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UNITED STATES 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
 For the Fiscal Year Ended: December 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from           to
 or
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Date
of event requiring this shell company report
 For the Transition Period from           to
 Commission file number: 1-11854
 NATUZZI S.p.A.
  NATUZZI S.p.A.
  Italy
  Via Iazzitiello 47, 70029 Santeramo, Italy
 
  Name of each class
    
    Name of each exchange on which registeredAmerican Depositary Shares 
Ordinary Shares with a par value of 1.0 each
    
    New York Stock Exchange
New York Stock Exchange*
 * Not for trading, but only in connection with the registration of the American
Depositary Shares
 -
    
    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, 2006: 54,738,538 Ordinary
Shares
  o þ
  o þ
   þ o
  o þ o
  o þ
  o þ




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##### Table of Contents



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
    
    
    8Item 4. Information on the Company
    
    
    9Introduction
    
    
    9Organizational Structure
    
    
    9Strategy
    
    
    10Manufacturing
    
    
    13Products
    
    
    18Markets
    
    
    19Incentive Programs and Tax Benefits
    
    
    23Management of Exchange Rate Risk
    
    
    24Trademarks and Patents
    
    
    24Regulation
    
    
    25Environmental Regulatory Compliance
    
    
    25Insurance
    
    
    25Description of Properties
    
    
    26Capital Expenditures
    
    
    27Item 4A. Unresolved Staff Comments
    
    
    27Item 5. Operating and Financial Review and Prospects
    
    
    27Critical Accounting Policies
    
    
    27Results of Operations
    
    
    29Liquidity and Capital Resources
    
    
    37Contractual Obligations and Commercial Commitments
    
    
    38
  i




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TABLE OF CONTENTS
(Continued)
 PageRelated Party Transactions
    
    
    38Product and Retail Development
    
    
    39Trend Information and Guidance
    
    
    39New Accounting Standards under Italian and U.S. GAAP
    
    
    40Item 6. Directors, Senior Management and Employees
    
    
    43Compensation of Directors and Officers
    
    
    48Share Ownership
    
    
    48Statutory Auditors
    
    
    48External Auditors
    
    
    49Employees
    
    
    49Item 7. Major Shareholders and Related Party Transactions
    
    
    50Major Shareholders
    
    
    50Related Party Transactions
    
    
    51Item 8. Financial Information
    
    
    51Consolidated Financial Statements
    
    
    51Export Sales
    
    
    51Legal and Governmental Proceedings
    
    
    51Dividends
    
    
    52Item 9. The Offer and Listing
    
    
    53Trading Markets and Share Prices
    
    
    53Item 10. Additional Information
    
    
    55By-laws
    
    
    55Certain Contracts
    
    
    63Exchange Controls
    
    
    63Taxation
    
    
    64Documents on Display
    
    
    69Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    69Item 12. Description of Securities Other than Equity Securities
    
    
    71
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TABLE OF CONTENTS
 PagePART II
    
    
    72Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    72Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    72Item 15.T Controls and Procedures
    
    
    72Item 16. [Reserved]
    
    
    74Item 16.A Audit committee financial expert
    
    
    74Item 16.B Code of Ethics
    
    
    74Item 16.C Principal Accountant Fees and Services
    
    
    74Item 16.D Exemptions from the Listing Standards for Audit Committees
    
    
    76Item 16.E Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    76PART III
    
    
    77Item 17. Financial Statements
    
    
    77Item 18. Financial Statements
    
    
    77Item 19. Exhibits
    
    
    77Exhibit 1.1Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1
   iii




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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
  
       1




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 
 Selected Financial Data
    2




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Year Ended At December 31,2006
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(millions ofdollars, except
    
    
    (millions of euro, except for Ordinary Share)per OrdinaryShare)(1)Income Statement Data:Amounts in accordance with Italian GAAP :Net sales:Leather- and fabric-upholstered furniture
    
    $
    871.3
    
    
    
    660.2
    
    
    
    594.8
    
    
    
    665.5
    
    
    
    674.0
    
    
    
    734.7Other(2)
    
    
    99.2
    
    
    
    75.2
    
    
    
    75.1
    
    
    
    87.9
    
    
    
    95.6
    
    
    
    70.4Total net sales
    
    
    970.5
    
    
    
    735.4
    
    
    
    669.9
    
    
    
    753.4
    
    
    
    769.6
    
    
    
    805.1Cost of sales
    
    
    (647.4
    )
    
    
    (490.5
    )
    
    
    (459.4
    )
    
    
    (484.5
    )
    
    
    (508.8
    )
    
    
    (517.4
    )Gross profit
    
    
    323.1
    
    
    
    244.9
    
    
    
    210.5
    
    
    
    268.9
    
    
    
    260.8
    
    
    
    287.7Selling expenses
    
    
    (245.8
    )
    
    
    (186.2
    )
    
    
    (182.2
    )
    
    
    (188.2
    )
    
    
    (179.3
    )
    
    
    (145.4
    )General and administrative expenses
    
    
    (55.6
    )
    
    
    (42.2
    )
    
    
    (43.0
    )
    
    
    (40.7
    )
    
    
    (39.2
    )
    
    
    (40.5
    )Operating income (loss)
    
    
    21.7
    
    
    
    16.5
    
    
    
    (14.7
    )
    
    
    40.0
    
    
    
    42.3
    
    
    
    101.8Other income (expense), net(3) (4) (5)
    
    
    3.8
    
    
    
    2.8
    
    
    
    3.0
    
    
    
    (3.9
    )
    
    
    3.7
    
    
    
    14.5Earnings (loss) before taxes and minority interests
    
    
    25.5
    
    
    
    19.3
    
    
    
    (11.7
    )
    
    
    36.1
    
    
    
    46.0
    
    
    
    116.3Income taxes
    
    
    (9.4
    )
    
    
    (7.1
    )
    
    
    (3.1
    )
    
    
    (17.6
    )
    
    
    (8.5
    )
    
    
    (25.0
    )Earnings (loss) before minority interests
    
    
    16.1
    
    
    
    12.2
    
    
    
    (14.8
    )
    
    
    18.5
    
    
    
    37.5
    
    
    
    91.3Minority interest
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    0.1Net earnings (loss)
    
    
    16.2
    
    
    
    12.3
    
    
    
    (14.6
    )
    
    
    18.4
    
    
    
    37.3
    
    
    
    91.4Net earnings (loss) per Ordinary Share
    
    
    0.30
    
    
    
    0.23
    
    
    
    (0.27
    )
    
    
    0.34
    
    
    
    0.68
    
    
    
    1.67Amounts in accordance with U.S. GAAP :Net earnings (loss)
    
    
    19.1
    
    
    
    14.5
    
    
    
    (6.9
    )
    
    
    18.8
    
    
    
    38.0
    
    
    
    92.0Net earnings (loss) per Ordinary Share (basic and
diluted)
    
    $
    0.34
    
    
    
    0.26
    
    
    
    (0.13
    )
    
    
    0.34
    
    
    
    0.70
    
    
    
    1.68Weighted average number of Ordinary Shares
Outstanding
    
    
    54,733,796
    
    
    
    54,733,796
    
    
    
    54,681,628
    
    
    
    54,681,628
    
    
    
    54,681,628
    
    
    
    54,681,628Balance Sheet Data :Amounts in accordance with Italian GAAP :Current assets
    
    $
    537.5
    
    
    
    407.3
    
    
    
    384.5
    
    
    
    389.4
    
    
    
    383.1
    
    
    
    402.6Total assets
    
    
    890.4
    
    
    
    674.7
    
    
    
    664.9
    
    
    
    673.2
    
    
    
    692.4
    
    
    
    674.5Current liabilities
    
    
    175.5
    
    
    
    133.0
    
    
    
    136.2
    
    
    
    131.5
    
    
    
    125.2
    
    
    
    128.7Long-term debt
    
    
    3.2
    
    
    
    2.4
    
    
    
    3.6
    
    
    
    5.0
    
    
    
    4.2
    
    
    
    3.6Minority interest
    
    
    0.8
    
    
    
    0.6
    
    
    
    0.7
    
    
    
    0.9
    
    
    
    0.9
    
    
    
    0.5Shareholders equity
    
    
    631.9
    
    
    
    478.9
    
    
    
    473.0
    
    
    
    487.9
    
    
    
    515.1
    
    
    
    495.8Amounts in accordance with U.S. GAAP :Shareholders equity
    
    $
    618.1
    
    
    
    468.4
    
    
    
    453.7
    
    
    
    464.5
    
    
    
    452.3
    
    
    
    432.3
 
 1)
    
    Amounts are translated into U.S. dollars by converting the euro amounts into U.S. dollars at
the Noon Buying Rate for euros on December 29, 2006 of U.S.$ 1.3197 per euro.2)
    
    Sales included under Other principally consist of sales of polyurethane foam and leather to
third parties and sales of living room accessories.3)
    
    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  2006 Compared to 2005, 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.4)
    
    Other income (expense), net, in 2005 was affected by the change in accounting principles for the
translation of foreign subsidiaries financial statements under Italian GAAP. See Note 3 (d) to the
Consolidated Financial Statements. In addition, other income (expense), net, in 2005 was positively
affected by revenues for capital grants. See Note 24 to the Consolidated Financial Statements
included in Item 18 of this annual report.5)
    
    Other income (expense), net, in 2006 was negatively affected by the provisions for contingent
liabilities. See Note 24 to the Consolidated Financial Statements included in Item 18 of this
annual report.
  3




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Exchange Rates
    Year:
    
    Average(1)
    
    
    At Period End2002
    
    
    0.9495
    
    
    
    1.04852003
    
    
    1.1411
    
    
    
    1.25972004
    
    
    1.2478
    
    
    
    1.35382005
    
    
    1.2400
    
    
    
    1.18422006
    
    
    1.2661
    
    
    
    1.3197
 Month ending:
    
    High
    
    
    Low29-Dec-06
    
    
    1.3327
    
    
    
    1.307331-Jan-07
    
    
    1.3286
    
    
    
    1.290428-Feb-07
    
    
    1.3246
    
    
    
    1.293330-Mar-07
    
    
    1.3374
    
    
    
    1.309430-Apr-07
    
    
    1.3660
    
    
    
    1.336331-May-07
    
    
    1.3616
    
    
    
    1.3419
 
 (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.
  
 Risk Factors
  The Group has a recent history of losses; the Groups future profitability and financial
condition depend on its ability to successfully restructure its operations  
  4




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 
  Demand for furniture is cyclical and may fall in the future 
  The Group operates principally in a niche area of the furniture market
 The furniture market is highly competitive 
   5




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Fluctuations in currency exchange rates may adversely affect the Groups results 
 The Group faces risks associated with its international operations 
 The price of the Groups principal raw material is difficult to predict
 The Groups past results and operations have significantly benefited from government incentive
programs, which may not be available in the future
  6




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The Group is dependent on qualified personnel
 Investors may face difficulties in protecting their rights as shareholders or holders of ADSs Statuto
 The Group has material weaknesses in its internal control over financial reporting 
 Control of the Company 
  7




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Forward Looking Information
    8




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Item 4. Information on the Company
 
 Introduction
  Divani & Divani by Natuzzi Divani & Divani
by Natuzzi Natuzzi Store Natuzz Divani & Divani by Natuzzi
 Industrie Natuzzi S.p.A. Natuzzi S.p.A. Statuto società per azioni
  
 Organizational Structure
  Percentage ofName
    
    ownership
    
    Registered office
    
    ActivityItalsofa Bahia Ltd
    
    97.99
    
    Bahia, Brazil
    
    (1)Minuano Nordeste S.A.
    
    100.00
    
    Pojuca, Brazil
    
    (1)Italsofa Shanghai Ltd
    
    100.00
    
    Shanghai, China
    
    (1)Softaly Shanghai Ltd
    
    100.00
    
    Shanghai, China
    
    (1)Italsofa Romania
    
    100.00
    
    Baia Mare, Romania
    
    (1)Natco S.p.A.
    
