidated Statements of Changes in Shareholders Equity for the
Years Ended December 31, 2004, 2003 and 2002
    
    F-4Consolidated Statements of Cash Flows for the Years Ended December
31, 2004, 2003 and 2002
    
    F-5Notes to the Consolidated Financial Statements
    
    F-7
 
 Item 19. Exhibits 1.1 English translation of the by-laws (Statuto) of the Company, as amended and restated as of
July 23, 2004. 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 Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. 13.1 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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68




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Shareholders of
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, 2004 and 2003 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, 2004. 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, 2004 and 2003 and
the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2004, 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 27 to the consolidated financial
statements. KPMG S.p.A. Bari, Italy
May 18, 2005 F - 1




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries 
 Consolidated Balance Sheets
 December 31, 2004 and 2003
  December 31, 2004
    
    
    December 31, 2003ASSETSCurrent assets:Cash and cash equivalents (note 4)
    
    
    87,340
    
    
    
    63,565Marketable debt securities (note 5)
    
    
    5
    
    
    
    5Trade receivables, net (note 6)
    
    
    137,559
    
    
    
    154,501Other receivables (note 7)
    
    
    41,169
    
    
    
    58,157Inventories (note 8)
    
    
    112,601
    
    
    
    97,518Unrealized foreign exchange gains (note 25)
    
    
    7,101
    
    
    
    6,276Prepaid expenses and accrued income
    
    
    2,390
    
    
    
    2,143Deferred income taxes (note 14)
    
    
    1,227
    
    
    
    955Total current assets
    
    
    389,392
    
    
    
    383,120Non current assets:Property plant and equipment (note 9 and 22)
    
    
    389,262
    
    
    
    360,846Less accumulated depreciation (note 9 and 22)
    
    
    (117,257
    )
    
    
    (106,653
    )Net property, plant and equipment
    
    
    272,005
    
    
    
    254,193Treasury shares (note 19)
    
    
    

    
    
    
    37,828Other assets (note 10)
    
    
    11,228
    
    
    
    17,087Deferred income taxes (note 14)
    
    
    602
    
    
    
    166Total assets
    
    
    673,227
    
    
    
    692,394LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings (note 11)
    
    
    5,572
    
    
    
    4,770Current portion of long-term debt (note 16)
    
    
    571
    
    
    
    1,291Accounts payable-trade (note 12)
    
    
    83,737
    
    
    
    80,913Accounts payable-other (note 13)
    
    
    20,353
    
    
    
    17,858Income taxes (note 14)
    
    
    2,521
    
    
    
    4,258Salaries, wages and related liabilities (note 15)
    
    
    18,732
    
    
    
    16,091Total current liabilities
    
    
    131,486
    
    
    
    125,181Long-term liabilities:Employees leaving entitlement (note 3 (n) )
    
    
    29,617
    
    
    
    27,587Long-term debt (note 16)
    
    
    4,998
    
    
    
    4,218Deferred income taxes (note 14)
    
    
    433
    
    
    
    376Deferred income for capital grants (note 3 (m))
    
    
    12,485
    
    
    
    13,359Other liabilities (note 17)
    
    
    5,359
    
    
    
    5,716Minority interest (note 18)
    
    
    916
    
    
    
    894Shareholders equity (note 19) :Share capital
    
    
    54,682
    
    
    
    57,526Reserves
    
    
    42,292
    
    
    
    80,236Additional paid-in capital
    
    
    8,282
    
    
    
    8,282Retained earnings
    
    
    382,677
    
    
    
    369,019Total shareholders equity
    
    
    487,933
    
    
    
    515,063Commitments and contingent liabilities (notes 21 and 25)
    
    
    
    
    
    
    Total liabilities and shareholders equity
    
    
    673,227
    
    
    
    692,394
 See accompanying notes to consolidated financial statements F - 2




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries 
 Consolidated Statements of Earnings
 Years ended December 31, 2004, 2003, and 2002
  2004
    
    
    2003
    
    
    2002Net sales (note 22)
    
    
    753,434
    
    
    
    769,579
    
    
    
    805,143Cost of sales (note 23)
    
    
    (484,601
    )
    
    
    (508,764
    )
    
    
    (517,423
    )Gross profit
    
    
    268,833
    
    
    
    260,815
    
    
    
    287,720Selling expenses
    
    
    (188,182
    )
    
    
    (179,282
    )
    
    
    (145,378
    )General and administrative expenses
    
    
    (40,673
    )
    
    
    (39,205
    )
    
    
    (40,532
    )Operating income
    
    
    39,978
    
    
    
    42,328
    
    
    
    101,810Other income (expense), net (note 24)
    
    
    (3,892
    )
    
    
    3,631
    
    
    
    14,551Earnings before taxes and minority
interest
    
    
    36,086
    
    
    
    45,959
    
    
    
    116,361Income taxes (note 14)
    
    
    (17,650
    )
    
    
    (8,501
    )
    
    
    (24,997
    )Earnings before minority interest
    
    
    18,436
    
    
    
    37,458
    
    
    
    91,364Minority interest
    
    
    (83
    )
    
    
    (158
    )
    
    
    74Net earnings
    
    
    18,353
    
    
    
    37,300
    
    
    
    91,438Basic earnings per share (note 3(u))
    
    
    0.34
    
    
    
    0.68
    
    
    
    1.67Diluted earnings per share (note 3(u))
    
    
    0.34
    
    
    
    0.68
    
    
    
    1.67
 See accompanying notes to consolidated financial statements F - 3




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries 
 Consolidated Statements of Changes in Shareholders Equity
 Years ended December 31, 2004, 2003 and 2002
  Share capital
    
    
    
    
    
    
    AdditionalNumber of
    
    
    
    
    
    
    
    
    
    
    paid-in
    
    
    RetainedOrdinary shares
    
    
    Amount
    
    
    Reserves
    
    
    capital
    
    
    Earnings
    
    
    TotalBalances 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
    )Transfers 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
    
    
    
    515,063Dividends distributed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,655
    )
    
    
    (7,655
    )Treasury shares cancelled
    
    
    
    
    
    
    (2,844
    )
    
    
    (37,828
    )
    
    
    
    
    
    
    2,844
    
    
    
    (37,828
    )Transfer for liquidation of subsidiary
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    116
    
    
    
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,353
    
    
    
    18,353Balances at December 31, 2004
    
    
    54,681,628
    
    
    
    54,682
    
    
    
    42,292
    
    
    
    8,282
    
    
    
    382,677
    
    
    
    487,933
 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, 2004, 2003 and 2002
  2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net earnings
    
    
    18,353
    
    
    
    37,300
    
    
    
    91,438Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    34,068
    
    
    
    27,221
    
    
    
    16,867Employees leaving entitlement
    
    
    7,435
    
    
    
    6,776
    
    
    
    7,091Deferred income taxes
    
    
    (651
    )
    
    
    799
    
    
    
    401Minority interest
    
    
    83
    
    
    
    158
    
    
    
    (38
    )(Gain) loss on disposal of assets
    
    
    (3,468
    )
    
    
    814
    
    
    
    30Unrealized foreign exchange losses and gains
    
    
    621
    
    
    
    (264
    )
    
    
    (2,923
    )Deferred income for capital grants
    
    
    (874
    )
    
    
    (870
    )
    
    
    194Change in assets and liabilities:Receivables, net
    
    
    28,052
    
    
    
    5,096
    
    
    
    (23,898
    )Inventories
    
    
    (16,637
    )
    
    
    (7,251
    )
    
    
    3,814Prepaid expenses and accrued income
    
    
    (240
    )
    
    
    (903
    )
    
    
    (322
    )Other assets
    
    
    (893
    )
    
    
    (2,122
    )
    
    
    (2,524
    )Accounts payable
    
    
    6,659
    
    
    
    (18,370
    )
    
    
    5,565Income taxes
    
    
    (1,737
    )
    
    
    (5,041
    )
    
    
    5,563Salaries, wages and related liabilities
    
    
    2,641
    
    
    
    1,383
    
    
    
    1,114Other liabilities
    
    
    (357
    )
    
    
    (1,719
    )
    
    
    1,024Employees leaving entitlement
    
    
    (4,795
    )
    
    
    (4,766
    )
    
    
    (3,781
    )Total adjustments
    
    
    49,907
    
    
    
    941
    
    
    
    6,177Net cash provided by operating activities
    
    
    68,260
    
    
    
    38,241
    
    
    
    97,615Cash flows from investing activities:Property, plant and equipment:Additions
    
