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As filed with the Securities and Exchange Commission on June 30, 2004 SECURITIES AND EXCHANGE COMMISSION   WASHINGTON, D.C. 20549
 FORM 20-F o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(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, 2003 001-14908
(Commission file number) Ducati Motor Holding S.p.A. (Exact name of registrant as specified in its charter)
 Ducati Motor Holding S.p.A.(Translation of registrants name into English) Italy(Jurisdiction of incorporation or organization) Via A. Cavalieri Ducati 3, 40132 Bologna, Italy
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Name of each exchangeTitle of each class
    
    on which registeredAmerican Depositary Shares, each representing ten
Ordinary Shares
    
    New York Stock ExchangeOrdinary
Shares*
    
    New York Stock Exchange
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None
(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
(Title of Class) Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report. 158,500,963 Ordinary Shares Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes    þ   No    o Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17    o   Item 18    þ




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* Not for trading, but only in connection with the registration of the American
Depositary Shares




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TABLE OF CONTENTS PART I
    
    
    2Item 1. Identity of Directors, Senior Management and Advisors
    
    
    2Item 2. Offer Statistics and Expected Timetable
    
    
    2Item 3. Key Information
    
    
    2Selected Consolidated Financial Data
    
    
    2Exchange Rates
    
    
    6Risk Factors
    
    
    7Forward-Looking Statements
    
    
    13Item 4. Information on the Company
    
    
    14History and Development of the Company
    
    
    14Business Overview
    
    
    15Organizational Structure
    
    
    20Products and Distribution
    
    
    22Description of Property
    
    
    37Capital Expenditures
    
    
    38Item 5. Operating and Financial Review and Prospects
    
    
    38Introduction
    
    
    39Critical Accounting Policies
    
    
    43Results of Operations
    
    
    452003 Compared to 2002
    
    
    462002 Compared to 2001
    
    
    49U.S. GAAP Reconciliation
    
    
    51International Financial Reporting Standards (IFRS)
    
    
    52Liquidity and Capital Resources
    
    
    52Other Financial Transactions
    
    
    53Derivative Financial Instruments for Hedging Purposes
    
    
    56Off-Balance Sheet Arrangements with Unconsolidated Entities
    
    
    56Contractual Obligations and Commercial Commitments
    
    
    57Implementation of New Accounting Pronouncements
    
    
    57Research and Development
    
    
    59Item 6. Directors, Senior Management and Employees
    
    
    60Directors
    
    
    60
 1




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Board Committees
    
    
    62Senior Management
    
    
    63Statutory Auditors
    
    
    65Compensation of Directors and Senior Management
    
    
    65Employees
    
    
    67Item 7. Major Shareholders and Related Party Transactions
    
    
    68Major Shareholders
    
    
    68Related Party Transactions
    
    
    69Item 8. Financial Information
    
    
    70Consolidated Financial Statements
    
    
    70Other Financial Information
    
    
    70Dividend Policy
    
    
    71Significant Changes
    
    
    72Item 9. The Offer and Listing
    
    
    72Trading Markets and Share Prices
    
    
    72Item 10. Additional Information
    
    
    73Share Option Plans
    
    
    73Buy Back Plan
    
    
    75Employee Stock Ownership Plan
    
    
    76By-Laws
    
    
    76Significant Differences with Corporate Governance Practices under NYSE Rules
    
    
    91Material Contracts
    
    
    96Exchange Controls
    
    
    96Taxation
    
    
    96Documents on Display
    
    
    100Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    100Item 12. Description of Securities Other than Equity Securities
    
    
    103PART II
    
    
    103Item 13. Defaults, Dividends Averages and Delinquencies
    
    
    103Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    103Item 15. Disclosure Controls and Procedures
    
    
    103Item 16. [Reserved]
    
    
    103
 2




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Item 16A. Audit Committee Financial Expert
    
    
    103Item 16B. Code of Ethics
    
    
    103Item 16C. Principal Accountant Fees and Services
    
    
    104Item 17. Financial Statements
    
    
    104Item 18. Financial Statements
    
    
    104Item 19. Exhibits
    
    
    105SIGNATURES
    
    
    106Exhibit 1.1Exhibit 12.1Exhibit 12.2Exhibit 13.1
  3




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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Our audited financial statements and other financial information contained
in this annual report on Form 20-F for the fiscal year ended December 31, 2003
(the annual report) have been prepared in conformity with generally accepted
accounting principles in Italy (Italian GAAP), except for certain items under
Item 3. Key InformationSelected Consolidated Financial Data, which have been
prepared in conformity with United States generally accepted accounting
principles (U.S. GAAP). For a detailed discussion of the differences between
Italian GAAP and U.S. GAAP, see Notes 29, 30 and 31 to the audited financial
statements. All of our per share and per American Depositary Share (ADS)
information has been adjusted to reflect the ten-for-one split of our shares
that occurred on September 7, 1998.

In this annual report, references to we, us, our, Ducati and the
Company are to Ducati Motor Holding S.p.A. and its subsidiaries and, unless
the context otherwise requires, to their predecessors. References to DMH are
to Ducati Motor Holding S.p.A. only. References to Lit., lira, lire and
Italian lire are to Italian lire, references to US$ , $, dollars and
U.S. dollars are to United States dollars and references to  or euro are
to the euro, the single currency established for certain members of the
European Union (including Italy) upon the commencement of the third stage of
the European Monetary Union (EMU) on January 1, 1999.

Beginning with fiscal year ended December 31, 2001, we publish our audited
financial statements in euro. For fiscal years ending before 2001, we
published our audited financial statements in Italian lire. From January 1,
1999 to February 28, 2002 (the last day in which the lira was legal tender in
Italy), we carried out non-cash transactions in euro as well as lire. For ease
of comparison, we have presented in this annual report (1) our audited
financial statements for fiscal years ending before 2001 and (2) other amounts
formerly stated in Italian lire in euro and dollars, as applicable, as follows:



| |  | converting the lire amounts into euro at the fixed conversion rate of
Lit. 1,936.27 per euro established in connection with the commencement
of the third stage of the EMU;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | converting the euro amount into U.S. dollars at the noon buying rate
in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York
(the Noon Buying Rate) for euro on December 31, 2003 of US$1.2597
per euro; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the Noon Buying Rate for euro on June 28, 2004 was US$1.2145 per euro.
Foreign currency translations in this annual report should not be
taken as representations that the foreign currency amounts actually
represent the equivalent U.S. dollar amounts or could be converted
into U.S. dollars at the rates indicated.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our restated euro financial information depicts the same trends as would
have been presented if we had continued to present our financial information in
lire.

In this annual report, references to the term cc are to cubic
centimeters, a measure of engine displacement. References to the terms
introduce or launch in respect of a model or line of Ducati motorcycles are
to the presentation of such model or family at international trade shows held
in September of each year for sale the year thereafter. References to the term
registrations are to the number of newly produced motorcycles registered with
governmental authorities over the relevant period, and are a standard industry
measure of retail motorcycle sales that generally excludes sales in countries
in which government registration systems are nonexistent or unreliable. Unless
otherwise indicated, registrations of Ducati motorcycles include our estimates
of sales in countries where government registration data is not yet available
or is otherwise nonexistent or unreliable.

1



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Market data used throughout this annual report was obtained from our
internal dealer data, surveys commissioned by us or industry publications.
Registration data is based on our analysis of the following published sources:  
    
    ACEM (Association des Constructeurs Européens de Motocycles) and GIRAL
(General Research International Associates Ltd.), an independent Swiss
motorcycle consultancy, for the Western European markets;  
    
    ANCMA (Associazione Nazionale Ciclo Motociclo Accessori), for Italy;  
    
    MIC (Motorcycle Industry Council), for the United States;  
    
    Nirinsha Shinbun, for Japan; and  
    
    the Australian Bureau of Statistics, for Australia. Although we believe that these sources are reliable, we have not
independently verified the information they have provided to us. We have also
not sought the consent of any of these entities to refer to their data in this
annual report. Ducati is our registered trademark. This annual report also includes
the trademarks of other companies. 
 PART I 
 Item 1. Identity of Directors, Senior Management and Advisors Not applicable. 
 Item 2. Offer Statistics and Expected Timetable Not applicable. 
 Item 3. Key Information 
 Selected Consolidated Financial Data The following table sets forth our selected historical consolidated
financial data as of and for the years ended December 1999, 2000, 2001, 2002
and 2003, which have been derived from our audited financial statements
included in this annual report or in our previous filings with the Securities
and Exchange Commission. Our audited financial statements and the selected
financial data set forth below have been prepared in conformity with Italian
GAAP. In addition, the following table sets forth certain selected financial
data prepared in conformity with U.S. GAAP. For information concerning
differences between Italian GAAP and U.S. GAAP as applied to our audited
financial statements, see Notes 29, 30 and 31 to the audited financial
statements. The selected consolidated financial data set forth below (except for other
financial data) should be read in conjunction with the audited financial
statements and Item 5. Operating and Financial Review and Prospects included
elsewhere in this annual report. 2




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Selected Consolidated Financial Data in Conformity with Italian GAAP Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(euro and dollars in thousands, except per share and ADS data) (1)CONSOLIDATED
STATEMENT OF
OPERATIONS DATANet sales
    
    
    294,527
    
    
    
    379,534
    
    
    
    407,815
    
    
    
    412,971
    
    
    
    388,241
    
    
    $
    489,067Cost of goods sold(2)
    
    
    (176,540
    )
    
    
    (228,890
    )
    
    
    (241,266
    )
    
    
    (249,264
    )
    
    
    (253,406
    )
    
    
    (319,216
    )Gross profit
    
    
    117,987
    
    
    
    150,644
    
    
    
    166,549
    
    
    
    163,707
    
    
    
    134,835
    
    
    
    169,851Selling, general and
administrative
expenses
    
    
    (70,704
    )
    
    
    (95,604
    )
    
    
    (107,968
    )
    
    
    (122,032
    )
    
    
    (112,806
    )
    
    
    (142,102
    )Depreciation of
property, plant and
equipment
    
    
    (6,628
    )
    
    
    (7,446
    )
    
    
    (9,998
    )
    
    
    (11,993
    )
    
    
    (15,013
    )
    
    
    (18,912
    )Amortization of
intangible assets
    
    
    (17,623
    )
    
    
    (22,147
    )
    
    
    (24,582
    )
    
    
    (21,991
    )
    
    
    (23,876
    )
    
    
    (30,076
    )Other operating
revenues
    
    
    3,336
    
    
    
    4,952
    
    
    
    7,547
    
    
    
    10,795
    
    
    
    23,178
    
    
    
    29,197Operating
income/(loss)
    
    
    26,368
    
    
    
    30,399
    
    
    
    31,548
    
    
    
    18,486
    
    
    
    6,318
    
    
    
    7,958Interest expense, net
    
    
    (11,886
    )
    
    
    (8,814
    )
    
    
    (12,750
    )
    
    
    (11,472
    )
    
    
    (9,273
    )
    
    
    (11,681
    )Foreign exchange
gain/(loss), net
    
    
    (2,427
    )
    
    
    (10,615
    )
    
    
    677
    
    
    
    1,363
    
    
    
    2,517
    
    
    
    3,171Other non-operating
income/(expense)
net(3)
    
    
    172
    
    
    
    6,702
    
    
    
    (28
    )
    
    
    134
    
    
    
    558
    
    
    
    703Profit/(loss) before
income taxes and
minority interest
    
    
    12,227
    
    
    
    17,672
    
    
    
    19,447
    
    
    
    8,511
    
    
    
    120
    
    
    
    151Income taxes
    
    
    (3,179
    )
    
    
    (7,189
    )
    
    
    (8,894
    )
    
    
    (1,986
    )
    
    
    (80
    )
    
    
    (101
    )Minority interest
    
    
    (127
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Net profit/(loss)
    
    
    8,921
    
    
    
    10,483
    
    
    
    10,553
    
    
    
    6,525
    
    
    
    40
    
    
    
    50Net profit/(loss)
per share(4)
    
    
    0.056
    
    
    
    0.066
    
    
    
    0.066
    
    
    
    0.041
    
    
    
    
    
    
    $
    Net profit/(loss)
per ADS(4)
    
    
    0.56
    
    
    
    0.66
    
    
    
    0.66
    
    
    
    0.41
    
    
    
    
    
    
    $
    OTHER FINANCIAL DATACapital expenditures
    
    
    8,706
    
    
    
    11,328
    
    
    
    13,464
    
    
    
    23,819
    
    
    
    15,746
    
    
    
    19,835Cash flows from
operating activities
    
    
    15,349
    
    
    
    41,606
    
    
    
    13,752
    
    
    
    44,911
    
    
    
    28,970
    
    
    
    36,494Cash flows from
investing activities
    
    
    (27,336
    )
    
    
    (26,877
    )
    
    
    (29,302
    )
    
    
    (44,345
    )
    
    
    (33,790
    )
    
    
    (42,565
    )Cash flows from
financing activities
    
    
    (15,371
    )
    
    
    (12,244
    )
    
    
    25,491
    
    
    
    (310
    )
    
    
    4,833
    
    
    
    6,088
 3




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As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003CONSOLIDATED BALANCE SHEET DATACash and cash equivalents
    
    
    11,279
    
    
    
    13,764
    
    
    
    23,705
    
    
    
    23,960
    
    
    
    23,973
    
    
    $
    30,199Net working capital(5)
    
    
    56,709
    
    
    
    56,133
    
    
    
    105,488
    
    
    
    97,546
    
    
    
    93,954
    
    
    
    118,354Property, plant and equipment, net
    
    
    47,228
    
    
    
    51,110
    
    
    
    54,576
    
    
    
    66,402
    
    
    
    67,167
    
    
    
    84,610Total assets
    
    
    349,934
    
    
    
    389,573
    
    
    
    447,732
    
    
    
    447,403
    
    
    
    457,033
    
    
    
    575,724Total indebtedness(6)
    
    
    123,595
    
    
    
    111,129
    
    
    
    132,140
    
    
    
    133,523
    
    
    
    151,209
    
    
    
    190,478Total shareholders equity
    
    
    131,077
    
    
    
    143,039
    
    
    
    154,597
    
    
    
    159,741
    
    
    
    158,399
    
    
    
    199,535
 Selected Consolidated Financial Data in Conformity with U.S. GAAP (in thousands)(7) Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(euro and dollars in thousands, except per share and ADS data) (1)CONSOLIDATED
STATEMENT OF
OPERATIONS DATAOperating income(8)
    
    
    15,391
    
    
    
    33,560
    
    
    
    33,691
    
    
    
    16,148
    
    
    
    6,321
    
    
    $
    7,963Profit/(loss)
before income
taxes, minority
interest and
extraordinary items
    
    
    (418
    )
    
    
    14,631
    
    
    
    20,308
    
    
    
    9,973
    
    
    
    852
    
    
    
    1,073Net profit/(loss)
    
    
    (4,438
    )
    
    
    7,094
    
    
    
    14,178
    
    
    
    6,966
    
    
    
    (610
    )
    
    
    (768
    )Net profit/(loss)
per share
(basic)(9)
    
    
    (29
    )
    
    
    45
    
    
    
    77
    
    
    
    44
    
    
    
    (4
    )
    
    
    (5
    )Net profit/(loss)
per ADSs (basic)
    
    
    (290
    )
    
    
    450
    
    
    
    770
    
    
    
    440
    
    
    
    (44
    )
    
    
    (55
    )Net profit/(loss)
per share (diluted)
    
    
    
    
    
    
    43
    
    
    
    76
    
    
    
    43
    
    
    
    (4
    )
    
    
    (5
    )Net profit/(loss)
per ADSs (diluted)
    
    
    
    
    
    
    430
    
    
    
    760
    
    
    
    430
    
    
    
    (44
    )
    
    
    (55
    )OTHER FINANCIAL DATAStock-based
compensation
    
    
    14,543
    
    
    
    2,997
    
    
    
    204
    
    
    
    101
    
    
    
    67
    
    
    $
    84Depreciation and
amortization(10)
    
    
    11,985
    
    
    
    13,187
    
    
    
    17,625
    
    
    
    16,975
    
    
    
    16,628
    
    
    
    20,946Cash flows from
operating
activities
    
    
    11,074
    
    
    
    27,364
    
    
    
    (3,444
    )
    
    
    4,679
    
    
    
    (2,231
    )
    
    
    (2,318
    )Cash flows from
investing
activities
    
    
    (9,840
    )
    
    
    (13,819
    )
    
    
    (9,759
    )
    
    
    (23,889
    )
    
    
    (14,019
    )
    
    
    (17,660
    )Cash flows from
financing
activities
    
    
    (2,439
    )
    
    
    (11,505
    )
    
    
    23,093
    
    
    
    19,890
    
    
    
    16,333
    
    
    
    20,575
 4




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As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003CONSOLIDATED
BALANCE SHEET DATATotal assets
    
    
    269,671
    
    
    
    312,332
    
    
    
    357,824
    
    
    
    398,495
    
    
    
    411,888
    
    
    $
    518,855Total shareholders
equity
    
    
    50,369
    
    
    
    62,346
    
    
    
    77,717
    
    
    
    83,483
    
    
    
    81,154
    
    
    
    102,230
  (1)
    
    Amounts are translated into U.S. dollars by converting the resulting euro
amount into U.S. dollars at the Noon Buying Rate for euro on December 31,
2003 of US$ 1.2597 per euro.  (2)
    
    These amounts exclude depreciation of property, plant and equipment and
amortization of intangible assets.  (3)
    
    For the year ended December 31, 2000, this item included a  6.7 million
gain recorded in connection with a voluntary, tax-driven
write-up of the book value of our trademark in the statutory accounts of
DMH. For the year ended December 31, 2003, this item included  5.2
million of gains recorded in connection with a voluntary,
tax driven write up of the book value of our trademark in the statutory
accounts of DMH, and  4.0 million of restructuring costs
related to a reorganization plan that provided for the termination by
mutual agreement of a certain number of employees in exchange for
severance incentives. See Item 5. Operating and Financial Review and
Prospects2003 Compared to 2002.  (4)
    
    For Italian GAAP purposes, the number of shares and ADSs is assumed to be
the shares and ADSs outstanding at the period-end; for U.S. GAAP purposes,
the number of shares has been calculated as the weighted average number of
shares and ADSs outstanding during the period. Italian per share numbers
do not reflect the effect of incremental shares, if any, that would have
been outstanding, assuming all options granted under our share option
plans were exercised during the relevant period.  (5)
    
    Net working capital is calculated as total current assets less total
current liabilities. Cash and cash equivalents, non-commercial
receivables and payables with Cagiva S.p.A. and the current portion of
indebtedness (long-term debt and short-term bank borrowings) are excluded
from such calculation.  (6)
    
    Total indebtedness comprises long-term debt (including current portion)
and short-term bank borrowings.  (7)
    
    Financial data prepared in conformity with U.S. GAAP is presented as
supplemental information for investors; our audited financial statements
included in this annual report are prepared in conformity with Italian
GAAP. For information concerning certain differences between Italian GAAP
and U.S. GAAP as applied to our audited financial statements, see Notes
29, 30 and 31 to the audited financial statements.  (8)
    
    Operating income, profit/(loss) before income taxes, minority interest
and extraordinary items and net profit/(loss) are stated after deducting a
non-cash expense for stock-based compensation of  3.0 million,  0.2
million,  0.1 million and  0.1 million for each of the years 2000
through 2003, respectively.  (9)
    
    We have not paid any dividends for the periods presented.  (10)
    
    Effective January 1, 2002, we adopted the provisions of SFAS 142, 
Goodwill and Other Intangible Assets. Subsequent to the adoption of SFAS
142, we do not amortize goodwill for U.S. GAAP purposes, but do test for
impairment. For Italian GAAP purposes, we continue to amortize goodwill.
In addition, goodwill in our Italian GAAP financial statements relating to
the 1996 acquisition of the Ducati brand name, trademark and related
intellectual property rights (see Notes 1(b) and 29 to our audited
consolidated financial statements) is not considered goodwill under U.S.
GAAP, but is reflected as part of Brand Name and therefore continues to
be amortized. 5




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Exchange Rates Fluctuations in the exchange rate between the euro and the U.S. dollar
will affect the U.S. dollar equivalent of euro prices of the shares listed on
the Mercato Telematico Azionario (Telematico), the automated screen-based
trading system managed by Borsa Italiana S.p.A. (the Italian Stock Exchange)
and, as a result, are likely to affect the market price of the ADSs in the
United States. Exchange rate fluctuations will also affect the U.S. dollar
amounts received by holders of ADSs on the conversion into U.S. dollars by the
Depositary of any cash dividends declared and paid in euro on the shares
represented by the ADSs. The following table sets forth the Noon Buying Rate for euro expressed in
U.S. dollars per euro rounded to the nearest one hundredth of a U.S. cent for
the periods indicated. Amounts for the year 1998 (before the adoption of the
euro) have been calculated based on the Noon Buying Rates for the Italian Lira,
converted into euro at the official fixed conversion rate of  1= Lit. 1,936.27
and expressed in dollars per  1. Year:
    
    Average(1)
    
    At Period End1999
    
    
    1.0588
    
    
    
    1.00702000
    
    
    0.9207
    
    
    
    0.93882001
    
    
    0.8909
    
    
    
    0.89012002
    
    
    0.9495
    
    
    
    1.04852003
    
    
    1.1411
    
    
    
    1.2597
 Month ending:
    
    High
    
    LowDecember 31, 2003
    
    
    1.2597
    
    
    
    1.1956January 31, 2004
    
    
    1.2853
    
    
    
    1.2389February 29, 2004
    
    
    1.2848
    
    
    
    1.2426March 31, 2004
    
    
    1.2431
    
    
    
    1.2088April 30, 2004
    
    
    1.2358
    
    
    
    1.1802May 31, 2004
    
    
    1.2274
    
    
    
    1.1801
  (1)
    
    Average of the Noon Buying Rate for euro for the last business day of
each month in the period. The effective Noon Buying Rate for euro on June 28, 2004 was US$ 1.2145
per 1 euro. 6




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Risk Factors Investing in our shares or ADSs involves certain risks. You should
carefully consider each of the following risks and all of the information
included in this annual report. The world motorcycle market is highly competitive The world motorcycle market is highly competitive. Our principal
competitors are four Japanese manufacturers (Honda, Suzuki, Yamaha and
Kawasaki), two European manufacturers (Triumph and BMW) and, to a more limited
extent, Harley-Davidson of the United States. Additional competitors,
including MV Agusta and Aprilia of Italy, also produce motorcycles that compete
with ours. Motorcycles produced by Harley-Davidsons Buell subsidiary also
compete with our Sport Naked motorcycles. Most of our competitors have
substantially greater financial resources, are more diversified and have
significantly higher sales volumes (allowing for greater economies of scale)
and market share than us. Certain of our competitors may also have shorter
product development cycles and may be able to bring new products to market more
quickly than we can. Like other competitors in the motorcycle industry, our
competitiveness is also influenced by our performance on international
professional racing circuits. We cannot assure you that the racing success of
Ducati motorcycles in the World Superbike Championship will continue or will be
replicated in the Moto GP Championships, which we re-entered in 2003. Racing
success may also be affected by events outside of our control, such as injuries
or accidents occurring to our riders. We are also subject to potential price
pressure from our competitors that may result from appreciation of the euro
relative to other currencies, in particular the U.S. dollar, the U.K. pound
sterling and the Japanese yen. In general, we cannot assure you that, in the
future, we will be able to maintain our present competitive position. See
Item 4. Information on the CompanyProducts and DistributionMarket Share and
Competition. Demand for motorcycles is cyclical In the past, the motorcycle industry has been subject to significant
changes in demand due to changing social and economic conditions affecting
discretionary consumer income, such as employment levels, business conditions,
taxation rates, fuel costs, interest rates and other factors. We have
experienced periods (notably 5.0% in 2002) of material decreases in demand in
our target market (the Sport sub-segment of the market for road motorcycles
with engine displacements of 500cc or greater (the >500cc Road Market)),
which has had a material effect on our results of operations for such periods.
The factors underlying such changes in demand are beyond our control, and
demand for our products may again decline in the future, which could have a
further negative impact on our business, prospects, results of operations or
financial condition. Our business is seasonal and we are required to predict levels of demand in
advance and provide current motorcycle models to the market on a timely basis Like other competitors in the motorcycle industry, our operations are
characterized by seasonal fluctuations in demand and a stable production level
(although we shut down production each year during the month of August and the
last two weeks of December). Annual retail demand for motorcycles is highest
during April, May and June, resulting in peak factory sales during March, April
and May and a build-up of inventory from September to February. As a result,
we must plan overall annual production levels based on predicted levels of
demand for our products, which we derive in part from our own market
assessments and long-term, non-binding purchase commitments from our
distributors. We must also provide current models to the market during the
critical annual spring season as demand typically shifts in the second half of
the year to models introduced for the ensuing year. Mismanagement of our
production levels or delayed delivery of current models can result in excess
inventories and resulting 7




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promotional expenses (i.e., rebates, discounts, complimentary accessories
and other incentives) that we incur to reduce the same. See the discussion of
our selling, general and administrative expenses in Item 5. Operating and
Financial Review and Prospects. We cannot assure you that we will accurately
predict annual and long-term demand in the future or in any event provide our
current motorcycles to the market on a timely basis. Any failure to do so may
have a material adverse effect on our business, prospects, results of
operations or financial condition. In addition, a number of factors could
cause dealers to delay or cancel orders already placed with us, including
general economic conditions, competitive factors and changes in governmental
regulation such as import/export rules and tariff rates. We are dependent on our suppliers, and increases in component prices may
negatively affect our operations We purchase virtually all of our motorcycle parts and components from
third-party suppliers. With the exception of a limited number of long-term
component supply contracts for periods ranging from one to three years, we only
enter into short-term, rolling contracts with suppliers. In addition, we
typically contract with our suppliers on a non-exclusive basis, which allows us
to replace our suppliers at any time. Generally, individual motorcycle
components are available from a variety of sources, and our policy is to
identify at least two sources of supply for each component. However, we rely
upon single-source suppliers for certain components, including platform
components. See Item 4. Information on the CompanyProducts and
DistributionProductionAssembly Operations. Our assembly operations may be
interrupted or otherwise adversely affected by delays in the supply of parts
and components from third-party suppliers. They may also be interrupted if
parts or components become unavailable on commercially reasonable terms in the
future. Even if parts and components are available from alternative sources,
we may face increased costs and production delays in connection with the
replacement of an existing supplier with one or more alternative suppliers.
These factors could have a material adverse effect on our business, prospects,
results of operations or financial condition. See Item 4. Information on the
CompanyProducts and Distribution. Like other competitors in the motorcycle industry, our operations are
affected by the prices of motorcycle components. The prices of motorcycle
components have been subject to fluctuations in the past and may be subject to
fluctuations in the future. These fluctuations may result from fluctuations in
the prices of raw materials (including commodities such as steel, aluminum,
energy and oil-related products) from which these components are manufactured.
In the first four months of 2004, the price of steel increased from 20% to 40%
(depending on the type of steel), resulting in an average increased
per-motorcycle production cost of approximately two percent. We believe that
it is likely that there will be further increases in steel prices. Any
increase in the prices of motorcycle components may have a material adverse
effect on our business, prospects, results of operations or financial
condition. We have made significant investments and capital expenditures as to which we
may not receive a return In 2002 and 2003, our capital expenditures in property, plant and
equipment were approximately  23.8 million and  15.7 million. Such
expenditures in 2002 principally related to our research and development
initiatives (i.e., the launch of the Multistradaand the 999). In 2002, we
also invested in research and development activities to develop the Ducati
Desmosedici motorcycle in connection with our participation in the Moto GP
Championship (which are included in our costs of goods sold for 2002). We had
fewer expenditures in 2003 owing to the reduced capital requirements relating
to the development of our new Sportclassic motorcycle model line. If any of
the above initiatives is unsuccessful, our related past and anticipated future
capital expenditures and several other research and development expenditures
may not result in any return or material benefit to us, which could have a
material adverse effect on our business, prospects, results of operations or
financial condition. 8




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We may be subject to significant product liability claims Like our competitors, we are exposed to possible claims for personal
injury from the use of our motorcycles, particularly in the United States,
where product liability claims grounded on personal injuries are more common
than in other countries. Although no claims of this kind have been made
against us that are not covered by our existing product liability insurance
coverage, such claims may arise in the future. A partially or completely
uninsured claim, if successful and of significant magnitude, could have a
material adverse effect on our business, prospects, results of operations or
financial condition. See Item 4. Information on the CompanyProducts and
DistributionInsurance; Product Liability. Our motorcycles may contain defects Like competing motorcycles, our products may have unanticipated defects.
Product defects have given rise to recalls of our motorcycles in the past and
may do so again in the future. Any unanticipated defects in our motorcycles or
recalls could be costly to us and may have a material adverse effect on the
Ducati brand and our business, prospects, results of operations and financial
condition. We rely on a single manufacturing facility Ducati motorcycles are manufactured at our sole production facility
located in Borgo Panigale outside Bologna, Italy. A significant interruption
of production at this facility would have a material adverse effect on our
business, prospects, results of operations and financial condition. Strikes and other labor disturbances may negatively impact our operations We operate in a heavily unionized industry and are subject to the risk of
strikes and other work stoppages. Our employees in Italy are subject to
national and company-specific bargaining agreements. Our national collective
bargaining agreement was renewed in May 2003, and expires in December 2006
generally, and in December 2004 as to the economic aspects. Our
company-specific collective bargaining agreement was signed in December 2003
and expires in December 2007. Our operations have not suffered material disruption as a result of
strikes or work stoppages in the recent past. However, we have been, and in
the future may be, subject to strikes and work stoppages in connection with the
negotiation of company-specific or national labor contracts. Any strikes, work
stoppages or other industrial actions may interrupt the production of
motorcycles and could have a material adverse effect on our business,
prospects, results of operations and financial condition. Our motorcycle design and technology are not protected by intellectual property
rights The design and technology of our motorcycles, including the Desmodromic
valve control system, are not protected by any material patent, trademark or
other intellectual property rights, other than the registered trademarks
associated with the Ducati brand itself. In particular, the technical features
that distinguish Ducati motorcycles are not protected by material patents or
other intellectual property rights. The component parts of our motorcycles are
manufactured according to well-known techniques and include components that are
not unique to our products. As a result, the design and technology of our
motorcycles are vulnerable to being copied or imitated by competitors, and
certain of our competitors have copied our technology and design features in
the past. Our competitors may have or develop equivalent or superior
manufacturing and design skills, and may develop an enhancement that will be
patentable or otherwise protected from duplication by others. These events
could have a material adverse effect on our business, prospects, results of
operations and financial condition. 9




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We are dependent on qualified personnel Like our competitors, our commercial success depends in part upon our
ability to continue to attract and retain highly qualified design, technical
and commercial management and other personnel. We cannot assure you that the
members of our management team will continue working for us in the long term.
In 2003 and 2004, many such personnel did not receive performance bonuses as
part of their compensation owing to our failure to meet certain financial
targets in 2002 and 2003, respectively. As a result, we may have increased
difficulty in retaining such personnel, especially if the labor market in
general improves. See Item 6. Directors, Senior Management and Employees.
Competition in general for qualified personnel in the motorcycle industry is
intense and we could be materially adversely affected by the loss of key
employees. We cannot assure you that we will be able to attract, recruit and
retain sufficient qualified personnel to remain competitive. The international nature of our operations exposes us to risks Like our competitors, we distribute motorcycles and other products in many
countries and face risks related to our international operations, including:  
    
    changes in governmental regulations;  
    
    licensing requirements;  
    
    tariffs or taxes and other trade barriers;  
    
    price, wage and exchange controls;  
    
    political, social and economic instability;  
    
    inflation; and  
    
    interest rate fluctuations. Any of these factors could materially adversely affect our business, prospects,
results of operations and financial condition. We are subject to foreign currency exchange rate fluctuations, particularly
with respect to the U.S. dollar We are exposed to foreign exchange rate risks. Our sales and operating
profits are affected by the impact of fluctuations in currency exchange rates
between the euro and certain foreign currencies on product prices and operating
expenses. In 2003, we had net sales denominated in U.S. dollars, Japanese yen
and U.K. pounds sterling that together exceeded 32.3% of our total net sales
for the year (with sales in U.S. dollars accounting for approximately 14.4% of
our total net sales), while our costs are principally denominated in euro. Fluctuations in the exchange rates of certain foreign currencies,
principally the U.S. dollar, the U.K. pound sterling and the Japanese yen,
relative to the euro may adversely affect our sales and operating results and
the international competitiveness of our Italian-based manufacturing
operations. We are also subject to potential price pressure from our
competitors that may result from appreciation of the euro relative to other
currencies, in particular the U.S. dollar, the U.K. pound sterling and the
Japanese yen. In 2003, the euros appreciation over other currencies
(including the U.S. dollar, where the appreciation was approximately 19.4% on
average, and 20.4% at year end), contributed to the decline in our sales and
operating results. We engage in foreign exchange transactions to hedge
portions of our transactional exposure to fluctuations in exchange rates
between the euro and various foreign currencies, including the U.S. dollar, the
U.K. pound sterling and the Japanese yen. Our hedging policy until the end of
2003 consisted in covering, during the last quarter of each year, the sales of
the coming year. Beginning in January 2004, we have shifted to an 18-month
rolling coverage. We cannot assure you that 10




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##### Table of Contents



the foregoing will adequately protect us from the effects of future
exchange rate fluctuations. See Item 11. Quantitative and Qualitative
Disclosures About Market Risk. We are subject to strict environmental, safety and other governmental
regulations Motorcycles sold in the United States, the European Union and all other
countries are subject to environmental emissions regulations and safety
standards. For example, applicable regulations in the United States include
the emissions and noise standards of the U.S. Environmental Protection Agency
and the more stringent emissions standards of the State of California Air
Resources Board. Ducati motorcycles sold in the United States are also subject
to the National Traffic and Motor Vehicle Safety Act and the rules promulgated
thereunder by the National Highway Traffic Safety Administration. All of our
motorcycle models are required to comply with applicable homologation
regulations in the countries in which they are distributed. As these laws and
regulations become increasingly stringent, future compliance requirements may
result in increased costs or the withdrawal of our motorcycles from certain
markets. As a result, future environmental, safety and other regulations may
have a material adverse effect on our business, prospects, results of
operations and financial condition. We are also subject to a number of domestic Italian governmental
regulations relating to the use and storage of materials, discharge and
disposal of wastes from the factory and safety standards of facilities and
processes. We have not been subject to material environmental or safety claims
in the past and believe that our activities conform in all material respects to
presently applicable environmental and safety regulations. However, the
failure to comply with present or future regulations could result in damages or
fines, suspension of production or cessation of certain activities. New
regulations could require us to incur significant expenses that could have an
adverse effect on our results of operations. Any failure to control the use
of, or adequately restrict the discharge of, hazardous substances or to comply
with safety requirements and legislation could subject us to significant
liabilities. See Item 4. Information on the CompanyProducts and
DistributionGovernmental and Environmental Regulation. We have incurred indebtedness On May 31, 2000, we issued a series of Eurobond notes (the Notes) in the
aggregate principal amount of  100.0 million, which mature on May 31, 2005.
Since their issuance, to reduce interest costs, we have repurchased an
aggregate principal amount of approximately  39.3 million of the Notes  9.0
million in 2001 (funded through advances proceeds from the sale and lease-back
transaction related to our Bologna facility), none in 2002,  15.3 million
during 2003 and  15.0 million during the first six months of 2004 (in each
case, funded from proceeds of corresponding committed bank loans). The terms
and conditions of the Notes do not include any financial coverage ratios or
performance covenants, but do limit our ability to create liens on assets to
secure (i) indebtedness represented by bonds, notes, debentures or other
negotiable instruments or (ii) any guarantee of such indebtedness. Events of
default under the terms and conditions of the Notes, which would entitle the
noteholders to declare the Notes to be immediately due and payable, include but
are not limited to, failure to pay interest or principal under the Notes when
due, failure to comply with any obligations under or in respect of the Notes,
failure to pay other indebtedness when due, acceleration of other indebtedness
and the occurrence of certain bankruptcy or other insolvency events. If the
noteholders declare the Notes to be immediately due and payable, our business,
prospects, results of operations and financial condition would be materially
and adversely affected. As a result of seasonal working capital requirements, our borrowings
fluctuate significantly during the year, generally peaking from February to
April. We expect to finance our working capital requirements by drawing on
credit lines that several Italian commercial banks have made available to us. 11