    99.99
    
    Bari, Italy
    
    (2)I.M.P.E. S.p.A.
    
    90.83
    
    Qualiano, Italy
    
    (3)Nacon S.p.A.
    
    100.00
    
    Bari, Italy
    
    (4)Lagene S.r.l.
    
    100.00
    
    Bari, Italy
    
    (4)
  9




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Percentage ofName
    
    ownership
    
    Registered office
    
    ActivityNatuzzi Americas Inc.
    
    100.00
    
    High Point, NC, USA
    
    (4)Natuzzi Iberica S.A.
    
    100.00
    
    Madrid, Spain
    
    (4)Natuzzi Switzerland AG
    
    97.00
    
    Kaltbrunn, Switzerland
    
    (4)Natuzzi Nordic
    
    100.00
    
    Copenaghen, Denmark
    
    (4)Natuzzi Benelux S.A.
    
    100.00
    
    Geel, Belgium
    
    (4)Natuzzi Germany Gmbh
    
    100.00
    
    Dusseldorf, Germany
    
    (4)Natuzzi Sweden AB
    
    100.00
    
    Stockholm, Sweden
    
    (4)Natuzzi Japan KK
    
    100.00
    
    Tokyo, Japan
    
    (4)Natuzzi Services Limited
    
    100.00
    
    London, UK
    
    (4)La Galleria Limited
    
    100.00
    
    London, UK
    
    (7)Natuzzi Netherlands Holding
    
    100.00
    
    Amsterdam, Holland
    
    (5)Natuzzi United Kingdom Limited
    
    100.00
    
    London, UK
    
    (7)Natuzzi Trade Service S.r.l.
    
    100.00
    
    Bari, Italy
    
    (6)Kingdom of Leather Limited
    
    100.00
    
    London, UK
    
    (7)Italholding S.r.l.
    
    100.00
    
    Bari, Italy
    
    (5)
 (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)
    
    Dormant
  
 Strategy
  Improving efficiency and reducing operating costs
  10




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Cassa Integrazione Guadagni
  Brand Portfolio Strategy
 i) The Natuzzi brand
   ii) The Italsofa brand
  11




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Geographical expansion
 Retail program and brand development Natuzzi Stores Natuzzi Galleries Natuzzi Stores Divani
and Divani by Natuzzi Natuzzi Galleries Natuzzi Stores Natuzzi Galleries Natuzzi Stores Natuzzi
 Product diversification
 ®
  12




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Manufacturing
         13




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TM TM
     Raw Materials
 i.e
  14




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15




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Supply-chain Management
 Procurement Policies and Operations integration.
 Production planning (order management, production, procurement)
     16




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Load optimization.
    17




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Transportation
   
 Products
      1
 
 1
    
    Last update December 2006
  18




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Markets
 Divani & Divani by Natuzzi Natuzzi Divani & Divani by Natuzzi Natuzzi Stores
  :
  19




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Leather- and Fabric -Upholstered Furniture Net Sales (millions of euro)
 2006
    
    
    2005
    
    
    2004U.S. and the
Americas(1)
    
    
    245.4
    
    
    
    37.2
    %
    
    
    241.7
    
    
    
    40.6
    %
    
    
    279.4
    
    
    
    42.0
    %Europe
    
    
    366.6
    
    
    
    55.5
    %
    
    
    313.2
    
    
    
    52.7
    %
    
    
    340.1
    
    
    
    51.1
    %Rest of the World
    
    
    48.3
    
    
    
    7.3
    %
    
    
    39.9
    
    
    
    6.7
    %
    
    
    46.0
    
    
    
    6.9
    %Total
    
    
    660.3
    
    
    
    100.0
    %
    
    
    594.8
    
    
    
    100.0
    %
    
    
    665.5
    
    
    
    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).
 Leather- and Fabric -Upholstered Furniture Net Sales (in seats) (2)
 2006
    
    
    2005
    
    
    2004U.S. and the Americas(1)
    
    
    1,364,873
    
    
    
    45.2
    %
    
    
    1,386,329
    
    
    
    49.3
    %
    
    
    1,564,901
    
    
    
    51.0
    %Europe
    
    
    1,449,696
    
    
    
    48.1
    %
    
    
    1,262,887
    
    
    
    44.9
    %
    
    
    1,319,740
    
    
    
    43.0
    %Rest of the World
    
    
    202,133
    
    
    
    6.7
    %
    
    
    162,523
    
    
    
    5.8
    %
    
    
    186,330
    
    
    
    6.0
    %Total
    
    
    3,016,702
    
    
    
    100.0
    %
    
    
    2,811,739
    
    
    
    100.0
    %
    
    
    3,070,971
    
    
    
    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.
 1 United States and the Americas.  
     20




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2 Europe
 2.1 Europe (excluding Italy).  
  Divani & Divani by Natuzzi Natuzzi Natuzzi Natuzzi Stores
   Natuzzi Galleries
 2.2 Italy  
 Divani & Divani by Natuzzi Divani & Divani by Natuzzi Natuzzi Store
  21




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3 Rest of the World
 3.1 Asia-Pacific.      
   3.2 Middle East
 Customer Credit Management
  22




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Advertising 
  
 Incentive Programs and Tax Benefits
         
   Gazzetta Ufficiale della Repubblica Italiana
  23




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University of Lecce Polytechnic University of Bari   
  
   
  
 Management of Exchange Rate Risk
  
 Trademarks and Patents
 Divani & Divani by Natuzzi
  24




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Regulation
  
 Environmental Regulatory Compliance
  
 Insurance
   25




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Description of Properties
  Size(approximatesquareLocation
    
    meters)
    
    FunctionSanteramo in Colle (BA)  Italy
    
    
    29,000
    
    
    Headquarters, prototyping, manufacturing of wooden
frames, leather cutting, sewing and product assembly,
showroom (Owned)Santeramo in Colle, Iesce (BA)
 Italy
    
    
    27,500
    
    
    Sewing and product assembly (Owned)Matera la martella  Italy
    
    
    38,000
    
    
    Fabric cutting, general warehouse of sofas and
accessory furnishing (Owned)Matera Iesce  Italy
    
    
    12,500
    
    
    Leather cutting, sewing and product assembly (Owned)Altamura (BA) via dellAvena 
Italy
    
    
    5,800
    
    
    Leather cutting, sewing (Owned)Altamura (BA) via Graviscella 
Italy
    
    
    8,500
    
    
    Product assembly (Owned)Altamura (BA) c.da Fornello
Italy
    
    
    7,000
    
    
    Warehouse (Owned)Altamura (BA) via della Paglia
 Italy
    
    
    3,300
    
    
    Training school, warehouse (Owned)Altamura (BA) NDS  Italy
    
    
    3,700
    
    
    Accessory Furnishings warehouse (Owned)Ginosa (TA)  Italy
    
    
    14,500
    
    
    Sewing and product assembly (Owned)Laterza (TA)  Italy
    
    
    10,000
    
    
    Leather cutting (Owned)Laterza (TA)  Italy
    
    
    13,000
    
    
    Fabric and lining cutting, leather warehouse (Owned)Laterza (TA)  Italy
    
    
    20,000
    
    
    Accessory Furnishing Packaging and Warehouse (Owned)Qualiano (NA)  Italy
    
    
    12,000
    
    
    Polyurethane foam production (Owned)Pozzuolo del Friuli (UD)  Italy
    
    
    20,000
    
    
    Leather dyeing and finishing (Owned)Montebello (VI)  Italy
    
    
    5,500
    
    
    Leather warehouse (Leased)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 production and wood and wooden
product manufacturing (Owned)Shanghai  China
    
    
    43,500
    
    
    Leather cutting, sewing and product assembly,
manufacturing of wooden frames, polyurethane foam
shaping, fiberfill production (Owned)Shanghai (Fengpu)  China
    
    
    14,000
    
    
    Leather and fabric cutting, leather and fabric
warehouse (Leased)Salvador de Bahia (Bahia) 
Brazil
    
    
    28,000
    
    
    Leather cutting, sewing and product assembly,
manufacturing of wooden frames, polyurethane foam
shaping, fiberfill production (Owned)Pojuca (Bahia)  Brazil
    
    
    30,000
    
    
    Leather cutting, sewing and product assembly,
manufacturing of wooden frames, wooden feet,
polyurethane foam shaping, fiberfill production
(Owned)
   
  26




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##### Table of Contents



Capital Expenditures
  Year ending December 31,(millions of Euro)2006
    
    
    2005
    
    
    2004Land and plants
    
    
    2.4
    
    
    
    3.4
    
    
    
    9.5Equipment
    
    
    7.0
    
    
    
    10.1
    
    
    
    17.7Other assets
    
    
    10.5
    
    
    
    11.6
    
    
    
    27.2Total
    
    
    19.9
    
    
    
    25.1
    
    
    
    54.4
 Natuzzi
Stores Natuzzi Galleries  Natuzzi
Stores Natuzzi Galleries
 
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
  
 Critical Accounting Policies
 Use of Estimates
  27




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##### Table of Contents



Recoverability of Long-lived Assets 
 Allowances for Returns and Discounts
 Allowance for Doubtful Accounts
 Revenue Recognition
  28




---



##### Table of Contents



Results of Operations
 Summary    .
    
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    66.7
    
    
    
    68.6
    
    
    
    64.3Gross profit
    
    
    33.3
    
    
    
    31.4
    
    
    
    35.7Selling expenses
    
    
    25.3
    
    
    
    27.2
    
    
    
    25.0General and administrative expenses
    
    
    5.7
    
    
    
    6.4
    
    
    
    5.4Operating income (loss)
    
    
    2.3
    
    
    
    (2.2
    )
    
    
    5.3Other income (expense), net
    
    
    0.4
    
    
    
    0.4
    
    
    
    (0.5
    )Income taxes
    
    
    1.0
    
    
    
    0.4
    
    
    
    2.4Net earnings (loss)
    
    
    1.7
    
    
    
    (2.2
    )
    
    
    2.4
  2006 Compared to 2005   
  
    
  29




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##### Table of Contents



     
    
 Divani & Divani by Natuzzi Natuzzi Stores  
      30




---



##### Table of Contents




  
  
   Natuzzi stores
  
  
    
  
 -
    
    A net realized gain of 0.7 million in 2006 (compared to a loss of 4.3 million in
2005) on domestic currency swaps due to the difference between the forward rates of the
domestic currency swaps and the spot rates at which the domestic currency swaps were closed
(the Group uses the forward rate to hedge its price risks against unfavourable exchange
rate variations);
 -
    
    A net realized loss of 8.2 million in 2006 (compared to a gain of 5.4 million in
2005), from the difference between invoice exchange rates and collection/payment exchange
rates;-
    
    A net unrealized gain of 2.8 million in 2006 (compared to an unrealized gain of
2.1 million in 2005) on accounts receivable and payable;-
    
    An unrealized gain of 5.5 million in 2006 (compared to an unrealized loss of 4.8
million in 2005), from the mark-to-market of domestic currency swaps.
  