    
    (51,860
    )
    
    
    (47,259
    )
    
    
    (68,653
    )Disposals
    
    
    9,407
    
    
    
    762
    
    
    
    242Government grants received
    
    
    
    
    
    
    3,119
    
    
    
    10,042Marketable debt securities:Purchases
    
    
    
    
    
    
    
    
    
    
    Proceeds from sales
    
    
    
    
    
    
    21
    
    
    
    1Purchase of business, net of cash acquired
    
    
    (100
    )
    
    
    (6,482
    )
    
    
    Disposal of business
    
    
    5,475
    
    
    
    
    
    
    
    
 F - 5




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##### Table of Contents



2004
    
    
    2003
    
    
    2002Purchase of minority interest
    
    
    
    
    
    
    
    
    
    
    (123
    )Net cash used in investing activities
    
    
    (37,078
    )
    
    
    (49,839
    )
    
    
    (58,491
    )Cash flows from financing activities:Long-term debt:Proceeds
    
    
    1,284
    
    
    
    1,970
    
    
    
    2,166Repayments
    
    
    (1,349
    )
    
    
    (1,739
    )
    
    
    (1,421
    )Short-term borrowings
    
    
    1,820
    
    
    
    299
    
    
    
    (134,315
    )Dividends paid to shareholders
    
    
    (7,655
    )
    
    
    (18,045
    )
    
    
    (15,705
    )Dividends paid to minority interests
    
    
    (61
    )
    
    
    (26
    )
    
    
    Net cash provided by (used in) financing
activities
    
    
    (5,961
    )
    
    
    (17,541
    )
    
    
    (149,275
    )Effect of translation adjustments on cash
    
    
    (1,446
    )
    
    
    (3,991
    )
    
    
    (1,354
    )Increase (decrease) in cash and cash equivalents
    
    
    23,775
    
    
    
    (33,130
    )
    
    
    (111,505
    )Cash and cash equivalents, beginning of the year
    
    
    63,565
    
    
    
    96,695
    
    
    
    208,200Cash and cash equivalents, end of the year
    
    
    87,340
    
    
    
    63,565
    
    
    
    96,695Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    
    1,003
    
    
    
    606
    
    
    
    3,588Cash paid during the year for income taxes
    
    
    9,293
    
    
    
    24,955
    
    
    
    20,188
 See accompanying notes to consolidated financial statements F - 6




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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)  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, 2004, together with the
related percentages of ownership, are as follows: Percentage ofName
    
    ownership
    
    
    Registered office
    
    ActivityItalsofa Bahia Ltda
    
    
    97.99
    
    
    Bahia, Brazil
    
    (1)Italsofa (Shanghai) Co., Ltd
    
    
    100.00
    
    
    Shanghai, China
    
    (1)SC Italsofa Romania S.r.l.
    
    
    100.00
    
    
    Baia Mare, Romania
    
    (1)Minuano Nordeste S.A.
    
    
    100.00
    
    
    Pojuca, Brazil
    
    (1)Natco S.p.A.
    
    
    99.99
    
    
    Bari, Italy
    
    (2)I.M.P.E. S.p.A.
    
    
    90.83
    
    
    Qualiano, Italy
    
    (3)Divani Due S.r.l.
    
    
    100.00
    
    
    Verona, Italy
    
    (4)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 ApS
    
    
    100.00
    
    
    Copenhagen, Denmark
    
    (4)Natuzzi Benelux NV
    
    
    100.00
    
    
    Geel, Belgium
    
    (4)Natuzzi Germany GmbH
    
    
    100.00
    
    
    Düsseldorf, Germany
    
    (4)Kingdom of Leather Limited
    
    
    100.00
    
    
    London, UK
    
    (4)Esmeralda Holdings, Ltd
    
    
    100.00
    
    
    London, U.K.
    
    (4)Nacon S.p.A.
    
    
    100.00
    
    
    Bari, Italy
    
    (5)Italholding S.r.l.
    
    
    100.00
    
    
    Bari, Italy
    
    (5)Kingdom of Leather Trustees Limited
    
    
    100.00
    
    
    London, U.K.
    
    (5)Natuzzi Netherlands Holding B.V.
    
    
    100.00
    
    
    Amsterdam, Holland
    
    (5)Natuzzi United Kingdom, Limited
    
    
    100.00
    
    
    London, U.K.
    
    (5)Natuzzi Trade Service S.r.l.
    
    
    100.00
    
    
    Bari, Italy
    
    (6)Softaly Shanghai, Ltd
    
    
    100.00
    
    
    Shanghai, China
    
    (7)
 
 (1)
    
    Manufacturing and distribution(2)
    
    Intragroup leather dyeing and finishing(3)
    
    Production and distribution of polyurethane foam(4)
    
    Distribution(5)
    
    Investment holding(6)
    
    Transportation services(7)
    
    Non operative 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)  During December 2004 the Company sold 100% of the outstanding common shares of Spagnesi
S.p.A. to a third party, for a cash consideration of 5,475. Spagnesi S.p.A. was a
manufacturing facility located in North of Italy (near to Florence), specialized in the
production of a particular line of traditional leather sofas. As of the date of the
disposal all products of this enterprise were bought by Natuzzi. In
particular, on the basis of the
disposal agreement Natuzzi will continue to buy up to 12,000 products
from Spagnesi at market
price for a certain period. However, the Company is under no
obligation to make such purchases.In 2004 Style and Comfort S.r.l. was merged into Natuzzi S.p.A..In January 2004 the Company incorporated a new subsidiary, Natuzzi Germany Gmbh, which
provides sales support for the Group in Germany.During 2004 the Company incorporated two new subsidiaries, Nacon S.r.l. and Italholding
S.r.l., which are investment holding companies.On November 23, 2004 the Company acquired 100% of Divani Due S.r.l., based in Verona, for a
cash consideration of 100. This acquired enterprise has a network of five stores mainly
located in North of Italy. The acquisition was accounted for using the purchase method and
it resulted in a goodwill of 1,251, 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
    
    
    353Goodwill
    
    
    1,251Other non current assets
    
    
    377Current liabilities
    
    
    (369
    )Non current liabilities
    
    
    (142
    )Purchase price
    
    
    1,470
  The purchase price is composed by the consideration paid 100,
plus the elimination of trade receivables from Divani Due S.r.l. of 1,370.In addition Divani Due S.r.l. recorded for the years ended December 31, 2004 and 2003 net
sales of 190 and 1,535, respectively.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 Natuzzi United
Kingdom Limited (former Castelgate 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 14 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 were 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. F - 8




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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) 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
    
    
    (20,994
    )
    
    
    (19,938
    )General and administrative expenses
    
    
    (4,957
    )
    
    
    (4,869
    )Operating loss
    
    
    (7,198
    )
    
    
    (744
    )Other income, net
    
    
    1,828
    
    
    
    (711
    )Loss before taxes
    
    
    (5,370
    )
    
    
    (1,455
    )Income taxes
    
    
    
    
    
    Net loss
    
    
    (5,370
    )
    
    
    (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, 2004 and 2003 this payable is
included in other liabilities (see notes 13 and 17). The main reason for this acquisition
was that the enterprise acquired signed an agreement with the Brazilian Government whereby
it will enjoy certain export incentives until 2015. At the time of the acquisition the
subsidiary was dormant. During 2004 this subsidiary started and completed the construction
of the 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. F - 9




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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)  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 the minority interest (20%) of Natuzzi
Switzerland AG for a consideration of 123 in cash. Goodwill arising from that acquisition
amounted to 97.2.
    