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During 2003, our cash flow from operating activities was  29.0 million
and our interest payments on indebtedness during the period were  6.4 million,
or 22.0% of our cash flow from operating activities. We cannot assure you that our operating results, cash flow and capital
resources will be sufficient for payment of our indebtedness in the future.
Further, we cannot assure you that we will be able to continue to draw on bank
credit lines to meet our seasonal working capital requirements. Absent
sufficient operating results, cash flow and capital resources, we could face
substantial liquidity problems and might be required to dispose of material
assets or operations to meet our debt service and other obligations. In
addition, we may be required to reduce or delay planned expansion and capital
expenditures, restructure or refinance our indebtedness or seek additional
equity capital. We cannot assure you that any of these strategies could be
effected on satisfactory terms, if at all. One or more of these strategies may
have a material adverse effect on our business or the price of our shares and
ADSs. Our ability to pay dividends is subject to limitations DMH has not paid any cash dividends on its shares since its formation in
1996. Italian law imposes certain restrictions on the distribution of dividends
by Italian companies. In particular, Italian law prohibits distributing
dividends other than from net income or distributable reserves set forth in a
companys statutory accounts approved by a meeting of shareholders and after
the establishment of certain compulsory reserves. In addition, if losses from
previous fiscal years have reduced a companys capital, dividends may not be
paid until the capital is reconstituted or its stated amount is reduced by the
amount of such losses. The application of these restrictions could limit our
ability to make distributions to holders of the shares and ADSs. You may face difficulties in protecting your rights as shareholders or holders
of ADSs DMH is incorporated under the laws of the Republic of Italy. As a result,
the rights and obligations of our shareholders and certain rights and
obligations of holders of our ADSs are governed by Italian law and DMHs
Statuto (or By-Laws). These rights and obligations are different from those
that apply to U.S. corporations. Under Italian law, an investor that has
acquired more than 30.0% of the shares of a company (or that already holds more
than 30.0%, and acquires more than an additional 3.0% of such shares during a
12-month period) whose shares are listed on the Telematico is required to
launch a tender offer for all of the shares of such company, but an investor
may acquire up to a 30.0% interest without being subject to such an obligation.
Further, under Italian law, ADS holders of ADSs have no right to vote the
shares underlying their ADSs, although under the deposit agreement governing
our ADSs, ADS holders have the right to give instructions to The Bank of New
York, the ADS depositary, as to how they wish such shares to be voted. For
these reasons, our public share and ADS holders may find it more difficult to
protect their interests against actions of our management, board of directors
or shareholders than they would as shareholders of a corporation incorporated
in the United States. The price of our shares and ADSs may be volatile No predictions can be made as to the effect, if any, that sales of our
shares or the availability of our shares for sale will have on the market price
of our shares or ADSs prevailing from time to time. Future sales of our shares
by shareholders, the issue and sale of new shares by us, or the perception that
such sales could occur may adversely affect prevailing market prices for our
shares and ADSs. You may not be able to resell your shares or ADSs at or above
the price at which you purchase them due to a number of factors, including:  
    
    a possible lack of liquidity in the market for our shares or ADSs; 12




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
    
    differences between our actual financial or operating results and
those expected by investors and analysts;  
    
    changes in analysts recommendations or projections;  
    
    pricing and competition in the motorcycle industry;  
    
    new statutes or regulations or changes in interpretations of existing
statutes and regulations affecting our business; and  
    
    changes in general market conditions. Control by certain shareholders As of June 28, 2004, TPG Motorcycle Acquisition L.P. (TPG Acquisition),
a limited partnership which is part of a group of investment funds
known as Texas Pacific Group (TPG), owned 33.15% of
our outstanding shares and controls us. In addition, as of May 6, 2004, Harris
Associates, L.P. and Giorgio Seragnoli owned 7.57% and 4.93%, respectively, of
our outstanding shares. The remainder of our shares are widely held. As a
result, TPG has the power to determine (or holds a veto right in respect of)
matters requiring shareholder approval, including the appointment of our board
of directors. The concentration of our beneficial ownership may also have the
effect of delaying, deterring or preventing a change in our control, may
discourage bids for our shares or ADSs at a premium over the market price of
the shares or ADSs and may otherwise adversely affect the market price of our
shares or ADSs. 
 Forward-Looking Statements We make forward-looking statements in this annual report. Examples of
such forward-looking statements include, but are not limited to: (i)
projections or expectations of revenues, income (or loss), earnings (or loss)
per share, dividends, capital structure or other financial terms or ratios;
(ii) our statements of plans, objectives or goals, including those related to
products or services; (iii) statements of future economic performance; and (iv)
statements of assumptions underlying such statements. Words such as
believes, anticipates, expects, intends and plans and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements. By their very nature, forward-looking statements involve inherent risks
and uncertainties, both general and specific, and risks exist that the
predictions, forecasts, projections and other forward-looking statements will
not be achieved. We caution readers that a number of important factors could
cause actual results to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements. These factors include:  
    
    the effects of our leverage on our operating results;  
    
    the effects of external economic factors on the motorcycle industry;  
    
    the effects of competition in the geographic and business areas in which we conduct operations;  
    
    the effects of, and changes in, regulation and government policy;  
    
    other changes in our operating environment; and  
    
    our success in managing the risks associated with these and other factors. We caution that the foregoing list of important factors is not exhaustive.
When relying on forward-looking statements to make decisions with respect to
Ducati, investors and others should carefully consider the foregoing factors
and other uncertainties and events. Such forward-looking statements speak only
as of the date on which they are made, and we do not undertake any obligation
to update or revise any of them, whether as result of new information, future
events or otherwise. 13




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Item 4. Information on the Company 
 History and Development of the Company We are one of the worlds leading manufacturers of high-performance sport
motorcycles. Founded in 1926, we are widely recognized among motorcycle
enthusiasts for producing racing-inspired motorcycles characterized by unique
engine features, innovative design, advanced engineering and overall technical
excellence. With an extensive racing pedigree dating to the 1950s, our
motorcycles have dominated the World Superbike Championship, where we have won
twelve of fourteen manufacturers titles since 1990 and more single race
victories than all other manufacturers combined. In 2003, after an absence of
over 30 years, we resumed participation in the Moto GP Championship, achieving
a second place finish in the manufacturers ranking of the Championship. We
believe that our globally recognized brand, unique product characteristics and
proven racing success provide us with a loyal and enthusiastic customer base
and enable us to position our motorcycles as premium price products within the
Sport sub-segment of the large-displacement motorcycle market. DMH, which operates under the trademark Ducati, was incorporated in
Italy on May 29, 1996 as a società per azioni, i.e., a joint stock company
whose capital is represented by shares. Our registered and administrative
office is located at Via A. Cavalieri Ducati 3, 40132 Bologna, Italy. Our
telephone number at this office is +39-051-641-3111. Our agent in the United
States is Ducati North America, Inc. Ducati North America, Inc.s address is
10443 Bandley Drive, Cupertino, CA 95014-1912 and its telephone number is (408)
253-0499. History Our predecessor was founded on July 4, 1926, when Antonio Cavalieri Ducati
and his three sons established one of the first companies in Italy to
manufacture radios and electrical components. In 1935, Ducati moved his
company to a modern, purpose-built factory at Borgo Panigale, outside Bologna,
where we manufacture motorcycles today. In 1947, our predecessor began
production and distribution of motorcycles, which rapidly developed a
reputation for high-performance, technical excellence and racing success.
During the 1950s, Ducati manufactured a series of increasingly powerful
motorcycles, including a number of models developed by the famous Ducati
engineer, Fabio Taglioni. Taglioni adapted for use on motorcycles the
Desmodromic valve control system, a signature (although unpatented) Ducati
technical feature that can be found on every motorcycle we produce today. As a result of their superior performance characteristics, Ducati
motorcycles rapidly achieved success in international racing competitions. A
125cc Grand Prix was runner-up in the 1958 World Championship and the 250cc
Mach 1 motorcycle, introduced in 1964, was among the fastest 250cc roadsters
available at the time. In 1972, a Ducati 750 GT prototype won a dramatic
victory in the Imola 200 race, establishing the reputation of a new Ducati
engine for high-performance and racing success. This engine, called the
L-twin, was comprised of two cylinders mounted at a 90-degree angle to form a
unique L-shaped design, a configuration that, combined with a Formula
One-inspired tubular trestle frame, proved successful in racing and in road
use. Following the Imola victory, Ducati commenced production of a series of
larger displacement motorcycles using the L-twin engine. These motorcycles
formed the foundation of the modern Ducati motorcycle lines and enjoyed a high
degree of success on world racing circuits, culminating in Mike Hailwoods
historic 1978 victory on a Ducati 900 Super Sport in the Isle of Man race.
Despite its technical excellence and racing success, Ducatis fortunes declined
sharply in the early 1980s, primarily as a result of the decision by the major
shareholder at the time, a state-owned industrial concern, to shift Ducatis
focus to products other than motorcycles, principally small diesel engines. 14




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In 1985, Cagiva S.p.A., an Italian manufacturing conglomerate (together
with its subsidiaries, Cagiva) acquired the Ducati brand and related
business. Cagiva reinvigorated the Ducati brand by refocusing on Ducatis
tradition of building high-performance racing motorcycles. Under Cagivas
ownership, Ducati motorcycles reinforced their reputation for excellence on and
off the racetrack. In March 1987, Marco Lucchinelli triumphed on a Ducati
Ottovalvole 851 prototype in the Daytona Battle of the Twins competition. In
1990, Raymond Roche rode a Ducati 888 to victory in the World Superbike
Championship, the first time a Ducati two-cylinder engine motorcycle
successfully challenged a four-cylinder engine produced by our Japanese
competitors. Beginning in 1995, however, liquidity problems at Cagiva
unrelated to the Ducati motorcycle business resulted in significant production
delays and reduced sales. In 1996, DMH was formed by affiliates of TPG and Deutsche Morgan Grenfell
(DMG) to acquire the Ducati brand name, trademark and related intellectual
property rights from Cagiva. Cagiva contributed the other assets and
liabilities associated with the Ducati business to DMH in exchange for shares
issued to Cagiva representing 49.0% of DMHs total issued and outstanding
shares. Following these transactions, TPG and DMG indirectly owned, in the
aggregate, 51.0% of the shares of DMH. On July 30, 1998, TPG and DMG through
their affiliates, together with a third investor, acquired the remaining 49.0%
of the shares of DMH owned by Cagiva. Beginning in late 1996, we successfully implemented a focused turnaround
program, which included: restarting the supply process; substantially
increasing our investment in working capital to increase production and
relaunch our research and development efforts; installing a new management
team; rebuilding our sales, marketing and public relations departments and
revamping our corporate image; initiating plans to streamline our assembly
process; establishing a quality control process; taking control of distribution
in key markets; and successfully introducing new models and new versions of our
motorcycles. In March 1999, DMH completed an initial public offering of 90,200,000
shares, of which 17,000,000 shares were issued by DMH and 73,200,000 shares
were sold by the selling shareholders in the initial public offering. As a
result of the initial public offering, TPG reduced its holdings in DMH from
72.0% to 34.8%. In connection with the initial public offering, our shares
were listed on Telematico and our ADSs were listed on the New York Stock
Exchange. In April 2001, our shares began trading on the Segmento Titoli con Alti
Requisiti (the Segment for Equity with High Standards, or STAR) of
Telematico. This segment was created by Borsa Italiana S.p.A. for small- and
medium-sized companies that operate in traditional sectors of the economy and
meet stricter requirements relating to transparency, liquidity and corporate
governance than those usually required for listing on the Telematico so that
such companies can achieve greater market visibility. As part of the STAR
admission requirements, we appointed Mediobanca to act as specialist for our
shares. The specialist is required to take a number of actions intended to
support the market for our shares and to facilitate the communication of
information about us to investors. 
 Business Overview We produce motorcycles in five model lines, which vary in their technical
and design features and intended customers: Superbike, Super Sport, Sport
Naked, Sport Touring and Multistrada. For model year 2006, we plan on selling
a sixth model line, the Sportclassic, which we expect to go into production at
the end of 2005. We sell our motorcycles and related products in 66 countries
worldwide, with a primary focus on the Western European and North American
markets, which together accounted for approximately 85.0% of our net sales in
each of the last three years. In 2003, no single country accounted for more
than 15.0% of our net sales of motorcycles and related products, with the
exception of 15




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Italy at 30%. We have a global distribution network directly controlling
our Italian sales and operating wholly owned distribution subsidiaries in North
America, France, Germany, the Benelux countries (which is also responsible for
Sweden), Japan and the United Kingdom. Our manufacturing operations, based in
Bologna, Italy, consist primarily of engine and motorcycle assembly and are not
vertically integrated, resulting in a relatively low fixed cost structure. Competitive Strengths We believe our position as one of the worlds leading manufacturers of
high-performance motorcycles is primarily attributable to the following
competitive strengths: Focused Market Niche Strategy.Founded in the Ducati racing heritage, our
product development effort is primarily focused on racing-derived motorcycles.
This focus gives us a strong competitive position in our targeted market niche
of high-performance sport motorcycles. We estimate that our worldwide market
share in our target market grew from 4.0% in 1996 to 5.4% in 2003. We remain
loyal to our original market for uncompromised, high-performance sport
motorcycles, a position recognized by our customers, motorcycle enthusiasts,
the press and the industry at large. Global Brand Strength.Our well-defined market positioning and unique
brand character, combined with the international success of our motorcycles in
the World Superbike Championships, the Moto GP Championship and other
international racing events promote awareness of the Ducati brand around the
world. The Ducati brand is recognized globally for large-displacement,
high-performance sport motorcycles and is associated with innovative design,
advanced engineering and racing success. We also reach Ducati fans all over
the world through our website. Technical Excellence.We believe that our motorcycles have a reputation
for advanced engineering and overall technical excellence. This reputation has
developed as a result of decades of consistent design and technical innovation
at Ducati, including such signature features as the Desmodromic valve control
system, the L-twin engine and the tubular trestle frame. We believe that
continued investment in research and development and closer integration of our
racing and product development efforts will enable us to maintain our technical
excellence, a key driver of demand across our global customer base. Performance Superiority.Ducati motorcycles excel on the racetrack
because of their superior handling characteristics and usable power. Our
motorcycles have dominated the World Superbike Championship, where we have won
twelve of fourteen manufacturers titles since 1990 and more single race
victories than all other manufacturers combined. In 2003, after an absence of
over 30 years, we renewed participation in the Moto GP Championship. We
believe that the superior performance of our motorcycles is the result of the
Ducati tradition of technical excellence. Strong Manufacturing Fundamentals.Our manufacturing operations are not
vertically integrated and have a relatively low fixed cost structure. We
assemble our motorcycles and engines and manufacture only two strategically
important components, crank cases and cylinder heads. We also use a relatively
large number of key common components, particularly high-cost engine components
and employ flexible production processes that we believe are well suited to our
current and anticipated production volumes. 16




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Business Strategy Following our acquisition of the Ducati business in September 1996, we
implemented a series of strategic initiatives to increase our sales,
profitability and market share. Major components of our strategy include: Expand Our Customer Base.We aim to open new entry doors to Ducati world
and to expand premium niches of the most appealing and untapped market segments
compatible with the Ducati brand, principally by continuing to introduce new
families of Ducati motorcycles specifically designed to attract customers
interested in more comfortable multipurpose motorcycles or the look and feel of
classic Ducati sport motorcycles of the past. Strengthen Our Position in Our Core Market.We intend to maintain and
strengthen our niche position in our target market of high-performance sport
motorcycles. To this end, all of our motorcycles will continue to incorporate
signature Ducati features such as the Desmodromic valve control system, the
L-twin engine, the tubular trestle frame and the distinctive Ducati sound. We
continuously seek to strengthen our position in our core market by upgrading
our motorcycle lines with technical and design innovations as they become
available from racing experience or the product development process. In
particular, we have made the following important innovations in the recent
past:  
    
    Superbike.Since the introduction of the 916Superbike in 1994, we
have continuously upgraded the technology and power of this motorcycle
with the 996in 1998, the 996Rin 2000 (with a more powerful
Testastrettaengine) and the 998in 2001. In July 2002, we introduced
the 999, a radically redesigned Superbike, which is lighter and more
aerodynamic than its predecessors and is powered by an improved
Testastrettaengine.  
    
    Super Sport.In 2002, we introduced a 620cc version of the Super
Sport, and upgraded the 750cc and 900cc engines of our Super Sport
motorcycles to 800cc and 1000cc Dual Spark. Dual spark engines have
two spark plugs per cylinder, offering extra reliability and power.  
    
    Sport Naked (or Monster).In 2001, we upgraded the Monster 600with
the introduction of the fuel-injected Monster 620ie, and in 2002, we
upgraded the 750cc and 900cc engines of the Monster to 800cc and
1000cc Dual Spark. In 2003, we also introduced the Monster S4R, our
most powerful Monster, featuring a four-valve, 996engine and new
single-sided aluminum rear swing arm, an upgrade of the Monster S4.  
    
    Sport Touring.In 2001, in addition to the ST4and ST2, we introduced
the ST4SSport Touring motorcycle. This model features a 996cc
engine, to which we added an Anti-Block Brake System (ABS) for model
year 2003. In 2003, we launched the ST3, which features a new
three-valve engine.  
    
    Multistrada.We presented a prototype of the Multistrada, our fifth
family of motorcycles, to the press and public in September 2001. The
first model, the Multistrada 1000 Dual Spark, featuring a dual valve,
air-cooled 1000cc engine, went into production in April 2003. This
motorcycle is a multipurpose sportsbike offering Superbike performance
in a more comfortable design with a more upright position.  
    
    Sportclassic.We presented the prototypes of the Sportclassic, our
sixth family of motorcycles, to the press and public in October 2003.
The first Sportclassic will be the Paul Smart 1000 Limited Edition,
which we expect will go into production at the end of 2005. This
motorcycle, featuring front and rear Ohlins suspension and painted in
the silver and green color scheme similar to the original Ducati 750
Super Sport, is inspired by the bike that Paul Smart rode to victory
in the Imola 200 race in 1974. It shares the same technology as our
other motorcycles, distinguishing itself by its 1970s look. 17




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We also continue to participate in worldwide racing events, and, in particular,
the World Superbike Championship, through our racing subsidiary, Ducati Corse
S.r.l. We believe that racing is a critical aspect of our marketing and
research and development efforts and an important component of the Ducati
image. Following a change in the eligibility requirements for the Moto GP
Championship, we began participating in the newly established Moto GP
Championship in 2003, for which we developed a racing motorcycle called the
Ducati Desmosedici, which is powered by a four stroke double twin cylinder
engine, continuing our tradition of racing inspired product development. Expand Our Product Offering.We will continue to develop and introduce
new products to appeal to the changing needs of our customers and to bring new
customers to the Ducati brand. We have successfully expanded the boundaries of
our traditional market niche by combining the allure of our high-performance
racing heritage with distinctive style or functional features. In 1993, we
introduced the Sport Naked line (represented by the Monster), appealing to the
lifestyle of the urban customer and, in 1997, we introduced the Sport Touring
line (represented by the ST2, the ST4, the ST4Sand the ST4S ABS), appealing to
customers looking for a greater degree of riding comfort. These new product
lines significantly broadened the Ducati customer base. Since their launch, we
have continued to expand our product offering with marketing-driven initiatives
designed to meet specific consumer needs, such as the Monster Darkin 1997
(targeted at younger customers) and Monster Cityin 1998 (targeted at urban
commuters). Our introduction in 1999 of the Monster 900and the Monster
Metallic, the Monster 620in 2002 and the Monster S4Rin 2003 were targeted at
appealing to the diverse tastes of Monsterconsumers, with the S4Roffering
customers a more powerful engine and an experience more akin to riding a
Superbike. With the launch of our website in September 2000, we introduced and
sold the limited production 996R Suberbike motorcycle exclusively over the
internet, and for model year 2002, we launched the 998. In July 2002, we
launched the 999, a radically redesigned Superbike aimed at broadening the
appeal of the Superbike family by enhancing the functionality and accessibility
of the bike, while maintaining the intensity of the Superbike experience. In
2002, we launched a new motorcycle family for model year 2003, the Multistrada,
designed to attract new customers to the Ducati brand. This motorcycle offers
Superbike performance in a more comfortable design and is characterized by a
more upright position and a new dual spark, air-cooled 1000cc engine. In
October 2003, we presented the prototypes for the Sportclassic line, our sixth
motorcycle family, which we plan on selling beginning in model year 2006. We
launched this motorcycle family, which is reminiscent of classic Ducati
motorcycles of the past yet features top technology, based on on-line research
of the interests of Ducatis fans. Strengthen Our Distribution Network.Our distribution strategy is aimed
at maximizing sales and increasing our contacts with retail customers. Among
other things, in carrying out our strategy, we:  
    
    continue to consolidate our position in the six strategic markets in
which we have established wholly owned sales and marketing
subsidiaries;  
    
    selectively replace on an ongoing basis under-performing distributors
in certain markets in which we do not carry out distribution directly
through wholly owned subsidiaries;  
    
    evaluate each year whether to appoint new distributors in markets in
which we have previously been inactive and whether to introduce
Ducati stores in selected markets throughout the world (so that 139
Ducati stores were opened by December 31, 2003, as compared with 111
Ducati stores opened at December 31, 2002); and  
    
    continue to increase and develop the information and activities on our
website, through our subsidiary Ducati.Com, which was created in July
2000 to build further our brand and broaden our reach to Ducati fans
and friends. 18




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We believe that a strong overall distribution network will be a key factor
in driving future increases in our market share. Strengthen Our Global Brand.We have undertaken a coordinated marketing
effort to reinforce the traditional strengths of the Ducati brand and to
increase the visibility of the Ducati name. We have launched an international
advertising campaign presenting Ducati motorcycles and our people, established
the Ducati Museum at our Bologna headquarters and created an official Internet
site. We also hosted the first World Ducati Weekend in Bologna in June 1998,
which attracted more than 10,000 Ducati enthusiasts, a second World Ducati
Weekend in Misano in June 2000, which attracted over 20,000 enthusiasts, a
third such event, the World Ducati Week in Misano in June 2002, which attracted
over 25,000 enthusiasts. A fourth such event, the World Ducati Weekend in
Misano in May 2004, attracted over 45,000 enthusiasts. We are actively
exploiting the marketing opportunities provided by our racing activities
through several sponsorship agreements and created a special purpose company,
Ducati Corse Srl, dedicated to our racing-related activities in the Moto GP
Championship and the Superbike Championship. We have also introduced VIP
hospitality tents at Superbike and Moto GP Championship racetracks to provide a
focal point for Ducati riders, dealers and enthusiasts. In addition, we
organize a number of events to encourage fans to join the World of Ducati, such
as womens riding schools, classic rallies around Italy, the Ducati tour club
and rental programs. We have sought to extend media coverage of the Ducati
brand beyond the traditional motorcycle sector press and have developed a new
corporate identity by standardizing our corporate logo, lettering and marketing
material on a worldwide basis. In 2000, we established a separate company
(Ducati.Com) with the mission of leveraging the Ducati brand and racing
heritage into a vertical internet portal dedicated to the Ducati life-style,
the world of motor racing and the world of motorcycle enthusiasts. We believe
that our marketing and community approach will further strengthen the brand
recognition and customer and fan loyalty that we currently enjoy. Expand Our Motorcycle-Related Product Offerings.We are leveraging the
strength of the Ducati brand name and our strong customer loyalty through a
targeted expansion of our product offering to include motorcycle-related
products. In 1997, we acquired a controlling stake in Gio.Ca.Moto, an Italian
company formed to take over the business of a well-established marketer of
performance and custom accessories dedicated to Ducati. Gio.Ca.Moto products
are currently marketed under the Ducati Performance brand name. In January
2000, we acquired substantially all of the shares that we did not already own
in Gio.Ca.Moto, which was subsequently merged into DMH as of December 31, 2001.
We have also entered the technical riding gear market with an exclusive line
of leather suits, jackets, boots and helmets created and produced by Dainese
and other leading manufacturers and sold under the Ducati Performance brand
name. All of these products are sold primarily through the Ducati distribution
network. We are also distributing a range of apparel (such as T-shirts, caps
and sweatshirts) for Ducati enthusiasts and have selectively licensed the
Ducati brand for use with appropriate products, such as model replicas, toys
and video games. Increase Our Production Efficiency.We are continuing to rationalize our
manufacturing processes to reduce complexity and increase production
efficiency. In particular, we implemented a platform approach to production
through which we are moving away from assembling numerous individual
components. Under the platform approach, a motorcycle is divided into a
discrete number of key components (or platforms) that are, in turn, made up
of a number of sub-components. One supplier is responsible for providing a
platform and managing the suppliers of the sub-components that comprise that
platform. By this approach, we intend to reduce costs through purchasing
leverage and component co-design with key suppliers, reduce inventories and
improve overall quality. In addition, we outsource all motorcycle warehousing,
delivery logistics and spare parts. Develop Our Internet Business.We established a dedicated Internet
homepage at www.ducati.com that includes a comprehensive catalogue of the
current motorcycle lines and related 19




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spare parts, the latest racing news, a virtual Ducati museum and contacts
for local dealerships. We intend to continue developing our Internet and
e-commerce operations. On July 24, 2000, we incorporated our Internet business
into a separate subsidiary (Ducati.Com) focusing on our Internet initiatives.
Our on-line strategy aims to leverage the Ducati brand and racing heritage with
the goals of increasing sales opportunities, improving operating efficiencies
and providing information and community space for Ducati enthusiasts. We
believe our on-line operations also help build overall greater brand awareness.
More specifically, our website is designed to address the following
opportunities: Commerce. We have developed two main channels of e-commerce:
Business-to-Consumers (for accessories, apparel and services like Ducati ticket
events) and Business-to-Business-to-Consumer (for motorcycles, accessories and
special products like limited edition products). Content. Our website offers:  
    
    complete information regarding our current motorcycle catalogue (including technical details and a downloadable brochure,
with pictures, sound, videos, available colors and versions);  
    
    tips, information and FAQ for motorcycle use and maintenance;  
    
    apparel, accessory and spare part catalogues, downloadable in PDF format;  
    
    coverage of the World Superbike Championship, the Moto GP Championship and other motor racing or special events;  
    
    a calendar of Ducati-related events; and  
    
    downloadable multimedia materials (e.g., screensavers, e-cards and wallpaper). Community. We also offer Ducati enthusiasts a combination of club
activities, e-mail capabilities, message boards and the possibility to set up
personal web pages. On December 31, 2003, the headcount of Ducati.Com was reduced from 20 as
of December 31, 2002 to 13 professionals, principally due to our having
concluded our development activities and our effort to reduce costs generally.
To further increase efficiency, we plan to merge Ducati.Com into DMH in the
fall of 2004. The information displayed on our website is not incorporated by
reference into this annual report. 
 Organizational Structure DMH designs, manufactures and distributes Ducati-branded motorcycles,
spare parts and engines. DMH has six direct, wholly owned subsidiaries engaged
in the regional distribution of Ducati motorcycles and other products: Ducati
North America Inc., Ducati France S.A.S., Ducati Motor Deutschland GmbH, Ducati
North Europe B.V., Ducati Japan KK and Ducati U.K. Limited. In
addition, DMH owns Ducati Corse S.r.l., the Ducati racing subsdiary,
Ducati.Com S.r.l., the Ducati company that focuses on our Internet
and e-commerce initiatives which is in the procss of being merged
into DMH, Ducati Retail S.r.l., the Ducati subsidiary that will make retail
sales of Ducati products at Ducati-owned stores in areas not covered
by our current dealerships, and Ducati Consulting S.r.l., the
Ducati subsidiary that will provide consulting and logistics services to all of
the Ducati Group companies as well as to our suppliers and other manufacturers. The following chart illustrates our organizational structure as of the
date of this annual report, including the country of incorporation of each
subsidiary. 20




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(CHART) In December 2001, Gio.Ca.Moto International s.r.l. was merged into DMH.
The merger became effective generally as of December 31, 2001, and had
retroactive effect to January 1, 2001 for accounting and tax purposes. Prior
to the merger, we owned 100% of the quotas of Gio.Ca.Moto after acquiring the
0.1% we did not already own in March 2001. On December 20, 2001, we sold our 40.0% equity interest in HPE
High-Performance Engineering S.r.l., a joint venture we entered into in 1998
with former director Piero Ferrari and others relating to advanced engine
technology. We sold our interest at a sale price equal to its book value of 
82,633. On February 14, 2002, as a result of losses for the year ended 2001 and in
accordance with Italian law, the shareholders of Ducati.Com S.p.A. resolved to
decrease its share capital from  2.6 million to zero. On such date, the
shareholders of Ducati.Com S.p.A. also approved the conversion of Ducati.Com
from a joint stock company (società per azioni) whose share capital is
represented by shares to a limited liability company (società a responsabilità
limitata), and to set its paid-in capital at  10,000. We intend to merge
Ducati.Com into DMH to make the organization and management of this entity more
efficient (in particular, in respect of treasury management, legal and
administrative functions). The merger will be completed in the fourth quarter
of 2004. On August 20, 2003, Ducati France S.A. changed its name to Ducati France
S.A.S. (Societé par Actions Simplifiée), and at such time DMH acquired the 0.1%
interest in such entity that it did not already own. On January 27, 2004, Ducati Corse S.r.l. transferred 1.0% of the quota
capital of Ducati.Com S.r.l. to Ducati Motor Holding S.p.A. On February 11, 2004, Ducati Benelux B.V. changed its name to Ducati North
Europe B.V. On April 14, 2004, we formed Ducati Retail S.r.l., a subsidiary held 99.0%
by DMH and 1.0% by Enrico DOnofrio, our manager of finance. Ducati Retail
S.r.l. will make retail sales of Ducati products at Ducati-owned stores in
areas not covered by our current dealerships (e.g., the sale of motorcycles
used by journalists or shown at fairs and exhibitions, or the sale of
merchandising at airports). 21




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On May 6, 2004, we formed Ducati Consulting S.r.l., a majority owned
subsidiary (85% held by DMH and the remaining interests held by two DMH
executives and a member of DMHs board) which will provide consulting and
logistics services to all of the Ducati Group companies as well as to our
suppliers and other manufacturers. 
 Products and Distribution The World Motorcycle Market In 2003, total world motorcycle registrations were estimated at over two
million units, which include all motorcycles and scooters with engine
displacements greater than 50cc registered in the United States, Western
Europe, Japan and Australia. We view the world motorcycle market as divided
into four main segments: motor scooters, off-road motorcycles, road
motorcycles with engine displacements of less than 500cc and road motorcycles
with engine displacements of 500cc or greater. Other subdivisions of the world
motorcycle market exist and there is no universally recognized system for
classifying this market. We believe that the >500cc Road Market accounted for over one million
registrations in the United States, Western Europe, Japan and Australia in 2003
and may be further segmented into Cruiser, Touring, Dual, Naked and
Sport sub-segments. The Touring sub-segment is comprised of motorcycles
designed for comfortable, long-distance travel, while the Dual sub-segment is
comprised of motorcycles designed for on and off-road riding. The Cruiser
sub-segment is comprised of heavy motorcycles with a classic design typically
featuring heavy use of chrome components. The Naked sub-segment is comprised
of motorcycles totally or partially without body panels. The Sport sub-segment
is principally comprised of motorcycles built for, or inspired by, a racing
environment. We currently compete in the Naked, Sport, and Dual sub-segments of the
>500cc Road Market. In 2003, we estimate that total motorcycle
registrations, including those in the United States, Western Europe, Japan and
Australia, were approximately 570,000 units in the above-mentioned
sub-segments, with approximately 20,000 additional motorcycles sold during 2003
in countries in which we compete but for which registration data is not
available. Naked motorcycles are characterized by the absence of body panels, a
design feature that leaves the engine exposed and reduces weight. Naked
motorcycles are targeted at customers who are particularly interested in urban
street riding. The Sport sub-segment is comprised of three main groupings:
Superbike motorcycles are racing-derived motorcycles equipped with the most
powerful engines and the latest technical advances and are targeted at riders
who desire a bike that is similar to those used on international professional
racing circuits. Super Sport motorcycles feature classic design and are
targeted at riders interested in balancing horsepower with greater rideability.
Sport Touring motorcycles combine the powerful engine of sport motorcycles
with the long-range driveability and features of Touring motorcycles, and are
targeted at customers who are interested in comfortable, one- or two-rider
traveling over relatively longer distances. For model year 2003, we introduced
a new line of motorcycles, the Multistrada, in the Dual sub-segment of the
>500cc Road Market. The Multistrada aims to combine the performance of
sport motorcycles with the comfort of tourism bikes. We estimate that in 2003 the market defined as the Sport, Naked, and Dual
sub-segments of >500cc Road Market, as measured by registrations, was
approximately 420,000 in Western Europe, 150,000 in the United States, 50,000
in Japan and 20,000 in Australia. Within Western Europe, Germany was the
largest market for sport motorcycles in 2003 (105,000 registrations), followed
by Italy (102,000), France (79,000) and the United Kingdom (60,000). 22




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We estimate that the Sport sub-segment of the >500cc Road Market
experienced a compound annual growth rate of 3% in Western Europe and 15% in
the U.S. during the 1997 to 2003 period. In the Naked sub-segment, we estimate
a compound annual growth rate of 9% in Western Europe and 14% in the U.S. over
the same period. In the Dual sub-segment, we estimate a compound annual growth
rate of 1.0% in Western Europe and 22.0% in the U.S. over the same period. Motorcycle Lines Consistent with the current segmentation of the Sport sub-segment of the
>500cc Road Market, we manufacture and distribute five high-performance
lines of motorcycles: Superbike, Super Sport, Sport Naked, Sport Touring and
Multistrada. Motorcycle sales accounted for 81% of our net sales in 2003, as
compared to 83% in 2002 and 85% in 2001. We manufacture multiple models within
our five product lines, which are differentiated primarily by their engine
capacity, fairing and color schemes. All of our motorcycles share several design features that are closely
associated with the Ducati brand and serve to distinguish Ducati motorcycles
from those of our competitors. All Ducati motorcycles are equipped with the
Desmodromic valve control system, a dual camshaft mechanism that we believe
allows more precise control of engine valves than traditional spring-based
systems, improving power output and overall engine efficiency. The Desmodromic
system, which is not patented, eliminates valve float that can occur at very
high engine speeds, thereby improving engine breathing and increasing engine
performance. The Desmodromic system also delivers power more smoothly over a
broader revolutions per minute (rpm) range than traditional engines, which
endows Ducatis two-cylinder engines with a key benefit of four-cylinder
unitsnamely consistent, usable power. Ducati motorcycle engines are also
built to the unique L-twin design, comprised of two cylinders mounted at a
90-degree angle, a configuration that we believe allows for lighter weight and
improved aerodynamics over the four-cylinder configurations of our competitors.
As a result of the engine design and the Desmodromic system, all Ducati
motorcycles produce a deep, resonant engine sound that is a noted Ducati
characteristic. In addition, all Ducati motorcycles employ a tubular trestle frame, a
design feature traditionally associated with Ducati motorcycles. We believe
that the tubular trestle frame, which is inspired by Formula One automotive
racing technology, increases the rigidity and strength of our motorcycles and
allows for a more compact design architecture that facilitates greater speed
and more precise handling. We believe that these features, among others,
contribute to the superior and distinctive performance of our motorcycles. As
part of our business strategy, all motorcycle models introduced in the future
will likely maintain these signature technical characteristics. Although they share the common characteristics described above, our
individual product lines are distinguished by the following features: Superbike.The Superbike, our flagship motorcycle, is closely derived
from the Ducati motorcycles currently competing in the World Superbike
Championship. Since the introduction of the first Ducati Superbike, the 851,
in 1987, we have continuously upgraded the technology and power of this
motorcycle. The 851 was based on custom-built championship racing bikes
modified to meet government safety and noise standards. With the success of
the 851, we extended the Superbike range to include the 916 and the 748,
introduced in 1993 and 1994. The 916 won several worldwide awards, including
four motorcycle of the year awards from Motor Cycle News (MCN) magazine.
For model year 1999, we launched the 996 to replace the 916. The 996 features
a 996cc liquid-cooled, four-valve twin engine. For model year 2000, we
introduced two new versions of the 748 Superbike, one with a more powerful
engine and another in a special racing version. For model year 2001, we
introduced the 996R Testastretta (meaning compact head), which features a
998cc engine. For sale in model year 2002, we launched the 23