  31




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##### Table of Contents



-
    
    Revenue from capital grants, which amounted to 4.4 million in 2005 and nil in 2006.
In 2005, Natuzzi received under the aforementioned project Natuzzi 2000 additional
capital grants amounting to 7.9 million. A part of these capital grants, amounting to 4.4
million, was related to depreciation of property, plant and equipment recorded in the
consolidated statements of earnings in years prior to 2005. Therefore, for this reason, the
amount of 4.4 million was classified under the caption other income (expense), net.-
    
    In 2006 the Company has charged to other income (expense), net the amount of  5.8
million for the estimated probable liabilities related to some claims (including tax
claims) and legal actions. In 2005 the provisions for contingent liabilities were  0.6
million.-
    
    Other expenses deriving from the write-off of fixed assets, which decreased from
2.8 million in 2005 to nil in 2006.-
    
    Revenue for export incentive benefits, which increased to  3.4 million from 2.1
million reported in 2005. This incentive is measured on the basis of the export sales
realized by the subsidiaries Italsofa Bahia Ltd and Minuano Nordeste S.A.-
    
    A payment of  1.1 million received in 2006 from the landlord of a store for the
termination of the related lease contract before the term specified in the lease agreement.
In 2005 the Group recorded an expense of 0.6 million as a provision established for the
penalties that the Group expected to pay to landlords of several stores located in England
for the early termination of the related operating leases.
      32




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##### Table of Contents



   
      
 2005 Compared to 2004  
 
  
   
  
  33




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##### Table of Contents



Divani & Divani by Natuzzi Natuzzi Stores Kingdom of Leather 
     
   
 
  Natuzzi Galleries Natuzzi Stores
  34




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##### Table of Contents




  
    
  
 -
    
    A net realized loss of 4.3 million in 2005 (compared to a gain of 5.0 million in
2004) 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 hedge its price risks against unfavorable exchange
variations);-
    
    A net realized gain of 5.4 million in 2005 (compared to a loss of 1.0 million in
2004), from the difference between the invoice exchange rate and the collection/payment
exchange rate;
 -
    
    During 2005 the Italian Accounting Profession changed the Italian accounting
standard regarding the translation of the financial statements of a foreign subsidiary (see
Note 3(d) to the Consolidated Financial Statements in Item 18 of this annual report).
According to the new accounting principle, the exchange difference resulting from the
translation of the financial statements of a foreign subsidiary expressed in a foreign
currency has to be recorded as a direct adjustment to shareholders equity. Therefore in
2005 the Group did not record in the statement of operations exchange differences from the
conversion of the non euro financial statements of the Companys subsidiaries, while in
2004 recorded a gain of 1.4 million. Had the new Italian standard not been adopted in
2005, the Company would have recognized, in 2005, a foreign exchange gain of 1.7 million
in the consolidated statement of earnings. The comparative financial statements of prior
years have not been adjusted to apply the new Italian GAAP foreign currency translation
standard retrospectively.-
    
    A net unrealized gain of 2.1 million in 2005 (compared to an unrealized loss of
10.2 million in 2004) on accounts receivable and payable;-
    
    An unrealized loss of 4.8 million in 2005 (compared to an unrealized gain of 7.1
million in 2004), from mark-to-market of domestic currency swaps.
  35




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##### Table of Contents



 
 -
    
    Revenue from capital grants of 4.4 million. In 2005, Natuzzi received under the
aforementioned project Natuzzi 2000 additional capital grants
amounting to 7.9 million. A part of these capital grants, amounting to 4.4 million, is
related to depreciation of property, plant and equipment recorded in the consolidated
statements of earnings in the years prior to 2005. Therefore, for this reason the amount
of 4.4 million has been classified under the caption other income (expense), net.
Another portion of these capital grants, amounting to 0.3 million has been classified in
the net sales as they relate to depreciation of 2005. The remaining portion of 3.2
million has been classified in the consolidated balance sheet at December 31, 2005 as
deferred income, and it will be charged to statements of earnings as revenue on a
systematic basis over the useful life of the related asset. See Note 24 to the
Consolidated Financial Statements included in Item 18 of this Annual Report.-
    
    Other expenses of 2.8 million deriving from the write-off of fixed assets, most of
them related to leasehold improvements related to the closure of some stores managed
directly by Natuzzi.-
    
    Revenue for incentive benefits of 2.1 million. This incentive is measured on the
basis of the export sales realized by the subsidiary Italsofa Bahia Ltd.-
    
    Expense of 0.6 million represents the provision established for the penalties that
the Company expects to pay to landlords of several stores located in England for the early
termination of the related operating leases. Actual amounts payable may be higher.-
    
    Other income, net of 1.4 million.
     36




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##### Table of Contents



   
      
 
 Liquidity and Capital Resources
  
     
    
   
  
  37




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##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by Period(in thousands of euros)Less than 1
    
    
    1-3
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    
    year
    
    
    years
    
    
    4-5 years
    
    
    yearsLong-Term Debt(1)
    
    
    2,751
    
    
    
    318
    
    
    
    657
    
    
    
    612
    
    
    
    1,164Interest due on Long Term Debt
(2)
    
    
    350
    
    
    
    69
    
    
    
    115
    
    
    
    86
    
    
    
    80Operating Leases (3)
    
    
    66,978
    
    
    
    12,524
    
    
    
    22,391
    
    
    
    18,168
    
    
    
    13,895Total Contractual Cash
Obligations
    
    
    70,079
    
    
    
    12,911
    
    
    
    23,163
    
    
    
    18,866
    
    
    
    15,139
 
 (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)
    
    Interest due on long-term debt has been calculated using fixed rates contractually
agreed with lenders(3)
    
    The leases relate to the leasing of manufacturing facilities and stores by several
of the Groups companies.
 Amount of Commitment Expiration PerPeriod(in thousands of euros)TotalAmounts
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    
    After 5Other Commitments
    
    Committed
    
    
    year
    
    
    1-3 years
    
    
    4-5 years
    
    
    yearsGuarantees(1)
    
    
    26,005
    
    
    
    26,005
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    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 Industrial Activities provides the Company with the final disbursement
of the capital grants already given.
 
 Related Party Transactions
   38




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##### Table of Contents



Product & Retail Development
   
  
 Trend Information and Guidance
  
  
  39




---



##### Table of Contents



  
  
  
 New Accounting Standards under Italian and U.S. GAAP
 Process of Transition to International Accounting Standards 
 Italian GAAP 
 Consolidated Financial Statements
    40




---



##### Table of Contents



U.S. GAAP 
 - SFAS
No. 151: Inventory Costs
 - SFAS
No. 153: Exchanges of
Nonmonetary Assets
 - SFAS
No. 154: Accounting Changes and Error
Corrections  a Replacement of APB Opinion No. 20 and FASB Statement No. 3
  41




---



##### Table of Contents



- EITF
05-06: Determining the
amortization period for leasehold improvements
 - EITF
04-13: Accounting for Purchases and Sales of Inventory with the Same Counterparty
 - SFAS
No. 157: Fair Value
Measurement
 - FASB
Interpretation No. 48: Accounting for Uncertainty in Income Taxes
 - FASB
Statement No. 123 (R): Share-Based Payment (Statement 123 (R))
  42




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##### Table of Contents



- SAB
108: Considering the effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB 108)
 
 Item 6. Directors, Senior Management and Employees
  Name
    
    Age
    
    Position with the CompanyPasquale Natuzzi *
    
    
    67
    
    
    Chairman of the Board of Directors and Chief
Sales OfficerErnesto Greco *
    
    
    56
    
    
    Chief Executive Officer, Member of the Board of
Directors and Human Resources & Organization
Director a.i.Giuseppe Desantis *
    
    
    44
    
    
    Vice Chairman of the Board of DirectorsGiuseppe Russo Corvace *
    
    
    57
    
    
    Member of the Board of Directors and Managing
Director for Accounting and FinanceArmando Branchini *
    
    
    62
    
    
    Outside DirectorStelio Campanale *
    
    
    45
    
    
    Outside DirectorMaurizia Iachino Leto di Priolo *
    
    
    58
    
    
    Outside DirectorFilippo Simonetti
    
    
    39
    
    
    Chief Financial OfficerGiovanni Costantino
    
    
    43
    
    
    Product & Retail Development General ManagerGiovanni Ferrari
    
    
    52
    
    
    Operations General ManagerGiambattista Massaro
    
    
    45
    
    
    Purchasing Corporate Director, Chairman of Natco
S.p.A.Annunziata Natuzzi
    
    
    43
    
    
    Chief Executive Officer of Natco S.p.A.Lorenzo Boffano
    
    
    56
    
    
    Retail Competence Center DirectorVito Tiziano Damiani
    
    
    43
    
    
    Internal Audit DirectorGaetano De Cataldo
    
    
    43
    
    
    Executive Vice President of Finance and
Operations of Natuzzi Americas, Inc.
  43




---



##### Table of Contents



Name
    
    Age
    
    Position with the CompanyNicola V.M. DellEdera
    
    
    45
    
    
    Finance DirectorJosé Manuel Gulias Roo
    
    
    49
    
    
    Spain and Portugal Country ManagerThomas Hagerup
    
    
    39
    
    
    Nordic Region Country ManagerOliver Heil
    
    
    40
    
    
    Commercial Director of the Asia & Pacific RegionCesare Laberinti
    
    
    74
    
    
    Chairman and Managing Director of IMPE S.p.AGiorgio Martellino
    
    
    38
    
    
    Legal DirectorNicola Masotina
    
    
    47
    
    
    Italy Country ManagerJan Mentens
    
    
    40
    
    
    Benelux Country ManagerGiovanni Mercadante
    
    
    50
    
    
    Accounting DirectorOttavio Milano
    
    
    41
    
    
    Control DirectorMarcelo Miraglia
    
    
    53
    
    
    Chairman and Managing Director of Minuano
Nordeste S.A and Italsofa Bahia LtdNick Moore
    
    
    45
    
    
    Managing Director of Natuzzi United Kingdom LtdAchille Poretta
    
    
    49
    
    
    Information Systems DirectorStefano Rezzin
    
    
    42
    
    
    Switzerland Country ManagerBodo Rupp
    
    
    48
    
    
    Germany and Austria Country ManagerStefano Sette
    
    
    38
    
    
    Vice President Sales WorldwideFredrick Starr
    
    
    75
    
    
    President and Chief Executive Officer of Natuzzi
Americas Inc.Francesco Stasolla
    
    
    41
    
    
    Chairman and Managing Director of Italsofa
 Romania S.r.l.Richard Tan
    
    
    47
    
    
    Chairman and Managing Director of Italsofa
 (Shanghai) Ltd and Softaly (Shanghai) Ltd
 *
    
    Nominated following the Natuzzi Annual Ordinary Shareholders Meeting held on May 3, 2007.
  .
   44




---



##### Table of Contents



Vitali, Romagnoli, Piccardi e Associati
 InterCorporate  Strategie e Impresa
         45




---



##### Table of Contents



46




---



##### Table of Contents



.
         47




---



##### Table of Contents



Compensation of Directors and Officers
 
  
 Share Ownership
  
 Statutory Auditors
  Name
    
    PositionFrancesco Venturelli
    
    ChairmanCataldo Sferra
    
    MemberCostante Leone
    
    MemberGiuseppe Pio Macario
    
    AlternateVittorio Boscia
    
    Alternate
  48




---



##### Table of Contents




   
 External Auditors
  
 Employees
  
    49




---



##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 
 Major Shareholders
   Number of
    
    
    
    PercentShares Owned
    
    
    
    OwnedPasquale Natuzzi(1)
    
    
    26,064,906
    
    
    
    47.5
    %Royce & Associates, LLC
    
    
    5,501,300
    
    
    
    10.0
    %Brandes Investment Partners, LP (2)
    
    
    4,725,030
    
    
    
    8.6
    %Tweedy, Browne Company, L.L.C.
    