    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, 2004, 2003 and 2002. The 2003 and 2002
financial statements have been approved by the respective shareholders of the relevant
companies. The 2004 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
and when applicable, by the International 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 27
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, 2004 and 2003, consolidated
statement of earnings, consolidated statements of changes in shareholders equity and
consolidated statement of cash flows for each of the years in the three-year period ended
December 31, 2004 are presented in euros. All consolidated financial statements for each
period F - 10




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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)  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, the 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 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, 2004 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:  n
    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. 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)  n
    Forward exchange contracts were used to hedge future sales if the sales
were supported by sales orders and customers 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.n
    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 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 are 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 income (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. 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) 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. 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 with estimable useful
lives, 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 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) 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. 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, 2004 and 2003 the deferred income for capital grants
amounts to 12,485 and 13,359, 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, assuming immediate separation, 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. 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) The expense recorded for the leaving entitlement for the years ended December 31, 2004,
2003 and 2002 was 7,435, 6,776 and 7,091, respectively. The number of workers employed by the Group totalled 6,832 and 6,230 at December 31, 2004
and 2003, 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, 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 a reasonable
estimate of such allowances due to large volumes of homogeneous transactions and historical
experience. p) Shipping and handling costs Shipping and handling costs sustained to transport products to customers are expensed in
the periods incurred and are included in selling expenses. Shipping and handling expenses
recorded for the years ended December 31, 2004, 2003 and 2002 were 70,329, 68,194 and
65,338, respectively. q) Advertising costs Advertising costs are expensed in the periods incurred and are included in selling
expenses. Advertising expenses recorded for the years ended December 31, 2004, 2003 and
2002 were 33,855, 32,114 and 23,578, 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 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) 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. Diluted earnings per
share included the effects of possible issuance of ordinary shares under share grants and
option plans in the determination of the weighted average number of ordinary shares
outstanding during the period. The following table provides the amounts used in the
calculation of earnings per share: 2004
    
    
    2003
    
    
    2002Net earnings attributable to
ordinary shareholders
    
    
    18,353
    
    
    
    37,300
    
    
    
    91,438Weighted-average number of ordinary
shares outstanding during the year
    
    
    54,681,628
    
    
    
    54,681,628
    
    
    
    54,681,628Increase resulting from assumed conversion
of share grants and options
    
    
    27,576
    
    
    
    
    
    
    
    Weighted-average number of ordinary
shares and potential shares outstanding
during the year
    
    
    54,709,204
    
    
    
    54,681,628
    
    
    
    54,681,628
  4.
    
    Cash and cash equivalentsCash and cash equivalents are analyzed as follows: 2004
    
    
    2003Cash on hand
    
    
    272
    
    
    
    503Bank accounts in Euro
    
    
    28,033
    
    
    
    6,217Bank accounts in foreign currency
    
    
    58,948
    
    
    
    56,524Money market instruments
    
    
    87
    
    
    
    321Total
    
    
    87,340
    
    
    
    63,565
 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)  5.
    
    Marketable debt securitiesDetails regarding marketable debt securities are as follows: 2004
    
    
    2003Foreign corporate bonds
    
    
    5
    
    
    
    5Italian Government bonds
    
    
    
    
    
    
    Total
    
    
    5
    
    
    
    5
  Further information regarding the Groups investments in marketable debt securities is
as follows: Gross unrealized
    
    
    Fair2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    valueForeign corporate bonds
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Italian Government bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5
 Gross unrealized
    
    
    Fair2003
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    valueForeign corporate bonds
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Italian Government bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5
 2004
    
    
    2003
    
    
    2002Proceeds from sales
    
    
    
    
    
    
    21
    
    
    
    Realized gains
    
    
    
    
    
    
    
    
    
    
    Realized losses
    
    
    
    
    
    
    
    
    
    
    
  The contractual maturity of the Groups marketable debt securities at December 31,
2004 is between 1  5 years. F - 17




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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)  6.
    
    Trade receivables, netTrade receivables are analyzed as follows: 2004
    
    
    2003North American customers
    
    
    42,841
    
    
    
    57,730Other foreign customers
    
    
    54,546
    
    
    
    52,472Domestic customers
    
    
    41,743
    
    
    
    45,723Trade bills receivable
    
    
    3,863
    
    
    
    4,238Total
    
    
    142,993
    
    
    
    160,163Allowance for doubtful accounts
    
    
    (5,434
    )
    
    
    (5,662
    )Total trade receivables, net
    
    
    137,559
    
    
    
    154,501
  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 2004, 2003 and 2002
or accounts receivable at December 31, 2004 and 2003. 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: 2004
    
    
    2003
    
    
    2002Balance, beginning of year
    
    
    5,662
    
    
    
    4,727
    
    
    
    5,469Charges-bad debt expense
    
    
    1,297
    
    
    
    1,441
    
    
    
    97Reductions-write off
of uncollectible accounts
    
    
    (1,525
    )
    
    
    (506
    )
    
    
    (839
    )Balance, end of year
    
    
    5,434
    
    
    
    5,662
    
    
    
    4,727
  Trade receivables denominated in foreign currencies at December 31, 2004 and 2003
totalled 66,336 and 80,528, respectively. These receivables consist of the following: 2004
    
    
    2003U.S. dollars
    
    
    36,257
    
    
    
    49,887British pounds
    
    
    8,744
    
    
    
    9,015Canadian dollars
    
    
    7,729
    
    
    
    9,174Australian dollars
    
    
    6,431
    
    
    
    6,685Other currencies
    
    
    7,175
    
    
    
    5,767Total
    
    
    66,336
    
    
    
    80,528
  7.
    
    Other receivablesOther receivables are analyzed as follows: F - 18




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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) 2004
    
    
    2003VAT
    
    
    14,289
    
    
    
    25,214Receivable from tax authorities
    
    
    10,269
    
    
    
    18,692Advances to suppliers
    
    
    4,506
    
    
    
    4,633Government capital grants
    
    
    4,890
    
    
    
    4,957Other
    
    
    7,215
    
    
    
    4,661Total
    
    
    41,169
    
    
    
    58,157
  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: 2004
    
    
    2003Leather and other raw materials
    
    
    70,763
    
    
    
    58,830Goods in process
    
    
    12,916
    
    
    
    15,213Finished products
    
    
    28,922
    
    
    
    23,475Total
    
    
    112,601
    
    
    
    97,518
  9.
    
    Property, plant and equipment and accumulated depreciationFixed assets are listed below together with accumulated depreciation. Cost or
    
    
    Accumulated
    
    
    Annual rate of2004
    
    valuation
    
    
    depreciation
    
    
    depreciationLand
    
    
    10,149
    
    
    
    
    
    
    
    Industrial buildings
    
    
    164,283
    
    
    
    (30,084
    )
    
    
    3-10
    %Machinery and equipment
    
    
    112,300
    
    
    
    (57,861
    )
    
    
    11.525
    %Airplane
    
    
    24,075
    
    
    
    (2,167
    )
    
    
    6
    %Office furniture and equipment
    
    
    22,025
    
    
    
    (15,619
    )
    
    
    12-20
    %Retail gallery and stores furnishings
    
    
    16,965
    
    
    
    (6,126
    )
    
    
    2535
    %Transportation equipment
    
    
    5,725
    
    
    
    (3,920
    )
    
    
    20-25
    %Leasehold improvements
    
    
    2,676
    
    
    
    (1,480
    )
    
    
    10-20
    %Construction in progress
    
    
    29,867
    
    
    
    
    
    
    
    Advances to suppliers
    
    
    1,197
    
    
    
    
    
    
    
    Total
    
    
    389,262
    
    
    
    (117,257
    )
 F - 19




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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) 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
    )
  Construction in progress relates principally to manufacturing facilities.10.
    
    Other assetsOther assets consist of the following: 2004
    
    
    2003Goodwill
    
    
    15,061
    
    
    
    14,338Equity in an affiliated company
    
    
    2,650
    
    
    
    Trademarks and patents
    
    
    561
    
    
    
    10,826Others
    
    
    11,323
    
    
    
    10,743Total, gross
    
    
    29,595
    
    
    
    35,907Less impairment losses
    
    
    (6,119
    )
    
    
    (232
    )Less accumulated amortization
    
    
    (12,248
    )
    
    
    (18,588
    )Total, net
    
    
    11,228
    
    
    
    17,087
  At December 31, 2004 and 2003 the net book value of goodwill may be analyzed as follows: 2004
    
    
    
    2003Gross carrying amount
    
    
    15,061
    
    
    
    14,338Less impairment losses
    
    
    (6,119
    )
    
    
    (232
    )Less accumulated depreciation
    
    
    (4,449
    )
    
    
    (1,982
    )Net book value
    
    
    4,493
    
    
    
    12,124
  At December 31, 2004 and 2003 the net book value of goodwill arising from business
acquisitions completed after July 1, 2001 amounts to 4,493 and 12,008, respectively.During 2004 the Company acquired 49% of the quotas of Salena S.r.l.. The consideration was
not paid in cash but with transfer of trade receivables, which fair value were 2,650. At
the date of the acquisition the excess of cost over the fair value of the portion of net
assets acquired has been allocated to land and buildings. This enterprise is not operating
and it owns land and industrial buildings, under a capital lease agreement, in a town close
to Milan (North of Italy). Part of the industrial buildings is leased to a transportation
company under an operating lease agreement. At December 31, 2004 this investment is
accounted under the equity method. F - 20




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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)  11.
    