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998R Testastretta, a radically redesigned Superbike that offers a more
powerful engine and is more aerodynamic that its predecessors. The 998R
Testastretta was nominated Sports Motorcycle of the Year by German magazine
Motorrad, Europes leading motorcycle publication. For model year 2003, we
launched the new 999, a radically redesigned Superbike, which is lighter and
more aerodynamic than its predecessors. For model year 2004, we launched the
749R, with a Testastretta series engine and chassis specifically developed to
ensure top competitiveness on the racetrack. The 749R completes the Superbike
range and marks Ducatis return to the World Supersport Championship. All
Superbike motorcycles can reach speeds in excess of 250-270 kilometers (155-170
miles) per hour and have a compact design and slim silhouette designed to
provide superior handling at such speeds. We sold 9,308 Superbike motorcycles
in 2003, representing 24.2% of total units sold and 36.1% of net motorcycle
sales, compared to 12,641 Superbike motorcycles in 2002, representing 32.0% of
total units sold and 47.2% of net motorcycle sales. Super Sport.Our Super Sport motorcycles are characterized by their light
weight, superior handling and tight cornering ability, as well as by their
classic design and engineering features. Ducati Super Sport motorcycles are
fitted with our traditional two-valve twin engine, nick-named the Pompone
(which means strong pump) by Ducati enthusiasts, and are aimed at riders that
prefer improved handling and smooth power delivery to maximum horsepower.
Ducati launched its first Super Sport motorcycle in 1973. Super Sport
motorcycles have been among our most popular and best selling for over two
decades, during which time the Super Sport line has undergone a series of
design and technical updates while retaining its essential characteristics. In
April 1998, we launched a new model in the Super Sport line, the 900Ssie for
sale the following year. In January 2000, we sold 2000 limited edition
MH900evoluzione motorcycles exclusively over the internet (all of which were
delivered by the spring of 2003). In addition, we launched a 750cc version of
the 900SS for model year 1999 and, for 2001 and 2002, respectively, we launched
new, matte black versions called the 750 and 900 Sport. For Model Year 2003,
we also launched 1000cc and 800cc models to replace the 750cc and 900cc
versions. We sold 2,818 Super Sport motorcycles in 2003, representing 7.3% of
total units sold and 5.9% of net motorcycle sales, compared to 3,812 Super
Sport motorcycles in 2002, representing 9.6% of total units sold and 7.9% of
net motorcycle sales. Sport Naked (or Monster).Our Sport Naked motorcycle line is aimed at
bringing the allure of sport bike performance to the urban rider. Utilizing
the engine and various other components of a Super Sport motorcycle, the
Monsters principal design characteristic is the absence of any fairing, which
leaves the engine exposed and reduces overall body weight. The Sport Naked
motorcycle line was launched in 1993 and became an immediate success, selling a
total of almost 11,500 units in its first two years of production. More
recently, we expanded the Sport Naked motorcycle line to include models
designed to meet particular market needs: the Monster City, which is primarily
a commuter motorcycle; the Monster Dark, a lower priced, stripped down version
which has reduced the median age of Ducati customers; and the limited edition,
premium priced Monster Chromo and Monster S. In September 1999, we further
expanded the Monster range by introducing the Monster 900 with fuel injection
and the Monster Metallic, a new version of the Monster bike with a colored
metallic gas tank, both for sale in 2000. For sale in model year 2002, we
introduced the fuel-injected Monster 620 to replace the Monster 600. For 2003,
we also launched 1000cc Dual Spark and 800cc models to replace the 750cc and
900cc versions. In 2003, for sale in 2004, we introduced the Monster S4R, our
most powerful Monster, featuring a four-valve, 996 engine and a new,
single-sided aluminum rear swing arm. In 2002, we produced the 100,000th
Monster and, in 2003, we celebrated the tenth anniversary of the Monster. We
sold 17,991 Sport Naked motorcycles in 2003, representing 46.8% of total units
sold and 36.9% of net motorcycle sales, compared to 19,600 Sport Naked
motorcycles sold in 2002, representing 49.6% of total units sold and 35.8% of
net motorcycle sales. 24




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##### Table of Contents



Sport Touring.Our Sport Touring line serves a group of consumers who
desire the speed, handling and styling of a Ducati, but prefer a more
comfortable ergonomic configuration for longer rides. In addition, the ST2 has
a more comfortable second seat to accommodate a passenger and is equipped with
two side bags. We introduced the Sport Touring line in April 1997 with the
ST2, which won the 1997 MCN magazine Sport Tourer of the Year award. For
model year 1999, we launched the ST4, a more powerful and technically advanced
four-valve per cylinder version of the ST2. For model year 2001, we introduced
the ST4S with a 996cc engine, and for model year 2002, we introduced a version
with an Anti-block Brake System (ABS). For model year 2004, we launched the
ST3, which features a new three-valve engine. We sold 2,275 Sport Touring
motorcycles in 2003, representing 5.9% of total units sold and 6.0% of net
motorcycle sales, compared to 3,481 Sport Touring motorcycles in 2002,
representing 8.8% of total units sold and 9.1% of net motorcycle sales. Multistrada.In September 2001, we first showed a prototype of our fifth
family of motorcycles called the Multistrada. The first model, the Multistrada
1000 Dual Spark, went into production in April 2003. The motorcycle is a
multipurpose sportsbike offering Superbike performance in a more comfortable
design with a more upright position and a new dual spark, air-cooled 1000cc
engine. We sold 6,025 Multistrada in 2003, representing 15.7% of total units
sold and 15.1% of net motorcycle sales. The gross profit for the years 2001, 2002 and 2003 for our motorcycle
product lines is listed below (in thousands of euro): Year Ended December 31,2001
    
    2002
    
    2003Gross Profit
    
    Gross Profit
    
    Gross Profit/000
    
    %
    
    /000
    
    %
    
    /000
    
    %Superbike
    
    
    55,322
    
    
    
    42.1
    
    
    
    62,879
    
    
    
    39.0
    
    
    
    37,224
    
    
    
    32.7Super Sport
    
    
    16,043
    
    
    
    34.2
    
    
    
    8,569
    
    
    
    31.8
    
    
    
    5,315
    
    
    
    28.3Sport Naked
    
    
    44,116
    
    
    
    32.7
    
    
    
    35,470
    
    
    
    29.0
    
    
    
    32,003
    
    
    
    27.5Sport Touring
    
    
    10,377
    
    
    
    32.1
    
    
    
    10,417
    
    
    
    33.4
    
    
    
    5,297
    
    
    
    27.7Multistrada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,764
    
    
    
    22.6Total/Average
    
    
    125,858
    
    
    
    35.3
    
    
    
    117,335
    
    
    
    33.3
    
    
    
    90,603
    
    
    
    28.7
 The gross profit margin is calculated by dividing gross profit by related
net sales. Gross profit is equal to net sales for each product line less costs
of specific components of that product line and a portion of direct and
indirect costs of production. These direct and indirect costs of production
have been charged to each product line in proportion to total revenue (10.5% in
2001, 10.8% in 2002 and 11.4% in 2003). The current suggested retail prices in Italy for our motorcycles range
from  6,995 for the Monster Dark 620cc motorcycle to  30,000 for the limited
edition 999R. In addition to these five motorcycle lines, we manufacture custom racing
motorcycles for our official teams, as well as for private race teams,
professional riders and racing enthusiasts who compete without direct factory
support. We sold 22 custom racing motorcycles in 2003 and 43 in 2002. This
reduction was mainly due to the introduction of the new 999 Superbike in 2002
for the Superbike Championship, which was only slightly modified in 2003, and
our decision to participate directly, beginning in 2003, in the Supersport
Championship rather than to continue to support private teams in that event.
We believe that selling racing motorcycles serves to reinforce Ducatis
reputation as a leader in high-performance motorcycle technology. The design
and manufacturing of racing motorcycles allow our experienced research and
development team to test new technical innovations and design features. 25




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Each Ducati motorcycle sold is covered by a two-year warranty. Warranty
costs are accrued when a motorcycle is sold based on our previous claims
experience. Motorcycle Related Products, Services and Licensing We leverage the strength of the Ducati name and the strong brand loyalty
of our customers through the targeted expansion of our product offering in
spare parts, Ducati Performance accessories, technical riding gear and
enthusiast apparel and licensing. In addition, we organize a number of events
to encourage fans to join the World of Ducati, such as riding schools, classic
rallies around Italy, online competitions, and Ducati tour and rental programs. Spare Parts and Engines.Sales of spare parts stabilized in 2003, after
continued growth during the previous years, reflecting principally the
stabilization of the number of Ducati motorcycles in circulation. We have
outsourced the physical movement and storage of our spare parts in Europe to
Saima Avandero S.p.A., an Italian logistics company, and in the United States
to Excel Inc., a parts logistics company in Columbus, Ohio. We manage our
spare parts catalogue and order processing electronically. As unit sales of
motorcycles increase, we expect to leverage the growing base of motorcycles in
use so as to expand our spare parts business beyond the growth related to
future increases in net sales of our motorcycles. In addition to manufacturing engines for Ducati motorcycles, until the
first quarter of 2000 we produced a relatively small number of 900cc engines
for Italian manufacturers Bi.mo.ta and Cagiva for use in their own motorcycles.
We have discontinued engine sales to Cagiva and Bi.mo.ta. Ducati Performance Accessories.A popular trend among many Ducati
owners is to replace motorcycle components with custom-made accessories to
increase the individuality of their motorcycles. In 1997, to meet the demand
for customized accessories, we acquired a controlling stake in Gio.Ca.Moto, an
Italian company formed to take over the business of a well-established marketer
of performance and custom accessories dedicated to Ducati. In January 2000, we
acquired substantially all of the remaining shares that we did not previously
own in Gio.Ca.Moto, which was subsequently merged into DMH as of December 31,
2001. Gio.Ca.Motos predecessor began distributing parts and accessories for
Ducati motorcycles in 1983. Through this acquired business, we design and
distribute a wide range of Ducati parts and accessories (some of which are
approved only for racing use) under the Ducati Performance trade name,
including custom-painted gasoline tanks, specialized exhaust systems, fenders,
fairings and carbon fiber parts and accessories. Technical Riding Gear and Enthusiast Apparel.We collaborate with a
number of leading manufacturers, including Dainese, Oakley, Fila and Suomy, in
the development of motorcycle suits, jackets, gloves, boots, helmets,
protective garments and other sports wear bearing the Ducati brand name. In
addition, we distribute an enthusiast line of apparel for sale to consumers,
including t-shirts, caps and memorabilia. Ducati branded apparel is primarily
sold through the Ducati distribution network, Ducati stores and at the Ducati
Museum retail outlet. Licensing.We also license the Ducati name, logo and other trademarks for
use by third parties, leaders in their markets (such as, among others, Oakley
Fila, Breil, Aquila, Nikko, Minichamps, Mattel, May Cheong, New Ray,
Protar-Italeri, Sonic-Ixo and Accademia) on a limited basis in connection with
the production of apparel and accessories, video games, toys, model replicas
and publishing. We recognize that third-party licensing has the potential to
increase awareness of the Ducati brand among the general public and to provide
an expanded source of revenue. 26




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Market Share and Competition We compete in the Sport sub-segment of the >500cc Road Market. Our
principal competitors are four Japanese manufacturers (Honda, Suzuki, Yamaha
and Kawasaki), two European manufacturers (BMW and Triumph) and, to a more
limited extent, Harley-Davidson of the United States. Harley-Davidsons Buell
subsidiary produces motorcycles that compete with our Sport Naked motorcycles.
Additional competitors include MV Agusta and Aprilia of Italy. Our Japanese competitors are generalist manufacturers competing in all
segments of the motorcycle market, from scooters to large-displacement off-road
and on-road motorcycles. BMW and Triumph manufacture motorcycles for various
sub-segments of the >500cc Road Market. Like Ducati, Harley-Davidson
focuses on a niche market, in particular the Cruiser sub-segment of the
>500cc Road Market, although it also has a limited offering of Sport Naked
motorcycles through its Buell subsidiary. Worldwide registrations of Ducati motorcycles were 38,969 in 2001, 39,607
in 2002 and 38,130 in 2003. The historical worldwide trend of Ducati
registrations masks significant regional variations. For example, from 2002 to
2003 Ducati registrations increased in Spain and Portugal (up 35%), Switzerland
(up 28%) and the Benelux countries (up 6%), and decreased in the United States
(down 17%), the United Kingdom (down 16%), France (down 8%) and Japan (down
7%). Growth in Spain was due to enthusiasm in that country for our
participation in the Moto GP Championship. The decrease in the United States
was due to our continued significant dealer network restructuring in that
country. The decrease in the United Kingdom reflected a market characterized
by significant discounting by manufacturers of motorcycles that would not meet
certain emissions regulations which took effect in June 2003. For a discussion
of the relationship between registrations and retail sales, see Item 5.
Operating and Financial Review and ProspectsIntroduction. We estimate that our worldwide market share in the Sport segment of the
>500cc Road Market was approximately 6.3% in 2001, 6.6% in 2002 and 5.7% in
2003 (and 6.1%, 6.2% and 6.2%, respectively, without considering North
America).
Honda, Suzuki, Yamaha and Kawasaki all have substantially greater worldwide
market shares than we do. Based on available registration data, we estimate
that these companies had approximately the following market shares of the Sport
segment of the >500cc Road Market worldwide in 2003: 2003 worldwide %of Sport sub-segmentCompany
    
    of >500cc Road MarketSuzuki
    
    
    23.5
    %Honda
    
    
    22.0
    %Yamaha
    
    
    19.0
    %Kawasaki
    
    
    12.0
    %
 We estimate that Triumph and BMW have a market share of approximately 3.0%
and 9.0%, respectively. Our market share varies among our motorcycle lines, comprising the Sport
segment of the >500cc Road Market. In 2003, we estimate that we had
approximately a 4.5% global share of our historical core market for Superbike
and Super Sport motorcycles and approximately a 7.3% global share of the market
for Naked motorcycles, reflecting the continued popularity of our Monster
bikes. We estimate that we had approximately a 4.1% global share of the market
for Sport Touring motorcycles in 2003, reflecting our entry into that market in
April 1997 with the launch of the ST2, followed by the launch of the ST4 in 27




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1998, the successful ST4S in 2000 and the ST4S with ABS in 2002. We
estimate that we had approximately a 3.6% global share of the market for dual
motorcycles in 2003 (with the Multistrada having been launched in the late
spring of 2003). Our market share also varies significantly across geographical areas. We
estimate that we had approximately a 12.0% share of the Sport segment of the
>500cc Road Market in Italy in 2003, third after Honda and Yamaha. For the
same period, we estimate that we held approximately a 7.0% share of the Sport
sub-segment in the larger Western European market, reflecting our strong
domestic Italian market share and approximately a 5.0% share in France, Germany
and the United Kingdom. In other countries, we estimate that during 2003 we
held approximately an 11.0% share of the Sport sub-segment in Australia,
approximately a 3.0% share in the United States and approximately a 5.0% share
in Japan. Market estimates in this annual report are based on our analysis of
registration data obtained from published sources, as well as of our internal
dealer data and surveys commissioned by us. See Presentation of Financial and
Other Information. The following table gives a breakdown of the total revenues in our
principal markets in the last three financial years: Year Ended December 31,2001
    
    2002
    
    2003(euro amounts in thousands)Italy
    
    
    92,448
    
    
    
    
    
    
    
    22.7
    %
    
    
    106,595
    
    
    
    
    
    
    
    25.8
    %
    
    
    112,896
    
    
    
    
    
    
    
    29.1
    %United States
    
    
    93,345
    
    
    
    
    
    
    
    22.9
    
    
    
    70,115
    
    
    
    
    
    
    
    17.0
    
    
    
    51,015
    
    
    
    
    
    
    
    13.1Germany
    
    
    46,453
    
    
    
    
    
    
    
    11.4
    
    
    
    49,773
    
    
    
    
    
    
    
    12.1
    
    
    
    42,454
    
    
    
    
    
    
    
    10.9Japan
    
    
    41,074
    
    
    
    
    
    
    
    10.1
    
    
    
    44,843
    
    
    
    
    
    
    
    10.9
    
    
    
    38,254
    
    
    
    
    
    
    
    9.9United Kingdom
    
    
    34,614
    
    
    
    
    
    
    
    8.5
    
    
    
    31,716
    
    
    
    
    
    
    
    7.7
    
    
    
    32,560
    
    
    
    
    
    
    
    8.4France
    
    
    34,133
    
    
    
    
    
    
    
    8.4
    
    
    
    33,650
    
    
    
    
    
    
    
    8.1
    
    
    
    32,092
    
    
    
    
    
    
    
    8.3Other foreign
countries
    
    
    65,748
    
    
    
    
    
    
    
    16.0
    
    
    
    76,279
    
    
    
    
    
    
    
    18.4
    
    
    
    78,971
    
    
    
    
    
    
    
    20.3Total
    
    
    407,815
    
    
    
    
    
    
    
    100
    %
    
    
    412,971
    
    
    
    
    
    
    
    100
    %
    
    
    388.242
    
    
    
    
    
    
    
    100
    %
 We believe that by strengthening our overall distribution network through,
among other things, our wholly owned sales and marketing subsidiaries in the
United States, France, Germany, the Benelux countries (which is also
responsible for Sweden), the United Kingdom and Japan, we will be able to
increase our market share in these key markets. See Business
OverviewBusiness Strategy. Seasonality of Our Business Worldwide motorcycle sales and registrations are seasonal, peaking during
March through May and April through June, respectively. During 2003, we
recorded 56.0% of our sales during the first six months of the year. Our
motorcycle production levels are relatively stable throughout the year
(excluding annual shutdown periods for the month of August and the last two
weeks of December). Consequently, we experience periods of inventory build up
from September through February in anticipation of the spring selling season.
Depending on market conditions and our commercial strategy, the level of
inventory we hold or sell to importers and dealers at any time may change, as a
result of which unit sales may be less seasonal than registrations. 28




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Product Research and Development The fundamentals of our product development include technical excellence,
consistent use of Ducatis signature features, styling and continual
innovation. We believe that we can continue successful product development by
leveraging an experienced engineering team, which spans three generations of
engineering talent dating back to the Taglioni era, with recently acquired
state-of-the-art technology. Ducati models have traditionally enjoyed relatively long product
lifecycles and have been continually improved and upgraded throughout their
production lifetimes. For example, the Super Sport motorcycle line was
introduced in 1973 and has evolved considerably since that time. At the same
time, we believe that reducing the time-to-market for our new model launches
can be a significant competitive advantage. Following our September 1996
acquisition of the Ducati business, we increased investment in research and
development and initiated a substantial restructuring of our design processes
to respond to this challenge. Using new techniques, we have reduced our
development and launch time to three years for the Multistrada, compared with
an average of seven years for the development of previous models. In 2003, our
research and development expenditures (capitalized and expensed) were  21.4
million (as compared to  23.9 million in 2002). To support the more rapid
introduction of future motorcycle models, our research and development
activities are evolving from a self-sufficient operation to a networked unit in
which Ducati research and development will be responsible for the strategic
coordination of multiple external sources of technical and engineering skills.
As an example, we have entered into a strategic partnership with IDEA
Institute, a leading design engineering company that has extensive experience
in the automotive sector. Our partnership with IDEA allows us to take
advantage of their design technology to better integrate our supplier network
in the manufacturing process and reduces development time and the cost of new
models. In addition, we continue to restructure our design processes to reduce the
time and cost required to design a new motorcycle. In the past, our motorcycle
design process involved employing an external design house, which worked from a
technical and marketing brief prepared by Ducati. To assume greater control
over the design process and to exploit new technologies in the design and
tooling process, we developed an independent, internal capacity for motorcycle
design known as the Ducati Design Center (DDC). The DDC operates within the
Ducati organization and has creative authority in the design and development of
future models and coordinates with the technical department and marketing
functions to bring new products to market. The DDC is intended to maintain and
strengthen Ducatis reputation for innovative design in the motorcycle
industry, primarily by integrating traditional motorcycle craftsmanship,
advanced computer-aided design (CAD), computer driven milling machines
(CAM) and rapid prototyping technology. For example, our design team can
scan a preliminary design of a motorcycle under development onto a computer
attached to an automated milling machine, which in turn can produce a physical
prototype in clay or fiberglass. To make design changes, our designers need
only resculpt the prototype, the coordinates of which can then be rescanned
into the computer. Because the computer maintains a fully updated engineering
drawing of the motorcycle as design changes are processed, CAD/CAM technology
saves significant time and resources in connection with new model development
and improves the quality of new models. We are already using systems
technology such as Computer Numerically Controlled (CNC) milling machines and
have hired initial staff dedicated to DDC functions. Our first practical example of a product developed using CAD/CAM
technology, the MH900evoluzione, was unveiled at the September 1998 INTERMOT
motorcycle trade show in Munich. The MH900evoluzione was featured on the cover
of various motorcycle magazines and was exhibited at the Pitti Immagine design
exhibit in Florence, Italy in January 1999. At the beginning of 2000, we sold
2000 limited edition MH900evoluzione motorcycles exclusively over the Internet.
Since then, many 29




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engines and vehicles have been designed with CAD/CAM technology including
the double twin engine for the Desmosedici racing motorcycle used in the Moto
GP Championship, the new 999 Superbike and the Multistrada. Distribution Distribution is a key strategic element of our plans to grow market share
and profitability. Historically, Ducati distributed its motorcycles directly
through retail dealers (typically multi-franchise dealers) in Italy, through a
wholly owned subsidiary in North America and through a series of independent
distributors covering specific geographic territories internationally. Each
distributor was responsible for building its own network of retail dealers,
most of whom sold competing motorcycle brands. Individual dealers in countries
outside Italy and the United States entered into commercial relationships with
a relevant distributor rather than with Ducati. During 1997, we put in place a distribution strategy aimed at maximizing
retail sales and increasing our contact with, and understanding of, our retail
customers. To achieve these objectives, we have acquired control of
distribution networks in strategic markets through the establishment of five
wholly owned sales and marketing subsidiaries, selectively replaced
under-performing distributors in certain markets, appointed new distributors in
markets in which we were previously inactive, launched a restructuring of our
dealer network in Italy and commenced the introduction of independent Ducati
stores in selected markets throughout the world. At December 31, 2003, there
were 139 independent Ducati stores worldwide. Wholesale Distribution.Currently, we sell motorcycles and related
products directly to our retail dealers in Italy, and through wholly owned
subsidiaries in North America, Germany, France, the Benelux countries (which is
also responsible for Sweden), the United Kingdom and Japan. In all other
countries, we sell our products through independent distributors. In Germany
in particular, we distributed our motorcycles through our German subsidiary and
a third-party importer until the end of 2002. Beginning January 1, 2003, we
acquired the business of our third-party importer, and have since sold our
motorcycles directly through our subsidiary in such country. As a result of
this acquisition, we began an effort to rationalize the twin dealer networks,
an effort that is still ongoing. We are also continuing the restructuring of
our operations in the United States, including the moving in January 2003 of
our U.S. headquarters from New Jersey to California and the replacement of
certain executive officers including the CEO of our U.S. subsidiary. For
further information regarding our U.S. restructuring, see #Item 5. Operating
and Financial Review and ProspectsIntroduction. We have completed expansion of our distribution network worldwide, which
currently covers 66 countries. To maintain global quality standards in our
distribution, we follow a policy of replacing certain distributors with low
sales performance with established motorcycle distributors with significant
prior experience in building unit sales for Harley-Davidson and other
manufacturers. We are currently focusing on replacing certain such
distributors in Eastern Europe and the Far East. We believe that our wholesale distribution strategy and, in particular,
the establishment of wholly owned subsidiaries to control sales and marketing
in key markets, has a number of important benefits. First, it moves Ducati
further along the distribution value chain, allowing us flexibility in
controlling the profits previously earned by our independent distributors.
Second, it moves us closer to consumers, improving our understanding of the
marketplace and the needs of motorcycle riders. Third, it removes an
intermediary between Ducati and our dealers, increasing our control over the
sales process to consumers and allowing marketing initiatives to be better
coordinated. Fourth, as motorcycles are stocked and shipped directly from the
factory to the dealers (except in the United States and Japan), it enhances our 30




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ability to redirect stock to meet peaks in demand for particular models in
different markets and reduces overall logistics costs. Retail Distribution.We sell motorcycles, parts and accessories to
consumers around the world through approximately 800 independent dealerships.
Prospective dealers are required to sign an agreement, usually on an annual
basis, with Ducati, the relevant subsidiary, or the local Ducati distributor to
become an authorized dealer. This agreement requires the dealer to provide
suitable space and staff devoted to the sale of Ducati motorcycles as well as
workshop facilities with adequate equipment, spare parts and qualified staff to
provide after-sales service. In Italy, we have restructured our distribution network, reducing the
overall number of Ducati dealers from 165 in 1996 to 57 in December 2003, and
offering enhanced support to the remaining dealers. The enhanced marketing and
merchandising support is designed to encourage dealers to invest in and upgrade
their dealerships according to the model of the Ducati stores discussed below.
As of December 31, 2003, there were 49 Ducati stores operating in Italy. We believe that the restructuring of our Italian dealer network has a
number of benefits for Ducati and our dealers. Dealers can be expected to
realize greater net sales and improved profitability. We expect to gain a
superior and uniform retail environment for our motorcycles and other products.
Our registrations in Italy were 11,701 units in 2001 (down 3%) 11,967 in 2002
(up 2%) and 12.041 in 2003 (up 1%). Moreover, the average number of
motorcycles sold per Italian dealer increased to approximately 211 in 2003 from
203 in 2002 and 194 in 2001. We are implementing a similar strategy regarding
our dealer network in other major markets outside Italy, initially France,
Germany and the U.K. A different strategy is being pursued in the United
States where, for geographic reasons, we intend to improve the quality of our
dealer network by closing small underperforming dealerships and selling through
high-standard multi-brand dealerships. Finally, we developed a design concept for Ducati stores to be implemented
by certain Ducati dealers in selected markets around the world. The Ducati
stores are positioned around the Ducati brand and offer a customized retail
environment and increased levels of service and technical support. Ducati
stores present Ducati motorcycles as their primary focus, supported by
merchandise areas dedicated to Ducati Performance parts and accessories and
lines of Ducati technical and enthusiast apparel. Within each store, a
History Wall provides images of Ducatis racing heritage and an Engineering
Wall shows a large scale engineering drawing of the 996, Ducatis flagship
Superbike motorcycle. We provide dealers operating the stores with a
specialized design consultancy service, but do not own an interest in the
stores. Outside Italy, we have launched Ducati stores in, among other
locations, New York, London, Vienna, Cape Town, Sydney, Seattle, Atlanta, Tokyo
and Frankfurt. As of December 31, 2003, there were 139 Ducati stores in
operation worldwide. Marketing Activities While Ducati is fundamentally a motorcycle manufacturer, we are also the
custodian of a valuable global brand. Brand Development.In early 1997, we developed a new corporate identity,
standardizing our corporate logo, lettering and promotional and marketing
material on a worldwide basis. The new hallmark D is a modern interpretation
of the logo that adorned many of the classic Ducati motorcycles of the past.
In 1998, we launched our first global corporate advertising campaign, which we
update annually. Entitled Ducati/People, the campaign features Ducati
workers and their motorcycles in and around Bologna, communicating the
authenticity and uniqueness of the Ducati brand. We have updated the campaign
for 2003 with images of our customers, chosen through an on-line global contest
set up by 31




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our website. We have lent active support to design museums around the
world to feature the design qualities of Ducati motorcycles. In particular,
the Ducati Monster and 916 were included in the The Art of the Motorcycle
exhibit at the Guggenheim Museum in New York and the Field Museum in Chicago in
1998 and 1999. In 2002, the Guggenheim opened the same exhibition at its new
museum in Las Vegas. We were also recognized for our lasting contribution to
motorcycle design through a sport motorcycle auction conducted by Sothebys in
Chicago in September 1999, the largest such auction to occur in North America.
The MH900evoluzione prototype appeared on the front cover of the auction
catalogue. We have worked with Sothebys on other Ducati oriented auctions
including those at Ducati Revs America in October 2001 and World Ducati Week in
June 2002 and May 2004. We intend to continue to support activities that
extend the Ducati brand into the worlds of art, design and fashion. For
example, in 2001 Roberto Cavalli designed a specialty Monster motorcycle that
was displayed at his flagship stores in New York and Milan. In addition, we
have established a dedicated Internet homepage that includes a comprehensive
catalogue of the current motorcycle lines and related spare parts, the latest
racing news, a virtual Ducati museum and contacts for local dealerships (See 
Internet). The information on our websites is not incorporated by reference
into this annual report In
May 2002, we launched the Ducati Desmo Finance Program, a
program through which certain third party financial institutions
offer financing, insurance and a personalized credit card in connection with
the purchase of our new or used motorcycles and related products in Italy. The
aim of the program is to increase motorcycle sales by improving the ease and
convenience of purchasing. We have implemented this program in Italy and plan
to roll out this program in the U.K. in 2004, and thereafter in the rest of
Europe, the U.S. and Japan. This program is at no cost or financial risk to
us. We believe that there are in excess of 400 local Ducati clubs in
existence around the world. In 1999, recognizing the potential of these
enthusiast organizations to increase our access to consumers and to build the
global Ducati brand, we created the Desmo Owners Club (or D.O.C.), a global
Ducati owners club that serves as an umbrella organization for all individual
Ducati clubs. We have implemented a program to establish contact with local
clubs and to sponsor some of their activities. For example, we have introduced
a program that encourages Ducati dealers and store owners to sponsor and
coordinate enthusiast activities through their retail outlets, in cooperation
with Ducati. As a result of this program, Ducati enthusiasts are able to,
among other things, schedule motorcycle riding courses and other Ducati-related
activities through Ducati stores and local dealers. In June 1998, we sponsored the first World Ducati Weekend in Bologna,
which was attended by an estimated 10,000 Ducati enthusiasts. The first World
Ducati Weekend marked the opening of the Ducati Museum at our Bologna
headquarters. Visitors to the museum are able to follow the history of the
Ducati brand to the present day, with examples of historic motorcycles
displayed in a custom-made venue, and then tour Ducatis production facilities.
The second World Ducati Weekend at the Misano, Italy racetrack in June 2000,
was attended by over 20,000 Ducati enthusiasts. The third such event, the
World Ducati Week in June 2002, attracted more than 25,000 participants. The
fourth such event, the World Ducati Week in May 2004, saw the participation of
over 45,000 fans, and was accompanied by the opening of a new, larger shop near
the Ducati museum. In 2001, we revived the Motogiro dItalia, a promotional
tour in Italy of vintage Ducati motorcycles, which had been suspended in 1957.
Since 2001, the Motogiro dItaliahas become an annual event, attracting more
than 50 international journalists and 350 participants each year from all over
the world. Other marketing initiatives include Centopassi, a five-day competitive
motorcycling tour through Alpine passes in northern Italy, in which
participants can challenge Ducati testers on the Multistrada. The winner of
this event is awarded a Multistrada. In 2003, we also launched the first-ever
online Ducati design competition, in which participants submit their vision of
Ducati motorcycles of the future and artwork or designs that recall Ducati and
its tradition of high-performance sport motorcycling. 32




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Media.As we enjoy widespread media attention through our international
racing program and product innovations, we do not invest substantially in paid
advertising. We believe that our motorcycles are aspirational products that
create a significant demand pull. The primary source of publicity comes from
articles written about Ducati in a broad range of motorcycle publications and,
with the exception of the United States (where there is substantially less
following of professional racing than in other markets), the performance of
Ducati motorcycles on international racing circuits. We have also sought to
extend media coverage of Ducati beyond the traditional motorcycle press.
Articles and broadcast segments featuring Ducati have appeared in Forbes, The
New York Times, The Wall Street Journaland Financial Timesand on CNN and
Bloomberg News (although the contents of the articles and broadcasts mentioned
above are not part of this annual report). In addition, Ducati enthusiasts,
including Hollywood celebrities, Formula One drivers, music stars and
international athletes, add to the overall brand equity and exposure. Racing.The performance of Ducati motorcycles on international
professional racing circuits helps to sustain and increase demand for Ducatis
products. Racing increases the visibility of Ducati motorcycles through media
coverage of the races and serves as a practical demonstration of the
high-performance characteristics of Ducati motorcycles. Our racing program
also supports our research and development function, as many features designed
specifically for improving performance on the racetrack are later introduced
onto production Ducati motorcycles. Ducati competes in the World Superbike Championship, through its official
teams and other private teams. Since 1990, Ducati motorcycles have won twelve
of fourteen manufacturers titles (including in 2003) and more single race
victories than all other manufacturers combined. In the 2002 season, the
Ducati Infostrada team was comprised of 2001 champion Troy Bayliss as well as
Ruben Xaus. Both factory racers rode the Ducati 998R, featuring the 998R
Testastrettaengine. In 2003, Neil Hodgson and Ruben Xaus raced on the new 999
TestastrettaSuperbike for a Ducati team primarily sponsored by Fila. In 2004,
Regis Laconi and James Toseland race the new 999F04, with Fila as primary
sponsor. In 2003, we entered a Ducati team, made up of Loris Capirossi and Troy
Bayliss as our official riders, in the Moto GP Championship for the first time
in three decades. Our decision was prompted by a change in the Moto GP
Championship rules allowing 1000cc four-stroke motorcycles to compete. To
compete in this event, we developed the Demosedici motorcycle, powered by an
innovative new four-stroke, double-twin cylinder engine. In 2003, Ducati
achieved a second place finish in the manufacturers ranking of the Moto GP
Championship, and Loris Capirossi and Troy Bayliss finished in fourth and sixth
place, respectively, in the riders ranking of the Moto GP Championship. In
2004, we have kept the same riders for our team and made agreements with Team
DAntin to be a satellite private team, with Neil Hodgson and Ruben Xaus riding
last years motorcycle. We believe that competing in the Moto GP Championship
will strengthen awareness of the Ducati name as well as allow us to carry out
innovative research and development, which we hope to apply to our racing
motorcycles as well as the motorcycles that we sell commercially. With our entry in the Moto GP Championship, we withdrew in 2001 our
official teams from the Super Sport World Series, a championship featuring
750cc two-cylinder and 600cc four-cylinder production motorcycles. In 2004, we
resumed our participation in the Super Sport World Series, highlighting in such
event our new 749R model. For 2004, Lorenzo Lanzi is riding the 749R for
Ducati, whereas beginning in 2005 we plan to have a two-rider team. Ducati Corse S.r.l., our subsidiary dedicated to racing activities, was
founded in 1999. Ducati Corse manages the activities of the Ducati racing
teams, manufactures and distributes specialized motorcycles and engines
exclusively for racing use and engages in promotional and other activities
designed to increase Ducatis presence on international racing circuits,
improve awareness of the Ducati brand and increase customer satisfaction with
our racing activities. In addition, we have signed a 33