    
    3,796,937
    
    
    
    6.9
    %
 
 (1)
    
    If Mr. Natuzzis Ordinary Shares are aggregated with those held by members of
the Natuzzi Family, the amount owned would be 28,864,906 and the percentage ownership of Ordinary
Shares would be 52.6%.(2)
    
    During the course of 2005, Brandes Investment Partners, LP increased its position in
Natuzzis shareholders base by 2,519,750 Natuzzi ADSs, thus holding 8.4% of shareholders equity
with a total of 4,587,197 Natuzzi ADSs as of December 31, 2005. During 2006, the position was
increased by only 151,837 ADSs.
  50




---



##### Table of Contents



Related Party Transactions
  
 Item 8. Financial Information
 
 Consolidated Financial Statements
  
 Export Sales
 
 
 Legal and Governmental Proceedings
 Istituto Nazionale di
Previdenza Sociale 
  51




---



##### Table of Contents



Contratti di
formazione e lavoro 
 
   
 
   
 Dividends
   52




---



##### Table of Contents



Dividends per
    
    
    Translated intoYear ended December 31,
    
    Ordinary Share
    
    
    dollars per ADS2006
    
    Not distributed
    
    Not distributed2005
    
    Not distributed
    
    Not distributed2004
    
    
    0.0673
    
    
    $
    0.092003
    
    
    0.1366
    
    
    $
    0.152002
    
    
    0.3300
    
    
    $
    0.35
   
 Item 9. The Offer and Listing
 
 Trading Markets and Share Prices
  (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.
  53




---



##### Table of Contents



New York Stock ExchangePrice per ADSHigh
    
    
    Low(in U.S. dollars)2002First 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
    
    
    
    10.290Second Quarter
    
    
    10.270
    
    
    
    8.100Third Quarter
    
    
    9.000
    
    
    
    8.050Fourth Quarter
    
    
    8.400
    
    
    
    6.7602006First Quarter
    
    
    7.810
    
    
    
    7.100Second Quarter
    
    
    7.600
    
    
    
    6.860Third Quarter
    
    
    7.250
    
    
    
    6.320Fourth Quarter
    
    
    8.650
    
    
    
    6.840Monthly Data:December-06
    
    
    8.650
    
    
    
    7.260January-07
    
    
    9.600
    
    
    
    8.430February-07
    
    
    9.500
    
    
    
    8.600March-07
    
    
    9.070
    
    
    
    8.150April-07
    
    
    8.350
    
    
    
    7.510May-07
    
    
    8.533
    
    
    
    7.800June 2007 (through June 20)
    
    
    8.210
    
    
    
    7.180
  54




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##### Table of Contents



Item 10. Additional Information
 
 By-laws
 Statuto
   General  
   Authorization of shares  At  
 Form and Transfer of Shares 
  55




---



##### Table of Contents



Dividend Rights 
  Voting Rights 
  Board of Directors 
 Presidente amministratori delegati
   56




---



##### Table of Contents



direttore generale
      57




---



##### Table of Contents



Statutory Auditors  Collegio Sindacale
     58




---



##### Table of Contents



External Auditor 
    Meetings of Shareholders 
 Il Sole 24 Ore Corriere della Sera La Repubblica
    59




---



##### Table of Contents



Preemptive Rights 
 Preference Shares; Other Securities 
  60




---



##### Table of Contents



Segregation of Assets and Proceeds 
  Liquidation Rights  pari passu
 Purchase of Shares by the Company 
   61




---



##### Table of Contents



  
 Notification of the Acquisition of Shares 
 Minority Shareholders Rights; Withdrawal Rights 
     62




---



##### Table of Contents



Liability for Mismanagement of Subsidiaries 
  
 Certain Contracts
  
 Exchange Controls
   Ufficio
Italiano Cambi
  63




---



##### Table of Contents




  
 Taxation
      64




---



##### Table of Contents



Taxation of Dividends
 Italian Tax Considerations  
   65




---



##### Table of Contents



United States Tax Considerations -
  66




---



##### Table of Contents



Taxation of Capital Gains
 Italian Tax Considerations
  67




---



##### Table of Contents



United States Tax Considerations -
  Taxation of Distributions from Capital Reserves
 Italian Tax Considerations -
  68




---



##### Table of Contents



Other Italian Taxes
  Transfer Tax 
 
 Documents on Display
  
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
    69




---



##### Table of Contents



Exchange Rate Risks
     
  
  Euro equivalent of contractual amounts of
    
    December 31,forward exchange contracts as of
    
    2006
    
    
    2005U.S. dollars
    
    
    90,744
    
    
    
    72,496Euro
    
    
    19,154
    
    
    
    Canadian dollars
    
    
    15,703
    
    
    
    17,698British pounds
    
    
    15,121
    
    
    
    26,783Australian dollars
    
    
    9,934
    
    
    
    10,744Norwegian kroner
    
    
    6,027
    
    
    
    5,928Swedish kroner
    
    
    3,887
    
    
    
    3,441Swiss francs
    
    
    2,584
    
    
    
    656Danish kroner
    
    
    924
    
    
    
    845Japanese yen
    
    
    864
    
    
    
    1,504Total
    
    
    164,942
    
    
    
    140,095
  
  70




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##### Table of Contents



December 31, 2006
    
    
    December 31, 2005Contract
    
    
    Fair
    
    
    Contract
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueAssets
    
    
    137,608
    
    
    
    6,141
    
    
    
    46,075
    
    
    
    392Liabilities
    
    
    27,334
    
    
    
    (678
    )
    
    
    94,020
    
    
    
    (5,159
    )Total
    
    
    164,942
    
    
    
    5,463
    
    
    
    140,095
    
    
    
    (4,767
    )
 
  Interest Rate Risks 
  
 Item 12. Description of Securities Other than Equity Securities
   71




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##### Table of Contents



PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  
 Item 15T. Controls and Procedures
 Disclosure Controls and Procedures
  Managements annual report on internal control over financial reporting
   72




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##### Table of Contents



Ongoing Remediation of Control Deficiencies in Internal Control Over Financial Reporting
      73




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##### Table of Contents



Changes in Internal Control Over Financial Reportin
 
 Item 16. [Reserved]
 
 Item 16.A Audit committee financial expert
  
 Item 16.B Code of Ethics
  
 Item 16.C Principal Accountant Fees and Services
  2006
    
    
    2005(in euros)Audit fees
    
    
    595,000
    
    
    
    558,412Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    Other fees
    
    
    
    
    
    
    Total fees
    
    
    595,000
    
    
    
    558,412
  74




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##### Table of Contents



75




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##### Table of Contents



Item 16.D Exemptions from the Listing Standards for Audit Committees.
  
    
    the board of statutory auditors is established and selected
pursuant to Italian law expressly permitting such a board;
    
    the board of statutory auditors is required under Italian law
to be separate from the Companys board of directors;
    
    the board of statutory auditors is not elected by management
of the Company and no Executive Officer of the Company is a member
of the board of statutory auditors;
    
    Italian Law provides for standards for the independence of the
board of statutory auditors from the Company and its management;
    
    the board of statutory auditors, in accordance with applicable
Italian law and the Companys governing documents, is responsible,
to the extent permitted by Italian law, for the appointment,
retention and oversight of the work (including, to the extent
permitted by law, the resolution of disagreements between
management and the auditor regarding financial reporting) of any
registered public accounting firm engaged for the purpose of
preparing or issuing an audit report or performing other audit,
review or attest services for the Company, and
    
    to the extent permitted by Italian law, the audit committee
requirements of paragraphs (b)(3), (b)(4) and (b)(5) of Rule 10A-3
apply to the Board of Statutory Auditors.
  
 Item 16.E Purchases of Equity Securities by the Issuer and Affiliated Purchasers
   76




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##### Table of Contents



PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    F-2Consolidated Statements of Operations for the Years Ended December
31, 2006, 2005 and 2004
    
    F-3Consolidated Statements of Changes in Shareholders Equity for the
Years Ended December 31, 2006, 2005 and 2004
    
    F-4Consolidated Statements of Cash Flows for the Years Ended December
31, 2006, 2005 and 2004
    
    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
January 23, 2007.
 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.
  77




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KPMG S.p.A.
 
  F - 1




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 
 Consolidated Balance Sheets as at December 31, 2006 and 2005
  December 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents (note 4)
    
    
    128,109
    
    
    
    89,723Marketable debt securities (note 5)
    
    
    5
    
    
    
    5Trade receivables, net (note 6)
    
    
    119,274
    
    
    
    123,608Other receivables (note 7)
    
    
    44,681
    
    
    
    46,256Inventories (note 8)
    
    
    100,358
    
    
    
    115,690Unrealized foreign exchange gains (note 25)
    
    
    5,463
    
    
    
    Prepaid expenses and accrued income
    
    
    1,955
    
    
    
    2,551Deferred income taxes (note 14)
    
    
    7,463
    
    
    
    6,632Total current assets
    
    
    407,308
    
    
    
    384,465Non current assets:Property plant and equipment (note 9 and 22)
    
    
    405,870
    
    
    
    407,847Less accumulated depreciation (note 9 and 22)
    
    
    (159,547
    )
    
    
    (145,054
    )Net property, plant and equipment
    
    
    246,323
    
    
    
    262,793Other assets (note 10)
    
    
    18,752
    
    
    
    16,616Deferred income taxes (note 14)
    
    
    2,291
    
    
    
    1,064Total assets
    
    
    674,674
    
    
    
    664,938LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings (note 11)
    
    
    3,801
    
    
    
    7,727Current portion of long-term debt (note 16)
    
    
    318
    
    
    
    426Accounts payable-trade (note 12)
    
    
    79,519
    
    
    
    73,533Accounts payable-other (note 13)
    
    
    23,067
    
    
    
    24,768Unrealized foreign exchange losses (note 25)
    
    
    
    
    
    
    4,767Income taxes (note 14)
    
    
    4,611
    
    
    
    2,907Salaries, wages and related liabilities (note 15)
    
    
    21,674
    
    
    
    22,083Total current liabilities
    
    
    132,990
    
    
    
    136,211Long-term liabilities:Employees leaving entitlement (note 3 (o) )
    
    
    35,269
    
    
    
    32,274Long-term debt (note 16)
    
    
    2,433
    
    
    
    3,582Deferred income for capital grants (note 3 (n) )
    
    
    14,075
    
    
    
    14,779Other liabilities (note 17)
    
    
    10,460
    
    
    
    4,358Minority interest (note 18)
    
    
    605
    
    
    
    709Shareholders equity (note 19) :Share capital
    
    
    54,739
    
    
    
    54,682Reserves
    
    
    42,292
    
    
    
    42,292Additional paid-in capital
    
    
    8,282
    
    
    
    8,282Retained earnings
    
    
    373,529
    
    
    
    367,769Total shareholders equity
    
    
    478,842
    
    
    
    473,025Committments and contingent liabilities (notes 21 and 25)
    
    
    
    
    
    
    Total liabilities and shareholders equity
    
    
    674,674
    
    
    
    664,938
 See accompanying notes to the consolidated financial statements
  F - 2




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 
 Consolidated Statements of Operations
 Years ended December 31, 2006, 2005 and 2004
  2006
    
    
    2005
    
    
    2004Net sales (note 22)
    
    
    735,439
    
    
    
    669,926
    
    
    
    753,434Cost of sales (note 23)
    
    
    (490,563
    )
    
    
    (459,492
    )
    
    
    (484,601
    )Gross profit
    
    
    244,876
    
    
    
    210,434
    
    
    
    268,833Selling expenses
    
    
    (186,238
    )
    
    
    (182,169
    )
    
    
    (188,182
    )General and administrative expenses
    
    
    (42,164
    )
    
    
    (42,955
    )
    
    
    (40,673
    )Operating income (loss)
    
    
    16,474
    
    
    
    (14,690
    )
    
    
    39,978Other income (expense), net (note 24)
    
    
    2,847
    
    
    
    2,960
    
    
    
    (3,892
    )Earnings (loss) before taxes
and minority interest
    
    
    19,321
    
    
    
    (11,730
    )
    
    
    36,086Income taxes (note 14)
    
    
    (7,085
    )
    
    
    (3,110
    )
    
    
    (17,650
    )Earnings (loss) before minority interest
    
    
    12,236
    
    
    
    (14,840
    )
    
    
    18,436Minority interest
    
    
    103
    
    
    
    216
    
    
    
    (83
    )Net earnings (loss)
    
    
    12,339
    
    
    
    (14,624
    )
    
    
    18,353Basic earnings (loss) per share (note 3 (x))
    
    
    0.23
    
    
    