    Short-term borrowingsShort-term borrowings consist of the following: 2004
    
    
    2003Bank borrowings
    
    
    4,255
    
    
    
    3,547Bank overdrafts
    
    
    1,317
    
    
    
    1,2235,572
    
    
    
    4,770
  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, 2004 the short-term borrowings included 5,482 denominated in foreign
currencies.The weighted average interest rates on the above-listed short-term borrowings at December
31, 2004 and 2003 are as follows: 2004
    
    
    2003Bank borrowings
    
    
    3.45
    %
    
    
    2.28
    %Bank overdrafts
    
    
    4.75
    %
    
    
    2.42
    %
  Credit facilities available to the Group, including amounts guaranteed under surety
bonds, amounted to 108,992 and 209,102 at December 31, 2004 and 2003, respectively. The
unused portion of these facilities amounted to 103,420 and 204,332 at December 31, 2004 and
2003, respectively.12.
    
    Accounts payable-tradeAccounts payable-trade totalling 83,737 and 80,913 at December 31, 2004 and 2003,
respectively, represent principally amounts payable for purchases of goods and services in
Italy and abroad, and includes 25,881 and 20,782 at December 31, 2004 and 2003,
respectively, denominated in foreign currencies.13.
    
    Accounts payable-otherAccounts payable-other are analyzed as follows: 2004
    
    
    2003Payable to customers
    
    
    5,422
    
    
    
    4,884Cooperative advertising and quantity discount
    
    
    3,663
    
    
    
    3,705Withholding taxes on payroll and on other
    
    
    3,367
    
    
    
    3,516Provision for returns warranties and other discounts
    
    
    3,477
    
    
    
    3,363Payable to minority interest for dividends
    
    
    648
    
    
    
    620Payable to third parties for business acquisition
    
    
    859
    
    
    
    430Other
    
    
    2,917
    
    
    
    1,340Total
    
    
    20,353
    
    
    
    17,858
 F - 21




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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)  14.
    
    Taxes on incomeItalian companies are subject to two income taxes at the following rates: 2004
    
    
    2003
    
    
    2002IRES (state tax)
    
    
    33.00
    %
    
    
    34.00
    %
    
    
    36.00
    %IRAP (regional tax)
    
    
    4.25
    %
    
    
    4.25
    %
    
    
    4.25
    %
  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 replaced IRPEG, with the simultaneous elimination of the dual income
tax system. The enacted IRES tax rate for 2004 is 33% of taxable income. IRES 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.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 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 were 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 and 2002 is derived from companies
entitled to some extent to the aforementioned exemptions, the most significant of which
expired in 2003. In addition, as from 2003 certain foreign subsidiaries (Italsofa Shanghai
Ltd, Italsofa Bahia Ltd, Minuano Nordeste S.A. and Italsofa Romania) enjoy significant tax
benefits, such as corporate income tax exemptions or reductions of the corporate income tax
rates effectively applicable, the most significant of which will expire in 2012. The tax
reconciliation table reported below describes the effect of such exemptions on the Groups
2004, 2003 and 2002 income tax charge.Approximately 55.1%, 57.3% and 88.8% respectively, of the Groups consolidated earnings
before taxes were generated by domestic Italian operations during 2004, 2003 and 2002.
However, consolidated earnings before taxes are analyzed as follows: 2004
    
    
    2003
    
    
    2002Domestic
    
    
    19,878
    
    
    
    26,319
    
    
    
    103,370Foreign
    
    
    16,208
    
    
    
    19,640
    
    
    
    12,991Total
    
    
    36,086
    
    
    
    45,959
    
    
    
    116,361
 F - 22




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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)  The effective income tax rates for the years ended December 31, 2004, 2003 and 2002
were 48.9%, 18.5% and 21.5%, respectively. The actual income tax expense differs from the
expected income tax expense (computed by applying the state tax, which is 33% for 2004,
34% for 2003 and 36% for 2002, to income before income taxes and minority interest) as
follows: 2004
    
    
    2003
    
    
    2002Expected income tax charge at full tax rates
    
    
    11,908
    
    
    
    15,626
    
    
    
    41,890Effects of:n Tax exempt income
    
    
    (5,664
    )
    
    
    (19,080
    )
    
    
    (25,079
    )n Aggregate effect of different tax
rates in foreign jurisdictions
    
    
    (1,796
    )
    
    
    (863
    )
    
    
    (1,806
    )n Italian regional tax
    
    
    5,954
    
    
    
    5,819
    
    
    
    7,049n Non-deductible expenses
    
    
    2,187
    
    
    
    3,075
    
    
    
    1,017n Depreciation and impairment of goodwill
    
    
    2,931
    
    
    
    570
    
    
    
    80n Effect of net change in valuation allowance
established against deferred tax assets
    
    
    1,119
    
    
    
    3,180
    
    
    
    1,725n Tax effect of unremitted earnings
    
    
    1,011
    
    
    
    119
    
    
    
    n Tax effect of change in tax rates
    
    
    
    
    
    
    55
    
    
    
    121Actual tax charge
    
    
    17,650
    
    
    
    8,501
    
    
    
    24,997
  Total taxes for the years ended December 31, 2004, 2003 and 2002 relate to earnings
from operations.Total income taxes for the years ended December 31, 2004, 2003 and 2002 were allocated 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) 2004
    
    
    2003
    
    
    2002Current:Italian
    
    
    14,769
    
    
    
    2,812
    
    
    
    22,104Foreign
    
    
    3,532
    
    
    
    4,890
    
    
    
    2,492Total (a)
    
    
    18,301
    
    
    
    7,702
    
    
    
    24,596Deferred:Italian
    
    
    (760
    )
    
    
    393
    
    
    
    112Foreign
    
    
    109
    
    
    
    406
    
    
    
    289Total (b)
    
    
    (651
    )
    
    
    799
    
    
    
    401Total (a + b)
    
    
    17,650
    
    
    
    8,501
    
    
    
    24,997
  The tax years from January 1, 1999 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, 2004 and 2003 are
presented below: 2004
    
    
    2003Deferred tax assets:n Tax loss carryforwards
    
    
    8,990
    
    
    
    4,497n Allowance for doubtful accounts
    
    
    1,195
    
    
    
    1,387n Provision for sales representatives
    
    
    816
    
    
    
    1,051n Provision for contingent liabilities
    
    
    368
    
    
    
    368n Provision for returns and discounts
    
    
    292
    
    
    
    381n Impairment of fixed assets
    
    
    11
    
    
    
    1,428n Other temporary differences
    
    
    1,311
    
    
    
    810Total gross deferred tax assets
    
    
    12,983
    
    
    
    9,922n Less valuation allowance
    
    
    (8,990
    )
    
    
    (8,060
    )Net deferred tax assets
    
    
    3,993
    
    
    
    1,862Deferred tax liabilities:n Unremitted earnings of subsidiaries
    
    
    (1,130
    )
    
    
    (119
    )n Government grants
    
    
    (809
    )
    
    
    (851
    )n Other temporary differences
    
    
    (658
    )
    
    
    (147
    )Total deferred tax liabilities
    
    
    (2,597
    )
    
    
    (1,117
    )Net deferred tax assets
    
    
    1,396
    
    
    
    745
  A valuation allowance has been established principally for the tax loss carryforwards.The valuation allowance for deferred tax assets as of December 31, 2004 and 2003 was 8,990
and 8,060, respectively. The net change in the total valuation allowance for the years
ended December 31, 2004 and 2003 was an increase of 930 and 3,498, 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 F - 24




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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)  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, 2004. 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: 2004
    
    Current
    
    
    Non current
    
    
    TotalGross deferred tax assets
    
    
    2,585
    
    
    
    10,398
    
    
    
    12,983Valuation allowance
    
    
    
    
    
    
    (8,990
    )
    
    
    (8,990
    )Net deferred tax assets
    
    
    2,585
    
    
    
    1,408
    
    
    
    3,993Deferred tax liabilities
    
    
    (1,358
    )
    
    
    (1,239
    )
    
    
    (2,597
    )Net deferred tax assets (liabilities)
    
    
    1,227
    
    
    
    169
    
    
    
    1,396
 2003
    
    Current
    
    
    Non current
    
    
    TotalGross deferred tax assets
    
    
    3,705
    
    
    
    6,217
    
    
    
    9,922Valuation allowance
    
    
    (2,458
    )
    
    
    (5,602
    )
    
    
    (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
  The tax loss carryforwards of the Group total 29,921 and expire as follows: 2005
    
    
    2006
    
    
    442007
    
    
    4002008
    
    
    5972009
    
    
    5,979Thereafter
    
    
    22,901Total
    
    
    29,921
  As of December 31, 2004, taxes that are due on distribution of the portion of
shareholders equity equal to unremitted earnings of most of the subsidiaries is 1,130 (119
at December 31, 2003). The Group has provided for such taxes as the likelihood of
distribution is probable.The Group has not provided for such taxes, amounting to 240, for some subsidiaries for
which the likelihood of distribution is remote and earnings are deemed to be permanently
reinvested.15.
    