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sponsorship and supply agreement with Shell to expire in 2005 under which
Shell acts as official lubricant supplier to Ducati (and exclusive supplier of
lubricants for the Ducati racing program) and as sponsor of the Ducati Moto GP
Championship and World Superbike Championship teams. We have also entered into
agreements with Philip Morris, sponsor of the Moto GP Championship team, Fila,
sponsor of the World Superbike Championship team and Breil, sponsor of the
Super Sport team. Internet.We have established a dedicated Internet homepage at
www.ducati.com that includes a comprehensive catalogue of our current
motorcycle lines and related spare parts, the latest racing news, a virtual
Ducati museum and contacts for local dealerships. We estimate that the site
attracts over 1.2 million unique visitors per month. We have also entered the
online auction business with the establishment of DucatiMemorabilia.com or
Desmobid, our first online auction site. Desmobid sells historic Ducati
memorabilia and used parts from racing bikes used in Ducatis racing
activities. The information on our websites is not incorporated by reference
into this annual report. The Ducati.Com portal serves Ducati enthusiasts, suppliers and dealers and
is active in three main areas: commerce, content and community. Commerce. We have developed two main channels of e-commerce:
Business-to-Consumers (for accessories, apparel and services like Ducati ticket
events) and Business-to-Business-to-Consumer (for motorcycles, accessories and
special products like limited edition products). Content. Our website offers:  
    
    complete information regarding our current motorcycle catalogue (including technical details and a downloadable brochure,
with pictures, sound, videos, available colors and versions);  
    
    tips, information and FAQ for motorcycle use and maintenance;  
    
    apparel, accessory and spare part catalogues, downloadable in PDF format;  
    
    coverage of the World Superbike Championship, the Moto GP Championship and other motor racing or special events;  
    
    a calendar of all Ducati events; and  
    
    downloadable multimedia materials available (e.g., screensavers, e-cards and wallpaper). Community. We also offer Ducati enthusiasts a combination of club
activities, e-mail capabilities, message boards and the possibility to set up
personal web pages. Marketing Unit.In 2003, we created a dedicated marketing unit within DMH
to carry out customer service as well as online and traditional marketing
activities (advertising, direct marketing and events). The creation of this
unit is intended to increase our community marketing activities to meet the
needs of the growing number of Ducati fans around the world. Production Our manufacturing operations are not vertically integrated and are
characterized by a relatively low fixed cost structure. Our production is
primarily focused on engine and motorcycle assembly and the machining of two
strategic components, crank cases and cylinder heads. Our strategic goal is to
integrate a limited manufacturing operation with a network of sophisticated,
high value-added suppliers in order to reduce complexity and increase
production efficiency. 34




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Assembly Operations.Our production facilities are located in Borgo
Panigale, outside Bologna, Italy. The facilities consist of 125,000 square
meters of land, including approximately 36,000 square meters (approximately
387,360 square feet) of covered manufacturing and office space as well as
parking areas and unused space and buildings. All of our manufacturing,
assembly and warehousing functions are currently performed on-site at Borgo
Panigale. In 2003, facing a slowing market and to reduce inventory units at
Ducati and at Ducati dealerships, we reduced motorcycle production at our
facility to 36,661 units from 41,411 units produced in 2002 (and 40,692 units
in 2001). We outsource the production of the majority of our parts and
components to third-party suppliers. In 2003, approximately 92.0% of our total
costs of goods sold (excluding depreciation) were for parts and components and
approximately 8.0% were for direct and indirect labor costs and research and
development costs. As a result, our motorcycle production is fundamentally an
assembly and testing process. As part of the production process each engine
and each finished motorcycle is subjected to rigorous quality checks, including
static and dynamic tests. We have implemented a number of initiatives to improve our production
processes and reduce costs. In 1999, we introduced a production software
system that allows us to monitor the flow of all production-related information
from initial order to final motorcycle delivery. The key advantage of this
system is a customized material requirement planning system that automatically
generates production schedules from sales forecasts, helps to optimize
warehouse volume levels, generates orders for purchasing materials and
organizes materials flow for production. In 2003, we began implementing a new
inventory management software system in the United States, which, if
successful, will be rolled out worldwide. The implementation of this software
system is still under way in 2004. To simplify production further and reduce costs, we use a platform
approach to production, and we are moving away from assembling numerous
individual components. Under the platform approach, a motorcycle is divided
into a discrete number of key components (or platforms) that are in turn made
up of a number of sub-components. One key supplier is made responsible for
provision of a platform and managing suppliers of the sub-components that go
into the platform. The platform assembly approach has reduced the number of
our suppliers and increased the volume of components supplied by each supplier,
thereby improving our ability to negotiate competitive prices. It has also
provided an opportunity to develop jointly new components with key suppliers at
the research and development stage. We implemented platform production
processes for 83 assembly groups (including cylinder heads, clutch covers and
fuel pumps), thereby significantly reducing the number of parts required to be
assembled directly on the motorcycle. In 1999, we also initiated an on-going
Lean Production Project with Porsche Consulting, and then with SOA Consulting
in 2003, to improve the quality and to reduce the costs of the production
process. As a result of these initiatives, we have made a significant
reduction in our direct labor needs. In 2000, we commenced a new project,
known as Desmo (Ducati evolution and supply management optimization), aimed at
reducing inefficiencies in the supply process. As part of our initiative to outsource non-strategic activities, we have
retained Saima Avandero S.p.A. to assume our shipping and warehousing
functions. Saima Avandero is responsible for the shipping and logistics of
finished goods at our Borgo Panigale facility. As a result, we are able to
fill orders for less than a complete container or truckload of motorcycles,
increasing our responsiveness to dealers. Saima Avandero manages all our spare
parts management functions at a dedicated center in Modena. Saima Avanderos
state-of-the-art technology allows us to increase the speed and flexibility of
the management, packaging and distribution of Ducati spare parts. Supplies and Suppliers We require a wide variety of parts, components and tools to manufacture
our motorcycles. While we currently source our parts and components from a
broad range of suppliers, our top ten parts and 35




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components suppliers accounted for approximately 45% of our parts and
components procurement spending in 2003. The parts and components required
from non-Italian suppliers accounted for approximately 20% of the total value
of parts and components acquired from suppliers in 2003. Our largest suppliers
include Brembo (brakes and wheels), Eaton (cylinder heads), Magneti Marelli
(body throttle and ignition system), P.M. (machining of engine crankcases),
Showa (suspensions), Remus (exhaust systems), Verlicchi (body steel frame),
CIAP (gears), ILAS (steel fuel tanks), Nuova GM (painted plastic parts), Ohlins
(suspensions), Mahle Mondial (cylinders & pistons), Denso Europe (starters &
generators), Zeuna Starker (exhaust systems), Michelin (tires) and Pirelli
(tires). With the exception of a limited number of long term component supply
contracts for periods ranging from one to three years for strategic supplies,
we enter only into short-term, rolling contracts with our suppliers. We
typically contract with our suppliers on a non-exclusive basis, allowing us to
replace suppliers at any time. In November 1998, we signed a sponsorship and
supply agreement with Shell, to expire in 2005, under which, among other
things, Shell acts as an official lubricant supplier to Ducati (and as an
exclusive supplier of lubricants to the Ducati racing program). Generally, motorcycle raw materials and components are available from a
variety of sources. Our policy has been to identify at least two sources of
supply for each component and to be able to switch promptly to the alternative
supplier should the need arise. However, we rely upon single-source suppliers
for certain high-tech components. Nonetheless, the prices of motorcycle components have been subject to
fluctuations in the past and may be subject to fluctuations in the future.
These fluctuations may result from fluctuations in the prices of raw materials
(including commodities such as steel and aluminum) from which these components
are manufactured. Intellectual Property We own the Ducati trademark and other trademarks associated with Ducati
motorcycles. The Ducati trademark is registered in all countries that are
signatory to the Madrid Agreement concerning the International Registration of
Marks. Ducati is also registered as a Community Trademark in all countries
that are part of the European Union and in 44 additional countries on an ad hoc
basis for motor vehicles. In addition, we have registered Ducati for toys,
apparel, glasses, watches and other sundries in the majority of the countries
in which the trademark for motors and vehicles is registered. Governmental and Environmental Regulation Like other motorcycle manufacturers, we incur substantial costs in
designing and testing products to comply with domestic and foreign safety and
emissions requirements. Motorcycles sold in the United States, the European Union and all other
countries are subject to environmental emissions regulations and safety
standards with which we must comply in order to sell products in such
countries. Applicable regulations in the United States include the emissions
and noise standards of the U.S. Environmental Protection Agency and the more
stringent emissions standards of the State of California Air Resources Board.
Ducati motorcycles sold in the United States are also subject to the National
Traffic and Motor Vehicle Safety Act and the rules promulgated thereunder by
the National Highway Traffic Safety Administration. Regulations applicable to
us in Italy include E.U. directives relating to emissions, pollution, and
noise, as well as national rules on emissions, pollution, noise, and safety
issued by the Ministry of Transport (Ministro delle Infrastruture e dei
Transporti). All of our motorcycle models are required to comply with
applicable homologation regulations in the countries in which they are
distributed. We are also subject to a number of Italian governmental
regulations relating 36




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to the use and storage of materials, discharge and disposal of factory
waste and safety standards of facilities and processes. Insurance; Product Liability We maintain insurance against a number of risks. We insure against loss
or damage to our facilities, against loss or damage to our products while they
are in transit to customers, against certain potential environmental
liabilities and against product liability claims. While we do not cover 100%
of these risks with insurance, we believe that our present level of insurance
is adequate in the light of past experience. We expect that our present
insurance levels will be maintained on substantially the same terms and
conditions in the future. We are engaged in a business that exposes us to possible claims for
personal injury from the use of our products. We maintain liability insurance
with a per-occurrence limit of  10.0 million and an aggregate liability cap of
 10.0 million per year. See Item 3. Key InformationRisk FactorsWe may be
subject to significant product liability claims. 
 Description of Property The following table sets forth our principal properties as of the date of
this annual report. ApproximateSquareLocation
    
    Footage
    
    Principal Use
    
    StatusBologna,
Italy(1)
    
    
    1,339,966
    
    
    Headquarters, production facility
    
    See belowCupertino,
California, USA(2)
    
    
    12,505
    
    
    Headquarters, Ducati North America
    
    LeasedParis, France
    
    
    2,800
    
    
    Headquarters, Ducati France S.A.
    
    LeasedCologne, Germany
    
    
    4,390
    
    
    Headquarters, Ducati Motor
Deutschland GmbH
    
    LeasedTokyo, Japan
    
    
    1,300
    
    
    Headquarters, Ducati Japan KK
    
    LeasedRotterdam, Holland
    
    
    1,100
    
    
    Headquarters, Ducati Benelux B.V
    
    LeasedNorthampton, England
    
    
    2,324
    
    
    Headquarters, Ducati U.K. Limited
    
    Leased
  (1)
    
    On June 29, 2001, we entered into a sale and leaseback transaction with
Locafit S.p.A. with respect to a portion of our production facility.
Please read Item 5. Operating and Financial Review and ProspectsOther
Financial Transactions for a description of the transaction.  (2)
    
    In January 2003, we relocated our North American headquarters from
Pompton Plains, New Jersey to Cupertino, California. In addition to the above properties, we lease space in various other
locations in the United States and Western Europe on a regular basis for
warehouse storage of motorcycles and parts. We believe that our operating facilities are in good condition and are
adequate, considered in light of our capital expenditure plans, for the
development, manufacture and marketing of our current and anticipated products. 37




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Capital Expenditures The following table sets forth our capital expenditures, before
retirements, for each year in the three-year period ended December 31, 2003. Year ended December 31,2001
    
    2002
    
    2003(euro thousands)Plant equipment
    
    
    3,349
    
    
    
    4,420
    
    
    
    2,960New product industrialization (molds)
    
    
    6,518
    
    
    
    14,475
    
    
    
    11,120Technical investments (engine and vehicle tests)
    
    
    2,432
    
    
    
    4,017
    
    
    
    1,146Investments in sales and administrative
departments
    
    
    4,894
    
    
    
    5,716
    
    
    
    5,563Capitalized research and development
    
    
    11,803
    
    
    
    15,200
    
    
    
    12,969Other
    
    
    384
    
    
    
    500
    
    
    
    98Total
    
    
    29,380
    
    
    
    44,328
    
    
    
    33,856
 Our capital expenditures in property, plant and equipment were  13.5
million,  23.8 million and  15.7 million in 2001, 2002 and 2003,
respectively. Capital expenditures in each of the years were made principally
to acquire equipment and tooling at our Bologna facility, as well as to develop
new motorcycle models (in particular, the Multistrada 1000DS, which we began
developing in 2000, and the Desmosedici, which we began developing in 2001).
Investments in intangible assets, which include our capitalized research and
development expenditures for these new models, amounted to  15.9 million, 
20.5 million and  18.1 million in 2001, 2002 and 2003, respectively. The
decrease in capital expenditures and investments in intangible assets between
2002 and 2003 was mainly due to our investment in research and development,
which peaked in 2002 with the complete renewal of our product range. See
Products and DistributionProduct Research and Development. Our capital expenditures currently in progress relate principally to the
implementation of a new inventory management software system, the acquisition
of equipment and tooling at our Bologna facility, and our continuing research
and development initiatives related to the Multistrada and the Desmosedici,
which we have developed and began using in 2003 to compete in the Moto GP
Championship. We believe that competing in the Moto GP Championship will
further enhance recognition of the Ducati brand for innovative design, advanced
engineering and racing success and spur further innovation in the design and
engineering of our motorcycles that will ultimately improve the quality and
performance of our road models. We spent  4.4 million during 2003 in
connection with this project and we estimate that we will spend up to
approximately  8.0 million in each year through 2006. We plan to finance
these expenditures from our operating cash flow. 
 Item 5. Operating and Financial Review and Prospects You should read the following discussion in connection with the audited
consolidated financial statements included elsewhere in this annual report. Our audited consolidated financial statements have been prepared in
conformity with Italian GAAP, which differs in certain significant respects
from U.S. GAAP. For a discussion of significant differences between Italian
GAAP and U.S. GAAP and the related reconciliation of net profit/(loss) and
shareholders equity in our audited consolidated financial statements, refer to
Notes 29, 30 and 31 to the audited consolidated financial statements. 38




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Introduction We are one of the worlds leading manufacturers of high-performance sport
motorcycles. Founded in 1926, we are widely recognized among motorcycle
enthusiasts for producing racing-inspired motorcycles characterized by unique
engine features, innovative design, advanced engineering and overall technical
excellence. With an extensive racing pedigree dating to the 1950s, our
motorcycles have dominated the World Superbike Championship, where we have won
twelve of fourteen manufacturers titles since 1990 and more single race
victories than all other manufacturers combined. In 2003, we resumed
participating in the Moto GP Championship after an absence of over 30 years,
with a second place finish in the manufacturers ranking of the Moto GP
Championship. We believe that our globally recognized brand, unique product
characteristics and proven racing success provide us with a loyal and
enthusiastic customer base and enable us to position our motorcycles as premium
price products within the Sport sub-segment of the large-displacement
motorcycle market. Our net sales are derived principally from sales of motorcycles and, to a
lesser extent, spare parts and engines, performance accessories and technical
riding gear and enthusiast apparel. Other revenues are from sponsorship
income, licensing revenues, rental and the sale of scrap, sundry components and
materials. Revenues and other income, costs and charges are accounted for net
of returns and discounts and are recognized (as to motorcycle sales) on the
date of shipment to the dealer or importer (which normally coincides with
passage of title, or the transfer of substantially all risk and reward, but
before sale to the end user). Revenues from services are recognized when
services are rendered to the independent dealer or other third party. Costs
are recognized on the accruals basis, and the costs of racing pilots and teams
are recognized over the terms of their contracts. As a result of our strategy
to develop our motorcycle-related product offering, we expect that net sales
attributable to our Ducati Performance line of accessories, technical riding
gear and enthusiast apparel may continue to increase at a faster rate than
motorcycle sales. We cannot assure you that such increases in sales can be
achieved. We produce motorcycles in five model lines, which vary in their technical
and design features and intended customers: Superbike, Super Sport, Sport
Naked, Sport Touring and the Multistrada. We are introducing a sixth model
line, the Sportclassic, in 2003 for sale beginning the end of 2005. We sell
our motorcycles and related products in 66 countries worldwide, with a primary
focus on the Western European and North American markets, which together
accounted for approximately 85.0% of our net sales in each of the last three
years. In 2003, no single country accounted for more than 15.0% of our net
sales of motorcycles and related products, with the exception of Italy at
approximately 30%. This provides us with significant geographical diversity of
sales. We have a global distribution network, directly controlling our Italian
sales and operating wholly owned distribution subsidiaries in North America,
France, Germany, the Benelux countries (which is also responsible for Sweden),
Japan and the United Kingdom. Our manufacturing operations, based in Bologna,
Italy, consist primarily of engine and motorcycle assembly and are not
vertically integrated, resulting in a relatively low fixed cost structure. We use motorcycle registrations as an indicator of retail sales.
Motorcycle registrations reflect registrations with governmental authorities
upon sales to end users. Because we generally sell our motorcycles to
importers and dealers, net sales are normally recognized upon sale to our
importers and dealers before such motorcycles are bought and registered by end
users. The differences between our unit sales to our importers and dealers and
registrations for corresponding periods reflect the increases and decreases in
the inventories of our importers and dealers. Registration data is unavailable
or unreliable in certain of our less important markets, and even where reliable
information is available, there is typically some delay in its publication by
governmental authorities. Accordingly, we estimate registrations based on
information obtained from importers and dealers in the relevant markets where
applicable and adjust such estimates as official data is published. 39




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Worldwide motorcycle sales and registrations are seasonal, peaking during
the months of March through May (sales) and April through June (registrations).
Our motorcycle production levels are relatively stable throughout the year
(excluding annual shutdown periods for the month of August and the last two
weeks of December). Consequently, we experience periods of inventory buildup
from September through February in anticipation of the Spring selling season.
Depending on market conditions and our commercial strategy, the level of
inventory we hold or sell to importers and dealers at any time may change, as a
result of which unit sales may be less seasonal than registrations. See Item
3. Key InformationRisk FactorsOur business is seasonal and we are required to
predict levels of demand in advance and provide current motorcycle models to
the market on a timely basis. Motorcycle manufacturers typically present new models once a year at
international trade shows held in September of each year. Following these
trade shows, we work closely with our distributors and dealers to anticipate
demand for our motorcycles in the following year. We endeavor to adjust the
start of our new model year production to avoid a buildup in inventory of the
previous years models. Any such buildup can result in additional promotional
expenses (e.g., rebates, discounts, complimentary accessories and other
incentives) that we incur to reduce excess inventories (and which we account
for in selling, general and administrative expenses (excluding depreciation)).
See 2002 Compared to 2001. Certain additional factors that adversely affected our results of
operations over the last three years include:  
    
    the continued strengthening of the euro against most other
currencies, in particular the U.S. dollar (appreciation of
approximately 19.4% on average in 2003, and 20.4% at year end, with our
sales in U.S. dollars accounting for approximately 14.4% of our total
net sales in 2003), the U.K. pound sterling and the Japanese yen. See
Item 3. Key InformationExchange Rates. Such strengthening of the
euro has principally impacted product prices. To preserve our market
share, we have generally kept unchanged our sale prices in the relevant
local currency, with a consequent reduction in our gross margin. We
have engaged in foreign exchange transactions to hedge portions of our
transactional exposure to such fluctuations in exchange rates, although
such transactions protect us only from short-term fluctuations and not
long-term variances. For further information on our foreign exchange
transactions, see Item 11. Quantitative and Qualitative Disclosures
About Market Risk and Note 1 to our audited financial statements. We
estimate that our sales decreased by approximately  4.7 million in
2002 (compared with 2001) and  10.6 million in 2003 (compared with
2002) owing to exchange rate fluctuations. We expect that the effect
of the strong euro will continue to impact our results of operations in
2004.  
    
    our continued restructuring of our U.S. distribution subsidiary,
which began in 2002 and is ongoing. This restructuring has involved:  
    
    moving of our headquarters in January 2003 from Pompton
Plains, New Jersey to Cupertino, California;
    
    replacement of certain executive officers (including
the CEO of our U.S. subsidiary) and employees;
    
    outsourcing of our spare parts warehousing; and
    
    a reorganization of our dealer network.  The restructuring has had a material impact on our results of operations
for our U.S. subsidiary. We estimate that the impact of this
restructuring on selling, general and administrative expenses in our
consolidated financial statements in 2003 and 2002 was  8.0 million and
 7.0 million, respectively. We expect that our ongoing U.S.
restructuring will continue to impact our results of operations in 2004. 40




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
    
    our renewed participation in the Moto GP Championship, in
connection with which we incurred approximately  8.0 million and  5.4
million in research and development expenses and capital expenditures
for fiscal years 2002 and 2003, respectively.
    
    the launch in 2002 of our fifth motorcycle line, the Multistrada,
in connection with which we incurred  2.2 million,  5.2 million and 
7.6 million in research and development expenses and capital
expenditures for fiscal years 2001, 2002 and 2003, respectively. In
2003, we sold 6,025 Multistrada motorcycles, or 15.7% of our total unit
sales. Cost of goods sold (excluding depreciation) is comprised primarily of
variable costs, such as the cost of parts, components and labor, as well as
costs relating to research and development that are not capitalized or included
under selling, general and administrative expenses (excluding depreciation).
In each of the last three years, approximately 85% of the total cost of goods
sold (excluding depreciation) incurred by Ducati was for parts and components,
and only approximately 15% was for direct and indirect labor costs and research
and development costs. Cost of goods sold is allocated to each sector
(motorcycles, spare parts, accessories and apparel, and other):  
    
    purchased materials and the cost of external processing are
allocated to a sector (and to each motorcycle family within the
motorcycle sector) based on the specific bills of materials of the
products concerned;
    
    direct production costs for the motorcycle sector, made up of the
cost of the workshops dedicated to the specific motorcycle family
(including labor) are allocated 100% to the relevant motorcycle family
to which such costs relate;
    
    indirect production costs, (such as the warehousing of raw
materials and finished motorcycles, logistics and general factory
services) are allocated 100% to the motorcycle sector (and, in turn, to
each motorcycle family within the motorcycle sector based on direct
production costs); and
    
    expensed R&D costs, making up 30% of our R&D and the associated
costs, are allocated 100% to the motorcycle sector (and, in turn, to
each motorcycle family within the motorcycle sector based on direct
production costs). Selling, general and administrative expenses (excluding depreciation)
primarily include personnel costs, advertising and promotion costs, expenses
relating to the Ducati racing program, charges for accrued warranty expenses
and charges for doubtful accounts. Promotion costs include rebates, discounts,
complimentary accessories and other incentives. This item also includes
expenses relating to marketing and distribution, including certain expenses
associated with our wholly owned distribution subsidiaries. Costs for services
are recognized on the date on which the service is received. Costs relating to
remuneration for motorcycle racing drivers and racing teams are recognized
according to the length of their respective contracts. Beginning in 2001,
research and development expenses associated with development of a four-stroke
double twin cylinder engine used for the Desmosedici motorcycle to compete in
the Moto GP Championship are included in selling, general and administrative
expenses (excluding depreciation). Depreciation of property, plant and equipment is comprised primarily of
charges over the estimated useful life for each class of assets against the
capitalized amount of these items. Amortization of intangible assets primarily reflects amortization of the
Ducati brand name, as well as amortization of goodwill and Cagivas non-compete
agreement given in connection with our September 1996 acquisition of the Ducati
business (which expired in September 2003), as well as a non-competition
agreement entered into with the former U.K. importer (which expired in January
2003), following the creation of Ducati U.K. Amortization of intangible assets
includes amortization of certain 41




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capitalized debt issuance costs, certain incidental costs of the initial
public offering of our shares in March 1999 and certain capitalized research
and development expenditures. Other operating revenues are principally comprised of sales of scrap,
sundry components and materials, licensing revenues and rental and sponsorship
income. Interest expense, net, principally reflects interest payments on our
financing arrangements, including the Notes and the Credit Agreement for the
relevant periods. See Liquidity and Capital Resources and Other Financial
Transactions. Foreign exchange gain/(loss), net, is comprised primarily of the
translation differences from conversion into euro of monetary assets and
liabilities denominated in a currency other than the euro, and does not include
unrealized foreign exchange gains on long-term assets and liabilities, which
are deferred at the balance sheet date under Italian GAAP. Foreign exchange
losses include unrealized foreign exchange losses on long-term assets and
liabilities. See Item 3. Key InformationRisk FactorsWe are subject to
foreign currency exchange rate fluctuations, particularly with respect to the
U.S. dollar. Also included in foreign exchange gain/(loss), net, are the
results of our forward contract hedging activities (forward currency contracts
we enter into against future commitments to hedge the risk of currency
fluctuations between the date of such a contract and the performance of the
related commitment). For further information on our hedging activities, see
Item 11. Quantitative and Qualitative Disclosures About Market Risk. Other non-operating income/(expense), net, which consists of gains and
losses of a non-operating nature, such as the release following the restatement
of our brand name in 2003 of our deferred taxation provision provided for in
prior years and restructuring costs related to our corporate reorganization
plan described in Item 6. Directors, Senior Management and
EmployeesEmployees, is considered to be incurred one-time only due to its
nature and magnitude. Income taxes comprise the current and deferred taxes that arise from our
activities in the relevant period based on tax regimes applicable to us at the
end of each accounting period. Following our March 1999 initial public
offering, we qualified for certain income tax rate reductions in Italy until
2002. Certain Italian tax regimes available to Ducati entail reduction of the
corporate income tax (IRPEG) rate applicable in each of the three years
discussed in this section, depending on various factors. DMH and its Italian
subsidiaries are subject to two income taxes: (i) corporate income tax (IRPEG
until 2003 and IRES as of 2004) and (ii) local income tax (IRAP). The ordinary
IRPEG tax rate was reduced from 37%, applicable in fiscal years 1999 and 2000,
to 36% for fiscal year 2001 and to 34% for fiscal year 2003, and will decrease
to 33.0% thereafter. The IRAP rate is equal to 4.25%. See Note 27 to the
audited consolidated financial statements for further information. For a more detailed description of the line items in the consolidated
statement of operations prepared in conformity with Italian GAAP that form part
of our audited consolidated financial statements, see Note 1 to the audited
consolidated financial statements. Intangible assets include capitalized research and development costs,
comprised principally of the cost of personnel employed in research and
development functions and the cost of materials and external consultants, where
the expenditure is incurred for specific product development. Otherwise,
research and development costs are expensed under cost of goods sold (excluding
depreciation) or, in the case of costs related to the development of the
double twin engine for the Desmosedici motorcycle developed to compete in the
Moto GP Championship, selling, general and administrative expenses (excluding
depreciation). 42




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Investments in tooling for new products are capitalized as property, plant
and equipment. Finally, a portion of the costs related to our racing program
(which are included in cost of goods sold (excluding depreciation)) are
associated with research and development, as many of Ducatis technical
innovations are derived from and tested in its racing program. 
 Critical Accounting Policies Our reported financial condition and results of operations are affected by
accounting methods, assumptions and estimates that we are required to make in
preparing our consolidated financial statements. We base our estimates on
historical experience and various other assumptions. The selection of critical
accounting policies, the judgments and other uncertainties affecting
application of those policies and the sensitivity of reported results to
changes in conditions and assumptions should be considered in reviewing the
discussion and analysis of our financial condition and results of operations
below, as well as our audited consolidated financial statements. Our
significant accounting policies are disclosed in Note 1 to our audited
consolidated financial statements. We believe the following critical
accounting policies involve the most significant judgments and estimates used
in the preparation of our audited consolidated financial statements. Inventories Inventories are stated at the lower of purchase or production cost and the
estimated realizable value, based on market conditions, taking account of
related selling expenses. Purchase costs include the amounts paid to suppliers
and any directly attributable related charges. Manufacturing costs include the
expenses incurred to bring the goods to their state at the balance sheet date.
These include both costs specific to individual goods and the costs incurred by
the entire production process allocable to the goods. In particular, all types
of inventory are valued on the first in/first out (FIFO) method. Inventories
are stated net of an allowance that reflects losses on obsolete and slow-moving
items. The determination of estimated realizable value and the allowance for
losses on obsolete or slow-moving items are based upon our historical
experience and assumptions about future demand and market conditions. This
allowance does not reflect obsolete or slow-moving items held by independent
dealers or importers. Accounting for Long-Lived Assets Property, plant and equipment are booked at purchase cost or valuation of
assets contributed in kind (for instance, upon the creation of a new Group
company such as Ducati Corse), including any directly related charges.
Ordinary maintenance and repair expenditure that does not increase the value of
the assets concerned is expensed as incurred. Extraordinary maintenance and
repair expenses that increase the useful life of property, plant and equipment
are capitalized and depreciated over the residual life of the assets concerned.
Property, plant and equipment are depreciated on a straight-line basis, using
the ordinary rates indicated by current tax legislation, which are considered
to reflect the estimated useful lives of the related assets. The annual rates
used are set out below in the note on depreciation. As required by International Financial Reporting Standard No. 17
(applicable to our consolidated financial statements under Italian GAAP),
significant fixed assets acquired under finance leasing contracts are booked
according to the finance lease accounting method. Acquired assets are treated
as capital expenditures based on the original value of the asset, and
depreciated over the estimated useful life of the asset. Lease installments,
including principal and interest, are included in other borrowings. As of
December 31, 2003, we had outstanding leasing contracts with regard to our
Bologna facility, as well as with regard to machinery and workstations,
totaling approximately  30.5 million. 43




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Intangible fixed assets are booked at purchase cost or valuation of assets
contributed in kind (for instance, upon the creation of a new Group company
such as Ducati Corse), including any directly related charges. Intangible
fixed assets of Italian group companies may also be restated, when so allowed
by the laws governing restatement of assets. Intangible fixed assets are
directly amortized on a straight-line basis over their estimated economic
useful life. Costs incurred in obtaining long-term finance (debt capacity)
are amortized over the life of the related loan, according to the residual
balance method. Intangible fixed assets are fully written down if they no
longer have any future economic benefit. Research and development costs are capitalized if applicable to specific
projects, where these are reasonably identifiable and quantifiable, and if
there is a reasonable certainty that they will be recoverable by means of the
revenues generated by such projects. Accounting for long-lived and intangible assets involves the use of
estimates for determining the fair value at the acquisition date, and the
useful lives of the assets over which the costs of acquiring these assets are
charged to the income statement. The allocation of research and development
expenses to be capitalized involves assumptions as to the recoverability of
such costs from revenues generated by the relevant projects. When an impairment in the value of assets occurs, nonscheduled write-downs
are made. In the year in which the reasons for the write down no longer exist,
the value of the asset is reinstated and the related adjustment is recorded in
the income statement. We assess the impairment of identifiable intangibles and
long-lived assets whenever there is reason to believe that the carrying value
may exceed the fair value and where a permanent impairment in value is
anticipated. The determination of impairments of long-lived and intangible
assets involves the use of estimates, which include but are not limited to the
cause, the timing and the amount of the impairment. Commitments and contingencies We are involved in various claims and legal actions arising in the
ordinary course of business. Litigation is subject to many uncertainties, and
the outcome of individual matters is not predictable with assurance. Reserves
established for contingent liabilities in such matters are monitored on an
on-going basis. It is possible that the final resolution of some of these
matters may require us to make expenditures in excess of established reserves. Product warranty Product warranty obligations are estimated on the basis of a time-series
analysis of labor and material costs incurred in connection with each
individual model. These estimates are established using historical information
on the nature, frequency, and average cost of warranty claims, taking into
account the registrations over the last 24 months and estimated costs for
future recall campaigns. We actively study trends of warranty claims and take
action to improve vehicle quality and minimize warranty claims. Actual cash
payments against warranties totaled  10.8 million in 2003, or 2.8% of net
sales,  11.1 million in 2002, or 2.7 % of net sales and  9.1 million in 2001,
or 2.2% of net sales. At December 31, 2003, we had a provision in our
financial statements of  6.3 million to cover estimated future product
warranty costs. Such amount covers the full cost to Ducati of warranty
repairs, whereas cash reimbursements include the margin realized by us on the
sale of spare parts. Our provision for product warranty expenses decreased in 2003 compared to
2002 mainly due to:  
    
    an overall decrease in the number of motorcycles covered by
warranty (as a result of decreased sales); 44




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
    
    lower warranty costs for 2002 and 2003 models (the models
currently under warranty) relative to models sold in prior years;
    
    improved management of warranty costs as part of our wider
cost reduction program; and
    
    a more accurate analysis of the historical trends in warranty
costs and spare part depreciation (as used to determine the amount
of the provision). We believe that the warranty reserve is appropriate; however, actual
claims incurred could differ from the original estimates. See Note 13 to the
audited consolidated financial statements. Deferred Taxation Deferred taxes have been accounted for in accordance with Accounting
Principle No. 25, issued in March 1999 by the Italian Accounting Profession.
Deferred tax assets and liabilities are calculated using current tax rates
applying at the respective accounting reference dates in the countries where
Group companies are based. The statutory financial statements of Group
companies recognize deferred tax assets and liabilities arising from timing
differences between statutory and taxable income and on carried forward tax
losses, whose recovery is considered to be reasonably certain, based on
predictions of the particular companys current and expected results. Deferred
tax assets and liabilities have also been provided as a result of eliminating
tax-driven items from the individual financial statements of our consolidated
subsidiaries and making other consolidation adjustments (principally unrealized
intercompany profits), which represent timing differences between the
individual financial statements of our consolidated subsidiaries and our
consolidated financial statements. These taxes are reviewed every year to
reflect changes in tax rates and in the financial and economic situation of the
companies concerned. Significant management judgment is required in determining our provision
for deferred tax assets and liabilities. The analysis is based on the
estimates of taxable income in the jurisdictions in which the group operates
and the period over which the deferred tax assets and liabilities will be
recoverable. If actual results differ from these estimates, or we adjust these
estimates in future periods, our financial position and results of operations
may be affected. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
base our estimates on the aging of our accounts receivable balances and our
historical write-off experience, customer credit-worthiness and changes in our
customer payment terms when evaluating the adequacy of the allowance for
doubtful accounts. If the financial condition of our customers were to
deteriorate, actual write-offs may be higher than expected. 
 Results of Operations The following table sets forth certain statement of operations data
expressed as a percentage of our net sales for the periods indicated: Year ended December 31,2001
    
    2002
    
    2003Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of goods sold (excluding depreciation)
    
    
    (59.2
    )
    
    
    (60.4
    )
    
    
    (65.3
    )Gross profit (excluding depreciation)
    
    
    40.8
    
    
    
    39.6
    
    
    
    34.7Selling, general and administrative expenses
(excluding depreciation)
    
    
    (26.5
    )
    