    (0.27
    )
    
    
    0.34Diluted earnings (loss) per share (note 3 (x))
    
    
    0.23
    
    
    
    (0.27
    )
    
    
    0.34
 See accompanying notes to the 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, 2006, 2005 and 2004
  Share capital
    
    
    
    
    
    
    AdditionalNumber of
    
    
    
    
    
    
    
    
    
    
    paid-in
    
    
    Retainedordinary shares
    
    
    Amount
    
    
    Reserves
    
    
    capital
    
    
    earnings
    
    
    TotalBalances 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
    
    
    
    487,933Dividends distributed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,828
    )
    
    
    (3,828
    )Exchange difference on translation of
financial statements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,544
    
    
    
    3,544Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,624
    )
    
    
    (14,624
    )Balances at December 31, 2005
    
    
    54,681,628
    
    
    
    54,682
    
    
    
    42,292
    
    
    
    8,282
    
    
    
    367,769
    
    
    
    473,025Increase share capital
    
    
    56,910
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    Exchange difference on translation of
financial statements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,522
    )
    
    
    (6,522
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,339
    
    
    
    12,339Balances at December 31, 2006
    
    
    54,738,538
    
    
    
    54,739
    
    
    
    42,292
    
    
    
    8,282
    
    
    
    373,529
    
    
    
    478,842
 See accompanying notes to the 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, 2006, 2005 and 2004
  2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net earnings (loss)
    
    
    12,339
    
    
    
    (14,624
    )
    
    
    18,353Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    30,281
    
    
    
    33,042
    
    
    
    34,068Employees leaving entitlement
    
    
    6,778
    
    
    
    6,877
    
    
    
    7,435Deferred income taxes
    
    
    (2,058
    )
    
    
    (6,300
    )
    
    
    (651
    )Minority interest
    
    
    (104
    )
    
    
    (216
    )
    
    
    83(Gain) loss on disposal of assets
    
    
    768
    
    
    
    (149
    )
    
    
    (3,468
    )Unrealized foreign exchange losses and (gains)
    
    
    (10,230
    )
    
    
    11,868
    
    
    
    621Deferred income for capital grants
    
    
    (1,309
    )
    
    
    (5,616
    )
    
    
    (874
    )Change in assets and liabilities:Receivables, net
    
    
    1,883
    
    
    
    10,580
    
    
    
    28,052Inventories
    
    
    15,444
    
    
    
    (1,546
    )
    
    
    (16,637
    )Prepaid expenses and accrued income
    
    
    596
    
    
    
    (141
    )
    
    
    (240
    )Accounts payable
    
    
    4,285
    
    
    
    (7,443
    )
    
    
    6,659Income taxes
    
    
    1,704
    
    
    
    386
    
    
    
    (1,737
    )Salaries, wages and related liabilities
    
    
    (445
    )
    
    
    3,318
    
    
    
    2,641Other liabilities
    
    
    6,102
    
    
    
    (1,001
    )
    
    
    (357
    )Employees leaving entitlement
    
    
    (3,854
    )
    
    
    (4,526
    )
    
    
    (4,795
    )Total adjustments
    
    
    49,841
    
    
    
    39,133
    
    
    
    50,800Net cash provided by operating activities
    
    
    62,180
    
    
    
    24,509
    
    
    
    69,153Cash flows from investing activities:Property, plant and equipment:Additions
    
    
    (15,563
    )
    
    
    (20,917
    )
    
    
    (51,860
    )Disposals
    
    
    1,057
    
    
    
    916
    
    
    
    9,407Other assets
    
    
    (3,560
    )
    
    
    (1,361
    )
    
    
    (893
    )Government grants received
    
    
    605
    
    
    
    1,002
    
    
    
    Purchase of business, net of cash acquired
    
    
    (250
    )
    
    
    (1,985
    )
    
    
    (100
    )Disposal of business
    
    
    
    
    
    
    
    
    
    
    5,475Net cash used in investing activities
    
    
    (17,711
    )
    
    
    (22,345
    )
    
    
    (37,971
    )
  F - 5




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##### Table of Contents



2006
    
    
    2005
    
    
    2004Cash flows from financing activities:Long-term debt:Proceeds
    
    
    363
    
    
    
    533
    
    
    
    1,284Repayments
    
    
    (1,620
    )
    
    
    (2,094
    )
    
    
    (1,349
    )Short-term borrowings
    
    
    (3,926
    )
    
    
    1,628
    
    
    
    1,820Dividends paid to shareholders
    
    
    
    
    
    
    (3,828
    )
    
    
    (7,655
    )Dividends paid to minority interests
    
    
    
    
    
    
    
    
    
    
    (61
    )Net cash used in financing activities
    
    
    (5,183
    )
    
    
    (3,761
    )
    
    
    (5,961
    )Effect of translation adjustments on cash
    
    
    (900
    )
    
    
    3,980
    
    
    
    (1,446
    )Increase in cash and cash equivalents
    
    
    38,386
    
    
    
    2,383
    
    
    
    23,775Cash and cash equivalents, beginning of the year
    
    
    89,723
    
    
    
    87,340
    
    
    
    63,565Cash and cash equivalents, end of the year
    
    
    128,109
    
    
    
    89,723
    
    
    
    87,340Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    
    1,400
    
    
    
    951
    
    
    
    1,003Cash paid during the year for income taxes
    
    
    6,555
    
    
    
    6,659
    
    
    
    9,293Non cash investing activties
    
    
    3,093
    
    
    
    
    
    
    
    
 See accompanying notes to consolidated financial statements
  F - 6




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 
 Notes to the consolidated financial statements
 1.
    
    Description of business and Group composition
   Percent ofName
    
    ownership
    
    
    Registered office
    
    ActivityItalsofa Bahia Ltd
    
    
    97.99
    
    
    Bahia, Brazil
    
    (1)Minuano Nordeste S.A.
    
    
    100.00
    
    
    Pojuca, Brazil
    
    (1)Italsofa Shanghai Ltd
    
    
    100.00
    
    
    Shanghai, China
    
    (1)Softaly Shanghai Ltd
    
    
    100.00
    
    
    Shanghai, China
    
    (1)Italsofa Romania
    
    
    100.00
    
    
    Baia Mare, Romania
    
    (1)Natco S.p.A.
    
    
    99.99
    
    
    Bari, Italy
    
    (2)I.M.P.E. S.p.A.
    
    
    90.83
    
    
    Qualiano,Italy
    
    (3)Nacon S.p.A.
    
    
    100.00
    
    
    Bari, Italy
    
    (4)Lagene S.r.l.
    
    
    100.00
    
    
    Bari, Italy
    
    (4)Natuzzi Americas Inc.
    
    
    100.00
    
    
    High Point, NC, USA
    
    (4)Natuzzi Iberica S.A.
    
    
    100.00
    
    
    Madrid, Spain
    
    (4)Natuzzi Switzerland AG
    
    
    97.00
    
    
    Kaltbrunn, Switzerland
    
    (4)Natuzzi Nordic
    
    
    100.00
    
    
    Copenaghen, Denmark
    
    (4)Natuzzi Benelux S.A.
    
    
    100.00
    
    
    Geel, Belgium
    
    (4)Natuzzi Germany Gmbh
    
    
    100.00
    
    
    Dusseldorf, Germany
    
    (4)Natuzzi Sweden AB
    
    
    100.00
    
    
    Stockholm, Sweden
    
    (4)Natuzzi Japan KK
    
    
    100.00
    
    
    Tokyo, Japan
    
    (4)Natuzzi Services Limited
    
    
    100.00
    
    
    London, UK
    
    (4)Italholding S.r.l.
    
    
    100.00
    
    
    Bari, Italy
    
    (5)Natuzzi Netherlands Holding
    
    
    100.00
    
    
    Amsterdam, Holland
    
    (5)Natuzzi Trade Service S.r.l.
    
    
    100.00
    
    
    Bari, Italy
    
    (6)Natuzzi United Kingdom Limited
    
    
    100.00
    
    
    London, UK
    
    (7)Kingdom of Leather Limited
    
    
    100.00
    
    
    London, UK
    
    (7)La Galleria Limited
    
    
    100.00
    
    
    London, UK
    
    (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)
    
    Dormant
  F - 7




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Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
  Goodwill
    
    
    2,600Fixed assets
    
    
    132Leasehold improvements
    
    
    468Current liabilities
    
    
    (107
    )Purchase price
    
    
    3,093
   Goodwill
    
    
    100Fixed assets
    
    
    38Current assets
    
    
    112Purchase price
    
    
    250
   F - 8




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
      Current assets
    
    
    1,107Goodwill
    
    
    1,664Other non current assets
    
    
    1,634Current liabilities
    
    
    (2,080
    )Non current liabilities
    
    
    (306
    )Purchase price
    
    
    2,019
   F - 9




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
  Current assets
    
    
    710Goodwill
    
    
    3,709Fixed assets
    
    
    221Leasehold improvements
    
    
    313Non current liabilities
    
    
    (143
    )Purchase price
    
    
    4,810
   Goodwill
    
    
    600Leasehold improvements
    
    
    400Cash paid
    
    
    1,000
  F - 10




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
       2.
    
    Basis of preparation
     F - 11




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
 3.
    
    Summary of significant accounting policies
  a)
    
    Principles of consolidation
   b)
    
    Foreign currency transactions
  c)
    
    Forward exchange contracts
  d)
    
    Financial statements of foreign operations
   F - 12




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Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
        F - 13




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
  e)
    
    Cash and cash equivalents
   F - 14




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
 f)
    
    Marketable debt securities
    g)
    
    Accounts receivable and payable
  h)
    
    Inventories
    i)
    
    Property, plant and equipment
  j)
    
    Treasury shares
   F - 15




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
 k)
    
    Other assets
   l)
    
    Impairment of long-lived assets and long-lived assets to be disposed of
  m)
    
    Income taxes
  n)
    
    Government grants
   F - 16




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Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
       o)
    
    Employees leaving entitlement
     F - 17




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
  p)
    
    Net sales
   q)
    
    Shipping and handling costs
  r)
    
    Advertising costs
  s)
    
    Commission expense
  t)
    
    Warranties
  u)
    
    Research and development costs
   F - 18




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
 v)
    
    Contingencies
  w)
    
    Use of estimates
  x)
    
    Earnings per share
  2006
    
    
    2005
    
    
    2004Net earnings (loss) attributable to
ordinary shareholders
    
    
    12,339
    
    
    
    (14,624
    )
    
    
    18,353Weighted-average number of ordinary
shares outstanding during the year
    
    
    54,733,796
    
    
    
    54,681,628
    
    
    
    54,681,628Increase resulting from assumed conversion
of share grants and options
    
    
    
    
    
    
    
    
    
    
    27,576Weighted-average number of ordinary
shares and potential shares outstanding
during the year
    
    
    54,733,796
    
    
    
    54,681,628
    
    
    
    54,709,204
 4.
    
    Cash and cash equivalentsCash and cash equivalents are analyzed as follows:
 2006
    
    
    2005Cash on hand
    
    
    510
    
    
    
    510Bank accounts in Euro
    
    
    16,746
    
    
    
    18,491Bank accounts in foreign currencies
    
    
    110,798
    
    
    
    70,699Money market instruments
    
    
    55
    
    
    
    23Total
    
    
    128,109
    
    
    
    89,723
  F - 19




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
 5.
    
    Marketable debt securitiesDetails regarding marketable debt securities are as follows:
 2006
    
    
    2005Foreign 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
    
    
    Fair2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    valueForeign corporate bonds
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Italian government bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5
 Gross unrealized
    
    
    Fair2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    valueForeign corporate bonds
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Italian government bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5
  6.
    