    Salaries, wages and related liabilitiesSalaries, wages and related liabilities are analyzed as follows: F - 25




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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) 2004
    
    
    2003Salaries and wages
    
    
    9,643
    
    
    
    8,180Social security contributions
    
    
    7,066
    
    
    
    6,130Vacation accrual
    
    
    2,023
    
    
    
    1,781Total
    
    
    18,732
    
    
    
    16,091
  16.
    
    Long-term debtLong-term debt at December 31, 2004 and 2003 consists of the following: 2004
    
    
    20032.25% 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 October 2007
    
    
    2,884
    
    
    
    1,9703.5% long-term debt payable in semi-annual
installments with final payment due August 24, 2004
    
    
    
    
    
    
    1,1064.0% long-term debt payable in quarterly installments
with final payment due in September 2005
    
    
    24
    
    
    
    267Others with various maturity dates
    
    
    495
    
    
    
    Total long-term debt
    
    
    5,569
    
    
    
    5,509Less current installments
    
    
    (571
    )
    
    
    (1,291
    )Long-term debt, excluding current installments
    
    
    4,998
    
    
    
    4,218
  Loan maturities after 2005 are summarized below: 2006
    
    
    2,1792007
    
    
    1,0422008
    
    
    2022009
    
    
    208Thereafter
    
    
    1,367Total
    
    
    4,998
  At December 31, 2004 long-term debt denominated in foreign currencies amounts to 3,278
(3,343 at December 31, 2003).Interest expense related to long-term debt for the years ended December 31, 2004, 2003 and
2002 was 110, 155 and 202 respectively. 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)  17.
    
    Other liabilitiesOther liabilities consist of: 2004
    
    
    2003Provision for contingent liabilities
    
    
    2,308
    
    
    
    1,175Termination indemnities for sales agents
    
    
    2,191
    
    
    
    2,822Payable to third parties for business acquisition
    
    
    860
    
    
    
    1,719Total
    
    
    5,359
    
    
    
    5,716
  18.
    
    Minority interestMinority interest shown in the accompanying consolidated balance sheet at December 31, 2004
is 916 (894 at December 31, 2003).19.
    
    Shareholders equityThe share capital is owned as follows: 2004
    
    
    2003Mr. Pasquale Natuzzi
    
    
    47.7
    %
    
    
    45.3
    %Miss Anna Maria Natuzzi
    
    
    2.6
    %
    
    
    2.4
    %Mrs. Annunziata Natuzzi
    
    
    2.5
    %
    
    
    2.4
    %Public investors
    
    
    47.2
    %
    
    
    45.0
    %Treasury shares
    
    
    
    
    
    
    4.9
    %100
    %
    
    
    100
    %
  An analysis of the reserves is as follows: 2004
    
    
    2003Treasury shares reserve
    
    
    
    
    
    
    37,828Legal reserve
    
    
    11,199
    
    
    
    11,199Monetary revaluation reserve
    
    
    1,344
    
    
    
    1,344Government capital grants reserve
    
    
    29,749
    
    
    
    29,865Total
    
    
    42,292
    
    
    
    80,236
  The number of ordinary shares issued at December 31, 2004 and 2003 is 54,681,628 and
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 was 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. 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)  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. As a consequence, as from this date the Company has
reduced non-current assets and shareholders equity by the amount of 37,828.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 12,329 and 13,281 at
December 31, 2004 and 2003, respectively.No taxes would be payable on the distribution of the monetary revaluation reserve and
government capital grants reserve.20.
    
    Share grants and optionsIn order to provide incentives to certain personnel, the shareholders of the Company on
July, 23 2004 approved in its Shareholders Ordinary and Extraordinary Meeting the
guidelines of a share incentive plan in favor of Natuzzi Groups managers subject to
assignment of Natuzzi S.p.A. shares. The 2004 plan will cover the period 2005-2009. During
this period the Company will assign performance share grants and performance share options
related to the achievement of pre-determined levels of individual, enterprise and share
price targets related to the years 2004 and 2005. The maximum number
of shares to be
issued in connection with the plan will be n. 3,000,000, each with a nominal value of
1.0, of which
500,000 in the form of restricted stock units and the remaining from
the conversion of stock options. The
Shareholders Meeting has delegated to the Board of Directors the regulation and management
of the 2004 plan, and the responsibility for the issuance of the options and grants under
the 2004 plan.Under the 2004 plan an employee is entitled to grants of restricted stock units and options
if certain performance targets are met. In particular, the Plan provides for: (a) grants of
restricted stock units for achievement of pre-determined objectives (management by
objectives or MBOs) in 2004 and 2005, which vest and settle if the applicable performance
targets are achieved, with respect to the 2004 MBOs in 2006 and 2007, and with respect to
2005 MBOs, in 2007 and 2008; (b) grants of options that only become exercisable if MBOs in
2004 and 2005 are achieved; and (c) the opportunity for participants to receive additional
50% options for combined achievement of 2004 and 2005 MBOs and the targeted price of the
Companys share (during a reference period) on the New York Stock Exchange.In order for an employee to obtain the additional 50% options based on 2004 MBOs, the
following conditions have to be met (first tranche): (a) achievement of 2004 MBOs, and the
arithmetic mean of the Companys American Depositary Shares (ADS) during the period from
October 1, 2005 and December 31, 2005 equal or greater than
U.S. dollar 15. Similarly, in order for
an employee to obtain the additional 50% options based on 2005 MBOs, the following
conditions have to be met (second tranche): achievement of 2005 MBOs, and the arithmetic
mean of the Companys American Depositary Shares (ADS) during the period from October 1,
2007 and December 31, 2007 equal or greater than U.S. dollar 24. F - 28




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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 share grants to be issued for the achievement of 2004 MBOs would be issued in two equal
installments during January 2006 and 2007. Similarly for the achievement of 2005 MBOs the
share grants would be issued in two equal installments during January 2007 and 2008. The
vesting period for these grants is considered to be reference year (2004 or 2005), as
continuation of employment after that date is not a condition for the said share grants.The share options to be issued have an exercise price of euro 8.51 (US Dollars 11.59 at
December 31, 2004 exchange rate), calculated in accordance with fiscal law in force. An
employee would be entitled to share options and additional options on the following dates:
50% of 2004 MBOs and 50% of first tranche in January 2006; remaining 50% of 2004 MBOs, 50%
of the first tranche and 50% of 2005 MBOs in January 2007; remaining 50% of 2005 MBOs and
50% of the second tranche in January 2008; remaining 50% of second tranche in January 2009.
If the employee is not on employment on the above dates, he or she is not entitled to the
remaining options. Therefore vesting dates for the options is determined to be the above
dates.The status of the share grants and options under the plan, as of December 31, 2004, is as
follows: MBO 2004Number of share grants
    
    
    143,180Number of options
    
    
    466,709Number of additional options
    
    
    233,354Total
    
    
    843,243
  On the basis of the plan the exercise price for the share grants is zero, while for
the options and additional options is euro 8.51 (USD 11.59 at December 31, 2004 exchange
rates). At December 31, 2004 the market price of Natuzzis share was euro 7.96 (USD 10.85
at December 31, 2004 exchange rates). F - 29




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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)  21.
    