    
    (29.6
    )
    
    
    (29.1
    )
 45




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Year ended December 31,2001
    
    2002
    
    2003Depreciation of property, plant and equipment
    
    
    (2.4
    )
    
    
    (2.9
    )
    
    
    (3.9
    )Amortization of intangible assets
    
    
    (6.0
    )
    
    
    (5.3
    )
    
    
    (6.1
    )Other operating revenues
    
    
    1.8
    
    
    
    2.6
    
    
    
    6.0Operating income
    
    
    7.7
    
    
    
    4.4
    
    
    
    1.6
 
 2003 Compared to 2002 Net sales Net sales were  388.2 million in 2003 compared to  413.0 million in
2002, a decrease of  24.8 million, or 6.0%. This decrease in net sales was
attributable principally to the following (4.0% and 2.0%, respectively): (1)
the strengthening of the euro against the U.S. dollar and other relevant
currencies (principally the Japanese yen and the U.K. pound) and (2) a decrease
in motorcycle unit sales of 2.8% and a negative mix of motorcycle models sold,
or a lower proportion of sales of models in respect of which the average margin
is higher (in 2003, we sold 4,327 fewer Superbike and Super Sport motorcycles
(which have higher margins) and 6,025 more Multistrada motorcycles (which have
a lower margin)), which more than off-set a positive country mix, or a lower
proportion of sales in countries in which average prices are lower (426 of the
total 1,017 fewer units sold in 2003 versus 2002 were in North America, where
we currently have a lower margin per motorcycle because of the weaker dollar).
In 2003, motorcycle net sales accounted for 81.4% of net sales (82.7% in
2002). Sales of spare parts accounted for 10.6% of net sales (10.3% in 2002)
and sales of performance accessories, technical riding gear and enthusiast
apparel accounted for 7.3% of net sales (6.6% in 2002). Revenues from non-core
activities (mainly tickets for various events arranged by Ducati) represented
0.7% of net sales (0.4% in 2002). In 2003, we produced motorcycles in five model lines, which vary in their
technical and design features and intended customers: Superbike, Super Sport,
Sport Naked, Sport Touring, and the Multistrada, introduced for sale in 2003.
The 2.8% decline in unit sales of Ducati motorcycles, from 39,534 in 2002 to
38,417 in 2003, resulted principally from a 34.6% decrease in unit sales of our
Sport Touring motorcycles, a 26.4% decrease in unit sales of Superbike
motorcycles, a 26.1% decrease in unit sales of our Super Sport motorcycles and
an 8.2% decrease in unit sales of Sport Naked motorcycles, partially offset by
sales of the new Multistrada line. Unit sales showed varying trends in our
principal geographic markets, with increases in the UK (+10.9%) and Italy
(+1.7%) and decreases in Germany (-25.3%), the United States (-8.4%), France
(-7.6%), Japan (-4.9%), and the Benelux countries (-1.5%). The decline in unit
sales resulted mainly from our December 2003 purchase of the business of our
third party importer in Germany (as a result of which motorcycles sold to such
importer that were still in its inventory at December 31, 2003 were counted as
part of our German subsidiarys inventory at such date); continuing disruptions
relating to the ongoing restructuring of our U.S. operations; a decline in
market demand in France; and a reduction in Japan, where we had sold 300 units
of the MH900E special series in 2002, but no such units in 2003. Ducati motorcycle registrations were 38,130 in 2003 compared to 39,607 in
2002, a decrease of approximately 3.7%. In particular, registrations increased
by 35% in Spain and Portugal, 28% in Switzerland and 6% in the Benelux
countries, while registrations declined 17% in the United States, 16% in the
UK, 8% in France and 7% in Japan. We believe that we generally kept our market
share throughout the world, with the exception of the U.S. The decrease in net sales of spare parts of 3.6% between 2003 and 2002 was
entirely due to the strengthening of the euro against foreign currencies. 46




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Cost of goods sold (excluding depreciation) Cost of goods sold (excluding depreciation) was  253.4 million in 2003
compared to  249.3 million in 2002, an increase of  4.1 million, or 1.6%,
principally as a result of the 2.0% growth in the apparel business. As a
percentage of net sales, cost of goods sold (excluding depreciation) increased
to 65.3% in 2003 compared to 60.4% in 2002, as a result of the deterioration of
the exchange rate and the higher costs associated with the product mix
(principally the higher production costs of the Multistrada) of motorcycles
sold in 2003. Gross profit (excluding depreciation) Gross profit (excluding depreciation) was  134.8 million in 2003 compared
to  163.7 million in 2002, a decrease of  28.9 million, or 17.6%, principally
as a result of the factors mentioned above. As a percentage of net sales,
gross profit (excluding depreciation) was 34.7% in 2003 compared to 39.6% in
2002. Selling, general and administrative expenses (excluding depreciation) Selling, general and administrative expenses (excluding depreciation) were
 112.8 million in 2003 compared to  122.0 million in 2002, a decrease of 
9.2 million, or 7.5%, principally as a result of reduced warranty and personnel
costs and the insourcing of certain sub-assembly activities, which together
more than offset costs related to our participation in the Moto GP
Championship. As a percentage of net sales, selling, general and
administrative expenses (excluding depreciation) decreased to 29.1% in 2003
from 29.6% in 2002. Research and development expenses relating to our racing
program are included under cost of goods sold (excluding depreciation). Depreciation of property, plant and equipment Depreciation of property, plant and equipment was  15.0 million in 2003
compared to  12.0 million in 2002, an increase of  3.0 million, or 25.0%,
principally reflecting increased capital investments for the production of the
Multistrada and of the three-valve engine. Amortization of intangible assets Amortization of intangible assets was  23.9 million in 2003 compared to 
22.0 million in 2002, an increase of  1.9 million, or 8.6%, related to
investment in new products including the Multistrada, the ST3 and the Monster
S4R. As a percentage of net sales, amortization of intangible assets increased
to 6.1% in 2003 compared to 5.3% in 2002. Other operating revenues Other operating revenues were  23.2 million in 2003 compared to  10.8
million in 2002, an increase of  12.4 million, or 115.0%, principally due to
sponsorship income related to the Moto GP Championship. As a percentage of net
sales, other operating revenues increased to 6.0% in 2003 compared to 2.6% in
2002. Operating income Operating income was  6.3 million in 2003 compared to  18.5 million in
2002, a decrease of  12.2 million, or 66.0%, principally for the reasons
stated above. As a percentage of net sales, operating income decreased to 1.6%
in 2003 compared to 4.4% in 2002. 47




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Interest expense, net Interest expense, net, was  9.3 million in 2003 compared to 11.5 million
in 2002, a decrease of  2.2 million, or 19.2%, principally reflecting reduced
dealer inventory financing incentives. Foreign exchange gain/(loss), net We had a foreign exchange gain, net, of  2.5 million in 2003 compared to
a gain of  1.3 million in 2002, principally reflecting the strengthening of
the euro against the U.S. dollar, which resulted in foreign exchange gains in
connection with currency hedging transactions entered into to protect our
operating results from currency variations Other non-operating income/(expense), net Our non-operating gain of  0.6 million in 2003, compared to a gain of 
0.1 million in 2002, is the net result of the following extraordinary items:  
    
    an extraordinary gain of  5.2 million resulting from
the restatement of the Ducati brand name in DMHs statutory
financial statements at December 31, 2003 from  71.2 million to
 98.4 million (corresponding to the brand names market value
reported in our consolidated financial statements at the same
date). Under Italian tax rules, we are entitled to accelerate
the amortization of certain assets for tax purposes insofar as we
create two special reserves, one for accelerated amortization and
another for deferred taxes (calculated by applying the standard
corporate tax rate of 38.25%) due, upon completion of the tax
acceleration, on the portion of amortization as reported in our
financial statements and already deducted for tax purposes
because of the accelerated amortization. In 2003, pursuant to a
special tax regime, DMH stepped up the value of the Ducati brand
name by paying a substitute tax of 19% on the surplus deriving
from the restatement, thereby aligning the value of this asset
amortized on a tax acceleration basis with the value carried in
the consolidated accounts. As a result of this alignment, the
accelerated amortization reserve was cancelled and the portion of
the reserve for deferred taxes created with respect to the
accelerated amortization of the brand name was subject to current
taxes in order to fund the 19% substitute tax payment on the
restatement surplus of  27.2 million (which did not have an
impact on our consolidated financial statements), whereas the
remainder, amounting to  5.2 million, was released thereby
generating the extraordinary gain.  
    
    out-of-period taxation costs of  0.587 million, of
which  0.150 million were incurred in May 2003 by DMH and Ducati
Corse S.r.l. as payment under an available tax amnesty. The
remaining  0.437 million resulted from the difference between
taxes effectively paid and our tax provision at December 31,
2002; and  
    
    restructuring costs of  4.0 million related to our
corporate reorganization plan, pursuant to which a certain number
of employees were terminated in 2003 by mutual consent in
exchange for severance incentives, including costs of  2.2
million associated with the termination of Carlo Di Biagios
employment contract. The cost of our corporate reorganization
plan was recorded as a non-operating expense for 2003. 48




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Profit before income taxes and minority interest Profit before income taxes and minority interest was  0.1 million in 2003
compared to  8.5 million in 2002, principally due to the reasons stated above. Income taxes Our income tax charge was  0.1 million in 2003 compared to  2.0 million
in 2002, a decrease of  1.9 million, as a result of decreased profit. Net profit We had a net profit of  40,000 in 2003 compared to  6.5 million in 2002,
principally due to the reasons stated above. 
 2002 Compared to 2001 Net sales Net sales were  413.0 million in 2002 compared to  407.8 million in
2001, an increase of  5.2 million, or 1.3%. The increase in net sales was
attributable principally to improvements in the mix of motorcycle models sold
of 2.9% and an increase in net sales of motorcycle-related products of 2.5%,
more than off-setting the adverse impact of foreign exchange losses of 2.1%, a
decrease in motorcycle unit sales of 1.0% and a negative country mix, or a
greater proportion of sales in countries in which average prices are lower of
1.0%. In 2002, motorcycle net sales accounted for 82.7% of net sales (84.7% in
2001), principally reflecting a decline in unit sales of 1.2% and negative
country mix, partially offset by the improvement in product mix. Sales of
spare parts accounted for 10.3% of net sales (9.5% in 2001) and sales of
performance accessories, technical riding gear and enthusiast apparel accounted
for 6.6% of net sales (5.5% in 2001). Revenues from other non-core activities
represented 0.4% of net sales in 2002. As mentioned above, the increase in 2002 net sales compared to 2001 net
sales was partially offset by the net effect of the strengthening of the euro
against the U.S. dollar, the Japanese yen and the U.K. pound sterling during
2002 relative to 2001. We sell a significant number of units in those
currencies and fluctuations between the euro and those currencies may impact
our net sales during a given period. See Note 19 to our audited consolidated
financial statements. In 2002, we produced motorcycles in four model lines, which vary in their
technical and design features and intended customers: Superbike, Super Sport,
Sport Naked, Sport Touring. A fifth product line, the Multistrada, was
introduced for sale in 2003. The 1.1% decline in motorcycle net sales between
2001 and 2002 resulted mainly from a 1.2% decline in unit sales of Ducati
motorcycles, to 39,534 in 2002 from 40,016 in 2001. The decrease in unit sales
resulted principally from a 32.8% decrease in unit sales of our Super Sport
motorcycles (or, excluding the effect of the sale of the limited edition
MH900evoluzione in 2001 and 2002, a 14.6% decrease), a 2.6% decrease in unit
sales of Sport Naked motorcycles, and a 4.3% decrease in unit sales of our
Sport Touring motorcycles, partially offset by a 19.5% increase in unit sales
of Superbike motorcycles (as customers warmly received the new 999 Superbike).
Unit sales showed varying trends in our principal geographic markets, with
increases in Japan (+10.6%); Italy (+6.5%); flat sales in the Benelux
countries; and decreases in the United States (-25.8%), the UK (-17.6%), France
(-9.1%), and Germany (-1.0%). The decline in unit sales resulted mainly from
declines in market demand in certain of our key markets (in particular, the
United States and Germany), disruptions relating to the restructuring of our
U.S. operations, a global policy of reducing sales into the dealer network to reduce their inventory (in particular,
the United States, the United 49




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Kingdom and Germany) and vacancies in key
management positions in France (which have since been filled). Ducati motorcycle registrations were 39,607 in 2002 compared to 38,969 in
2001, an increase of approximately 2.0%. In particular, registrations in Japan
and the UK grew 9.0%, the Benelux countries were up 6.0%, and Italy increased
2.0%, more than off-setting a decline in Germany of 9.0%, in France of 7.0% and
in the United States of 1.0%. We also estimate that we gained market share in
all of these countries, with the exception of France, where our results were
negatively affected by a vacancy in a key management position (which has since
been filled). The increase in net sales of spare parts of 9.2% between 2002 and 2001
reflects principally the significant increase in motorcycle unit sales
experienced from 1996 to 2002. Cost of goods sold (excluding depreciation) Cost of goods sold (excluding depreciation) was  249.3 million in 2002
compared to  241.3 million in 2001, an increase of  8.0 million, or 3.3%,
principally as a result of increased materials and research and development
expenses associated with the new Superbike and Multistrada models. As a
percentage of net sales, cost of goods sold (excluding depreciation) increased
to 60.4% in 2002 compared to 59.2% in 2001. Gross profit (excluding depreciation) Gross profit (excluding depreciation) was  163.7 million in 2002 compared
to  166.5 million in 2001, a decrease of  2.8 million, or -1.7%, principally
as a result of factors mentioned above. As a percentage of net sales, gross
profit (excluding depreciation) was 39.6% in 2002 compared to 40.8% in 2001. Selling, general and administrative expenses (excluding depreciation) Selling, general and administrative expenses (excluding depreciation) were
 122.0 million in 2002 compared to  108.0 million in 2001, an increase of 
14.0 million, or 13.0%, principally as a result of the restructuring of our
U.S. operations, general promotional activities (e.g., the World Ducati Week),
higher warranty costs (due to the growing number of units under warranty),
increased sales personnel costs and expenses that we incurred in our effort to
reduce excess inventories (in particular in the United States). As a
percentage of net sales, selling, general and administrative expenses
(excluding depreciation) increased to 29.6% in 2002 compared to 26.5% in 2001.
Expenses incurred in connection with our racing program (excluding as regards
development of the Desmosedici to compete in the Moto GP Championship) were 
6.5 million and  6.1 million in 2002 and 2001, respectively. Research and
development expenses relating to our racing program are included under cost of
goods sold (excluding depreciation). See Notes 20 and 21 to our audited
consolidated financial statements. Depreciation of property, plant and equipment Depreciation of property, plant and equipment was  12.0 million in 2002
compared to  10.0 million in 2001, an increase of  2.0 million, or 20.0%,
principally reflecting increased capital investments. 50




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Amortization of intangible assets Amortization of intangible assets was  22.0 million in 2002 compared to 
24.6 million in 2001, a decrease of  2.6 million (or 10.6%), principally due
to the devaluation of software for Ducati.Com. As a percentage of net sales,
amortization of intangible assets decreased to 5.3% in 2002 compared to 6.0% in
2001. Other operating revenues Other operating revenues were  10.8 million in 2002 compared to  7.5
million in 2001, an increase of  3.3 million, or 44.0%, principally due to
higher sponsorship income. As a percentage of net sales, other operating
revenues increased to 2.6% in 2002 compared to 1.8% in 2001. Operating income Operating income was  18.5 million in 2002 compared to  31.5 million in
2001, a decrease of  13.0 million, or 41.3%, principally for the reasons
stated above. As a percentage of net sales, operating income decreased to 4.4%
in 2002 compared to 7.7% in 2001. Interest expense, net Interest expense, net, was  11.5 million in 2002 compared to  12.8
million in 2001, a decrease of  1.3 million, or 10.2%, principally reflecting
reduced dealer inventory financing incentives. Foreign exchange gain/(loss), net We had a foreign exchange gain, net, of  1.3 million in 2002 compared to
a gain of  0.7 million in 2001, principally reflecting the strengthening of
the euro against the U.S. dollar and the U.K. pound sterling, which resulted in
foreign exchange gains in connection with currency hedging transactions entered
into to protect our operating results from currency variations. Profit before income taxes and minority interest Profit before income taxes and minority interest was  8.5 million in 2002
compared to  19.4 million in 2001, principally due to the reasons stated
above. Income taxes Our income tax charge was  2.0 million in 2002 compared to  8.9 million
in 2001, a decrease of  6.9 million, principally thanks to one-time tax
benefits resulting from the so-called Tremonti Law, which reduces taxation on
certain capital expenditures. Net profit We had a net profit of  6.5 million in 2002 compared to  10.6 million in
2001, principally due to the reasons stated above. 
 U.S. GAAP Reconciliation The principal differences between Italian GAAP and U.S. GAAP as they
affect the audited consolidated financial statements for the years ended
December 31, 2001, 2002 and 2003 were the accounting treatment of: (i)
acquisition of the Ducati motorcycle business, (ii) deferred costs, (iii) debt 51




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issuance costs related to our Notes, (iv) foreign currency translation,
(v) derivative financial instruments, (vi) financing of
dealer incentives (in particular, cash
discounts and flooring incentives are classified under U.S. GAAP as a reduction
of revenue), (vii) costs related to
software projects, (viii) deferred taxes, (ix) stock-based
compensation, (x) securitization and consolidation of special
purpose entities and (xi) earnings per shares. In
respect of securitization and consolidation of special purpose
entities, we have consolidated DDF1 under U.S. GAAP for 2003. The
effect of such consolidation on our consolidated assets under U.S.
GAAP was: (i) an increase in cash and cash equivalents of
10 million
and a decrease in investments of
10 million
(relating to the Class B bonds issued to us by DDF1), and (ii) an
increase in accounts receivable of
33 million
(relating to the Class A bonds issued by DDF1). The effect of such
consolidation on our consolidated liabilities was an increase in long
term liabilities of
33 million
(also relating to the Class A bonds issued by DDF1). The
consolidation did not impact our statement of operations under U.S.
GAAP, as we reimbursed all of DDF1s operating costs (which
reimbursements were already reflected in our statement of operations
under Italian GAAP). In addition, start up costs of
680,000 at
December 31, 2003, capitalized and not yet amortized under
Italian GAAP, have been expensed for U.S. GAAP purposes. We
expect to continue to consolidate DDF1 under U.S. GAAP in the
future as a result of FIN 46R. See Implementation of New
Accounting Pronouncements and Other Financial
TransactionsSecuritization. Under U.S. GAAP, volume bonuses
are accrued at the time of revenue recognition and are classified as a
reduction of revenue in accordance with EITF 01-09 (issue 6), and the amount of
such reduction in 2001, 2002 and 2003 was approximately  16.4 million,  16.5
million and  14.4 million, respectively. Notes 29, 30 and 31 to the audited
consolidated financial statements contain a detailed description of the
differences between Italian GAAP and U.S. GAAP, as well as a reconciliation of
net profit and shareholders equity between Italian GAAP and U.S. GAAP. Under Italian GAAP, net profit was approximately  10.5 million in 2001, 
6.5 million in 2002 and  40,000 in 2003. Under U.S. GAAP, net profit
approximated  14.2 million in 2001,  7.0 million in 2002 and  0.1 in 2003. Under Italian GAAP, shareholders equity was approximately  159.7 million
at December 31, 2002 and  158.4 million at December 31, 2003. Under U.S.
GAAP, shareholders equity approximated  83.5 million at December 31, 2002 and
 81.2 million at December 31, 2003. Under Italian GAAP, research and development expenditure is capitalized
and is reflected as part of investing activities. Under U.S. GAAP, research
and development expenditure is expensed and reflected as part of operating
activities. 
 International Financial Reporting Standards (IFRS) Like all listed EU companies, we will be required to apply International
Financial Reporting Standards (IFRS) in the preparation of our consolidated
financial statements for fiscal years from January 1, 2005 on. We will also
present our 2004 results based on Italian GAAP and IFRS for comparative
purposes. We are currently in the process of establishing an IFRS
implementation program, which will include a central team at the parent company
level and working groups at the level of our principal operating companies. As
part of this program, we will review the IFRS principles in force, as well as
the significant changes contained in current proposals for the revision of
those standards, which to date have not been finalized. By the end of 2004, we will:  
    
    identify the significant differences between the
Italian GAAP accounting principles that we currently follow, and
the applicable provisions of IFRS; and  
    
    formulate an action plan aimed at identifying the steps
required to adapt our corporate processes and information systems
to render them capable of supplying the information necessary for
the preparation of our 2005 consolidated financial statements in
accordance with IFRS, and to permit us to process the information
related to 2004 to be presented for comparative purposes. 
 Liquidity and Capital Resources Our principal ongoing sources of liquidity are primarily derived from cash
flow from operations. We generated approximately  29.0 million of cash flows
from operating activities for the year ended December 31, 2003 compared to 
44.9 million in 2002 and  13.8 million in 2001. The decrease of  15.9
million from 2003 to 2002 was due principally to our lower net profit for the
year,  6.5 million less than in 2002, by an increase of working capital of 
7.9 million, higher depreciation and amortization 52




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of 4.9 million and changes in other liabilities and net current assets
that absorbed cash totaling  6.4 million, and the increase of  31.1 million
from 2002 to 2001 was principally due to our trade receivables securitization
(see Other Financial Transactions). Our working capital is broken down as
follows (in millions): 2003
    
    2002
    
    2001Trade receivables
    
    
    80.4
    
    
    
    82.0
    
    
    
    98.0Inventories
    
    
    104.8
    
    
    
    111.4
    
    
    
    97.6Trade payables
    
    
    (89.5
    )
    
    
    (95.1
    )
    
    
    (76.7
    )Total
    
    
    95.7
    
    
    
    98.3
    
    
    
    108.9
 Our decreased trade receivables at December 31, 2003 of  80.4 million was
primarily due to an overall decrease in net sales compared to 2002 Our decreased inventories at December 31, 2003 of  104.8 were driven by a
buildup of finished products (i.e., finished motorcycles) generated in 2002 to
satisfy production requirements during the spring of 2003 and to provide for
potential union-related work stoppages which did not materialize, as well as
weak market demand in 2002 (particularly in the fourth quarter). Our decreased trade payables at December 31, 2003 of  89.5 was due mainly
to new plant and equipment for the introduction of the new 999R and Multistrada
models in 2002. Of our  29.0 million of cash flows that we generated in 2003, we used
approximately  15.7 million in property, plant and equipment (compared to 
23.8 million in 2002) and  18.1 million in investments in intangible assets
(compared to  20.5 million in 2002). Our expenditures in property, plant and
equipment in 2002 and 2003 were principally to acquire equipment and tooling at
our Bologna facility. The decrease between the two years reflects our greater
investment in 2002 in equipment and tooling for the manufacture of new
products, such as the Multistrada and the 999. For this same reason, our
investment in intangible assets (relating to research and development)
decreased relative to 2002. We currently have levels of long-term debt and available lines of credit
of  282.5 million, of which approximately  116.4 million remained available
at December 31, 2003. During 2003, we assigned  168.4 million of trade
receivables in securitization and factoring transactions. See Other
Financial Transactions. We believe that the financial resources available to us from our
operations will be sufficient to meet our working capital needs and capital
expenditure requirements in the foreseeable future. Any reduction in our
financial resources from our operations could impair our ability to fund our
future liquidity needs. 
 Other Financial Transactions Notes On May 31, 2000, DMH issued the Notes in the aggregate principal amount of
 100.0 million. The Notes, which mature on May 31, 2005, bear interest at a
fixed rate of 6.50% per annum, with the total principal amount being repayable
at maturity. The net proceeds to DMH from the sale of the Notes was
approximately  99.2 million, after deduction of the issue price discount and
the combined management and underwriting commission and the selling concession.
We used these net proceeds to prepay in full all amounts owed under the
related credit agreement governing the Notes (the Credit Agreement), which 53




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was terminated. The terms and conditions of the Notes do not include any
financial coverage ratios or performance covenants, but do limit our ability to
create liens on assets to secure (i) indebtedness represented by bonds, notes,
debentures or other negotiable instruments or (ii) any guarantee of such
indebtedness. Events of default under the terms and conditions of the Notes,
which would entitle the noteholders to declare the Notes to be immediately due
and payable, include, but are not limited to, failure to pay interest or
principal under the Notes when due, failure to comply with any obligations
under or in respect of the Notes, failure to pay other indebtedness when due,
acceleration of other indebtedness and the occurrence of certain bankruptcy or
other insolvency events. On May 18, 2001, we repurchased  9.0 million in aggregate principal
amount of the Notes in two tranches (4.0 million in aggregate principal amount
at an aggregate purchase price equal to 101.23% of the original par value of
the Notes, and 5.0 million in aggregate principal amount at an aggregate
purchase price equal to 101.25% of the original par value of the Notes). We
partially funded these repurchases through advance proceeds from the sale and
lease-back transaction completed on June 29, 2001, through which we sold, and
leased back, part of our Bologna property. Proceeds from this sale and
leaseback transaction were also used to finance our operations. In 2003, we
bought back on the market approximately  15.3 million in aggregate principal
amount of our Notes (at an average purchase price equal to 102.8% of their
original par value). In 2004 through the date of this Annual Report, we bought
back on the market approximately  15.0 million in aggregate principal amount
of our Notes (at an average purchase price of 101.0% of their original par
value). We funded these repurchases through proceeds of corresponding
committed bank loans. The costs related to the above repurchases have been reclassified as
financial charges. At December 31, 2003, an aggregate principal amount of
approximately  75.7 million of the Notes remained outstanding, and as at June
28, 2004 the outstanding principal amount was approximately  60.7 million.
All repurchased Notes have been cancelled. In view of our obligation to repay
the Notes in 2005, we are considering different options, including the issuance
of new debt or equity securities, or obtaining additional committed bank loans
or a syndicated debt. On July 2, 2001, we entered into a Credit-Linked transaction, in which
we acquired a  15.0 million note (the Credit-Linked Note) issued by the
London branch of Banca Nazionale del Lavoro (BNL). The Credit-Linked Note
yields an annual coupon of 5.89% and matures on May 31, 2005. BNL may prepay
the Credit-Linked Note, among other things, if we default on the Notes. We
purchased the Credit-Linked Note to maximize liquidity over its term. The
transaction is shown in the net financial position under long-term investments
for  15.0 million. In the balance sheet, this item is reclassified to other
non-current assets. Securitization In 2003, we assigned to Ducati Desmo Finance 1 S.r.l. (DDF1)  a special
purpose entity owned by two Dutch foundations in which we have no economic or
voting interest or ability to control management or board decisions 
approximately  116.0 million of our trade receivables, as compared with
approximately  26.7 million in 2002. Of the receivables assigned in 2003, we
have collected  110.1 million from DDF1 (and  26.7 million for 2002). Of the
remaining  5.9 million for 2003,  0.8 million is related to interest and
expenses and  5.1 million is a so-called deferred reserve payable by DDF1 to
us to the extent that DDF1 has available funds based on the performance of the
assigned receivables. The securitization essentially exposes us to the risk of
not collecting this deferred amount which is subordinated to the collection by
DDF1 of the assigned receivables. In addition, we are obligated to compensate
DDF1 for any amounts (which typically are approximately  1 to 2 million per
year) for rebates claimed by dealer debtors on receivables assigned. We
continue to assign receivables to DDF1 on an ongoing basis. 54




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The receivables we assigned to DDF1 are part of our non-recourse roll-over
securitization program, and we intend to assign additional receivables in
similar transactions in 2004 and in subsequent years. Our securitization
program reflects a change in our credit management practices in Italy and
Europe to benefit from savings relative to the cost of non-recourse factoring
and interest income on planned financing activities previously carried out by
third party factoring companies. Historically, we entered into non-recourse
factoring agreements to manage the risk of non-payment of these receivables.
We eliminated our non-recourse factoring program in 2001 (in Italy) and 2002
(in northern Europe). The significant increase in 2003 as compared to 2002 of
receivables assigned to DDF1 reflects the completion of our switch from
factoring to securitization. Pursuant to the factoring agreements, we received
approximately  18.3 million and  43.0 million in 2002 and 2001, respectively.
We did not enter into any such agreements in 2003. The total costs of this
roll-over securitization transaction, approximately  1.1 million, have been
capitalized and will be amortized over five years, which is the anticipated
duration of our securitization program, as the quality of the receivables
portfolio transferred is considered high, and thus we consider it unlikely that
we will terminate the securitization beforehand. DDF1 through June 30, 2003 financed the purchase of our receivables
through a bridge loan from Banca Intesa, and thereafter through the issuance of
 43 million in aggregate principal amount of bonds ( 33 million of Class A
bonds and  10 million of Class B bonds). The bond issuance also served to
replace the bridge loan granted by Banca Intesa. The Class A bonds were taken
up entirely by Banca Intesa, which then sold 99.5% of them to Romulus Funding
Inc., a U.S. finance company that is wholly owned by Global Securitization
Services LLC. We have no economic or voting interest in, or ability to control
management or board decisions of, these companies. Our North American
subsidiary, Ducati North America Inc., on June 30, 2003 purchased all of the
Class B bonds as the principal manner in which we retain a certain degree of
risk in our securitization financing as required by rating agencies and market
practice. The bonds mature on July 28, 2009, earn interest at 3-month Euribor
(paid quarterly in arrears), and are subordinated to the Class A bonds. We
classify the Class B bonds as financial fixed assets as they cannot be sold for
a two year period subsequent to their purchase. To finance this purchase, DMH
made a non-returnable payment of  10 million to Ducati North America Inc. Our receivables are recorded at face value, after providing for an
allowance for doubtful accounts to reflect their estimated realizable value.
For receivables that we sold in factoring arrangements, the amount due from the
principal debtor is paid by the factoring company, less a reduction for their
fees. For receivables that we have assigned in our securitization
transactions, an amount equal to the amount collected for the receivables
assigned was deducted from trade receivables and credited to banks, while the
deferred amount from DDF1 remained as trade receivables (the risk of
non-payment of this deferred portion, which is based on the performance of the
underlying trade receivables, was taken into account in calculating the
allowance for doubtful accounts). Payables are recorded at face value, which
is considered to represent their settlement value. Leasing Agreements As required by International Financial Reporting Standards (applicable
under Italian GAAP), fixed assets acquired under finance leasing contracts, if
significant, are booked according to the finance lease accounting method.
Beginning in 2001, the acquired assets are treated as capital expenditures
based on the original value of the asset, and depreciated over the estimated
useful life of the asset. Lease installments, including principal and
interest, are included in other borrowings. Given that lease contracts were
not significant to the Ducati Group through December 31, 2000, accrued lease
installments were included in selling, general and administrative expense
(excluding depreciation), while liabilities for future installments were
recorded in the notes to the audited consolidated financial statements,
together with the effect that there would have been if the current method of
accounting for leases had been adopted. 55




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Until December 31, 2000, minor leases for machinery and work stations were
accounted for in the same way as in the statutory financial statements (as they
were immaterial). In our audited consolidated financial statements for the
period ended December 31, 2001, we have chosen to use the financial method,
booking the leased assets and charging depreciation over their useful life in
the same way as property, plant and equipment, while booking the liability to
the leasing company and charging the financial expenses in the statement of
operations on an accruals basis, considering the importance of the sale and
lease-back operation. Following the adoption of this method, minor lease
contracts have also been accounted for in this way. Repurchases of Shares Under a share repurchase plan enabling us to repurchase on the Telematico
up to  6.0 million of our shares in one or more transactions by November 6,
2003, in June and July 2003 we purchased a total of 293,235 Ducati shares for
an aggregate purchase price of  391,225 (or an average per share purchase
price of  1.3334) in order to support trading in our shares on the Italian
stock market. On May 6, 2004, our shareholders approved the buy back plan to
repurchase up to a maximum of 15,556,800 shares, equivalent to about 9.8% of
our outstanding Ducati shares. As of June 28, 2004, we held 1,521,378 Ducati
shares. For more information on this buy back plan, see Item 10. Additional
InformationBuy Back Plan. 
 Derivative Financial Instruments for Hedging Purposes Our primary market risk exposure is foreign currency risk. To manage this
risk, we enter into derivative financial instruments (i.e., forward exchange
contracts). At December 31, 2003, we had  72.3 million in forward exchange
contracts, compared to  81.6 million at December 31, 2002. We are also exposed
to interest rate risk associated with short and long-term bank financings on
which we pay a variable interest rate. To manage this risk, we enter into
interest rate swap agreements and interest rate cap agreements. For more
information on our derivative financial instruments, see Item 11. Quantitative
and Qualitative Disclosures About Market Risk. 
 Off-Balance Sheet Arrangements with Unconsolidated Entities On February 14, 2002, our board of directors approved the extension
through 2004 of the retention bonus plan payable to Federico Minoli and up to
four additional senior officers of Ducati designated by the managing director.
We estimate that such bonuses could amount to as much as  250,000 in the
aggregate. On March 5, 2003, our board also confirmed the allocation to Mr.
Minoli of an indemnity on termination as our managing director of US$ 1.2
million. For more information on these events, see Item 6. Directors, Senior
Management and EmployeesCompensation of Directors and Senior Management. In connection with our trade receivables securitization program described in
"Other Financial Transactions, we have undertaken to pay, and have guaranteed
vis-à-vis investors purchasing securities issued by DDF1 in the securitization
of the receivables, certain specified operating costs of DDF1. We have not
guaranteed the collection of any nonperforming receivables assigned by us to
DDF1. Moneys payable by us in connection with this undertaking are deducted by
DDF1 from the deferred portion of the purchase price outstanding from time to
time from DDF1 to us for our receivables. Approximately  770,000 were
deducted from the deferred purchase price in respect of such costs in 2003 and
we expect that approximately  900,000 will be deducted in respect of such
costs in 2004. 56




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Contractual Obligations and Commercial Commitments We have various contractual obligations and commercial commitments arising
from our continuing operations. The following represents our contractual
obligations and other commercial commitments as of December 31, 2003: Contractual Obligations: Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 yearsLong-Term Debt
    
    
    81,882
    
    
    
    
    
    
    
    81,882
    
    
    
    
    
    
    
    Capital Lease Obligations
(production facility)
    
    
    19,825
    
    
    
    3,254
    
    
    
    8,493
    
    
    
    8,078
    
    
    
    Operating Leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unconditional Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Cash Obligations
    
    
    101,707
    
    
    
    3,254
    
    
    
    90,375
    
    
    
    8,078
    
    
    
    
 Other Commercial Commitments: Amount of Commitment Expiration Per PeriodTotal Amounts
    
    Less than
    
    1-3
    
    4-5
    
    AfterOther Commercial Commitments
    
    Committed
    
    1 year
    
    years
    
    years
    
    5 yearsLines of Credit
    
    
    188.2
    
    
    
    182.0
    
    
    
    5.0
    
    
    
    1.2
    
    
    
    Standby Letters of Credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Guarantees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Standby Repurchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Commercial Commitments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Commitments
    
    
    188.2
    
    
    
    182.0
    
    
    
    5.0
    
    
    
    1.2
    
    
    
    
 
 Implementation of New Accounting Pronouncements In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which addresses
how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, which was issued in
January 2003. We will be required to apply FIN 46R to variable interest in
VIEs created after December 31, 2003. For variable interest in VIEs created
before January 1, 2004, the Interpretation will be applied beginning on January
1, 2005. For any VIEs that must be consolidated under FIN 46R that were
created before January 1, 2004, the assets, liabilities and non-controlling
interests of the VIE initially would be measured at their carrying amounts with
any difference between the net amount added to the balance sheet and any
previously recognized interest being 57