    Trade receivables, netTrade receivables are analyzed as follows:
 2006
    
    
    2005North American customers
    
    
    37,408
    
    
    
    48,257Other foreign customers
    
    
    54,217
    
    
    
    47,127Domestic customers
    
    
    32,163
    
    
    
    31,781Trade bills receivable
    
    
    1,543
    
    
    
    1,602Total
    
    
    125,331
    
    
    
    128,767Allowance for doubtful accounts
    
    
    (6,057
    )
    
    
    (5,159
    )Total trade receivables, net
    
    
    119,274
    
    
    
    123,608
  F - 20




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
   Trade receivables
    
    N° of customers
    
    

%on
trade receivables2006
    
    
    2
    
    
    
    16
    %2005
    
    
    2
    
    
    
    16
    %2004
    
    
    1
    
    
    
    9
    %
 Net sales
    
    N° of customers
    
    

%net sales2006
    
    
    2
    
    
    
    18
    %2005
    
    
    2
    
    
    
    13
    %2004
    
    
    1
    
    
    
    6
    %
   2006
    
    
    2005
    
    
    2004Balance, beginning of year
    
    
    5,159
    
    
    
    5,434
    
    
    
    5,662Charges-bad debt expense
    
    
    1,695
    
    
    
    1,326
    
    
    
    1,297Reductions-write off of
uncollectible accounts
    
    
    (797
    )
    
    
    (1,601
    )
    
    
    (1,525
    )Balance, end of year
    
    
    6,057
    
    
    
    5,159
    
    
    
    5,434
  2006
    
    
    2005U.S. dollars
    
    
    36,938
    
    
    
    41,549Australian dollars
    
    
    5,440
    
    
    
    5,853British pounds
    
    
    4,760
    
    
    
    5,470Canadian dollars
    
    
    4,023
    
    
    
    7,405Other currencies
    
    
    4,257
    
    
    
    6,467Total
    
    
    55,418
    
    
    
    66,744
  F - 21




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
 7.
    
    Other receivablesOther receivables are analyzed as follows:
 2006
    
    
    2005Government capital grants
    
    
    11,798
    
    
    
    11,798Receivable from tax authorities
    
    
    11,642
    
    
    
    10,343VAT
    
    
    10,133
    
    
    
    13,867Advances to suppliers
    
    
    3,301
    
    
    
    2,264Other
    
    
    7,807
    
    
    
    7,984Total
    
    
    44,681
    
    
    
    46,256
    8.
    
    InventoriesInventories are analyzed as follows:
 2006
    
    
    2005Leather and other raw materials
    
    
    61,060
    
    
    
    68,481Goods in process
    
    
    10,696
    
    
    
    13,294Finished products
    
    
    28,602
    
    
    
    33,915Total
    
    
    100,358
    
    
    
    115,690
 9.
    
    Property, plant and equipment and accumulated depreciation
  Cost or
    
    
    Accumulated
    
    
    Annual rate of2006
    
    valuation
    
    
    depreciation
    
    
    depreciationLand
    
    
    17,194
    
    
    
    
    
    
    
    Industrial buildings
    
    
    184,780
    
    
    
    (39,475
    )
    
    
    2-10
    %Machinery and equipment
    
    
    113,910
    
    
    
    (72,290
    )
    
    
    10-25
    %Airplane
    
    
    24,075
    
    
    
    (5,056
    )
    
    
    6
    %Office furniture and equipment
    
    
    27,159
    
    
    
    (19,754
    )
    
    
    10-20
    %Retail gallery and store furnishings
    
    
    26,237
    
    
    
    (15,515
    )
    
    
    25-35
    %Transportation equipment
    
    
    5,755
    
    
    
    (4,632
    )
    
    
    20-25
    %Leasehold improvements
    
    
    5,252
    
    
    
    (2,825
    )
    
    
    10-20
    %Construction in progress
    
    
    619
    
    
    
    
    
    
    
    Advances to suppliers
    
    
    889
    
    
    
    
    
    
    
    Total
    
    
    405,870
    
    
    
    (159,547
    )
  F - 22




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
 Cost or
    
    
    Accumulated
    
    
    Annual rate of2005
    
    valuation
    
    
    depreciation
    
    
    depreciationLand
    
    
    17,463
    
    
    
    
    
    
    
    Industrial buildings
    
    
    182,750
    
    
    
    (35,543
    )
    
    
    2-10
    %Machinery and equipment
    
    
    118,097
    
    
    
    (69,968
    )
    
    
    10-25
    %Airplane
    
    
    24,075
    
    
    
    (3,611
    )
    
    
    6
    %Office furniture and equipment
    
    
    25,472
    
    
    
    (18,033
    )
    
    
    10-20
    %Retail gallery and store furnishings
    
    
    24,070
    
    
    
    (11,339
    )
    
    
    25-35
    %Transportation equipment
    
    
    5,762
    
    
    
    (4,354
    )
    
    
    20-25
    %Leasehold improvements
    
    
    4,133
    
    
    
    (2,206
    )
    
    
    10-20
    %Construction in progress
    
    
    5,442
    
    
    
    
    
    
    
    Advances to suppliers
    
    
    583
    
    
    
    
    
    
    
    Total
    
    
    407,847
    
    
    
    (145,054
    )
 Construction in progress relates principally to manufacturing facilities.10.
    
    Other assetsOther assets consist of the following:
 2006
    
    
    2005Goodwill
    
    
    13,977
    
    
    
    11,277Equity in affiliated enterprises
    
    
    3,867
    
    
    
    3,867Others
    
    
    16,786
    
    
    
    13,274Total, gross
    
    
    34,630
    
    
    
    28,418Less accumulated amortization
    
    
    (15,878
    )
    
    
    (11,802
    )Total, net
    
    
    18,752
    
    
    
    16,616
 At December 31, 2006 and 2005 the net book value of goodwill may be analyzed as follows:
 2006
    
    
    2005Gross carrying amount
    
    
    13,977
    
    
    
    11,277Less accumulated depreciation
    
    
    (4,676
    )
    
    
    (2,155
    )Net book value
    
    
    9,301
    
    
    
    9,122
  F - 23




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
   11.
    
    Short-term borrowingsShort-term borrowings consist of the following:
 2006
    
    
    2005Bank borrowings
    
    
    3,351
    
    
    
    4,174Bank overdrafts
    
    
    450
    
    
    
    3,5533,801
    
    
    
    7,727
    2006
    
    
    2005Bank borrowings
    
    
    4.87
    %
    
    
    4.92
    %Bank overdrafts
    
    
    3.58
    %
    
    
    5.10
    %
  F - 24




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
  12.
    
    Accounts payable-trade
  13.
    
    Accounts payable-otherAccounts payable-other are analyzed as follows:
 2006
    
    
    2005Provision for warranties
    
    
    6,561
    
    
    
    6,896Advances from customers
    
    
    5,441
    
    
    
    6,785Cooperative advertising and quantity discount
    
    
    3,835
    
    
    
    3,018Withholding taxes on payroll and on others
    
    
    3,059
    
    
    
    2,375Payable to minority interest for dividends
    
    
    593
    
    
    
    593Payable to third parties for business acquisition
    
    
    
    
    
    
    860Others
    
    
    3,578
    
    
    
    4,241Total
    
    
    23,067
    
    
    
    24,768
 The following table provides the movements in the provision for warranties:
 2006
    
    
    2005
    
    
    2004Balance, beginning of year
    
    
    6,896
    
    
    
    3,477
    
    
    
    3,363Charges to profit and loss
    
    
    6,386
    
    
    
    4,764
    
    
    
    6,700Reductions for utilization
    
    
    (6,721
    )
    
    
    (1,345
    )
    
    
    (6,586
    )Balance, end of year
    
    
    6,561
    
    
    
    6,896
    
    
    
    3,477
 14.
    
    Taxes on incomeItalian companies are subject to two income taxes at the following rates:
 2006
    
    
    2005
    
    
    2004IRES (state tax)
    
    
    33.00
    %
    
    
    33.00
    %
    
    
    33.00
    %IRAP (regional tax)
    
    
    4.25
    %
    
    
    4.25
    %
    
    
    4.25
    %
  F - 25




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
     2006
    
    
    2005
    
    
    2004Domestic
    
    
    (11,012
    )
    
    
    (8,144
    )
    
    
    19,878Foreign
    
    
    30,333
    
    
    
    (3,586
    )
    
    
    16,208Total
    
    
    19,321
    
    
    
    (11,730
    )
    
    
    36,086
  F - 26




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
  2006
    
    
    2005
    
    
    2004Expected income (loss) tax charge
at full tax rates
    
    
    6,376
    
    
    
    (3,871
    )
    
    
    11,908Effects of:- Tax exempt income
    
    
    (5,779
    )
    
    
    (4,954
    )
    
    
    (5,664
    )- Aggregate effect of different tax
rates in foreign jurisdictions
    
    
    (4,434
    )
    
    
    (1,442
    )
    
    
    (1,796
    )- Italian regional tax
    
    
    4,646
    
    
    
    4,727
    
    
    
    5,954- Non-deductible expenses
    
    
    2,694
    
    
    
    3,537
    
    
    
    1,970- Provisions for contingent liabilities
    
    
    914
    
    
    
    155
    
    
    
    217- Depreciation and impairment of goodwill
    
    
    274
    
    
    
    396
    
    
    
    2,931- Effect of net change in valuation allowance
established against deferred tax assets
    
    
    1,989
    
    
    
    4,157
    
    
    
    1,119- Tax effect of unremitted earnings
    
    
    405
    
    
    
    405
    
    
    
    1,011Actual tax charge
    
    
    7,085
    
    
    
    3,110
    
    
    
    17,650
   F - 27




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
  2006
    
    
    2005
    
    
    2004Current:Italian
    
    
    
    
    
    
    5,738
    
    
    
    6,593
    
    
    
    14,769Foreign
    
    
    
    
    
    
    3,405
    
    
    
    2,817
    
    
    
    3,532Total (a)
    
    
    
    
    
    
    9,143
    
    
    
    9,410
    
    
    
    18,301Deferred:Italian
    
    
    
    
    
    
    (2,592
    )
    
    
    (3,260
    )
    
    
    (760
    )Foreign
    
    
    
    
    
    
    534
    
    
    
    (3,040
    )
    
    
    109Total (b)
    
    
    
    
    
    
    (2,058
    )
    
    
    (6,300
    )
    
    
    (651
    )Total (a + b)
    
    
    
    
    
    
    7,085
    
    
    
    3,110
    
    
    
    17,650
   2006
    
    
    2005Deferred tax assets:- Tax loss carryforwards
    
    
    17,562
    
    
    
    14,937- Provision for returns and discounts
    
    
    2,047
    
    
    
    1,873- Allowance for doubtful accounts
    
    
    1,746
    
    
    
    1,594- Inventory obsolescence
    
    
    1,849
    
    
    
    2,490- Provision for contingent liabilities
    
    
    1,403
    
    
    
    368- Intercompany profit on inventory
    
    
    1,051
    
    
    
    475- Provision for sales representatives
    
    
    658
    
    
    
    555- Unrealized net losses on foreign exchange
    
    
    590
    
    
    
    - Goodwill
    
    
    374
    
    
    
    17- Other temporary differences
    
    
    1,698
    
    
    
    1,218Total gross deferred tax assets
    
    
    28,978
    
    
    
    23,527- Less valuation allowance
    
    
    (15,146
    )
    
    
    (13,153
    )Net deferred tax assets (a)
    
    
    13,832
    
    
    
    10,374Deferred tax liabilities:- Unremitted earnings of subsidiaries
    
    
    (1,940
    )
    
    
    (1,535
    )- Revenue recognition
    
    
    (768
    )
    
    
    (303
    )- Government grants
    
    
    (655
    )
    
    
    (658
    )- Other temporary differences
    
    
    (715
    )
    
    
    (182
    )Total deferred tax liabilities (b)
    
    
    (4,078
    )
    
    
    (2,678
    )Net deferred tax assets (a + b)
    
    
    9,754
    
    
    
    7,696
  F - 28




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##### Table of Contents



Natuzzi
S.p.A. and Subsidiaries
 Notes to the consolidated financial statements
    2006
    
    Current
    
    
    Non current
    
    
    TotalGross deferred tax assets
    
    
    10,886
    
    
    
    18,092
    
    
    
    28,978Valuation allowance
    
    
    
    
    
    
    (15,146
    )
    
    
    (15,146
    )Net deferred tax assets
    
    
    10,886
    
    
    
    2,946
    
    
    
    13,832Deferred tax liabilities
    
    
    (3,423
    )
    
    
    (655
    )
    
    
    (4,078
    )Net deferred tax assets
    
    
    7,463
    
    
    
    2,291
    
    
    
    9,754
 2005
    
    Current
    
    
    Non current
    
    
    TotalGross deferred tax assets
    
    
    8,655
    
    
    
    14,872
    
    
    
    23,527Valuation allowance
    
    
    
    
    
    
    (13,153
    )
    
    
    (13,153
    )Net deferred tax assets
    
    
    8,655
    
    
    
    1,719
    
    
    
    10,374Deferred tax liabilities
    
    
    (2,023
    )
    
    
    (655
    )
    
    
    (2,678
    )Net deferred tax assets
    
    
    6,632
    
    
    
    1,064
    
    
    
    7,696
  2008
    
    
    5272009
    
    
    5,7132010
    
    
    3,6642011
    
    
    5,453Thereafter
    
    
    42,434Total
    
    
    57,791
  F - 29




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
   15.
    