    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, 2004, 2003 and 2002 was 11,976, 11,046 and 2,384,
respectively. As of December 31, 2004, the minimum annual rental commitments are as
follows: 2005
    
    
    14,7112006
    
    
    16,1262007
    
    
    16,2442008
    
    
    16,1242009
    
    
    15,924Thereafter
    
    
    2,960Total
    
    
    82,089
  Certain banks have provided guarantees at December 31, 2004 to secure payments to third
parties amounting to 6,092 (3,658 at December 31, 2003). These guarantees are unsecured and
have various maturities extending through December 31, 2005.In December, 1996, the Company and the Contract Planning Service of the Italian Ministry
of Industrial Activities 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 now projected to total approximately 69,800. According to the new
agreement, the Italian Government will contribute 35,000. Receipt of the 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 24,200.
Capital expenditures under the Natuzzi 2000 project amounted to approximately 70,755 at
December 31, 2004. The capital grants are secured by surety bonds for 26,005 from a bank.
These surety bonds are unsecured and will expire when the Italian Ministry of Industrial
Activities releases the final approvals of all investments made.In prior years the Company and certain Italian subsidiaries, on the basis of the Italian
law, for the personnel employed with the contract so called training and work enjoyed an
exemption for the social contribution due to the National Institute for Social Security
(Istituto Nazionale per la Previdenza Socialeor INPS) for a certain period. During 2004,
the European Court of Justice decided that these grants were not in conformity with
European Union law and regulations in force about competition. As a consequence of this
disposition the European Commission has established that Italy has to recover from its
enterprises all the social contribution not paid from November 1995 to May 2001 for the
above work contracts. Therefore, the Italian National Institute for Social Security has
communicated to the Company and certain Italian subsidiaries to reimburse all the social
contribution due and not paid, amounting to 16,000, by end of February 2005. The Company,
based on the advice of its legal F - 30




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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)  consultants, did not pay the amounts claimed back and, at the same time, has activated a
legal action against the National Institute for Social Security in order to obtain the
cancellation of the above request of 16,000. The Company intends to vigorously defend its
position. The Company believes that the probability of a favorable final outcome is very
high. Therefore, the Company for this liability recorded a provision of 475 in the
Consolidated Financial Statements as of December 31, 2004, as this amount is considered the
probable final liability.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
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.22.
    
    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: 2004
    
    
    2003
    
    
    2002Leather upholstered furniture
    
    
    547,923
    
    
    
    550,029
    
    
    
    623,755Fabric upholstered furniture
    
    
    117,598
    
    
    
    123,921
    
    
    
    110,997Total
    
    
    665,521
    
    
    
    673,950
    
    
    
    734,752
  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. Sales of upholstered furniture
    
    2004
    
    
    2003
    
    
    2002United States of America
    
    
    238,807
    
    
    
    280,770
    
    
    
    330,575England
    
    
    83,391
    
    
    
    80,409
    
    
    
    56,196Italy
    
    
    73,017
    
    
    
    71,277
    
    
    
    76,145Canada
    
    
    38,175
    
    
    
    37,910
    
    
    
    32,586Spain
    
    
    27,557
    
    
    
    14,045
    
    
    
    11,475France
    
    
    26,026
    
    
    
    23,393
    
    
    
    24,370Belgium
    
    
    19,956
    
    
    
    15,959
    
    
    
    17,354Germany
    
    
    19,743
    
    
    
    25,392
    
    
    
    37,936Australia
    
    
    19,414
    
    
    
    15,356
    
    
    
    13,186Holland
    
    
    13,075
    
    
    
    14,004
    
    
    
    16,858
 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) Sales of upholstered furniture
    
    2004
    
    
    2003
    
    
    2002Norway
    
    
    12,151
    
    
    
    10,084
    
    
    
    13,281Ireland
    
    
    6,419
    
    
    
    7,760
    
    
    
    16,816Other countries (none greater than 2%)
    
    
    87,790
    
    
    
    77,591
    
    
    
    87,974665,521
    
    
    
    673,950
    
    
    
    734,752
 Long-lived assets
    
    2004
    
    
    2003Italy
    
    
    149,449
    
    
    
    161,292Romania
    
    
    35,026
    
    
    
    33,277China
    
    
    25,377
    
    
    
    8,454United States of America
    
    
    25,105
    
    
    
    27,902Brazil
    
    
    24,819
    
    
    
    14,610Spain
    
    
    4,994
    
    
    
    3,375England
    
    
    4,161
    
    
    
    2,158Switzerland
    
    
    2,074
    
    
    
    2,298Other countries
    
    
    1,000
    
    
    
    827Total
    
    
    272,005
    
    
    
    254,193
  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 2004,
2003 and 2002 totalled 87,913, 95,629 and 70,391, respectively.No single customer accounted for more than 5% of net sales in 2004, 2003 or 2002. 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)  23.
    
    Cost of salesCost of sales is analyzed as follows: 2004
    
    
    2003
    
    
    2002Opening inventories
    
    
    97,518
    
    
    
    84,081
    
    
    
    87,895Purchases
    
    
    335,433
    
    
    
    355,867
    
    
    
    338,484Labor
    
    
    107,173
    
    
    
    104,495
    
    
    
    106,954Third party manufacturers
    
    
    26,943
    
    
    
    32,859
    
    
    
    38,572Other manufacturing costs
    
    
    30,136
    
    
    
    28,980
    
    
    
    29,599Closing inventories
    
    
    (112,602
    )
    
    
    (97,518
    )
    
    
    (84,081
    )Total
    
    
    484,601
    
    
    
    508,764
    
    
    
    517,423
  24.
    
    Other income (expense), netOther income (expense), net is analyzed as follows: 2004
    
    
    2003
    
    
    2002Interest income
    
    
    1,375
    
    
    
    1,701
    
    
    
    5,423Interest expense and bank commissions
    
    
    (1,961
    )
    
    
    (1,317
    )
    
    
    (3,870
    )Interest (expense) income, net
    
    
    (586
    )
    
    
    384
    
    
    
    1,553Gains (losses) on foreign exchange, net
    
    
    (4,809
    )
    
    
    64
    
    
    
    7,254Unrealized exchange
gains on domestic currency swaps
    
    
    7,101
    
    
    
    6,276
    
    
    
    2,021Gains on foreign exchange
    
    
    2,292
    
    
    
    6,340
    
    
    
    9,275Losses on securities, net
    
    
    (50
    )
    
    
    (754
    )
    
    
    Other, net
    
    
    (5,548
    )
    
    
    (2,339
    )
    
    
    3,723Total
    
    
    (3,892
    )
    
    
    3,631
    
    
    
    14,551
  Gains (losses) on foreign exchange are related to the following: 2004
    
    
    2003
    
    
    2002Net realized gains on
domestic currency swaps
    
    
    4,973
    
    
    
    25,369
    
    
    
    10,930Net realized losses on accounts
receivable and payables
    
    
    (1,052
    )
    
    
    (7,585
    )
    
    
    (8,835
    )Net unrealized gains (losses) on
accounts receivable and payable
    
    
    (10,169
    )
    
    
    (16,584
    )
    
    
    5,796Exchange difference gains (losses) on
translation of foreign financial statements
    
    
    1,439
    
    
    
    (1,136
    )
    
    
    (637
    )Total
    
    
    (4,809
    )
    
    
    64
    
    
    
    7,254
  Other, net consists of the following: F - 33




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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) 2004
    
    
    2003
    
    
    2002Impairment loss of goodwill

    
    
    (6,119
    )

    
    
    
    

    
    
    Write-off of fixed assets

    
    
    (1,311
    )

    
    
    
    

    
    
    Gain on disposal of subsidiary
    
    
    3,419

    
    
    
    
    
    
    
    Impairment loss of fixed assets

    
    
    
    

    
    
    (4,292
    )

    
    
    Pre-acquisition loss of KOL
    
    
    
    
    
    
    1,694
    
    
    
    Tax liabilities settlements
    
    
    
    
    
    
    
    
    
    
    (481
    )Tax refund
    
    
    
    
    
    
    
    
    
    
    1,314Other, net
    
    
    (1,537
    )
    
    
    259
    
    
    
    2,890Total
    
    
    (5,548
    )
    
    
    (2,339
    )
    
    
    3,723
  Impairment loss of goodwillThe impairment loss for goodwill of 6,119 is related to the Natuzzi UK Group (former KOL
Group, see note 1). Natuzzi UK Group revised its growth strategy as a consequence of the
actual and forecasted critical situation in the United Kingdom market, and the decision of
the Company to redesign its distribution strategy in this country. As a result of this
revision, the carrying value of the goodwill related to such reporting units as of December
31, 2004 resulted impaired. The fair value of such reporting unit as of December 31, 2004
was determined on the basis of the methodology so called Unlevered Discounted Cash Flow.
The comparison of the fair value with the carrying value of this reporting unit resulted in
the determination of an impairment in value of 6,119.Write-off of fixed assetsIn 2004 the Company recorded a write-off of fixed assets of 1,311 that will not be used
anymore.Gain on disposal of subsidiaryIn December 2004 the Company sold 100% of the outstanding common shares of Spagnesi S.p.A.
to a third party, for a cash consideration of 5,475. The gain recorded in the consolidated
statements of earnings in other income (expense), net is 3,419 (see also note 1 and note 27
k).Impairment loss on long-lived assetsThe Company has evaluated the impairment of long-lived assets in accordance with its
accounting policy (whenever the events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable). Based on such analysis, in 2003 the
Company recorded an impairment loss of 4,292.Pre-acquisition loss for Natuzzi United Kingdom Ltd (formerly KOL Group)The 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
27 (f)). F - 34




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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)  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.25.
    