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recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
non-controlling interest of the VIE. We expect that we will have
to consolidate DDF1 (a non-qualified special purpose entity) under FIN
46R for U.S. GAAP purposes. As we have already consolidated this
entity in 2003 under U.S. GAAP, we believe that any such
consolidation under FIN 46R would not have a material impact on our
U.S. GAAP audited financial statements FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For us, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement will be effective for us on January 1, 2005. The effective date has
been deferred indefinitely for certain other types of mandatorily redeemable
financial instruments. We currently do not have any financial instruments that
are within the scope of this Statement. In June 2001, FASB Statement No. 143, Accounting for Asset Retirement
Obligations, was issued. Statement 143 requires us to record the fair value of
an asset retirement obligation as a liability in the period in which it incurs
a legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. We also would record a corresponding asset that is depreciated
over the life of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation would be adjusted at the end of each
period to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. We were required to adopt Statement 143 on
January 1, 2003. The adoption of Statement 143 had no effect on our financial
statements. In April 2002, the FASB Statement No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Correction,
was issued. Statement 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part
of the risk management strategy of many companies. Statement No. 145 also
amends FASB Statement No. 13, Accounting for Leases, to require sale-leaseback
accounting for certain lease modifications that have economic effects similar
to sale-leaseback transactions. The provisions of Statement 145 related to the
rescission of FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, were applied in fiscal years beginning after May 15,
2002. The provisions of Statement 145 related to Statement 13 were effective
for transactions occurring after May 15, 2002. The adoption of Statement 145
had no effect on our audited financial statements. In June 2002, the FASB Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, was issued. Statement 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of
Statement 146 were effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. During 2003, we notified
and terminated certain employees, including the managing director, and incurred
certain employee termination benefits. All of the employees were notified and
terminated in 2003, with all related termination severance paid in 2003; under
Italian GAAP, the residual amount of  11,000, accrued in 2003 but not paid at
December 31, 2003 has been recorded as Provision for corporate
reorganization. As this amount does not meet the recognition criteria
prescribed by Statement 146, the adoption of Statement 146 resulted in the
reversal to the statement of income of the residual amount accrued in the
Italian GAAP financial statements, for  11,000. In addition, under Italian
GAAP these amounts are shown as non-operating expense and under U.S. GAAP they are
part of operating expenses. 58




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In November 2002, FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34, was issued. This
Interpretation enhances the disclosures to be made by a guarantor in its
interim and annual audited financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
the Interpretation were applicable to guarantees issued or modified after
December 31, 2002 and the disclosure requirements were effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FIN 45 had no effect on our audited financial statements. In December 2002, FASB Statement No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123, was issued. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, Statement 148 amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements. Disclosures required by this standard are
included in the notes to these audited financial statements. In December 2003, FASB Statement No. 132 (revised), Employers Disclosures
about Pensions and Other Postretirement Benefits, was issued. Statement 132
(revised) prescribes employers disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or recognition
of those plans. The Statement retains and revises the disclosure requirements
contained in the original Statement 132. It also requires additional
disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pensions plans and other postretirement benefit plans.
The Statement generally is effective for fiscal years ending after December 15,
2003. 
 Research and Development Intangible assets include capitalized research and development costs,
comprised principally of the cost of personnel employed in research and
development functions and the cost of materials and external consultants, where
the expenditure is incurred for specific product development. Otherwise,
research and development costs are expensed under cost of goods sold (excluding
depreciation) or, in the case of costs related to the development of a
four-stroke double twin cylinder engine to compete in the Moto GP
Championship, under selling, general and administrative expenses (excluding
depreciation). Our capitalized research and development costs were  13.0
million,  16.5 million and  13.3 million in 2003, 2002 and 2001,
respectively. Our expensed research and development costs were  5.0 million,
 4.9 million and  3.8 for the same years. These expensed costs included
research and development expenses for specific projects on our racing program,
which amounted to  1.4 million for 2003,  1.4 million for 2002 and  1.5
million for 2001. Amortization charges relating to our capitalized research
and development costs were  11.0 million,  8.9 million and  7.6 million in
2003, 2002 and 2001, respectively. These amortization charges relate only to
research and development costs capitalized since our September 1996 acquisition
of the Ducati business, and may increase in future periods as a result of new
capitalizations. In relation to our R&D activity, we have benefited from
financial assistance from the Italian Government, amounting to  1.7 million in
2003. Such assistance is expected to continue in 2004. 59




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Item 6. Directors, Senior Management and Employees 
 Directors The following table sets forth the names of the members of the current
board of directors, their positions, year of initial appointment and date of
birth. All members of the board other than Messrs. Foti, Lipparini and Thorley
were appointed at the shareholders meeting held on May 7, 2002 for a
three-year term to expire upon the approval by the shareholders (in the spring
of 2005) of our financial statements for fiscal year 2004. Messrs. Foti and
Lipparini were appointed as directors at the shareholders meeting held on May
6, 2003 to replace Messrs. Piero Ferrari and Carlo Di Biagio (our former
managing director), for a term to expire concurrently with the term of our
other directors. Mr. Thorley was temporarily appointed by the board of
directors in May 2003 to replace Mr. Choi and then appointed as director at the
shareholders meeting held on May 6, 2004, also for a term to expire
concurrently with the term of our other directors. Year FirstAppointed to BoardName
    
    Position
    
    of Directors
    
    Date of birthFederico Minoli
    
    Chairman and
Managing Director
    
    
    1996
    
    
    
    1949Giorgio Seragnoli
    
    Vice-Chairman
    
    
    1998
    
    
    
    1955David Bonderman
    
    Director
    
    
    1996
    
    
    
    1942Mauro Benetton
    
    Director
    
    
    1998
    
    
    
    1962Alessandro M. M. Foti
    
    Director
    
    
    2003
    
    
    
    1960Abel G. Halpern
    
    Director
    
    
    1998
    
    
    
    1967Andrea Lipparini
    
    Director
    
    
    2003
    
    
    
    1960Paolo Pietrogrande
    
    Director
    
    
    1999
    
    
    
    1957Dante Razzano
    
    Director
    
    
    1996
    
    
    
    1948Giles Thorley
    
    Director
    
    
    2003
    
    
    
    1967Ulrich Weiss
    
    Director
    
    
    1998
    
    
    
    1936
 We have briefly summarized below the principal business activities,
experience and other principal directorships, if any, of our current directors. Federico Minolihas been a director of DMH since September 1996 and
chairman of DMH since July 1998. Mr. Minoli has been our managing director
since March 2003, a position that he had previously held from April 1997 to
July 2000. He holds several other board level positions within the Ducati
group, including the position of chairman of Ducati North America. Prior to
joining DMH, Mr. Minoli was a partner and vice president of Bain & Co., the
international management consulting firm. From 1987 to 1989, Mr. Minoli held a
number of senior positions at Benetton S.p.A., the international clothing
retailer, including general manager of Benetton for Canada, the United States
and Central America. Prior to 1987, Mr. Minoli was a consultant with McKinsey
& Co. and served with Playtex International and Procter & Gamble S.p.A. Mr.
Minoli is a founding partner of HMD Partners (founded in 2003) and serves on
the board of directors of Bally International AG, Mantero Finanziaria S.p.A.,
Escada AG, Almaweb, Uno A Erre Italia S.p.A. and Gori & Zucchi S.p.A. He was
also temporary CEO of Bally International AG from May 2001 to April 2002 and
has been Chairman of Unoaerre S.p.A. since November 2000. He is a trustee of
the Riders for Health Association and the sole director of Dream Engine S.r.l.
See Item 7. Major Shareholders and Related Party TransactionsRelated Party
Transactions. 60




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Giorgio Seragnoliis Vice Chairman of the Board of Directors of Ducati
Motor Holding. Mr. Seragnoli is Chairman of Fortitudo Pallacanestro S.r.l., a
basketball team based in Bologna, and of Ber Banca S.p.A. He also serves on
the board of numerous companies, including Compagnia Sviluppi Industriali ed
Immobiliari S.p.A., a real estate holding company, Fonderie Sabiem S.p.A.,
Cotton Club S.p.A. and BOPA S.r.l. Mr. Seragnoli is a past director of G.D.,
Castelgarden, Mediaset, Olcese, Banca Fideuram and CAER Gruppo Bancario. He
was also a member of the Presidential Committee of the Associazione degli
Industriali of Bologna. David Bondermanis principal, general partner and founder of Texas Pacific
Group (TPG), a family of investment funds that invests primarily in
restructurings, recapitalizations and buyouts in the United States, Canada and
Western Europe. TPGs affiliates make similar investments in Latin America,
East Asia and Eastern Europe. The past and present portfolio of TPG and its
principals include: Continental Airlines, America West Airlines, Beringer Wine
Estates, J. Crew, Del Monte, Ducati Motor Holding, Globespan Technologies, ON
Semiconductor and Seagate Technology. Prior to forming TPG, Mr. Bonderman was
Chief Operating Officer of the Robert M. Bass Group, Inc. (now doing business
as Keystone, Inc.) in Fort Worth, Texas. RMBG is the personal investment
vehicle of Fort Worth, Texas-based investor, Robert M. Bass. Prior to joining
RMBG in 1983, Mr. Bonderman was a partner in the law firm of Arnold & Porter in
Washington, DC, where he specialized in corporate, securities, bankruptcy, and
antitrust litigation. From 1969 to 1970, Mr. Bonderman was a Fellow in Foreign
and Comparative Law in conjunction with Harvard University and from 1968 to
1969, he was Special Assistant to the U. S. Attorney General in the Civil
Rights Division. From 1967 to 1968, Mr. Bonderman was Assistant Professor at
Tulane University School of Law in New Orleans. Mr. Bonderman graduated Magna
Cum Laude from Harvard Law School in 1966. He was a member of the Harvard Law
Review and a Sheldon Fellow. He is a 1963 Phi Beta Kappa graduate of the
University of Washington in Seattle. Mr. Bonderman also serves on the Boards
of the following public companies: ProQuest Company; Co-Star Group, Inc.;
Ryanair Holdings, plc; Gemplus International S.A. Mauro Benettonhas been the Marketing Director of Benetton Group S.p.A.
since December 1992. Born in 1962, the eldest son of Luciano Benetton, Mr.
Benetton began working for the Benetton Group as a student, first in London and
then in Paris. In 1985, he moved to Ponzano, Italy, to begin working at
Benettons headquarters, where he was in charge of marketing for one of the
Benettons main lines, Sisley. Mr. Benetton planned and oversaw this brands
successful re-launch. He left Benetton in June 2003 and in September 2003 he
joined Lab Id s.r.l. as retail project manager for the robe di kappabrand. Abel G. Halpernis a founding partner of HMD Partners (founded in 2003).
Prior to 2003, Mr. Halpern was Co-Head of TPGs European private equity and
investment activities, based in London since 1996. Previously, Mr. Halpern was
based in Mexico City, focusing on Latin American investments. Before joining
TPG, Mr. Halpern was a management and strategy consultant with Bain & Company,
an international strategic consultancy firm. Mr. Halpern received a Masters of
Business Administration from Harvard University and a Bachelor of Arts degree,
magna cum laude and with distinction, from Yale University. Mr. Halpern also
serves on the Board of Directors of Escada AG and Bally International AG. Paolo Pietrograndehas been a director of DMH since January 1999. Mr.
Pietrogrande is chief executive officer of Nuovi Cantieri Apuania, an Italian
shipbuilder specialized in speciality chemical vessels and cruise ferries. He
currently is co-director of the executive MBA Almaweb at Bologna University.
Prior to his current position at Nuovi Cantieri Apuania, Mr. Pietrogrande was a
consultant to Ducati as to the restructuring of our group and was chief
executive officer of Enel GreenPower S.p.A. (a subsidiary of Enel S.p.A.) from
1999 to 2003. Prior to joining Enel, Mr. Pietrogrande was the director of
business development of GE Power Systems European business in Florence, Italy.
Before joining General Electric in 1996, Mr. Pietrogrande was a management and
strategy consultant with Bain & Co., 61




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and prior to that served as deputy director of KTI S.p.A., as vice
president of marketing for KTI Group B.V. Eastern Division and as business
development manager of KTI Corporation. Mr. Paolo Pietrogrande also serves on
the board of Ryanair Holdings, plc and has authored two books on advanced power
generation. Dante Razzanois principal and senior partner of Invest Industrial S.p.A.,
a southern European private equity firm managing over  500 million. Mr.
Razzano was head of Italian private equity at Deutsche Morgan Grenfell (1992 to
2003). He was managing director of Citibank NA and CEO of Citicorps Italian
merchant bank from 1988 to 1992 (Citinvest S.p.A.), and was responsible for
southern European M&A for Citicorp, based in New York, in 1987. From 1970 to
1986, he was vice president and group executive of Manufacturers Hanover Trust
Co., New York. Mr. Razzano also serves on the board of Permasteelisa S.p.A.,
an Italian public company. Ulrich Weisshas been a director of DMH since October 1998. Until May
1998, Dr. Weiss served in various capacities as a member of the board of
directors of Deutsche Bank AG for 19 years. While at Deutsche Bank, Dr. Weiss
was responsible for Deutsche Banks business in Italy and was president of
Deutsche Bank S.p.A., Milan. Dr. Weiss is a member of the Advisory Board of
Deutsche Bank, and of several supervisory Boards and Boards of Directors in
Germany and Italy, including Continental A.G., Benetton Group S.p.A. and
Piaggio Holding S.p.A. Giles Thorleyis chief executive officer of Punch Taverns Plc.
Previously, Mr. Thorley was chief executive officer of the Unique Pub Company
Plc, and was an executive officer of Nomura International Plc. Mr. Thorley is
a trained barrister, a member of the Bar of England and Wales, of the British
Institute of Innkeeping and a Supervisory Board member of the British Beer and
Pub Association. He is a trustee of the Rona Trust charitable organization and
holds a law degree from the University of London. Andrea Lipparini, Ph.D., is a Full Professor of Strategy at the Università
Cattolica in Milan. He is the founder and director of Knowledge Lab S.r.l. and
also serves on the board of Air Dolomiti S.p.A. Professor Lipparini has
published approximately 100 articles and six books in the area of competitive
business management and business strategy. Professor Lipparini is also a
training and management development consultant to various industrial companies,
including Ferrari, Maserati, Volkswagen and Eni. Alessandro Fotiis the CEO of Fin-Eco Bank S.p.A., and general manager of
Fineco S.p.A., two companies of the Capitalia Group. He is a member of the
Board of Investment of Fin-Eco Investimenti SGR S.p.A., a member of the
supervisory board of directors of Entrium Direct Bankers, and serves on the
board of Assosim (the Association of Italian securities investment firms) and
Netscalibur S.p.A. Previously, Mr. Foti held various financial positions at
Montedison S.p.A. and IBM S.p.A. in Milan. He holds a Business Administration
degree from Bocconi University in Milan. 
 Board Committees Our board of directors established an executive committee in 1999 that is
authorized to resolve on all matters that may be decided by our board other
than on those that may not be delegated by the board pursuant to Italian law,
such as the preparation of the financial statements and increases of the share
capital pursuant to delegations from shareholders. Meetings of the executive
committee may be called by any member in accordance with the rules applicable
to the board of directors. Resolutions of the committee must be adopted by the
vote of a majority of its members. The current members of the executive
committee  Messrs. Minoli, Halpern, Razzano and Seragnoli  were appointed on
May 9, 2002 for a term to expire concurrently with the term of their membership
on the board, in the spring of 2005. 62




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Our board of directors also established a compensation committee in 1999.
The compensation committee proposes to the board the remuneration of our
directors with special delegated powers, including the chairman and managing
director, and has the authority to determine the remuneration of our managers.
Meetings of the compensation committee may be called by any member in
accordance with the rules applicable to the board of directors. Resolutions of
the committee must be adopted by the vote of a majority of its members. On May
9, 2002, Messrs. Bonderman, Halpern, Pietrogrande, Razzano and Weiss were
re-appointed as members of the compensation committee for a term to expire
concurrently with the term of their membership on the board. To comply with the code of corporate governance issued by Borsa Italiana
S.p.A., our board of directors also established an internal control committee,
which is mainly responsible for assessing the adequacy of the internal control
system through an evaluation of work programs and reports prepared by those
responsible for internal control, and for relations with external auditors.
The internal control committee reports to the board of directors about the work
performed and the adequacy of the internal control system at least every six
months, at the time of approving the annual financial statement and the
semi-annual report. Of the three current members of the internal control
committee, Messrs. Weiss and Pietrogrande were appointed on May 9, 2002, and
Mr. Foti was appointed on March 5, 2003 in substitution of Mr. Ferrari. Their
term expires concurrently with the term of their membership on the board. See Item 10. Additional InformationBy-lawsBoard of Directors. 
 Senior Management The following table sets forth the names of our senior officers who are
not also directors, their respective positions, the year they were appointed to
such positions and their date of birth. Year FirstAppointed to BoardName
    
    Position
    
    of Directors
    
    Date of birthGianluigi Mengoli
    
    Manager, Research and Development
    
    
    1994
    
    
    
    1948Danilo Bernardini
    
    Manager, Personnel and Human
Resources
    
    
    1995
    
    
    
    1948David Gross
    
    Crseative Director
    
    
    2003
    
    
    
    1966Claudio Domenicali
    
    Managing Director of Ducati Corse
    
    
    1999
    
    
    
    1967Gianfranco Giorgini
    
    Manager, Operations
    
    
    1999
    
    
    
    1953Enrico DOnofrio
    
    Manager, Finance
    
    
    2000
    
    
    
    1957Cristiano Silei
    
    Manager, Strategic Planning and
Product Development
    
    
    2003
    
    
    
    1968Mirko Bordiga
    
    Manager, Sales
    
    
    2003
    
    
    
    1968
 We have briefly summarized below the principal functions and experience of
our senior officers. Claudio Domenicalihas been managing director of Ducati Corse S.r.l. since
April 1999. Mr. Domenicali is responsible for all Ducati Corse operations,
including overseeing the hiring policies for riders, research and development,
logistics, commercial and marketing activities, administration and information
technology. Mr. Domenicali joined our predecessor company in 1991. From 1994
to 1996, Mr. Domenicali was responsible for the technical office. From 1996 to
1999, he was deputy of technical 63




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director of research and development while managing all the racing
technical matters. Mr. Domenicali holds a degree in Mechanical Engineering
from the University of Bologna. David Grosswas appointed as creative director in 2003, responsible for
overseeing Ducatis activities related to branding, image, alliances,
licensing, communications and marketing, after having been our manager of
strategic planning from April 1997. From 2001 to 2003, Mr. Gross was has also
responsible for the development of new motorcycle projects, including the
Multistrada 1000DS and MH900e. Prior to joining us, Mr. Gross was a corporate
finance lawyer with Simpson Thacher & Bartlett in New York from 1993 to 1997.
Mr. Gross also has over a decades experience as a financial journalist with
Time Magazine and other publications. See Item 7. Major Shareholders and
Related Party TransactionsRelated Party Transactions. Gianluigi Mengolihas been the manager of research and development since
1994. Mr. Mengoli joined our predecessor company in 1973 as a project designer
and, in 1980, became responsible for our research and development functions.
Prior to joining us, Mr. Mengoli was a technical designer for Simoncini, a
Bologna-based company. Danilo Bernardinihas been the manager of personnel and human resources
since 1995. Prior to joining Ducati, Mr. Bernardini was responsible for
personnel at various units of Cagiva (including CRC) from 1987 and at our
predecessor company from 1983 to 1987. From 1977 to 1983, Mr. Bernardini held
a number of positions at the Zanussi Group, an Italian appliance manufacturer.
In addition, Mr. Bernardini has had previous experience as a sports journalist
for the Italian motorcycling magazine, Motociclismo. Gianfranco Giorginihas been the manager of operations since May 1999.
Among other things, Mr. Giorgini is responsible for purchasing, warehousing,
production planning and distribution. Prior to joining us, Mr. Giorgini held a
variety of positions in a 25 year career with Lombardini Motori S.p.A.,
including serving as logistics manager from 1992 to 1997. Enrico DOnofriohas been our manager of finance since October 2000.
Prior to that, Mr. DOnofrio worked for 17 years at Procter & Gamble where he
held a number of finance positions, including Finance Manager in Portugal and
Director of Finance & Accounting at P&G headquarters in Belgium. He began his
career at Olivetti as a research and development analyst. Mr. DOnofrio holds
a degree in Mechanical Engineering and a M.B.A. from Bocconi University in
Milan. Cristiano Sileijoined DMH as commercial director in April 1997. Since
joining DMH, Mr. Silei has been responsible for the development of our
strategic plan, the reorganization of our commercial department, general
management of our North American subsidiary, evaluation of acquisition
opportunities and the start up of Ducati.com. Prior to joining Ducati, Mr.
Silei was at the Paris and Milan offices of the Bain & Co. management
consulting firm, where he specialized in business restructuring. Mr. Silei
also worked at the Rome office of Andersen Consulting in the area of business
process reengineering. Born in Siena on September 24, 1968, Mr. Silei holds a
degree in business administration from the Bocconi University in Milan. Mirko Bordigahas been the manager in charge of sales since March 2003.
He has been general manager of our subsidiary Ducati Japan since 1999, prior to
which he was the area manager for Ducati for the Asia-Pacific area. 64




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Statutory Auditors The following table sets forth the names of the three members of our
current board of statutory auditors and the two alternate statutory auditors,
their respective positions, the year of their appointment and date of birth.
The current board of statutory auditors was elected for a three-year term on
May 6, 2004. All of our statutory auditors and Mr. Gianluca Nanni Costa were
first appointed in 1998. Mr. Salvatore Lantino was first appointed in 2004. Name
    
    Position
    
    Year Appointed
    
    BornMatteo Tamburini
    
    Chairman
    
    
    1998
    
    
    
    1958Italo Giorgio Minguzzi
    
    Member
    
    
    1998
    
    
    
    1945Francesco Serantoni
    
    Member
    
    
    1998
    
    
    
    1941Gianluca Nanni-Costa
    
    Alternate
    
    
    1998
    
    
    
    1959Salvatore Lantino
    
    Alternate
    
    
    2004
    
    
    
    1959
 During 2003, our statutory auditors received in the aggregate  124,000 in
compensation for their services as statutory auditors to DMH and its Italian
subsidiaries. 
 Compensation of Directors and Senior Management Starting from the year 2002, each of our directors is entitled to an
annual compensation in return for his services as director equal to  15,000.
Mr. Minoli waived his rights to this compensation for his current term as
director. Directors are also entitled to reimbursement of expenses incurred in
connection with the performance of their functions. Mr. Minoli received cash compensation of approximately  1.2 million in
2003 as chairman and managing director of DMH and chairman of Ducati North
America. The amount includes bonuses paid to Mr. Minoli under the Retention
Plan described below. For the year 2004, Mr. Minoli is entitled to receive $
400,000 in annual base compensation for his services as chairman of Ducati
North America and  250,000 in annual base compensation as managing director of
DMH. Mr. Di Biagio, who held several board level positions at DMH and with
certain of our subsidiaries, resigned from all board positions and as our
managing director effective March 5, 2003, and as manager in charge of investor
relations of DMH effective March 31, 2003. Pursuant to the termination
agreement that we have entered into with Mr. Di Biagio in connection with his
resignation as managing director, Mr. Di Biagio retains all of the share option
rights (whether or not yet vested) attributed to him through the date of his
resignation; these option rights will continue to be subject to applicable
provisions of the 1997 Stock Option Plan and the 1999 Stock Option Plan. See
Item 10. Additional InformationShare Option Plans. Mr. Di Biagio did not
receive any severance payments in connection with his termination as managing
director. See Employees for further information on the cost of Mr. Di
Biagios resignation as manager in charge of investor relations of DMH,
including reference to his severance package. Mr. Pietrogrande received an overall amount of  289,725 in 2003 and 
135,150 in 2004 for consulting services rendered to DMH (relating to the
management of human resources, suppliers and group organizational issues as
part of our cost reduction program). On February 11, 2002, the compensation committee extended for the years
2002, 2003 and 2004 a retention plan (with certain amendments) already in
effect for the years 1999, 2000 and 2001 (the 65




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Retention Plan). The beneficiaries of the Retention Plan are Mr. Minoli
and up to four additional senior officers of Ducati designated by the managing
director. Mr. Di Biagio was also a beneficiary of the Retention Plan until his
resignation as managing director of DMH. Under the Retention Plan, the
beneficiaries are entitled to an extraordinary bonus ranging from 0% to 300% of
their base salary, determined based on the annual percentage increase in
certain measures of our financial performance. Bonuses under the Retention
Plan vest on the date of approval of the consolidated financial statements for
the year of reference and are payable in one lump sum within twelve months of
such vesting, provided that the beneficiaries are our employees on the payment
date. In case of termination by us of a beneficiarys employment for reasons
other than just cause (giusta causaor giustificato motivo soggettivo),
unvested bonuses are terminated but we are obligated to pay each such senior
officer three times the amount of the vested bonus. Extraordinary bonuses under the Retention Plan for earnings recorded in
2001 were paid in 2003 as follows: $ 400,000 and  511,000 to Messrs. Minoli
and Di Biagio in their capacities as Chairman and managing director,
respectively, and $ 200,000 and  115,300 to two other senior officers of
Ducati. On the basis of Ducatis 2002 and 2003 results, no extraordinary
bonuses have vested for those years under the Retention Plan. In addition, Mr. Minoli was granted 500,000 share option rights during
2004 in connection with our 1999 Stock Option Plan. None of our other
directors are beneficiaries under our 1999 Stock Option Plan. Our board of directors has approved an end-of-term payment obligation of
US$ 1.2 million for Federico Minoli, which will be payable if he is removed or
is not re-appointed as our managing director for reasons other than just cause
before his sixtieth birthday in 2009. Subsequent to Mr. Di Biagios
resignation as managing director, Mr. Di Biagio was not entitled to any special
termination payment. During the year ended December 31, 2003, the aggregate compensation paid
to the senior officers listed above, exclusive of compensation to Messrs.
Minoli and Di Biagio and our other directors, was approximately  1.4 million.
This aggregate compensation includes discretionary performance-based bonuses
granted to our senior officers in 2003 and does not include an additional 
42,998 of compensation in the form of mandatory leaving entitlements which our
employees are entitled under Italian law (under Italian law, an employee is
entitled to an end-of-employment payment which is accrued each year based on
such employees annual salary). At December 31, 2003, we had a reserve for pensions and similar
obligations for our directors and members of senior management, amounting to 
171,900. Pursuant to our management bonus plan, each of our managers, including the
senior officers listed above, is entitled to an annual bonus if certain
conditions are satisfied relating to our financial performance and such
beneficiarys individual performance. On the basis of Ducatis 2003 results,
our managers are not entitled to any bonuses under the management bonus plan
for that year. In addition, Ducati senior officers, including those listed above received
in the aggregate 920,000 share option rights during 2004 under our 1999 Stock
Option Plan. See Item 10. Additional InformationShare Option Plans. At May 6, 2004, Messrs. Minoli and Seragnoli owned 225,000 and 7,815,692,
of our outstanding shares, respectively. None of our other directors or senior
officers listed above own more than 1% of our share capital. See Item 10.
Additional InformationShare Option Plans for a description of our share
option plans. 66




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Beneficial ownership of our shares held by TPG Acquisition may be
attributed to David Bonderman, who disclaims beneficial ownership of such
shares. See Item 7. Major Shareholders and Related Party Transactions. 
 Employees As of December 31, 2003, we employed 1,162 persons worldwide (of which
1,038 were employed in Italy, 31 in the United States, 18 in the United
Kingdom, 18 in France, 21 Germany, 19 in Japan and 7 in the Netherlands), as
compared to 1,212 at December 31, 2002 and 1,144 at December 31, 2001. In
2003, we employed no temporary employees. Of our employees, 939 were employed
by DMH, of whom 568 were employed in operations and the remainder in research
and development, sales, marketing and central functions. Our employees outside
Bologna are engaged primarily in sales and marketing. At December 31, 2003,
our employees included 60 managers worldwide, as compared to 58 and 49 at
December 31, 2002 and 2001, respectively. We believe that our relations with
our employees are good. Under Italian law, employees are entitled to amounts based on salary and
years of service upon leaving their employment. We had a liability for such
termination indemnities of  8.3 million at December 31, 2003. See Note 15 to
the audited consolidated financial statements. Under Italian law, we make
social security and national healthcare contributions for our employees to the
Italian government, which provides pension and healthcare insurance benefits. Employees in Italy are subject to national and company-specific collective
bargaining agreements. National agreements are negotiated collectively between
the national associations of companies within a given industry and the
respective national unions. National agreements provide a basic framework on
working conditions, including, among other things, pay, security and other
provisions. Our employees in Italy are principally subject to the National
Metalworkers and Installers collective bargaining agreement, which was renewed
in May 2003 and expires in December 2006 (except for its economic aspects,
which expire in December 2004 and need to be re-negotiated thereafter to be
coterminous with the overall agreement). Company-specific agreements are negotiated between individual companies
and union representatives. These agreements address issues of special
importance to the relevant company and may supplement the basic provisions of
the national framework contract. Our company-specific agreement was signed in
December 2003 and will expire in December 2007. The terms of this agreement
provide for, among other things, covered employees to be paid an annual
performance bonus based on collective productivity, profitability and quality
targets. We have not experienced any significant work stoppages due to strikes
since 1996. To improve our efficiency, at board meetings held on March 5, 2003 and on
April 8, 2003, we approved a reorganization plan that provided, among other
things, for the termination by mutual agreement of a number of our employees in
exchange for severance payments. These terminations took place during 2003 and
included the termination by mutual agreement of Mr. Di Biagios employment
contract with DMH as manager in charge of investor relations, effective March
31, 2003. The total cost to us in 2003 of the severance incentives contemplated
under the above plan amounted to approximately  4.0 million, of which  3.6
million related to DMH and  2.2 million related to costs associated with the
termination of Mr. Di Biagios employment contract (including compensation for
consultancy and non-competition agreements). The total cost was recorded as a
non-operating 67




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expense for 2003 in accordance with Italian Accounting Standard No. 19
(which provides for recognition in the year in which the decision to implement
a reorganization plan is taken). We have approved an employee stock ownership plan (ESOP). For more
information about this plan, see Item 10. Additional InformationEmployee
Stock Ownership Plan. 
 Item 7. Major Shareholders and Related Party Transactions 
 Major Shareholders The following table sets forth information regarding the beneficial
ownership of our shares as of the shareholders meeting held on May 6, 2004
(the last date on which accurate shareholder data is available to us) by each
shareholder known by us to be the beneficial owner of more than 2.0% of our
shares. These shareholders do not hold any different voting rights from those
held by other ordinary shareholders. Number of
    
    Percent ofName of Shareholder
    
    Shares Owned
    
    Shares OwnedTPG Motorcycle Acquisition, L.P
    
    
    52,657,750
    
    
    
    33.22
    %Harris Associates, L.P.
    