    Salaries, wages and related liabilities
  2006
    
    
    2005Salaries and wages
    
    
    11,320
    
    
    
    11,954Social security contributions
    
    
    7,577
    
    
    
    7,298Vacation accrual
    
    
    2,777
    
    
    
    2,831Total
    
    
    21,674
    
    
    
    22,083
 16.
    
    Long-term debt
  2006
    
    
    20052.25% long-term debt payable in annual equal instalments
with final payment due May 30, 2015

    2,460
    
    
    
    2,6990.96% long-term debt payable in annual instalments with
final payment due September 2010
    
    
    291
    
    
    
    3.0% long-term debt payable in semi-annual equal
instalments with final payment due October 2007
    
    
    
    
    
    
    1,309Total long-term debt
    
    
    2,751
    
    
    
    4,008Less current instalments
    
    
    (318
    )
    
    
    (426
    )Long-term debt, excluding current instalments
    
    
    2,433
    
    
    
    3,582
   F - 30




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes
to the consolidated financial statements  (
  2008
    
    
    3252009
    
    
    3322010
    
    
    3392011
    
    
    273Thereafter
    
    
    1,164Total
    
    
    2,433
   17.
    
    Other liabilities
  2006
    
    
    2005Provision for contingent liabilities
    
    
    8,696
    
    
    
    2,868Termination indemnities for sales agents
    
    
    1,764
    
    
    
    1,490Total
    
    
    10,460
    
    
    
    4,358
  18.
    
    Minority interest
  19.
    
    Shareholders equity
  2006
    
    
    2005Mr. Pasquale Natuzzi
    
    
    47.5
    %
    
    
    47.6
    %Miss Anna Maria Natuzzi
    
    
    2.6
    %
    
    
    2.6
    %Mrs. Annunziata Natuzzi
    
    
    2.5
    %
    
    
    2.5
    %Public investors
    
    
    47.4
    %
    
    
    47.3
    %100
    %
    
    
    100
    %
  F - 31




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes
to the consolidated financial statements  (
  2006
    
    
    2005Legal reserve
    
    
    11,199
    
    
    
    11,199Monetary revaluation reserve
    
    
    1,344
    
    
    
    1,344Government capital grants reserve
    
    
    29,749
    
    
    
    29,749Total
    
    
    42,292
    
    
    
    42,292
        F - 32




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
 20.
    
    Share grants and options
 
      F - 33




---



##### Table of Contents



AdditionalMBO 2004
    
    Shares
    
    
    Options
    
    
    options
    
    
    TotalBalance at December 31, 2005
    
    
    113,786
    
    
    
    369,752
    
    
    
    
    
    
    
    483,538Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (56,910
    )
    
    
    
    
    
    
    
    
    
    
    (56,910
    )Forfeited
    
    
    
    
    
    
    (88,746
    )
    
    
    
    
    
    
    (88,746
    )Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2006
    
    
    56,876
    
    
    
    281,006
    
    
    
    
    
    
    
    337,882Weighted average remaining
contractual life
    
    0.04 years
    
    2.04 years
    
    
    
 AdditionalMBO 2005
    
    Shares
    
    
    Options
    
    
    options
    
    
    TotalBalance at December 31, 2005
    
    
    57,626
    
    
    
    165,946
    
    
    
    82,973
    
    
    
    306,545Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    (24,020
    )
    
    
    (12,010
    )
    
    
    (36,030
    )Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2006
    
    
    57,626
    
    
    
    141,926
    
    
    
    70,963
    
    
    
    270,515Weighted average remaining
contractual life
    
    0.54 years
    
    2.04 years
    
    2.04
years
  F - 34




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
    21.
    
    Commitments and contingent liabilities
  2007
    
    
    12,5242008
    
    
    11,6672009
    
    
    10,7242010
    
    
    9,5602011
    
    
    8,608Thereafter
    
    
    13,895Total
    
    
    66,978
    F - 35




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
     22.
    
    Segmental and geographical information
   F - 36




---



##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
  2006
    
    
    2005
    
    
    2004Leather upholstered furniture
    
    
    573,086
    
    
    
    498,942
    
    
    
    547,923Fabric upholstered furniture
    
    
    87,165
    
    
    
    95,895
    
    
    
    117,598Total
    
    
    660,251
    
    
    
    594,837
    
    
    
    665,521
   2006
    
    
    2005
    
    
    2004Sales of upholstered furnitureUnited States of America
    
    
    204,303
    
    
    
    207,215
    
    
    
    238,807Italy
    
    
    81,911
    
    
    
    67,020
    
    
    
    73,017Spain
    
    
    45,955
    
    
    
    35,668
    
    
    
    27,557England
    
    
    39,874
    
    
    
    50,805
    
    
    
    83,391Canada
    
    
    36,244
    
    
    
    31,608
    
    
    
    38,175France
    
    
    33,551
    
    
    
    24,622
    
    
    
    26,026Germany
    
    
    30,927
    
    
    
    24,329
    
    
    
    19,743Belgium
    
    
    28,013
    
    
    
    20,761
    
    
    
    19,956Australia
    
    
    18,269
    
    
    
    16,543
    
    
    
    19,414Holland
    
    
    16,624
    
    
    
    13,654
    
    
    
    13,075Sweden
    
    
    12,227
    
    
    
    10,809
    
    
    
    8,735Norway
    
    
    10,520
    
    
    
    11,271
    
    
    
    12,151Other countries (none greater than 2%)
    
    
    101,833
    
    
    
    80,532
    
    
    
    85,474660,251
    
    
    
    594,837
    
    
    
    665,521
 2006
    
    
    2005Long lived assetsItaly
    
    
    135,956
    
    
    
    144,398Romania
    
    
    36,088
    
    
    
    36,046Brazil
    
    
    23,791
    
    
    
    25,677China
    
    
    21,983
    
    
    
    24,490United States of America
    
    
    18,381
    
    
    
    21,789Other countries
    
    
    10,124
    
    
    
    10,393Total
    
    
    246,323
    
    
    
    262,793
  F - 37




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
  23.
    
    Cost of sales
  2006
    
    
    2005
    
    
    2004Opening inventories
    
    
    115,690
    
    
    
    112,601
    
    
    
    97,518Purchases
    
    
    313,207
    
    
    
    295,277
    
    
    
    335,432Labor
    
    
    109,360
    
    
    
    108,327
    
    
    
    107,173Third party manufacturers
    
    
    19,609
    
    
    
    25,340
    
    
    
    26,943Other manufacturing costs
    
    
    33,055
    
    
    
    33,637
    
    
    
    30,136Closing inventories
    
    
    (100,358
    )
    
    
    (115,690
    )
    
    
    (112,601
    )Total
    
    
    490,563
    
    
    
    459,492
    
    
    
    484,601
 24.
    
    Other income (expense), net
  2006
    
    
    2005
    
    
    2004Interest income
    
    
    3,609
    
    
    
    1,857
    
    
    
    1,375Interest expense and bank commissions
    
    
    (2,077
    )
    
    
    (1,803
    )
    
    
    (1,961
    )Interest (expense) income, net
    
    
    1,532
    
    
    
    54
    
    
    
    (586
    )Gains (losses) on foreign exchange, net
    
    
    (4,651
    )
    
    
    3,211
    
    
    
    (4,809
    )Unrealized exchange
gains (losses) on domestic currency swaps
    
    
    5,463
    
    
    
    (4,767
    )
    
    
    7,101Gains (losses) on foreign exchange
    
    
    812
    
    
    
    (1,556
    )
    
    
    2,292Losses on securities, net
    
    
    
    
    
    
    
    
    
    
    (50
    )Other, net
    
    
    503
    
    
    
    4,462
    
    
    
    (5,548
    )Total
    
    
    2,847
    
    
    
    2,960
    
    
    
    (3,892
    )
  F - 38




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
  2006
    
    
    2005
    
    
    2004Net realized gains (losses) on
domestic currency swaps
    
    
    664
    
    
    
    (4,269
    )
    
    
    4,973Net realized gains (losses) on accounts
receivable and payable
    
    
    (8,166
    )
    
    
    5,434
    
    
    
    (1,052
    )Net unrealized gains (losses) on
accounts receivable and payable
    
    
    2,851
    
    
    
    2,046
    
    
    
    (8,730
    )Total
    
    
    (4,651
    )
    
    
    3,211
    
    
    
    (4,809
    )
  2006
    
    
    2005
    
    
    2004Provisions for contingent liabilities
    
    
    (5,828
    )
    
    
    (560
    )
    
    
    (1,133
    )Incentive from landlord
    
    
    1,100
    
    
    
    
    
    
    
    Revenue for capital grants
    
    
    
    
    
    
    4,380
    
    
    
    Export incentive benefits
    
    
    3,371
    
    
    
    2,100
    
    
    
    Penalties to landlords
    
    
    
    
    
    
    (658
    )Impairment loss of goodwill
    
    
    
    
    
    
    
    
    
    
    (6,119
    )Write off of fixed assets
    
    
    
    
    
    
    (2,770
    )
    
    
    (1,311
    )Gain on disposal of subsidiary
    
    
    
    
    
    
    
    
    
    
    3,419Pre-acquisition loss
    
    
    
    
    
    
    495
    
    
    
    Other, net
    
    
    1,860
    
    
    
    1,475
    
    
    
    (404
    )Total
    
    
    503
    
    
    
    4,462
    
    
    
    (5,548
    )
  F - 39




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
 Provisions for contingent liabilities
       Incentive from landlord
   F - 40




---



##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
 Revenue for capital grants
    Export incentive benefits
  Penalties to landlords
  Impairment loss of goodwill
  Gain on disposal of subsidiary
   F - 41




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
 Pre-acquistion loss
  25.
    
    Financial instruments and risk management
   2006
    
    
    2005U.S. dollars
    
    
    90,744
    
    
    
    72,496Euro
    
    
    19,154
    
    
    
    Canadian dollars
    
    
    15,703
    
    
    
    17,698British pounds
    
    
    15,121
    
    
    
    26,783Australian dollars
    
    
    9,934
    
    
    
    10,744Norwegian kroner
    
    
    6,027
    
    
    
    5,928Swedish kroner
    
    
    3,887
    
    
    
    3,441Swiss francs
    
    
    2,584
    
    
    
    656Danish kroner
    
    
    924
    
    
    
    845Japanese yen
    
    
    864
    
    
    
    1,504Total
    
    
    164,942
    
    
    
    140,095
  F - 42




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
  2006
    
    
    2005Contract
    
    
    Unrealized
    
    
    Contract
    
    
    Unrealizedamount
    
    
    gains (losses)
    
    
    amount
    
    
    gains (losses)Assets
    
    
    137,608
    
    
    
    6,141
    
    
    
    46,075
    
    
    
    392Liabilities
    
    
    27,334
    
    
    
    (678
    )
    
    
    94,020
    
    
    
    (5,159
    )Total
    
    
    164,942
    
    
    
    5,463
    
    
    
    140,095
    
    
    
    (4,767
    )
    26.
    