    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 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, 2004 and 2003: 2004
    
    
    2003U.S. dollars
    
    
    66,108
    
    
    
    32,942British pounds
    
    
    51,451
    
    
    
    46,267Canadian dollars
    
    
    18,629
    
    
    
    19,044Australian dollars
    
    
    16,173
    
    
    
    10,796Norwegian kroner
    
    
    8,774
    
    
    
    Swedish kroner
    
    
    5,932
    
    
    
    Japanese yen
    
    
    2,740
    
    
    
    3,532Swiss francs
    
    
    2,240
    
    
    
    3,629Danish kroner
    
    
    940
    
    
    
    Total
    
    
    172,987
    
    
    
    116,210
 F - 35




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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 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. 2004
    
    
    2003Contract
    
    
    Unrealized
    
    
    Contract
    
    
    Unrealizedamount
    
    
    gains (losses)
    
    
    amount
    
    
    gains (losses)Assets
    
    
    159,584
    
    
    
    7,191
    
    
    
    104,206
    
    
    
    6,544Liabilities
    
    
    13,403
    
    
    
    (90
    )
    
    
    12,004
    
    
    
    (268
    )Total
    
    
    172,987
    
    
    
    7,101
    
    
    
    116,210
    
    
    
    6,276
  At December 31, 2004 and 2003, the forward exchange contracts had a net unrealized
gain of 7,101 and 6,276, respectively. This gain is recorded in other income (expense), net
in the consolidated statements of earnings.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.26.
    
    Fair value of financial instrumentsThe following table summarizes the carrying value and the estimated fair value of the
Groups financial instruments: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairvalue
    
    
    value
    
    
    value
    
    
    valueAssets:- Marketable debt securities
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5- Treasury shares
    
    
    
    
    
    
    
    
    
    
    37,828
    
    
    
    22,697Liabilities:- Long-term debt
    
    
    5,569
    
    
    
    4,829
    
    
    
    5,509
    
    
    
    4,800
  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 - 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)  27.
    
    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. The
adjustment to net earnings and shareholders' equity represents the
reversal of excess depreciation recorded under Italian GAAP on
revalued assets.(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 hedged 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 2004 and 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 commitments 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, 2004 and 2003, and US GAAP, at December
31, 2004, 2003 and 2002 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 marked 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 (see 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 - 37




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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. In 2004, the
treasury shares were cancelled (see note 19), and therefore there is no US GAAP
difference as of December 31, 2004.(e)
    
    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. A significant
portion 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, 2004 and
2003 and related consolidated statements of earnings for each of the years in the
three-year period ended December 31, 2004 are indicated below: 2004
    
    
    2003Effects
    
    
    Effects
    
    
    VariationIncrease
    
    
    Increase
    
    
    forConsolidated balance sheet
    
    (Decrease)
    
    
    (Decrease)
    
    
    2004Trade receivables, net
    
    
    (36,623
    )
    
    
    (47,263
    )
    
    
    10,640Inventories
    
    
    23,549
    
    
    
    31,194
    
    
    
    (7,645
    )Total effect on current assets (a)
    
    
    (13,074
    )
    
    
    (16,069
    )
    
    
    2,995Accounts payable-trade
    
    
    (4,625
    )
    
    
    (6,654
    )
    
    
    2,029Income taxes
    
    
    (2,535
    )
    
    
    (1,723
    )
    
    
    (812
    )Total effect on current liabilities (b)
    
    
    (7,160
    )
    
    
    (8,377
    )
    
    
    1,217Total effect on shareholders equity (a-b)
    
    
    (5,914
    )
    
    
    (7,692
    )
    
    
    1,778
 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) Consolidated statement of earnings
    
    2004
    
    
    2003
    
    
    2002Net sales
    
    
    10,640
    
    
    
    741
    
    
    
    (13,547
    )Cost of sales
    
    
    (7,645
    )
    
    
    327
    
    
    
    8,057Gross profit
    
    
    2,995
    
    
    
    1,068
    
    
    
    (5,490
    )Selling expenses
    
    
    (2,029
    )
    
    
    414
    
    
    
    1,625Operating income
    
    
    966
    
    
    
    1,482
    
    
    
    (3,865
    )Income taxes
    
    
    812
    
    
    
    (565
    )
    
    
    741Effect on net earnings
    
    
    1,778
    
    
    
    917
    
    
    
    (3,124
    )
  (f)
    
    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 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 did 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 are 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 purposes of net earnings, but is considered for the purpose of computing goodwill.
The following pre-acquisition amounts of KOL were 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
    )
 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) Other income, net
    
    
    1,481Loss before taxes
    
    
    (551
    )Income taxes
    
    
    551Net loss
    
    
    
  (g)
    
    Under Italian GAAP, the Company amortizes the goodwill arising from business
acquisitions on a straight-line basis over a period of five years. US GAAP states that
goodwill 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 No. 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 SFAS 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, 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
    )
    
    
    
    
    
    
    1,224Acquisition of Divani Due
    
    
    1,251
    
    
    
    1,251
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    (2,647
    )
    
    
    (512
    )
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    2,309Impairment Losses
    
    
    (9,179
    )
    
    
    (6,119
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,060
    )Balance at December 31, 2004
    
    
    1,251
    
    
    
    4,493
    
    
    
    5,629
    
    
    
    
    
    
    
    (1,914
    )
    
    
    
    
    
    
    473
  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, as at December 31, 2004 and 2003 goodwill is impaired to the
extent of 9,179 and 528, respectively.The impairment loss for goodwill of 9,179 is related to Natuzzi UK Group (formerly KOL
Group, see notes 1 and 24). Natuzzi UK Group revised its growth strategy as a
consequence F - 40




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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)  of the actual and forecasted critical situation in the United Kingdom market, and the
decision of the Company to redesign its distribution strategy in this country. As a
result of this revision, the carrying value of the goodwill related to such reporting
unit as of December 31, 2004 was determined on the basis of the methodology called
Unlevered Discounted Cash Flow. The comparison of the fair value with the carrying
value of this reporting unit resulted in the determination of an impairment in value
of 9,179. The difference between impairment recognized under Italian
GAAP (6,119) and U.S. GAAP (9,179) is attributable to the
classification and amortization differences discussed above.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: Net earnings
    
    2004
    
    
    2003
    
    
    2002Net earnings under US GAAP, as reported
    
    
    18,753
    
    
    
    38,027
    
    
    
    91,994Add back: amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    Net earnings under US GAAP, adjusted
    
    
    18,753
    
    
    
    38,027
    
    
    
    91,994Basic earning per share
    
    
    0.34
    
    
    
    0.70
    
    
    
    1.68Diluted earning per share
    
    
    0.34
    
    
    
    0.70
    
    
    
    1.68
  (h)
    
    Share grants and optionsUnder Italian GAAP the Company does not record in consolidated statement of
earnings the compensation expense related to share based compensation plans.Under US GAAP, the provisions of Statement of Financial Accounting Standards No. 123
(SFAS No. 123), Accounting for Stock Based Compensation,allow entities to continue to
apply the provisions of Accounting Principles Board Opinion (APB) No. 25 Accounting
for Stock Issued to Employees for the accounting of compensation expense for its
share based compensation plans, and requires certain pro-forma disclosures for
employee share options granted as if the fair value based methods defined in SFAS No.
123 had been applied. For US GAAP purpose, the Company has elected to apply the
provisions of APB Opinion No. 25 and related interpretations and to provide the
pro-forma disclosure provisions of SFAS No. 123 for its share grants and options plan.
Compensation expense is recorded in the financial statements on the measurement date
only if the market value of the underlying shares exceeds the exercise price.For US GAAP purposes, the Company recognizes compensation
expense based upon the intrinsic value of awards as of the date when
both the exercise price and the number of shares is determinable (the
"measurement date"). From the date of grant until the measurement
date occurs, compensation expense is determined based on the
intrinsic value of the award at each reporting date. For US GAAP
purposes, in 2004 the Company recorded a charge of 1,140.Under current Italian tax legislation, issuance of shares to satisfy share based
compensation plans does not result in a deduction for tax purposes and, as such, no
deferred taxation impacts have been recognized for US GAAP.The average fair value of share, option and additional option granted during 2004 was
approximately euro 7.86 per share, euro 2.05 per option and euro 0.02 per additional 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)  option, respectively. The fair value of each share, option and additional option is
estimated using a pricing binomial model, that considers the following assumptions or
variables: Expected life and performance related conditions
    