    
    11,999,776
    
    
    
    7.57
    %Giorgio Seragnoli
    
    
    7,815,692
    
    
    
    4.93
    %
 Prior to our March 1999 initial public offering, TPG Acquisition and an
affiliate held in the aggregate approximately 72.0% of our share capital. TPG Acquisition is part of a group of investment funds known as Texas
Pacific Group or TPG. Texas Pacific Group was founded by David Bonderman,
James G. Coulter and William S. Price III to pursue public and private
investment opportunities through a variety of methods, including leveraged
buyouts, recapitalizations, joint ventures, restructurings and strategic public
securities investments. Messrs. Bonderman, Coulter and Price are the
shareholders of the general partner of the TPG funds of TPG. Each of Messrs.
Bonderman, Coulter and Price disclaims beneficial ownership of our shares held
by TPG Acquisition. Mr. Bonderman is a member of our board of directors. As of May 6, 2004, Harris Associates, L.P. owned 7.57% of our share
capital, a 2.6% increase as compared with its holdings as of May 6, 2003. As of May 6, 2004, 158,500,963 shares were outstanding. As of May 6,
2004, there were 142,377 ADS (equivalent to 1,423,770 shares) held by 463
record holders in the United States. Since May 6, 2004, an additional 325,444
shares were issued pursuant to the exercise of options under our 1997 Stock
Option Plan. See Item 10. Additional
Information  Share Option Plans. Because brokers or other nominees held certain shares and ADSs, the number
of direct record holders in the United States may not be fully indicative of
the number of direct beneficial owners in the United States or wherever the
direct beneficial owners of such shares are resident. 68




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Related Party Transactions No member of the board of directors or board of statutory auditors and no
senior officer (including close members of any such persons families) nor any
enterprise over which any such person is able to exercise a significant
influence has had any interest in any transactions that are or were unusual in
their nature or conditions or are or were material to us, and that were either
effected since December 31, 2002 or that were effected during an earlier period
and remain outstanding or unperformed in any respect. We have not provided any
loans or guarantees to or for the benefit of any such person since December 31,
2002 and none remain outstanding or unperformed. Following is a brief description of various contractual relationships with
associates and members of our board of directors (see also Item 6. Directors,
Senior Management and EmployeesCompensation of Directors and Senior
Management): In 2003, we paid an aggregate of  392,000 to Dream Engine S.r.l. to
organize the following Ducati-sponsored events (as well as  50,000 for direct
expenses related to the same two events): the Motogiro dItalia, a promotional
tour of vintage motorbikes that took place in July 2003 (for consideration of 
207,000), the Centopassi, a five-day amateur motorcycle competition that was
held in August 2003 in northern Italy (for consideration of  135,000). Mr.
Minoli, our chairman and managing director, is the sole director of Dream
Engine. Messrs. Minoli and Gross together indirectly beneficially own 99.9% of
the quotas of Dream Engine. In 2004, we agreed to pay an aggregate of 
465,865 to Dream Engine S.r.l. to organize the 2004 Motogiro dItalia(for
consideration of  150,000), the 2004 Centopassi(for consideration of 
135,000), and the 2004 World Ducati Weekend (for consideration of  180,865). In 2003 and 2004, we paid Mr. Pietrogrande  289,725 and  135,150,
respectively, in compensation for consulting services. In 2003, we also
entered into a commercial services agreement with Contemporanea Progetti
S.r.l., pursuant to which Contemporanea Progetti S.r.l. developed architectural
projects relating to the Ducati Museum and other parts of our factory for a
total consideration of  17,000. A relative of Paolo Pietrograndes holds a
30% interest in Contemporanea Progretti S.r.l. On November 5, 2003, our Board of Directors approved our entering into a
consulting relationship with Knowledge Lab S.r.l. (in which Andrea Lipparini
holds a 22.5% interest) for the training of personnel. We paid to Knowledge
Lab S.r.l. consideration equal to Euro 1,800 for the services rendered in 2003. On April 14, 2004, we formed Ducati Retail S.r.l. a majority owned
subsidiary (99.0% held by DMH and 1.0% held by Enrico DOnofrio, our manager of
finance). Ducati Retail S.r.l. will make retail sales of Ducati products at
Ducati-owned stores in areas not covered by our current dealerships (e.g., the
sale of motorcycles used by journalists or shown at fairs and exhibitions, or
the sale of merchandising at airports). On May 6, 2004, we formed Ducati Consulting S.r.l. to provide consulting
and logistics services to all of the Ducati Group companies as well as to our
suppliers and other manufacturers. Ducati Consulting S.r.l. is 85% held by DMH, with
the remaining interests held by Messrs. Contino (5.0%), Pellerey (5.0%) and
Lipparini (5.0%). Until June 30, 2004, Mr. Contino was responsible for
procurement in DMH, and Mr. Pellerey was responsible for a program to improve
the efficiency of our plant. Beginning July 2004, Messrs. Contino and Pellerey
will be managers of Ducati Consulting S.r.l.. Mr. Lipparini is a director on
the board of DMH. 69




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DMH has commercial relationships with other companies of the Ducati Group
that handle product sales in specific countries (i.e., the U.S., Germany,
France, Japan, Netherlands and the UK). These relationships include sales by
DMH of motorcycles and related products that it produces to these companies (at
prices reflecting the local market and competitive environment in the countries
in which the purchasing companies operate) as well as after sales services
(mainly warranties) carried out by those companies on DMHs behalf. Trade
receivable and payable balances for those sales and other services in the
amount of approximately  97,800 and  19,000, respectively, existed as of
March 31, 2004 between our subsidiaries and DMH. Financially, these companies operate independently, although some benefit
from particular forms of centralized financing or loans granted by DMH, mostly
in certain stages of growth (i.e., start-up) or during difficult market
conditions. The other subsidiaries involved in distribution self-finance their
operations out of profits, and, if they need additional financing, by factoring
their trade receivables without recourse. At December 31, 2003, the only significant debt payable that DMH owed to
any of its subsidiaries was to Ducati Corse S.r.l. in the amount of
approximately  7.4 million for Ducati Corses yet-to-be-paid-in share capital. Ducati Corse was set up so that all aspects related to the racing
division, including R&D, could be handled separately from the production and
sales side of the business, which is handled by DMH. In particular, DMH and
Ducati Corse entered into the following agreements:  
    
    Right to use and manage DMHs racing business as a going concern (affitto di ramo di azienda);  
    
    Sponsorship agreement pursuant to which DMH sponsors Ducati Corses racing activities; and  
    
    R&D agreement pursuant to which Ducati Corse agreed to carry out R&D for DMH for sporting activities related to the Moto GP
and Superbike Championships, management of a number of private teams in the Superbike Championship, and motorcycle
production. DMH and its subsidiary Ducati.Com S.r.l. are tied by a service agreement
for advertising and commercial and data collection services to be carried out
by Ducati.Com on behalf of DMH on the www.ducati.com website. 
 Item 8. Financial Information 
 Consolidated Financial Statements Please refer to Item 18. Financial Statements of this annual report. 
 Other Financial Information Export Sales Export sales from Italy were approximately  275.3 million in 2003, as
compared with  306.4 million in 2002, and represented 70.9% of our net sales
in 2003 (and 74.2% in 2002). Legal Proceedings We are party to various claims and legal actions arising in the ordinary
course of business. We do not believe that any litigation to which we are a
party is likely, individually or in the aggregate, to have a materially adverse
effect on our business, financial condition or results of operations. 70




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We are engaged in litigation with our former distributor in Belgium in
connection with our decision not to renew our distributorship agreement and an
alleged failure by our predecessor to deliver motorcycles in 1996. On
September 14, 1998, the Commercial Court of Liege found in favor of the
distributor and awarded provisional damages of approximately BEF 54 million
(including interest) (approximately  1.3 million). On September 21, 1998, we
appealed this decision. Notwithstanding our appeal, on February 24, 1999, the
former distributor enforced the prior judgment by selling an inventory of
Ducati motorcycles which it had previously attached in Belgium. The proceeds
of the sale were BEF 27,835,078 (approximately  690,013). On May 27, 1999,
the Court of Appeal of Liege found that Belgian courts lacked jurisdiction over
the case and set aside the prior judgment. The former distributor was
adjudicated bankrupt on October 14, 1999. Bankruptcy trustees of the former
distributor appealed the May 27, 1999 judgment before the Supreme Court of
Belgium, which rejected the appeal on June 21, 2001. We have taken various
steps to recover the proceeds of the sale. However, given the existence of
secured creditors of the former distributors bankruptcy estate, we are
unlikely to be successful in our efforts to recover these proceeds. On August
4, 2000, the trustee also sought payment for the alleged value (BEF 13.7
million, or approximately  340,000) of spare parts that were part of the
distributors inventory at the time of termination on the assumption that we
had an obligation to buy back these spare parts. We have denied responsibility
for this payment. Our provision for this litigation at December 31, 2003 was 
23,000. We are also involved in litigation with a former chief executive officer,
Mr. Ernesto Vettore, of the predecessor company of Ducati North America Inc. in
connection with the termination of his employment. Mr. Vettores claim is for
an amount of approximately  400,000 and remains pending before the Federal
District Court of New Jersey. Until May 21, 2003, a parallel litigation with
Mr. Vettore, based essentially on the same facts as the New Jersey proceedings,
was pending in Italy before the Court of Varese. On that date, the Italian
proceedings were settled among the parties at no charge to us. Our provision
for this litigation at December 31, 2003 was  143,000. We are also engaged in litigation with Virginio Ferrari, the manager of
one of the two racing teams sponsored by Ducati in the 1998 World Superbike
Championship. In December 1998, Mr. Ferrari filed a claim against us in the
Italian courts in the amount of approximately  6.7 million, alleging that he
had a three year agreement with Ducati for the sponsorship of a racing team and
that we breached this agreement in electing not to sponsor Mr. Ferraris team
for the 1999 World Superbike Championship. We are contesting Mr. Ferraris
claim and have not taken a provision in connection with this litigation. In 2001, Michael Hailwoods widow, individually and in her capacity as
beneficiary of his estate, filed a claim before the Federal District Court of
New Jersey against us and Ducati North America Inc. alleging trademark
infringement, violation of a purported right of publicity and other claims with
regard to the sale of MH900e motorcycle. These claims were all settled on
April 2003 for a value equal approximately to 375,000 in favor of Michael
Hailwoods widow. Such amount was taken from our total provision for that
litigation, which was approximately  507,000 as of December 31, 2002. 
 Dividend Policy DMH has not paid any cash dividends on its shares since its formation in
1996. The payment by us of any annual dividend must be proposed by the board
of directors and is subject to the approval of the shareholders at the annual
shareholders meeting. Before dividends may be paid out of our unconsolidated
net income in any year, an amount equal to 5.0% of such net income must be
allocated to our legal reserve until such reserve is at least equal to
one-fifth of the value of our issued share capital. If our capital is
reduced as a result of accumulated losses, dividends may not be paid until the
capital is reconstituted or its stated amount is reduced by the amount of such
losses. The board of directors may authorize the distribution of interim
dividends, subject to certain statutory limitations. 71




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Dividends are payable to those persons who hold the shares through an
Intermediary on the dividend payment date declared by the shareholders
meeting. Payments with respect to dividends are distributed through Monte
Titoli on behalf of each shareholder with whom the shareholder has deposited
his or her shares. Holders of ADSs will be entitled to receive payments in
respect of dividends on the underlying shares through The Bank of New York, as
ADR Depositary, in accordance with the deposit agreement relating to the ADRs. 
 Significant Changes At our May 6, 2004 meeting, our shareholders approved (i) the merger of
our subsidiary Ducati.Com into DMH, which will be completed in the fourth
quarter of 2004 (see Item 4. Information on the CompanyOrganizational
Structure); (ii) amendments to our By-laws in response to the 2004 Italian
corporate law reform (see Item 10. Additional InformationBy-laws); (iii) a
buy back plan regarding the repurchase on the Telematico of up to 15,556,800 of
our shares and the conversion of our restatement reserve of approximately 
22.03 million created in connection with the restatement to market value of our
trademark from non-distributable to freely distributable (see Item 10.
Additional InformationBuy Back Plan); and (iv) a capital increase of up to
1,585,000 shares in connection with the share option rights that we have
granted in 2004 to beneficiaries who are employees of the Ducati group under
the 1999 Stock Option Plan (see Item 10. Additional InformationShare Option
Plans). 
 Item 9. The Offer and Listing 
 Trading Markets and Share Prices The principal trading markets for our shares is Telematico and for our
ADSs (each representing ten shares) is the New York Stock Exchange. Our ADSs
have been listed on the New York Stock Exchange and our shares have been listed
on the Telematico since our initial public offering in March 1999. The Bank of
New York is our depositary for purposes of issuing the American Depositary
Receipts (ADRs) evidencing the ADSs. The following table sets forth the high
and low closing prices of our ADSs as recorded on the New York Stock Exchange
Composite Tape and the high and low closing prices of our shares as recorded on
the Telematico, for the quarters and months indicated (source: Bloomberg). 72




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Mercato Telematico
    
    New York Stock ExchangeAzionario Price per Share
    
    Price per ADSHigh
    
    Low
    
    High
    
    Low(in euro)
    
    (in U.S. dollars)1999 (from March 24, 1999)
    
    
    3.098
    
    
    
    2.528
    
    
    
    33.0625
    
    
    
    25.18752000
    
    
    3.200
    
    
    
    1.938
    
    
    
    30.75
    
    
    
    17.68752001
    
    
    2.222
    
    
    
    1.091
    
    
    
    20.50
    
    
    
    10.302002
    
    
    2.031
    
    
    
    1.396
    
    
    
    20.50
    
    
    
    13.652003
    
    
    1.799
    
    
    
    1.103
    
    
    
    18.70
    
    
    
    12.15First Quarter 2002
    
    
    1.902
    
    
    
    1.697
    
    
    
    16.70
    
    
    
    14.80Second Quarter 2002
    
    
    2.031
    
    
    
    1.537
    
    
    
    18.69
    
    
    
    15.10Third Quarter 2002
    
    
    1.841
    
    
    
    1.498
    
    
    
    17.65
    
    
    
    15.00Fourth Quarter 2002
    
    
    2.004
    
    
    
    1.396
    
    
    
    20.50
    
    
    
    13.65First Quarter 2003
    
    
    1.799
    
    
    
    1.103
    
    
    
    18.70
    
    
    
    12.15Second Quarter 2003
    
    
    1.485
    
    
    
    1.114
    
    
    
    16.75
    
    
    
    12.15Third Quarter 2003
    
    
    1.547
    
    
    
    1.286
    
    
    
    17.60
    
    
    
    14.60Fourth Quarter 2003
    
    
    1.483
    
    
    
    1.349
    
    
    
    17.40
    
    
    
    16.10First Quarter 2004
    
    
    1.407
    
    
    
    1.276
    
    
    
    17.55
    
    
    
    15.85December 2003
    
    
    1.407
    
    
    
    1.349
    
    
    
    17.15
    
    
    
    16.50January 2004
    
    
    1.380
    
    
    
    1.286
    
    
    
    17.55
    
    
    
    16.10February 2004
    
    
    1.337
    
    
    
    1.276
    
    
    
    16.80
    
    
    
    15.85March 2004
    
    
    1.407
    
    
    
    1.300
    
    
    
    17.45
    
    
    
    15.85April 2004
    
    
    1.359
    
    
    
    1.300
    
    
    
    16.50
    
    
    
    15.55May 2004
    
    
    1.307
    
    
    
    1.163
    
    
    
    15.51
    
    
    
    14.40
 In April 2001, our shares began trading on the Segmento Titoli con Alti
Requisiti(or STAR) of Telematico. This segment was created recently by
Borsa Italiana S.p.A. for small- and medium-sized companies operating in
traditional sectors of the economy and meeting stricter requirements relating
to transparency, liquidity and corporate governance than those usually required
for listing on the Telematico. As part of the STAR admission requirements, we
appointed Mediobanca to act as specialist for our shares. The specialist is
required to take a number of actions intended to support the market for our
shares and to facilitate the communication of information about us to
investors. 
 Item 10. Additional Information 
 Share Option Plans In 1997, we established a share option plan for our then managing director
and certain senior officers and independent consultants (the 1997 Stock Option
Plan), pursuant to which options to purchase 8,148,148 shares at an exercise
price of euro 0.723 per share were granted during the year ended December 31,
1997. All of these options vested as of December 31, 2001 and expire on August
4, 2007. As of June 28, 2004, 109,592 options had been cancelled. Twenty
percent of the remaining vested options became exercisable upon TPG
Acquisitions disposition of a portion of its shares in our March 1999 initial
public offering, of which options to purchase 962,963, 309,000 and 229,000
shares were exercised by participants in 1999, 2000 and 2001, respectively.
The other 80% of such vested options, equal to options to purchase 6,537,593
shares, became exercisable on May 6, 2004. Of these, 325,444 were exercised in
June 2004. Once vested and exercisable, options may only be exercised during a
30-day period following the date of the shareholder approval of our Italian
GAAP financial statements. 73




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Options are forfeited if the beneficiary is terminated for cause. As of
June 28, 2004, options to purchase 6,212,149 shares remained exercisable. In September 1999, our board of directors also approved a stock
option/stock appreciation rights plan (the 1999 Stock Option Plan) for
certain of our executive directors, officers and independent consultants that
are designated to participate in the plan by the compensation committee of the
board of directors. On March 11, 2004, our board amended the 1999 Stock Option
Plan to include expressly high-level employees of companies of the Ducati Group
as covered by the plan. Under this plan, the board of directors may grant
options or stock appreciation rights (each such option or right, a Right) in
any year in respect of not more than 2.0% of our outstanding share capital.
Beginning in 2002, Rights may be granted under the plan upon approval by the
board of directors of our Italian GAAP preliminary consolidated income
statement and balance sheet for the prior fiscal year (which approval typically
occurs by February 15 of each year) and expire seven years after the date of
grant. Until 2001, Rights under the plan were granted following approval by
the board of directors of our Italian GAAP consolidated financial statements
for the prior fiscal year (which approval typically occurs in March of each
year). Rights vest in three equal annual installments (or as otherwise
determined by the board of directors) starting on December 31 of the year
following the year of grant, but are forfeited, whether or not vested, if the
employee is terminated for cause. Upon exercise, our obligation in respect of
the Rights may be satisfied in shares or, if the Shares are no longer listed on
the Telematico or the issuance of new shares or the buy back of existing shares
have not been approved, in cash (calculated with reference to the market value
of the shares at the time of exercise). To exercise their Rights, the
participants must pay us a strike price that is the greater of (i) our
consolidated per share net worth at the time of exercise and (ii) the value of
the shares on the grant date as determined in accordance with the tax
provisions in force on such grant date (currently the average official price
for the shares in the month preceding the grant date). Based on the criterion
described under (ii) above, the strike price would be  2.88 per share,  2.81
per share,  1.99 per share,  1.80 per share and  1.317 per share for Rights
granted in 1999, 2000, 2001, 2002 and 2004, respectively. Other than in the
event of death or disability of a beneficiary, once vested, rights granted
prior to 2002 may only be exercised during a 30-day period following the
approval by the board of directors of our Italian GAAP consolidated financial
statements for the prior fiscal year, and rights granted beginning in 2002 may
only be exercised during a 30-day period following the approval by the board of
directors of our Italian GAAP preliminary consolidated income statement and
balance sheet for the prior fiscal year. In 1999, we granted 500,000 Rights to Mr. Minoli, 500,000 to Mr. Di Biagio
and an aggregate of 2,159,259 Rights to 51 additional beneficiaries. In March
of 2000, our board of directors approved the grant of 3,159,259 Rights for the
year 2000 (of which 500,000 were granted to Mr. Minoli, 500,000 were granted to
Mr. Di Biagio and 2,159,259 were granted to 70 additional beneficiaries
selected by the compensation committee). In March 2001, the board approved the
grant of 3,165,000 Rights under the plan for the year 2001 (of which 500,000
were granted to Mr. Minoli, 500,000 to Mr. Di Biagio and 2,165,000 to 73
additional beneficiaries selected by the compensation committee). On February
14, 2002, the board approved the grant of 3,960,000 Rights for the year 2002
(of which 500,000 were granted to each of Messrs. Minoli and Di Biagio and
2,960,000 were granted to 90 additional beneficiaries selected by the
compensation committee). In granting these Rights in 2002, which together
represent approximately 2.5% of our outstanding share capital, the board
decided to waive for 2002 the above-mentioned 2.0% limit on Rights to be
granted in any year under the plan, due to the prior expiration of 1,190,638
unexercised rights granted under the plan before 2002. Our board did not authorize any grant of options in relation to 2003. On
March 11, 2004, our board approved the grant of 3,170,000 Rights for the year
2004 (of which 500,000 were granted to Mr. Minoli and 2,670,000 to 65
additional beneficiaries selected by our compensation committee). 74




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Rights granted in 1999 through 2004 vest in three annual installments
beginning on December 31 of the year following the year of grant, as follows:
50% in the first year and 25% in each of the two subsequent years. As of June
28, 2004, a total of 2,099,388 Rights granted under the 1999 Stock Option plan
had been cancelled, and a total of 14,514,130 Rights, whether or not vested,
remained exercisable subject to the conditions set forth above. On May 2, 2000, our shareholders meeting approved a capital increase of
up to 12 million shares in connection with the Rights that we have granted from
1999 to 2002 under the 1999 Stock Option Plan. On May 6, 2004, our shareholders meeting approved a capital increase of
up to 1,585,000 shares in connection with the Rights that we have granted in
2004 to beneficiaries who are employees of the Ducati Group. 
 Buy Back Plan At a May 6, 2004 meeting, our shareholders approved a plan (the Buy Back
Plan) pursuant to which, at the direction of our managing director, duly
empowered by our board of directors, we may:  
    
    repurchase on the Telematico up to 15,556,800 of our shares
(representing approximately 9.8% of our then issued and paid-in share
capital);  
    
    retain such shares as treasury shares;  
    
    transfer such shares either to beneficiaries of the Employee Stock
Ownership Plan (See Employee Stock Ownership Plan) and the 1999
Stock Option Plan as required thereunder; or  
    
    dispose, subject to applicable law, of such shares on the Telematico
to maintain liquidity of our shares on such stock exchange. At an extraordinary meeting held on May 6, 2004, our shareholders approved
the conversion of our revaluation reserve of  22.027 million (net of the
applicable 19% substitute tax) created in connection with the restatement to
market value of our trademark pursuant to Article 10, paragraph 1, of Law No.
342 of 2000 as amended by Article 2, paragraph 25, of Law No. 350 of 2003 (the
Revaluation Reserve) from non-distributable to freely distributable. Our
shareholders approved the conversion of the Revaluation Reserve into a freely
distributable reserve to enable us to use such reserve to implement the Buy
Back Plan (under applicable Italian law, buy back plans can only be funded from
profits available for dividends or out of distributable reserves as appearing
on our latest duly approved unconsolidated financial statements). Use of this
reserve to implement the Buy Back Plan, however, is conditional upon the
expiration of the 90 day period following the filing of the May 6, 2004
shareholders resolution with the Companies Registry, during which time our
creditors may file an opposition to the conversion as permitted by Italian law. Under the Buy Back Plan, we may repurchase these shares in one or more
transactions over an 18-month period from May 6, 2004 at a per share purchase
price of not more than 10% above or below the market price for the shares on
the Telematico on the day prior to any purchase. There is no time-limit under
the Buy Back Plan in respect of the disposal of any shares repurchased before
the end of this 18-month period. Repurchases and disposals of our shares under
the Buy Back Plan shall be carried out in accordance with applicable Italian
law relating to buy back plans in Italy, as more fully described in
"By-lawsPurchase by Us of Our Own Shares, as well as certain conditions
relating to the ESOP and the 1999 Stock Option Plan as more fully described in
"Share Option Plans. 75




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As of June 28, 2004, we owned 1,521,378 of our shares, of which 293,235
shares were repurchased pursuant to our buy back plan expiring November 2003,
and 1,228,143 shares were repurchased pursuant to our buy back plan expiring
November 2005. 
 Employee Stock Ownership Plan On February 14, 2002, the board approved an Employee Stock Ownership Plan
(ESOP) to facilitate the purchase of our ordinary shares by non-director
Ducati employees (including part-time employees) under indefinite contracts who
are resident in Italy. In each year, our managing director must decide to
implement the ESOP for it to be effective. Under the ESOP, each employee in
any year through 2006 in which the ESOP is implemented can request to purchase,
at a discount, a number of our ordinary shares not to exceed an amount equal to
 3,000. The request must be submitted within 20 days after the approval of
our annual unconsolidated financials statements. To satisfy purchases of shares made under the ESOP, we will instruct a
broker appointed by us to purchase on the Telematico on our behalf the number
of shares equal to the total euro amount so requested for purchase by employees
under the ESOP. On the same day of such purchase, we assign the shares to
employees upon payment of the purchase price minus a discount (funded by us) of
one-third of such purchase price. To be able to purchase our shares for
delivery to the employees under the ESOP, we must obtain authorization by our
shareholders of a buy back plan pursuant to which we may repurchase shares for
purposes of the ESOP. On May 6, 2004, the shareholders authorized us to
purchase up to 15,556,800 shares on the Telematico within the subsequent 18
months, including to deliver shares to employees under the ESOP. See Buy
Back Plan. Shares are purchased at current market prices within 20 days of
receiving an employees request, provided that such prices are not more than
10.0% above or below the market price of the shares on the Telematico on the
day prior to such purchase. Only shares purchased as described above are used
to satisfy purchases of shares under the ESOP. The shares purchased by the
employees under the ESOP may not be transferred for a period of three years; as
a result, under Italian tax law, the discount we offer under the ESOP is not
considered taxable income for the employees. Pursuant to the provisions applicable to share buy back plans, we may not
purchase our shares, including for delivery under the ESOP, unless, among other
things, the amount of distributable or available reserves in our unconsolidated
financial statements as approved for the prior year (after any distribution of
dividends or repurchase of our shares for purposes other than as related to the
ESOP that we may decide to make) is equal to or greater than the aggregate euro
amount that represents all shares that ESOP beneficiaries would be entitled to
purchase. If the amount of distributable and available reserves is less than
such aggregate euro amount, we may, at our discretion, implement the ESOP at a
per-beneficiary subscription limit that is less than  3,000. The ESOP was not implemented in 2003 and, as of the date of this annual
report, has not been implemented for 2004. As of June 28, 2004, 1,024
employees would be eligible to participate in the ESOP had it been implemented
as of such date. 
 By-Laws The following is a summary of certain information concerning our shares
and By-laws (Statuto) and of Italian law applicable to Italian companies whose
shares are listed in a regulated market in the European Union. The summary
contains all the information that we consider to be material regarding the
shares but does not purport to be complete and is qualified in its entirety by
reference to the By-laws or Italian law, as the case may be. 76




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Italian companies whose shares are listed on a regulated market of the
European Union are principally governed by two sets of rules  the Italian
Civil Code (applicable to all Italian companies), and the Unified Financial Act
(Testo Unico dellIntermediazione Finanziaria, or TUF) of February 24, 1998 and
implementing regulations thereof (applicable to listed companies). In January
2003, the Italian government approved a wide-ranging reform of the corporate
law provisions of the Italian Civil Code, which came into force on January 1,
2004. In February 2004, the Italian government amended the TUF to coordinate
it with the new corporate law provisions of the Italian Civil Code. The
amendments to the Italian Civil Code and to the TUF constitute the so-called
2004 corporate law reform. On May 6, 2004 our shareholders approved a number
of amendments to our By-laws dictated or made possible by the 2004 corporate
law reform. The following summary takes into account the 2004 corporate law
reform and the consequent amendments to our By-laws. General Our
issued share capital consists of 158,826,407 shares with no par value. All of the issued
shares are fully paid, non-assessable and in registered form. We are registered with the Companies Registry of the Court of Bologna at
n. 59309/98, with registered office at 3, Via A. Cavalieri Ducati, Bologna,
Italy. As set forth in Article 4 of the By-laws, our corporate purpose is the
production, marketing and sale of motorcycles, engines and other parts and
components, as well as of any other products or accessories that may benefit
the production, marketing and sale of motorcycles, engines and other parts and
components. DMH is generally authorized to take any actions necessary or
useful to achieve its corporate purpose. On May 7, 2002, our shareholders
amended Article 4 of our by-laws by expressly including motorcycle rentals and
motorcycle riding schools amongst the secondary activities that we may conduct
to accomplish our corporate purpose. Authorization of Shares Additional shares may be authorized in connection with capital increases
approved by our shareholders in an extraordinary meeting, but this
authorization would generally be given only after recommendation by our board
of directors. At a meeting on September 7, 1998, our shareholders authorized the
issuance of up to 8,148,148 shares which are reserved for distribution to
beneficiaries of the 1997 Stock Option Plan. As of June 28, 2004, 1,826,407
shares had been issued upon exercise of options by beneficiaries under the 1997
Stock Option Plan and options to purchase 6,212,149 shares remained
exercisable. See also Share Option Plans. At a meeting on May 2, 2000, our shareholders authorized the issuance of
up to 12 million shares, not subject to pre-emptive rights, in connection with
the granting of Rights in the years 1999 through 2002 to beneficiaries of the
1999 Stock Option Plan. At a meeting on May 6, 2004, our shareholders
authorized the issuance of up to 1,585,000 shares, not subject to preemptive
rights, in connection with the Rights that we have granted in 2004 to
beneficiaries of the 1999 Stock Option Plan who are employees of the Ducati
Group. As of June 28, 2004, no shares had been issued for implementation of
the 1999 Stock Option Plan. See also Share Option Plans. 77




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Form and Transfer of Shares Pursuant to the TUF, Legislative Decree No. 213 of June 24, 1998 (Decree
No. 213) and implementing Regulation No. 11768 of December 23, 1998
(Regulation No. 11768) of the Commissione Nazionale per le Società e la Borsa
(the National Commission for Companies and the Stock Exchange or CONSOB),
since January 1, 1999 it is no longer possible for a shareholder to obtain the
physical delivery of share certificates representing shares of Italian listed
companies. Shares of Italian listed companies are no longer represented by
paper certificates and the transfer and exchange of shares takes place
exclusively through an electronic book-entry system. All shares must,
accordingly, be deposited by their owners with an intermediary (each an
Intermediary), which is defined by Regulation No. 11768 as:  
    
    an Italian or EU bank;  
    
    a non-EU bank authorized by the Bank of Italy to operate in the Italian market;  
    
    a Società di Intermediazione Mobiliare, or SIM;  
    
    an EU investment company;  
    
    a non-EU investment company authorized by CONSOB to provide investment services in Italy;  
    
    an Italian asset management company;  
    
    a stock broker;  
    
    the company which has issued the shares;  
    
    the controlling shareholder of the company which has issued the shares;  
    
    the Bank of Italy;  
    
    an EU or non-EU entity operating a centralized clearing system;  
    
    a financial intermediary operating a clearing system governed by art. 69 (2) and 70 of the TUF;  
    
    a financial intermediary registered on the list kept by the Bank of Italy under art. 107 of Legislative Decree No. 385 of
September 1, 1993;  
    
    the Italian Post Office (Poste Italiane S.p.A.);  
    
    Cassa Depositi e Prestiti società per azioni (a state-owned company mainly responsible for extending loans to public
administration bodies);  
    
    The Italian Ministry of Economics and Finance; and  
    
    the managers of foreign clearing, settlement and guarantee systems for financial instruments, provided that they are
subject to supervision equivalent to that provided by Italian law. The Intermediary in turn deposits the shares with Monte Titoli or with
another company authorized by CONSOB to operate a centralized clearing system. To transfer shares under the system introduced by Decree No. 213, the
owners of shares are required to give instructions to their Intermediaries. If
the transferee is a client of the transferors Intermediary, the Intermediary
simply transfers the shares from the transferors account to the account of the
transferee. If, however, the transferee is a client of another Intermediary,
the transferors Intermediary instructs the company operating a centralized
clearing system to transfer the shares to the account of the transferees
Intermediary, which then registers the shares on the transferees account. Each Intermediary maintains a custody account for each of its clients
setting out the financial instruments of such client and keeps a record of all
transfers, payment of dividends, exercise of rights attributable to such
instruments, charges or other encumbrances on the instruments. The account
holder or any other eligible party (for example, in the case of a charge over
the financial instrument, the chargee) may submit a request to the Intermediary
for the issue of a certified statement of account. The request must indicate
the quantity of the financial instruments in respect of which the statement is
requested, the rights which the applicant intends to exercise and the duration
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is required. Within three business days from the receipt of such request,
the Intermediary shall issue a certified statement of account which constitutes
evidence of the account holders ownership of the financial instruments
indicated. Once a certificate has been issued, the Intermediary may not effect
any transfer of the corresponding securities until the certificate loses its
validity or is returned. The new book-entry system commenced operations on October 5, 1998, when
Monte Titoli cancelled all certificates representing listed financial
instruments in its possession and returned them to the issuing companies. At
the same time, Monte Titoli registered the shares in accounts held under the
name of the depositing Intermediaries and gave them and the issuing companies
notice of the registration. The Intermediaries, in turn, registered the shares
in the shareholders accounts. Since January 1, 1999, shareholders of listed
companies have been allowed to exercise their rights only after they have
deposited their share certificates with an Intermediary and authorized it to
deposit the shares with a company operating a centralized clearing system. As a result of the foregoing, it is not possible for a shareholder to
obtain physical delivery of share certificates representing shares. Instead,
transfers of shares are possible only using the procedures described above. The shares have been accepted for clearance through Euroclear and
Clearstream. Purchasers of shares may elect to hold such shares through
Euroclear and Clearstream. Persons owning a beneficial interest in shares held
through Monte Titoli, Euroclear and Clearstream must rely on the procedures of
Monte Titoli, Euroclear and Clearstream, respectively, and of the
Intermediaries that have accounts with Monte Titoli, Euroclear and Clearstream,
to exercise their rights as holders of shares. Dividend Rights The payment by us of any annual dividend is proposed by the board of
directors and is subject to the approval of the shareholders at the annual
shareholders meeting. Before dividends may be paid out of our unconsolidated
net income in any year, an amount equal to 5.0% of such net income must be
allocated to our legal reserve until such reserve is at least equal to
one-fifth of the value of our issued share capital. If our capital is
reduced as a result of accumulated losses, dividends may not be paid until the
capital is reconstituted or reduced by the amount of such losses. The board of
directors may authorize the distribution of interim dividends, subject to
certain statutory limitations. Dividends are payable to those persons who hold the shares through an
Intermediary on the dividend payment date declared by the shareholders
meeting. Dividends not collected within five years from the dividend payment
date are forfeited to our benefit. Payments in respect of dividends are
distributed through Monte Titoli on behalf of each shareholder by the
Intermediary with which the shareholder has deposited its shares. Holders of
ADSs are entitled to receive payments in respect of dividends on the underlying
shares through The Bank of New York, as ADR depositary, in accordance with the
deposit agreement relating to the ADRs. See Item 8. Financial
InformationDividend Policy. Voting Rights Shareholders are entitled to one vote per share, although a slate voting
system applies in case of appointment of members of the board of statutory
auditors. See Statutory Auditors. Proxy solicitation is possible. Solicitation can be engaged in by certain
professional investment and financial intermediaries, as well as certain
companies whose sole purpose is to carry out proxy solicitation, on behalf of a
qualified soliciting shareholder (generally, one or more shareholders who own 79




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and have owned at least 1.0% of our shares for more than six months and
who have been registered with us as having been shareholders of at least 1.0%,
for the same period of time). Proxies may be collected by a shareholders association provided that such
association has been formed by notarized private agreement, does not carry out
business activities and is made up of at least 50 individuals, each of whom
owns not more than 0.1% of our voting capital. Members of the shareholders
association may, but are not obliged to, grant proxies to the legal
representative of the association, and proxies may also be granted in respect
of only certain of the matters to be discussed at the relevant shareholders
meeting. The association may vote in different manners in compliance with the
instructions expressed by each member who has granted a proxy to the
association. As a registered shareholder, The Bank of New York, as ADR depositary, or
its nominee is entitled to vote the shares underlying the ADSs. The Deposit
Agreement requires The Bank of New York (or its nominee) to accept voting
instructions from owners of ADSs and to execute such instructions to the extent
permitted by law. Neither Italian law nor our By-laws limit the right of
non-resident or foreign owners to hold or vote the shares. Board of Directors Pursuant to our By-laws, our board of directors must consist of five to
fifteen individuals. The board of directors is elected at a shareholders
meeting for up to three fiscal years, as determined by the shareholders from
time to time. The directors, who may but are not required to be our
shareholders, may be re-appointed for successive terms. In accordance with the
By-laws, the board of directors has complete power of ordinary and
extraordinary administration of our business and in particular may perform all
acts it deems advisable for the achievement of our corporate purposes, except
for the actions reserved by applicable law or the By-laws to a vote of the
shareholders at an ordinary or extraordinary shareholders meeting. See also
"Meetings of Shareholders. The board of directors must appoint a chairman (presidente) and may
appoint a vice-chairman to replace the chairman when he is absent or
unavailable. The chairman of the board of directors and, in his absence, the
vice-chairman and the managing directors, if any, are severally our legal
representatives. The board of directors may delegate powers to one or more
managing directors (amministratori delegati), and/or to an executive committee
composed of directors, and/or to one or more ad hoc committees of directors,
determine the nature and scope of the delegated powers of each director and
committee and revoke such delegation at any time. Our By-laws provide that the
chairman of the board of directors and, if any, the managing directors are
members of the executive committee. Our executive directors must ensure, under
the supervision of the board of directors, that our organizational and
accounting structure is appropriate to our business and must report to the
board of directors and to the board of statutory auditors at least quarterly on
the Companys business and the main transactions carried out by us or by our
subsidiaries. In accordance with Italian law and the By-laws, the board of directors may
not delegate certain of its responsibilities, including those relating to the
approval of the draft financial statements, the approval of merger and
de-merger plans to be presented to shareholders meetings, increases in the
amount of our share capital or the issuance of convertible debentures (if any
such power has been delegated to the board of directors by vote of the
extraordinary shareholders meeting) and the calling of an ordinary or an
extraordinary shareholders meeting to resolve upon the actions to be taken by
us in case of decrease of our shareholders equity to less than two thirds of
our paid-in capital as a result of accumulated losses. See also Meetings of
Shareholders. 80