    Fair value of financial instruments
  2006
    
    
    2005Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairvalue
    
    
    value
    
    
    value
    
    
    valueAssets:-   Marketable debts securities
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Liabilities:-   Long-term debt
    
    
    2,751
    
    
    
    2,472
    
    
    
    4,008
    
    
    
    3,614
  F - 43




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
    27.
    
    Application of generally accepted accounting principles in the United States of
America
   Reconciliation of net earnings (loss):
 2006
    
    
    2005
    
    
    2004Net earnings (loss) under Italian GAAP
    
    
    12,339
    
    
    
    (14,624
    )
    
    
    18,353Adjustments to reported income:(a) Revaluation of property,
plant and equipment
    
    
    27
    
    
    
    29
    
    
    
    27(b) Government grants
    
    
    1,453
    
    
    
    3,119
    
    
    
    612(c) Revenue recognition
    
    
    (615
    )
    
    
    2,804
    
    
    
    966(i) Goodwill and intangible assets
    
    
    1,828
    
    
    
    (249
    )
    
    
    (925
    )(j) Share grants and options
    
    
    (254
    )
    
    
    136
    
    
    
    (1,140
    )(k) Translation of foreign financial statements
    
    
    762
    
    
    
    1,684
    
    
    
    (l) Penalties to landlords
    
    
    (658
    )
    
    
    658
    
    
    
    Tax effect of US GAAP adjustments
    
    
    (393
    )
    
    
    (446
    )
    
    
    860Net earnings (loss) in conformity with US GAAP
    
    
    14,489
    
    
    
    (6,889
    )
    
    
    18,753Basic earnings (loss) per share in conformity
with US GAAP
    
    
    0.26
    
    
    
    (0.13
    )
    
    
    0.34Diluted earnings (loss) per share in conformity
with US GAAP
    
    
    0.26
    
    
    
    (0.13
    )
    
    
    0.34
  F - 44




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
 Reconciliation of shareholders equity:
    
    2006
    
    
    2005Shareholders equity under Italian GAAP
    
    
    478,842
    
    
    
    473,025(a) Revaluation of property, plant and equipment
    
    
    (588
    )
    
    
    (615
    )(b) Government grants
    
    
    (14,036
    )
    
    
    (15,489
    )(c) Revenue recognition
    
    
    (6,260
    )
    
    
    (5,645
    )(i) Goodwill and intangible assets
    
    
    5,251
    
    
    
    2,898(k) Translation of foreign financial statements
    
    
    5,424
    
    
    
    (1,860
    )(l) Penalties to landlords
    
    
    
    
    
    
    658Tax effect of US GAAP adjustments
    
    
    (208
    )
    
    
    710Shareholders equity in conformity with US GAAP
    
    
    468,425
    
    
    
    453,682
    F - 45




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
         F - 46




---



##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
 2006
    
    
    2005Effects
    
    
    EffectsIncrease
    
    
    IncreaseConsolidated balance sheet
    
    (Decrease)
    
    
    (Decrease)Trade receivables, net
    
    
    (29,721
    )
    
    
    (33,106
    )Inventories
    
    
    19,824
    
    
    
    22,711Total effect on current assets (a)
    
    
    (9,897
    )
    
    
    (10,395
    )Accounts payable-trade
    
    
    (3,637
    )
    
    
    (4,750
    )Income taxes
    
    
    (1,741
    )
    
    
    (1,468
    )Total effect on current liabilities (b)
    
    
    (5,378
    )
    
    
    (6,218
    )Total effect on shareholders equity (a-b)
    
    
    (4,519
    )
    
    
    (4,177
    )
 Consolidated statement of operations
    
    2006
    
    
    2005
    
    
    2004Net sales
    
    
    3,385
    
    
    
    3,517
    
    
    
    10,640Gross profit
    
    
    498
    
    
    
    2,679
    
    
    
    2,995Operating income
    
    
    (615
    )
    
    
    2,804
    
    
    
    966Total effect on net earnings
    
    
    (342
    )
    
    
    1,737
    
    
    
    1,778
  Net sales
    
    
    943Cost of sale
    
    
    (483
    )Gross profit
    
    
    460Selling expense
    
    
    (417
    )General and administrative expense
    
    
    (175
    )Operating loss
    
    
    (132
    )Other income, net
    
    
    132Loss before taxes
    
    
    Income taxes
    
    
    Net loss
    
    
    
  F - 47




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
   US GAAP
    
    
    IT GAAP
    
    
    DifferenceCurrent assets
    
    
    1,107
    
    
    
    1,107
    
    
    
    Goodwill
    
    
    985
    
    
    
    1,664
    
    
    
    (679
    )Order backlog
    
    
    1,082
    
    
    
    
    
    
    
    1,082Other non current assets
    
    
    1,634
    
    
    
    1,634
    
    
    
    Deferred tax liabilities
    
    
    (403
    )
    
    
    
    
    
    
    (403
    )Current liabilities
    
    
    (2,080
    )
    
    
    (2,080
    )
    
    
    Non current liabilities
    
    
    (306
    )
    
    
    (306
    )
    
    
    Purchase price
    
    
    2,019
    
    
    
    2,019
    
    
    
    
    F - 48




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
   US GAAP
    
    
    IT GAAP
    
    
    DifferenceGoodwill
    
    
    
    
    
    
    600
    
    
    
    (600
    )Intangible assets
    
    
    957
    
    
    
    
    
    
    
    957Leasehold improvements
    
    
    400
    
    
    
    400
    
    
    
    Deferred tax liabilities
    
    
    (357
    )
    
    
    
    
    
    
    (357
    )Cash paid
    
    
    1,000
    
    
    
    1,000
    
    
    
    
  US GAAP
    
    
    IT GAAP
    
    
    DifferenceGoodwill
    
    
    1,778
    
    
    
    2,600
    
    
    
    (822
    )Fixed assets
    
    
    132
    
    
    
    132
    
    
    
    Leasehold improvements
    
    
    468
    
    
    
    468
    
    
    
    Operating lease agreements
    
    
    1,310
    
    
    
    
    
    
    
    1,310Deferred tax liabilities
    
    
    (488
    )
    
    
    
    
    
    
    (488
    )Payable to employes
    
    
    (107
    )
    
    
    (107
    )
    
    
    Purchase price
    
    
    3,093
    
    
    
    3,093
    
    
    
    
  F - 49




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
   US GAAP
    
    
    IT GAAP
    
    
    DifferenceGoodwill
    
    
    37
    
    
    
    100
    
    
    
    (63
    )Fixed assets and leas. impr.
    
    
    38
    
    
    
    38
    
    
    
    Inventory
    
    
    112
    
    
    
    112
    
    
    
    Franchisee agreements
    
    
    100
    
    
    
    
    
    
    
    100Deferred tax liabilities
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )Purchase price
    
    
    250
    
    
    
    250
    
    
    
    
     F - 50




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
  Goodwill
    
    
    Intangibles
    
    
    Deferred taxesUS
    
    
    Italian
    
    
    US
    
    
    Italian
    
    
    US
    
    
    ItalianBalance at December 31, 2003
    
    
    9,179
    
    
    
    12,008
    
    
    
    6,141
    
    
    
    
    
    
    
    (2,088
    )
    
    
    Acquisition of Divani Due S.r.l.
    
    
    1,251
    
    
    
    1,251
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    (2,647
    )
    
    
    (512
    )
    
    
    
    
    
    
    174
    
    
    
    Impairment losses
    
    
    (9,179
    )
    
    
    (6,119
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2004
    
    
    1,251
    
    
    
    4,493
    
    
    
    5,629
    
    
    
    
    
    
    
    (1,914
    )
    
    
    Acquisition of Koineè S.r.l.
    
    
    985
    
    
    
    1,664
    
    
    
    1,082
    
    
    
    
    
    
    
    (403
    )
    
    
    Acquisition of stores in Rome
    
    
    3,709
    
    
    
    3,709
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of a store in Milan
    
    
    
    
    
    
    600
    
    
    
    957
    
    
    
    
    
    
    
    (357
    )
    
    
    Fulfilment of order backlog
    
    
    
    
    
    
    
    
    
    
    (1,082
    )
    
    
    
    
    
    
    403
    
    
    
    Amortization
    
    
    
    
    
    
    (1,344
    )
    
    
    (511
    )
    
    
    
    
    
    
    174
    
    
    
    (23
    )Balance at December 31, 2005
    
    
    5,945
    
    
    
    9,122
    
    
    
    6,075
    
    
    
    
    
    
    
    (2,097
    )
    
    
    (23
    )Acquisition of Milan stores
    
    
    1,778
    
    
    
    2,600
    
    
    
    1,310
    
    
    
    
    
    
    
    (488
    )
    
    
    Acquisition of other stores
    
    
    37
    
    
    
    100
    
    
    
    100
    
    
    
    
    
    
    
    (37
    )
    
    
    Amortization
    
    
    
    
    
    
    (2,521
    )
    
    
    (693
    )
    
    
    
    
    
    
    241
    
    
    
    (494
    )Balance at December 31, 2006
    
    
    7,760
    
    
    
    9,301
    
    
    
    6,792
    
    
    
    
    
    
    
    (2,381
    )
    
    
    (517
    )
     F - 51




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
        F - 52




---



##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
  2005
    
    
    2004Net earnings (loss) in conformity with US GAAP, as reported
    
    
    (6,889
    )
    
    
    18,753Stock-based employee compensation, as reported
    
    
    (136
    )
    
    
    1,140Stock-based employee compensation expense under fair value
    
    
    (756
    )
    
    
    (1,284
    )Pro forma net earnings (loss)
    
    
    (7,781
    )
    
    
    18,609
  Expected life and performance related conditions
    
2 years
    
    
    
    
    
    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
    %
  2005
    
    As reported
    
    
    Pro-formaBasic loss per share
    
    
    (0.13
    )
    
    
    (0.14
    )Diluted loss per share
    
    
    (0.13
    )
    
    
    (0.14
    )
 2004
    
    As reported
    
    
    Pro-formaBasic earnings per share
    
    
    0.34
    
    
    
    0.34Diluted earnings per share
    
    
    0.34
    
    
    
    0.34
   F - 53




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
        F - 54




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
        Comprehensive Income
   F - 55




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
  SFAS No. 151:
  SFAS No. 153:
 Exchanges of Nonmonetary Assets
 SFAS No. 154:
  EITF 05-06:
 Determining the amortization period
for leasehold improvements
  F - 56




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
 EITF 04-13:
 Accounting for Purchases and Sales of Inventory with the Same Counterparty
 SFAS No. 157:
 Fair Value Measurement
 FASB Interpretation No. 48:
 Accounting for Uncertainty in Income
Taxes
  F - 57




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##### Table of Contents



Natuzzi S.p.A. and Subsidiaries
 Notes to the consolidated financial statements  (
 SAB 108
 Considering the effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108)
  F - 58




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##### Table of Contents



SIGNATURES
  NATUZZI S.p.A.(REGISTRANT)By
    
    /s/ Ernesto GrecoErnesto GrecoChief Executive Officer




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##### Table of Contents



Exhibit Index
 1.1
    
    English translation of the by-laws (Statuto) of the Company, as amended and restated as of
January 23, 2007.2.1
    
    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 Section 906 of the Sarbanes-Oxley Act of 2002.