    2 - 5.3 yearsExpected volatility of the underlying share
    
    
    23
    %Expected dividend yield of the underlying share
    
    
    2
    %Risk-free interest rate
    
    
    2.43 - 3.79
    %
  The Companys pro forma net earnings for the year ended December 31, 2004,
compensation expenses, relating to Natuzzis share based compensation plan, have been
recorded in accordance with SFAS No. 123 and are presented below: Net income in accordance with US GAAP, as reported
    
    
    18,753Stock-based employee compensation expense, as reported
    
    
    1,140Stock-based employee compensation expense under fair value
    
    
    (1,284
    )Pro forma net earnings
    
    
    18,609
  The Companys pro forma earnings per share for the year ended December 31, 2004,
compensation expenses, relating to Natuzzis share based compensation plan, have been
recorded in accordance with SFAS 123 and are presented below: As reported
    
    
    Pro-formaBasic earnings per share
    
    
    0.34
    
    
    
    0.34Diluted earnings per share
    
    
    0.34
    
    
    
    0.34
  (i)
    
    During 2004 and 2003 the Company under Italian GAAP has recognized impairment
losses on tangible and intangible assets of 8,063 and of 4,292, respectively, 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 costs should be
recorded as a reduction of net sales. Such expenses include advertising contributions
paid to resellers which amounted at December 31, 2004, 2003 and 2002 to 3,376, 3,284
and 2,432, respectively.(k)
    
    During 2004, under Italian GAAP the Company has recognized the gain on
disposal of the subsidiary Spagnesi S.p.A. (see also note 1 and 24), amounting to
3,419, as part of non operating income in the caption other income (expense), net.
Under US GAAP, the disposal 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)  in not considered a discontinued operation, and the gain should be recorded as part
of operating income. The calculation of net earnings and shareholders equity in conformity with US GAAP is as
follows: 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)  Reconciliation of net earnings: 2004
    
    
    2003
    
    
    2002Net earnings under Italian GAAP
    
    
    18,353
    
    
    
    37,300
    
    
    
    91,438Adjustments to reported income:(a) Revaluation of property,
plant and equipment
    
    
    27
    
    
    
    27
    
    
    
    44(b) Derivative and hedging activities
    
    
    
    
    
    
    (2,713
    )
    
    
    3,783(c) Government grants
    
    
    612
    
    
    
    673
    
    
    
    1,269(e) Revenue recognition
    
    
    966
    
    
    
    1,482
    
    
    
    (3,865
    )(g) Goodwill and intangible assets
    
    
    (925
    )
    
    
    1,033
    
    
    
    105(h) Share grants and options
    
    
    (1,140
    )
    
    
    
    
    
    
    Effect of minority interests on
US GAAP adjustments
    
    
    
    
    
    
    
    
    
    
    Tax effect of US GAAP adjustments
    
    
    860
    
    
    
    225
    
    
    
    (780
    )Net earnings in conformity with US GAAP
    
    
    18,753
    
    
    
    38,027
    
    
    
    91,994Basic earnings per share in conformity
with US GAAP
    
    
    0.34
    
    
    
    0.70
    
    
    
    1.68Diluted earnings per share in conformity
with US GAAP
    
    
    0.34
    
    
    
    0.70
    
    
    
    1.68
  Reconciliation of shareholders equity: 2004
    
    
    2003Shareholders equity under Italian GAAP
    
    
    487,933
    
    
    
    515,063(a) Revaluation of property, plant and equipment
    
    
    (644
    )
    
    
    (671
    )(c) Government grants
    
    
    (18,608
    )
    
    
    (19,220
    )(d) Treasury shares
    
    
    
    
    
    
    (37,828
    )(e) Revenue recognition
    
    
    (8,449
    )
    
    
    (9,415
    )(g) Goodwill and intangible assets
    
    
    2,387
    
    
    
    3,312Tax effect of US GAAP adjustments
    
    
    1,916
    
    
    
    1,056Shareholders equity in conformity with US GAAP
    
    
    464,535
    
    
    
    452,297
  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 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)  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 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. 150: F - 45




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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 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 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.SFAS No. 151:In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151), which is an
amendment of Accounting Research Bulletin No. 43, Inventory Pricing. SFAS 151 clarifies
that abnormal amounts of idle facility expense, freight, handling costs and wasted
materials (spoilage) should be recognized as current period charges. The provisions of
SFAS 151 are effective for inventory costs incurred beginning January 1, 2006, and are
applied on a prospective basis. The Company does not expect the adoption of SFAS 151 to
have a significant impact on the Companys consolidated financial statements.SFAS No. 153:In December 2004, the FASB issued SFAS Statement No. 153, Exchanges of Nonmonetary Assets,
which eliminates an exception in APB 29 for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. This Statement will be effective for the Company for
nonmonetary asset exchanges occurring on or after January 1, 2006. Application of this
Statement is not expected to have an impact on the consolidated financial statements of the Company.SFAS No. 123 R:In December 2004, the FASB issued SFAS No.123 (revised 2004), Share-Based Payment, which is
a revision of SFAS No.123, Accounting for Stock-Based Compensation. SFAS No.123(R)
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS
No. 95, Statement of Cash Flows. Generally, the approach in SFAS No.123(R) is similar to
the approach described in SFAS No. 123. However, SFAS No.123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer an
alternative. Also, SFAS No.123(R) provides significant additional guidance regarding the
valuation of employee stock options. While SFAS No.123(R) does not require the use of a
specific option-pricing model, it does indicate that lattice models usually will provide a
better estimate of fair value of an employee stock option. The company currently prepares
the pro forma disclosures required under SFAS No.123 using a binomial model. F - 46




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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)  SFAS No.123(R) must be adopted no later than January 1, 2006. Early adoption is permitted
in periods in which financial statements have not yet been issued. SFAS No.123(R) permits
public companies to adopt its requirements using one of two methods:  §
    
    A modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No.123(R)
for all share-based payments granted or modified after the effective date and (b)
based on the requirements of SFAS No.123 for all awards granted to employees prior
to the effective date of SFAS No.123(R) that remain unvested on the effective
date.§
    
    A modified retrospective method that includes the requirements of the
modified prospective method described above, but also permits entities to restate
based on the amounts previously recognized under SFAS No.123 for purposes of pro
forma disclosures of either (a) all prior periods presented or (b) prior interim
periods of the year of adoption.  As permitted by SFAS No.123, the company currently accounts for share-based payments to
employees using the APB Opinion No. 25 intrinsic-value method. Accordingly, the adoption of
the SFAS No.123(R) fair value method will affect the Companys
results of operations. The Company has not yet determined the impact,
if any, that the adoption of SFAS No. 123(R) will have on the
Company's consolidated financial 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 have any VIE for consolidation.FASB Interpretation No. 47: F - 47




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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)  In March 2005, the FASB issued FASB Interpretation (FIN) No. 47 Accounting for Conditional
Asset Retirement Obligations, which clarifies that a liability (at fair value) must be
recognized for asset retirement obligations when it has been incurred if the amount can be
reasonably estimated, even if settlement of the liability is conditional on a future event.
FIN 47 is effective as of December 31, 2005. The Company currently does not have any asset
retirement obligations.28.
    
    Subsequent eventsDuring the first quarter of 2005, unfavorable currency conditions and persistent pricing
pressure affecting the US market in particular, as well as the modest economic growth still
characterizing the European Area, continued to affect the demand for Natuzzis products. In
light of the above and in consideration of the decreasing order flow for Natuzzi branded
products and the ongoing efforts of the Company to become more efficient and competitive,
the Board of Directors in a meeting held on May 18, 2005 approved a new restructuring plan.
The plan includes a temporary work force reduction of 1,320 positions, by the end of 2005,
in all departments across the Company, with a focus on reducing manufacturing costs in
Italy, increasing overall efficiencies and improving productivity F - 48




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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, 2005




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Exhibit Index  1.1
    
    English translation of the by-laws (Statuto) of the Company, as amended and restated as of
July 23, 2004.2.1
    
    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 2002.13.1
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.