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The board of directors may also appoint a general manager (direttore
generale) and one or more senior managers (direttori) who report directly to
the board and confer powers for single acts or categories of acts to our
employees or persons unaffiliated with us. Meetings of the board of directors are called by written notice by the
chairman on his own initiative and must be called upon the request of the
vice-chairman, any managing director or at least two other directors or upon
the request of our board of statutory auditors. Meetings may be held in
person, or by video-conference or tele-conference, in any member state of the
European Union, the United States and Switzerland. The quorum for meetings of
the board of directors is a majority of the directors in office. Resolutions
are adopted by the vote of a majority of the directors present at the meeting. Directors having any interest in a proposed transaction must disclose
their interest to the board, even if such interest is not in conflict with the
interest of the company in the same transaction. The interested director is
not required to abstain from voting on the resolution approving the
transaction, but the resolution must state explicitly the reasons for, and the
benefit to the company of, the approved transaction. In the event that these
provisions are not complied with, or that the transaction would not have been
approved without the vote of the interested director, the resolution may be
challenged by a director or by the board of statutory auditors if the approved
transaction may be prejudicial to the company. A managing director having any
such interest in a proposed transaction within the scope of his powers must
solicit prior board approval of such transaction. The interested director may
be held liable for damages to us resulting from a resolution adopted in breach
of the above rules. Finally, directors may be held liable for damages to their
company if they illicitly profit from insider information or corporate
opportunities. Under Italian law, directors may be removed from office at any time by the
vote of shareholders at an ordinary shareholders meeting although, if removed
in circumstances where there was no just cause, such directors may have a claim
for indemnification against us. Directors may resign at any time by written
notice to the board of directors and to the chairman of the board of statutory
auditors. The board of directors must appoint substitute directors to fill
vacancies arising from removals or resignations, subject to the approval of the
board of statutory auditors, to serve until the next ordinary shareholders
meeting. If at any time more than half of the members of the board of
directors appointed at a shareholders meeting resign or otherwise cease to be
directors, the entire board of directors will be considered to have lapsed and
the remaining members of the board of directors (or the board of statutory
auditors if all the members of the board of directors have resigned or ceased
to be directors) must promptly call an ordinary shareholders meeting to
appoint a new board of directors. The remuneration of directors is determined by shareholders at ordinary
shareholders meetings. The board of directors or a committee of such board,
in each case after consultation with the board of statutory auditors, may
determine the remuneration of directors that perform management or other
special services for us, such as the managing director. Directors are entitled
to reimbursement for expenses reasonably incurred in connection with their
functions. Effective January 1, 2004, an Italian stock corporation may adopt one of
two different models of corporate governance structure, as an alternative to
the current model based on a board of directors and a board of statutory
auditors. Stock corporations may opt for (i) a one-tier model with a single
board of directors, including an audit committee composed of independent
non-executive directors, or (ii) a two-tier model, including a management
board, which is entrusted with management responsibilities, and a supervisory
board which is entrusted mainly with control and supervisory responsibilities
and, among other functions, appoints and removes the members of the management
board and approves the companys annual financial statements. The adoption of
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requires an extraordinary shareholders meeting resolution. The amended
By-laws approved by our shareholders on May 6, 2004, do not provide for a
change in our governance structure. Statutory Auditors In addition to electing the board of directors, our shareholders elect a
board of statutory auditors (Collegio Sindacale). At ordinary shareholders
meetings, the statutory auditors are elected for a term of three fiscal years,
may be re-elected for successive terms and may be removed only for cause and
with the approval of a competent court. Pursuant to certain provisions of the TUF, the by-laws of listed companies must:  
    
    specify the number of statutory auditors (not fewer than three) and alternate members (not fewer than two);  
    
    regulate the appointment of the chairman of the board of statutory auditors;  
    
    limit the number of mandates that the statutory auditors may have in other companies; and  
    
    include clauses ensuring that minority shareholders may elect one statutory auditor (or two if the board is composed of
more than three members). Each member of the board of statutory auditors must provide evidence that
he is in good standing and meets certain professional standards. Our By-laws currently provide that the board of statutory auditors shall
consist of three statutory auditors and two alternate statutory auditors (who
are automatically substituted for a statutory auditor who resigns or is
otherwise unable to serve). The By-laws also provide that the statutory
auditors may not hold the position of statutory auditor in more than three
other listed companies (not counting our subsidiaries). Moreover, pursuant to
our By-laws, at least one auditor and one alternate auditor must be enrolled in
the Italian registry of chartered accountants and have practised the accounting
profession for at least three years. As to the other auditors, our
shareholders may select them also among candidates who, for at least three
consecutive years, have held managerial positions within the financial,
administration and control departments of listed companies or within
governmental entities active in sectors which are closely connected to our
business sector, or have had professional or academic experience in legal,
economic, financial or technical matters closely connected to our business
sector. According to our By-laws, the statutory auditors are elected according to
a cumulative voting system, whereby each shareholder or group of shareholders
holding at least 1.0% of our shares may present a slate listing in progressive
order three candidates to the position of statutory auditor and two candidates
to the position of alternate; each shareholder (or shareholders under common
control) may present and vote for a single slate and each candidate may appear
on a single slate. If more than one slate is presented, two statutory auditors
and one alternate are elected from the slate which obtains the largest number
of votes in the shareholders meeting (the candidate listed first on such slate
shall become the chairman of the board of statutory auditors) and one statutory
auditor and one alternate are elected from the slate that obtains the second
largest number of votes. The TUF provides further that the board of statutory auditors is required
to verify that we (i) comply with applicable law and its By-laws, (ii) respect
the principles of correct administration, (iii) maintain adequate
organizational structure, internal controls and administrative and accounting
systems and (iv) adequately instruct our subsidiaries to transmit to us
information relevant to our disclosure obligations. 82




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Our board of statutory auditors is required to meet at least once every
ninety days. Meetings of the board of statutory auditors are called by written
notice by the chairman of the board of statutory auditors on his own initiative
and must be called upon the request of the two regular auditors. Meetings may
be held in person, or by video-conference or tele-conference. The quorum for
meetings of the board of statutory auditors is a majority of the regular
auditors. Resolutions are adopted by the vote of a majority of the auditors
present at the meeting. In addition, our statutory auditors shall attend the meetings of our board
of directors and shareholders meetings and of our executive committee. The
statutory auditors may decide to call a meeting of the shareholders, the board
of directors or the executive committee, ask information to the directors about
our business or that of our subsidiaries, carry out inspections and
verifications at our premises and exchange information with the supervisory
bodies of our subsidiaries or with our external auditors. Our board of
statutory auditors must report to the shareholders meeting convened to approve
our annual stand-alone financial statements on its review activities and on any
irregularities detected during its review activities. The board of directors
must report to the statutory auditors at least quarterly on its activities and
on the main transactions carried out by us. Our board of statutory auditors may convene our shareholders meeting if
it detects serious irregularities during its review activities and there is an
urgent need to take action. Any shareholder may submit a complaint to the
board of statutory auditors regarding facts that such shareholder believes
should be subject to scrutiny by the board of statutory auditors, which must
take any complaint into account in its report to the shareholders meeting. If
shareholders collectively representing 2.0% of our share capital submit such a
complaint, the board of statutory auditors must promptly undertake an
investigation and present its findings and any recommendations to a
shareholders meeting (which it shall convene if the complaint concerns serious
irregularities and there is an urgent need to take action). The board of statutory auditors may report to the competent court serious
breaches of the duties of the directors which may be prejudicial to us or to
our subsidiaries. Our board of statutory auditors is also required to notify
the CONSOB without delay of any irregularities found during its review
activities. CONSOB may report to the competent court serious breaches of the
duties of the statutory auditors of a listed company. As mentioned in the preceding section, effective January 1, 2004, Italian
stock corporations may depart from the traditional Italian model of corporate
governance structure and opt for two alternative models neither of which
includes a board of statutory auditors. External Auditors The TUF requires companies whose shares are listed on regulated markets of
EU Member States to appoint a firm of external auditors that shall verify (i)
during the fiscal year, that the companys accounting records are correctly
kept and accurately reflect the companys activities, and (ii) that the
financial statements correspond to the accounting records and the verifications
conducted by the external auditors and comply with applicable rules. The
external auditors express their opinion on the financial statements in a report
that may be consulted by the shareholders prior to the annual shareholders
meeting. The external auditors are appointed by the ordinary shareholders meeting
for a three-year term (which may not be renewed more than twice). Such
appointment must be notified to CONSOB. 83




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On May 6, 2004, our shareholders appointed KPMG S.p.A., with legal offices
at Via Vittor Pisani 25, Milan, Italy, as our external auditors for a third
consecutive three-year term. Pursuant to Italian law their term may not be
extended further. Meetings of Shareholders Shareholders are entitled to attend and vote at ordinary and extraordinary
shareholders meetings. Votes may be cast personally or by proxy.
Shareholders meetings may be called by our board of directors (or the board of
statutory auditors) and must be called if requested by holders of at least 10%
of the issued shares. Shareholders are not entitled to request that a meeting
of shareholders be convened to resolve upon matters which as a matter of law
shall be resolved upon on the basis of a proposal, plan or report by our board
of directors. If the shareholders meeting is not called despite the request
by shareholders and such refusal is unjustified, the competent court may call
the meeting. Shareholders are informed of all shareholders meetings to be held by
publication of a notice in the MF  Milano Finanzaor Finanza & Mercatidaily
newspapers or in the Official Journal of the Italian Republic (Gazzetta
Ufficiale) at least 30 days before the date fixed for the meeting (20 days if
the meeting is called at the request of holders of at least 10% of the issued
shares). The above formalities and terms regarding the call notice may be
reduced in other very limited circumstances. As a matter of practice, we
publish the notice in at least two national daily newspapers, as recommended by
CONSOB. Shareholders meetings must be convened at least once a year. Our annual
stand-alone financial statements are prepared by our board of directors and
submitted for approval to the ordinary shareholders meeting which must be
convened within 120 days after the end of the fiscal year to which such
financial statements relate. This term may be extended to up to 180 days after
the end of the fiscal year, as long as we are bound by law to draw up
consolidated financial statements or if particular circumstances concerning our
structure or our purposes so require. At ordinary shareholders meetings,
shareholders also appoint the external auditors, approve the distribution of
dividends, appoint the board of directors and statutory auditors, determine
their remuneration and vote on any business matter the resolution or
authorization of which is entrusted to them by law. Extraordinary shareholders meetings may be called to pass upon split-ups,
dissolutions, appointment of receivers and similar extraordinary actions.
Extraordinary shareholders meetings may also be called to resolve upon
proposed amendments to the By-laws, issuance of convertible debentures, mergers
and de-mergers, capital increases and reductions, where such resolutions may
not be taken by our board of directors. In particular, our board of directors
may transfer our registered office within Italy or resolve upon other
amendments to our By-laws when these amendments are required by law, resolve
upon mergers by absorption into us of our subsidiaries in which we hold at
least 90% of the issued share capital and reductions of our share capital in
case of withdrawal of a shareholder. Moreover, if, as a result of accumulated
losses, our shareholders equity decreases to less than two-thirds of our
paid-in capital but not below  120,000, and this decrease is not reduced
within one-third in the fiscal year following that of the original decrease,
the corresponding reduction of our share capital is resolved upon by our board
of directors and not by our shareholders meeting. Our board of directors may
also resolve upon the issuance of shares or convertible debentures if such
powers have been previously delegated to the board of directors by vote of the
extraordinary shareholders meeting. The notice of a shareholders meeting may specify up to two meeting dates
for an ordinary or extraordinary shareholders meeting; such meeting dates are
generally referred to as calls. The extraordinary meeting may be convened on
third call through a new notice if the quorum required for shareholder action
on second call is not reached. 84




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The quorum required for shareholder action at an ordinary shareholders
meeting on first call is at least 50% of the total number of issued shares,
while on second call there is no quorum requirement. In either case,
resolutions may be approved by holders of the majority of the shares present or
represented at the meeting. The quorum required at an extraordinary
shareholders meeting on first, second and third call is at least 50%, more
than one-third and at least one-fifth, respectively, of our issued shares.
Resolutions of any extraordinary shareholders meeting require the approval of
at least two-thirds of the holders of shares present or represented at such
meeting. A shareholders meeting may be attended only by shareholders with voting
rights, whose financial intermediary shall have delivered to us, at least two
days prior to the date of the meeting on first call, a notice entitling the
shareholder to attend the meeting. Once the above notice is communicated to us
by the relevant intermediary the shares cannot be disposed of until the meeting
has taken place. Shareholders may attend the shareholders meeting by proxy. A proxy may
be given only for a single shareholders meeting (including, however, the
first, second and third calls of such meeting), except as part of a general
power of attorney or a power of attorney granted by a corporation, association,
foundation or any other legal entity to one of its employees. A proxy may be
exercised only by the person expressly named in the applicable form. The person exercising the proxy cannot be our subsidiary, a director,
statutory auditor or employee of ours or of any of our subsidiaries. Proxies may be solicited by an Intermediary (banks or investment
companies, asset management companies and companies having proxy solicitation
as their sole purpose) on behalf of a qualified soliciting shareholder (a
shareholder who owns and has owned at least 1.0%  or such lesser percentage
determined by CONSOB  of our voting capital for at least six months and who
has been registered with us as holder of such shares for the same period of
time). Proxies may also be collected by a shareholders association from among
its members provided that such association has been formed by notarized private
agreement, does not carry out business activities other than those relevant to
the purpose of the association and is made up of at least 50 individuals each
of whom owns not more than 0.1% of our voting capital. Members of the
shareholders association may, but are not obliged to, grant proxies to the
legal representative of the association and proxies may also be granted in
respect of only certain of the matters to be discussed at the relevant
shareholders meeting. The association may vote in different manners in
compliance with the instructions given by each member who has granted a proxy
to the association. CONSOB has established provisions which govern the
transparency and proper performance of the solicitation and collection of
proxies. Pre-emptive Rights Pursuant to Italian law, holders of shares are entitled to subscribe for
new issuances of shares, debentures convertible into shares and any other
warrants, rights or options entitling the holders to subscribe for shares in
proportion to their holdings, unless such issues are for non-cash consideration
or pre-emptive rights are waived or limited by a resolution adopted at an
extraordinary shareholders meeting by holders of a majority of the issued
shares. There can be no assurance that the owners of ADSs will be able to
exercise fully any pre-emptive rights to which the holders of shares are
entitled. Reports to Shareholders We are required to publish, in the Italian language, audited annual
stand-alone financial statements of DMH and our audited annual consolidated
financial statements, all prepared in conformity with Italian GAAP. We also
produce an annual report to shareholders in the Italian language which 85




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contains a directors report together with audited financial statements
(consolidated and unconsolidated) of DMH. We are required to produce semi-annual and quarterly reports to
shareholders in the Italian language which contain a directors report as well
as our unaudited semi-annual and quarterly condensed financial statements
(consolidated and, in the case of semi-annual statements only, unconsolidated).
We are also required to prepare annual reports on Form 20-F to be filed with
the U.S. Securities and Exchange Commission containing, among other matters,
our audited consolidated financial statements. Preference Shares or Savings Shares; other Securities We are permitted in accordance with Italian law to issue preference shares
or savings shares. Preference shares would typically not be entitled to vote
in an ordinary shareholders meeting, but would be entitled to vote together
with the shares in extraordinary shareholders meetings and could be entitled
to vote in ordinary shareholders meetings as well if their terms so provided.
Savings shares are entitled to vote in neither ordinary nor extraordinary
shareholders meetings. However, Italian law provides for special meetings of
holders of each class of shares for the approval of resolutions adopted by the
shareholders which affect their rights vis-à-visthe other classes of shares.
Preference shares would have preferential rights to the payment of dividends
and to the repayment of capital in the event of liquidation. Savings shares
typically have preferential rights to the payment of dividends, but the by-laws
may provide for different or additional preferential rights. We have no present intention of issuing preference shares or savings
shares and none are currently authorized or outstanding. The authorization of
preference shares and of savings shares requires an amendment to the By-laws,
thus being subject to the approval by an extraordinary shareholders meeting.
See Meetings of Shareholders. Pursuant to the 2004 corporate law reform, effective January 1, 2004,
Italian companies are permitted to issue other classes of equity securities
with different economic and voting rights, so-called participation certificates
with limited voting rights, as well as so-called tracking stock, if their
by-laws permit such issuance. Our By-laws do not currently permit such
issuance. The power to issue debt securities not convertible into our shares is
vested in our board of directors. Segregation of Assets and Proceeds Pursuant to the 2004 corporate law reform, effective January 1, 2004, the
board of directors of an Italian company may resolve to segregate assets of the
company into one or more separate pools. Such pools of assets may have an
aggregate value not exceeding 10% of the shareholders equity of the company.
Each pool of assets must be used exclusively for the carrying out of a specific
business and may not be attached by the general creditors of the company.
Similarly, creditors with respect to such specific business may only attach
those assets of the company that are included in the corresponding pool. Tort
creditors, on the other hand, may always attach any assets of the company. The
board of directors may issue securities carrying economic and administrative
rights relating to a pool. In addition, financing agreements relating to the
funding of a specific business may provide that the proceeds of such business
be used exclusively to repay the financing. Such proceeds may be attached only
by the financing party and such financing party would have no recourse against
other assets of the company. We have no present intention to enter into any such transaction and none
is currently in effect. 86




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Liquidation Rights Pursuant to Italian law and subject to the satisfaction of the claims of
all other creditors, shareholders are entitled to a distribution in liquidation
that is equal to the value of their shares (to the extent available out of our
net assets). Holders of preferred shares, if any such shares are issued in the
future by us, would be entitled to a priority right to any such distribution
from liquidation up to their par value. Holders of saving shares, if any such
shares are issued in the future by us and if our By-laws so provide, would be
entitled to a priority right to any distribution from liquidation. Thereafter,
all shareholders would rank equally in their claims to the distribution or
surplus assets, if any. Ordinary shares rank pari passuamong themselves in
liquidation. Purchase by Us of Our Own Shares We are permitted to purchase shares, subject to certain conditions and
limitations provided by Italian law. Shares may only be purchased out of
profits available for dividends or out of distributable reserves, in each case
as appearing on the latest shareholder  approved stand-alone financial
statements. Further, we may only repurchase fully paid-in shares. Such
purchases must be authorized by an ordinary shareholders meeting. The number
of shares to be acquired, together with any shares previously acquired by us or
any of our subsidiaries may not (except in limited circumstances) exceed in
aggregate 10% of the total number of shares then issued and the aggregate
purchase price of such shares may not exceed the earnings reserve specifically
approved by shareholders. Shares held in excess of such 10% limit must be sold
within one year of the date of purchase. Similar limitations apply with
respect to purchases of our shares by our subsidiaries. A corresponding reserve equal to the purchase price of such shares must be
created in the balance sheet, and such reserve is not available for
distribution, unless such shares are sold or cancelled. Shares purchased and
held by us may be resold only pursuant to a resolution of our shareholders
adopted at an ordinary shareholders meeting. The voting rights attached to
the shares held by us or our subsidiaries cannot be exercised, but the shares
can be counted for quorum purposes in shareholders meetings. Dividends and
other rights, including pre-emptive rights, attached to such shares will accrue
to the benefit of other shareholders. The TUF provides that the purchase by a listed company of its own shares
and the purchase of shares of a listed company by its subsidiaries must take
place by way of a public offer or on the market, in a manner agreed with Borsa
Italiana S.p.A., ensuring the equality of treatment among shareholders.
Subject to certain limitations, the foregoing does not apply to shares being
purchased by a company from its employees or from the employees of its
controlling company or subsidiaries. At a May 6, 2004 meeting, our shareholders approved a buy back plan for
the repurchase of our shares. See Buy Back Plan. As of June 28, 2004, we owned 1,521,378 of our shares, of which 293,235
shares were repurchased pursuant to our buy back plan expiring November 2003,
and 1,228,143 shares were repurchased pursuant to our buy back plan expiring
November 2005. Notification of the Acquisition of Shares and Voting Rights Pursuant to Italian securities laws, including the TUF and CONSOB
Regulation No. 11971 of May 14, 1999 as subsequently amended (Regulation No.
11971), any acquisition of any interest in excess of 2.0% in the voting shares
of a listed company must be notified to CONSOB and the company whose shares are
acquired. The voting rights attributable to the shares in respect of which
such 87




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notification has not been made may not be exercised. Any resolution taken
in violation of the foregoing may be annulled if the resolution would not have
been adopted in the absence of such votes. In addition, any person whose aggregate interest in the voting shares of a
listed company exceeds or falls below 2%, 5%, 7.5%, 10% and successive
percentages being multiples of 5, respectively, of the listed companys voting
share capital, is obliged to notify CONSOB and the issuer. For the purpose of
calculating these ownership thresholds, shares owned by any person,
irrespective of whether the voting rights attributable thereto are exercisable
by such person or by a third party, are taken into consideration and, except in
certain circumstances, account should also be taken of shares held through, or
shares the voting rights of which are exercisable by, subsidiaries, fiduciaries
or intermediaries. For the purpose of calculating the ownership thresholds of
5%, 10%, 25%, 50% and 75%, shares should also be taken into account that: (i) a
person has an option to, directly or indirectly, acquire or sell; and (ii) a
person may acquire further to the exercise of a warrant or conversion right
which is exercisable within 60 days. The notification must be repeated when
such person, upon the exercise of the right referred to in (i) or (ii) above,
acquires or sells shares which cause his aggregate ownership in the listed
company to exceed or fall below the relevant thresholds. Notification should
be made (except in certain circumstances) within five trading days of the event
which gives rise to the notification obligation. Cross-ownership of listed companies may not exceed 2.0% of their
respective voting shares and cross-ownership between a listed company and an
unlisted company may not exceed 2.0% of the voting shares of the listed company
and 10.0% of the voting shares of the unlisted company. If the relative
threshold is exceeded, the company which is the latter to exceed such threshold
may not exercise the voting rights attributable to the shares in excess of the
threshold and must sell the excess shares within a period of 12 months. If the
company does not sell the excess shares, it may not exercise the voting rights
in respect of its entire shareholding. If it is not possible to ascertain
which is the latter company to exceed the threshold, subject to a different
agreement between the two companies, the limitation on voting rights and the
obligation to sell the excess shares applies to both of the companies
concerned. The 2.0% limit for cross-ownership is increased to 5.0% on the
condition that such limit is only exceeded by the two companies concerned
following an agreement authorized in advance by an ordinary shareholders
meeting of each of the two companies. Furthermore, if a party holds an
interest in excess of 2.0% of a listed companys share capital, such listed
company or the party which controls the listed company may not purchase an
interest above 2.0% in a listed company controlled by the first party. In case
of non-compliance, voting rights attributable to the shares held in excess may
not be exercised. If it is not possible to ascertain which is the latter party
to exceed the limit, the limitation on voting rights applies to both, subject
to any different agreement between the two parties. Any shareholders
resolution taken in violation of the limitation on voting rights may be
annulled if the resolution would not have been adopted in the absence of such
votes. The foregoing provisions in relation to cross-ownership do not apply
when the thresholds are exceeded following a public tender offer aimed at
acquiring at least 60% of a companys ordinary shares or when a controlled
company purchases shares of a controlling company within the limits set forth
in Article 2359 bisof the Italian Civil Code and following the procedures
described under Purchase by Us of Our Own Shares; however, certain
restrictions on the manner of purchase apply. Pursuant to the TUF, agreements among shareholders of a listed company or
of its parent company, must be notified to CONSOB (within 5 days), published in
summary form in the press (within 10 days) and filed with the Chamber of
Commerce (within 15 days). Failure to comply with the above rules renders the
agreements null and void and the shares cannot be voted. These rules apply to
shareholders agreements which: (i) concern (including prior consultation for) the exercise of voting
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(ii) contain limitations on the transfer of shares of the companies under
point (i), above, or of securities which grant the right to purchase or
subscribe said shares; (iii) provide for the purchase of shares or securities mentioned in point
(ii), above; or (iv) have as their object or effect the exercise (including joint
exercise) of a dominant influence over the companies under point (i),
above. Any shareholders agreement of the nature described above may have a
maximum term of three years or, if executed for an unlimited term, can be
terminated by a party upon six months prior notice. In case of a public
tender offer, shareholders who intend to participate in the tender offer may
withdraw from the agreement without notice, such withdrawal being effective
only in the event that the relevant shares are actually sold. Regulation No. 11971 contains provisions which govern the method and
content of the notification and publication of the agreements as well as of
subsequent amendments thereto. The regulation also provides that any party to
an agreement referred to in (i) and (iv) above concerning more than 5% of the
listed companys share capital is obliged to notify CONSOB and the listed
company in question of its overall shareholding in the listed company, unless
such information has already been notified in compliance with other provisions
of the TUF. In accordance with Italian anti-trust laws, the Italian anti-trust
authority is required to prohibit the acquisition of control in a company which
would thereby create or strengthen a dominant position in the domestic market
or a significant part thereof and which would result in the elimination or
substantial reduction, on a lasting basis, of competition, provided that
certain turnover thresholds are exceeded. However, if the turnover of the
acquiring party and the company to be acquired exceed certain higher turnover
thresholds, the anti-trust review of the acquisition falls within the exclusive
jurisdiction of the European Commission. Minority Shareholders Rights Shareholders resolutions which are not adopted in conformity with
applicable law or our By-laws may be challenged (with certain limitations and
exceptions) within ninety days by absent, dissenting or abstaining shareholders
representing individually or in the aggregate at least 0.1% of our share
capital (as well as by our board of directors or our board of statutory
auditors). Shareholders not reaching this threshold or shareholders not
entitled to vote at our meetings may only claim damages deriving from the
resolution. Dissenting or absent shareholders may require us to buy back their shares
for the average closing price of the previous six months as a result of
shareholders resolutions approving, among other things, material modifications
of the companys corporate purpose or of the voting rights of our shares, the
transformation of the Company from a stock corporation into a different legal
entity, the transfer of our registered seat outside Italy or the de-listing of
our shares from Telematico. Each shareholder may bring to the attention of the board of statutory
auditors facts or acts which are deemed wrongful. If such shareholders
represent more than 2.0% of our share capital, the board of statutory auditors
must investigate without delay and report its findings and recommendations to
the shareholders meeting. Shareholders representing more than 5.0% of our share capital have the
right to report to the competent court serious breaches of the duties of the
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subsidiaries. In addition, shareholders representing at least 5.0% of our
share capital may commence derivative suits before the competent court against
our directors, statutory auditors and general managers. We may waive or settle
the suit unless shareholders holding at least 5.0% of the shares vote against
such waiver or settlement. We will reimburse the legal costs of such action in
the event that the claim of such shareholders is successful and the court does
not award such costs against the relevant directors, statutory auditors or
general managers. Minority shareholders may appoint a member of the board of statutory
auditors, pursuant to the slate voting system introduced in the By-laws
according to the TUF. See Statutory Auditors. Tender Offer Rules Pursuant to the TUF, a public tender offer must be made by any person
that, by reason of its purchases of shares, holds more than 30% of the shares
of an Italian company listed on an Italian regulated market entitling their
holders to vote on the appointment or revocation of the directors or the
commencement of derivative suits against them (for purposes of this section,
and as applicable to our shares, the Ordinary Shares). The tender offer must
cover all the Ordinary Shares of the listed company. Similarly, a tender offer
for all the Ordinary Shares of a listed company must be made by any person who,
having more than 30% of the Ordinary Shares without exercising majority voting
rights at ordinary shareholders meetings, acquires  by way of acquisition or
exercise of subscription or conversion rights  during a 12-month period more
than an additional 3% of the Ordinary Shares. Moreover, according to a release
issued by CONSOB if, as a result of a share buy back effected by a listed
company, the controlling shareholder of that company holds more than 30% of the
outstanding Ordinary Shares (i.e., exclusive of treasury stock), the obligation
to launch a tender offer is triggered. Likewise, the obligation to launch a
tender offer is triggered when a share buy back results in an increase of more
than 3% of the outstanding Ordinary Shares owned by the controlling shareholder
originally holding more than 30% but less than 50% of the companys outstanding
Ordinary Shares. The offer must be launched within thirty days from the date
on which the relevant threshold was exceeded, at a price not lower than the
average of the weighted average of the market price for the shares in the
previous twelve months, and the highest price paid for the Ordinary Shares by
the offeror in the same period. Under Regulation No. 11971, a purchaser is exempted from the tender offer
obligation when: (i) the purchasers equity interest, as a result of an
acquisition, does not exceed the 30% threshold by more than 3% (provided that
the purchaser commits (a) not to exercise the voting rights pertaining to any
Ordinary Shares exceeding the 30% threshold and (b) to sell any shares
exceeding the 30% threshold within 12 months from the date of purchase); (ii)
another person (or several persons acting jointly) already owns more than 50%
of the outstanding Ordinary Shares, (iii) the 30% threshold is exceeded as a
result of a capital increase in connection with a debt restructuring plan
approved by CONSOB, (iv) the 30% threshold is exceeded as a result of transfers
of Ordinary Shares among related persons, (v) the 30% threshold is exceeded as
a result of the exercise of pre-emptive rights, (vi) the 30% threshold is
exceeded through mergers or demergers having an industrial purpose, approved by
the shareholders of the company whose shares would otherwise be the target of
the tender offer. The TUF provides further that the acquisition of an interest
above 30% of the Ordinary Shares of a company does not trigger the obligation
to launch a 100% tender offer if the person concerned has exceeded the
threshold as a result of a public tender offer launched on 60% or more of the
Ordinary Shares of the company. This provision, however, is available only (i)
if the tender offer has been approved by shareholders of the company holding a
majority of the Ordinary Shares (excluding the offeror and the current majority
shareholder), and (ii) if the offeror (its subsidiaries, controlling person,
related companies and other person connected to it by virtue, inter alia, of
shareholders agreements) has not acquired more than 1% of the Ordinary Shares
of the company in the preceding 12 months; CONSOB shall ensure compliance with
these conditions before allowing the offer to be launched. After such an offer
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becomes subject to the duty to launch an offer for 100% of the Ordinary
Shares if, in the course of the subsequent 12 months, (i) it (or its
affiliates) purchases more than an additional 1% of the Ordinary Shares of the
company, or (ii) if the company approves a merger or split-up. Finally, the
TUF provides that anyone holding 90% or more of the voting shares of a company
must launch an offer for the remaining voting shares unless an adequate
distribution is restored so as to ensure proper trading within a period of 120
days. Any shareholder holding more than 98% of the voting shares of a listed
company following a tender offer for all such shares issued by the company, has
the right to obtain title to the remaining shares within four months after the
end of the tender offer if it has stated in the offer document its intention to
make such an acquisition at a price set by a court-appointed expert. Liability for Mismanagement of Subsidiaries Pursuant to the 2004 corporate law reform, companies and other entities
that, acting in their own interest or the interest of third parties, mismanage
a company subject to their direction and coordination powers are liable to such
companys shareholders and creditors for ensuing damages. Said liability is
excluded if (i) the ensuing damage is fully eliminated, including through
subsequent transactions, or (ii) the damage is effectively offset by the global
benefits deriving in general to the company from the continuing exercise of
such direction and coordination powers. Direction and coordination powers are
presumed to exist, among other things, with respect to consolidated
subsidiaries. On February 12, 2004, our board of directors determined that we
are not subject to the direction and coordination powers of any entity. 
 Significant Differences with Corporate Governance Practices under NYSE Rules Overview Corporate governance rules for Italian stock corporations (società per
azioni) like us whose shares are listed on the Italian Stock Exchange (the
ISE), are set forth in the Italian Civil Code, in the TUF as well as in the
corporate governance rules set forth by the voluntary code of corporate
governance issued by the Italian Stock Exchange (the Corporate Governance
Code). As described in more detail below, these Italian corporate governance
rules differ in a number of ways from those applicable to U.S. domestic
companies under NYSE listing standards, as set forth in the NYSE Manual. As a general rule, our main corporate bodies are governed by the Italian
Civil Code and the TUF and are assigned specific powers and duties that are
legally binding and cannot be derogated from. The Corporate Governance Code
builds on this general framework and sets forth recommendations for responsible
corporate governance intended to reflect generally accepted best practice.
While these recommendations are not legally binding, the regulations issued by
the ISE require that its listed companies issue an annual compliance report
disclosing which recommendations, if any, are not being followed and why such
recommendations are not being followed. The annual compliance report must also
contain a general description of our corporate governance system. As part of
the STAR admission requirements set forth by the ISE regulations (see Item 4.
Information on the CompanyHistory and Development of the CompanyHistory) we
are required to comply with certain rules contained in the Corporate Governance
Code (the STAR Governance Rules). As stated in our annual compliance report
to the ISE, issued on April 16, 2004, we comply with the STAR Governance Rules
and are substantially in compliance with the other rules set forth in the
Corporate Governance Code. We follow the traditional Italian corporate governance system, with a
board of directors (consiglio di amministrazione) and a separate board of
statutory auditors (collegio sindacale), with supervisory functions. See
"By-LawsBoard of Directors and By-LawsStatutory Auditors for 91




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a description of the powers and duties of our board of directors and of
our board of statutory auditors, respectively. The two boards are separate and
no individual may be a member of both boards. Both the members of the board of
directors and the members of the board of statutory auditors owe duties of
loyalty and care to us. As required by Italian law, a firm of external
auditors is in charge of auditing our financial statements. See
"By-LawsExternal Auditors. The members of our board of directors and board
of statutory auditors, as well as the firm of external auditors, are directly
and separately appointed by shareholder resolution at our general shareholders
meetings. As required by the STAR Governance Rules, moreover, our board of directors
also established an internal control committee which is mainly responsible for
assessing the adequacy of our internal control system and for relations with
our external auditors. See Item 6. Directors, Senior Management and
EmployeesBoard Committees. In accordance with the STAR Governance Rules, our
internal control committee is composed of non-executive directors, the majority
of whom are independent. See Independent Directors. However, as explained
in more detail below, this committee does not serve as our audit committee
for purposes of Rule 10A-3 under the Exchange Act or NYSE listing standards. This system contrasts with the unitary system envisaged for U.S. domestic
companies by the NYSE listing standards, which contemplate the board of
directors serving as the sole governing body. Following is a summary of the significant differences between Italian
corporate governance rules and practices, as we have implemented them, and
those applicable to U.S. issuers under NYSE listing standards, as set forth in
the NYSE Manual. Independent Directors NYSE domestic company standards. The NYSE listing standards applicable to
U.S. companies provide that independent directors must comprise a majority of
the board. In order for a director to be considered independent, the board
of directors must affirmatively determine that the director has no material
direct or indirect relationship with the company. These relationships can
include commercial, industrial, banking, consulting, legal, accounting,
charitable and familial relationship (among others). More specifically, a
director is not independent if such director or his/her immediate family
members, has certain specified relationships with the company, its parent, its
consolidated subsidiaries, its internal or external auditors, or companies that
have significant business relationships with the company, its parent or its
consolidated subsidiaries. Ownership of a significant amount of stock is not a
per se bar to independence. In addition, a three-year cooling off period
following the termination of any relationship that compromised a directors
independence must lapse before that director can again be considered
independent. Our practice. Pursuant to the STAR Governance Rules, our board of
directors shall include an adequate number (at least three out of eleven) of
non-executive independent directors such that their views carry significant
weight in the adoption of the boards resolutions. Under the STAR Governance Rules, a director is not independent if he or
she (i) entertains significant relationships of an economic nature, directly,
indirectly or on behalf of third parties, with the issuer or its affiliates
(that is, its subsidiaries, executive directors or controlling shareholder(s));
(ii) holds, directly, indirectly or on behalf of third parties, an equity
interest affording control or a significant influence over the issuer; (iii) is
a party to a shareholders agreement for the control of the issuer; or (iv) has
close family relations with an executive director, controlling shareholder or
other persons who do not themselves qualify as independent. The following
economic relationships are deemed significant for purposes of the director
independence requirements: (a) business relationships entertained in the
current or the previous year, including through companies which the director
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of, unless the relationships are at market conditions, are not such as to
influence the directors autonomous judgment and do not have a value exceeding
5% of the annual turnover of either party to the transaction; (b) professional
services rendered, including through a partnership, in the current or the
previous year, unless the services are rendered at market conditions, are not
such as to influence the directors autonomous judgment and the consideration
does not exceed 5% of the directors annual income or  200,000; and (c)
employment relationships or serving as an executive director in the previous
three years. Compliance with the independence requirements is assessed periodically by
our board of directors. The ISE may request information as regards compliance. As of the date of this years annual compliance report to the ISE, our
board consisted of 11 directors, 6 of whom qualified as independent directors
under the STAR Governance Rules. The members of our board of statutory auditors must meet the independence
requirements mandated by Italian law. Statutory auditors independence is
assessed on the basis of a few general principles, rather than detailed rules.
In particular, a person who (i) is a director, or the spouse or a close
relative of a director, of our company or any of our affiliates; (ii) has an
employment or consulting or similar relationship with our company or any of our
affiliates; or (iii) has an economic relationship with us or any of our
affiliates which might compromise his/her independence, cannot be appointed to
our board of statutory auditors. Although there is no formal cooling off
requirement, if a statutory auditor who is a registered chartered accountant
(i) during his term entertains, or entertained in the two years prior to the
appointment, a regular or material consulting relationship with the company
that appointed him as statutory auditor or with any of its subsidiaries, or
(ii) during his term is employed by, or serves as a director of - or was
employed or served as a director in the three years prior to the appointment -
the company that appointed him as statutory auditor or any of its controlling
entities, such auditors licence may be suspended or withdrawn. Finally, we are
required to provide in our By-laws a mechanism to permit minority shareholders
to elect one statutory auditor. See By-LawsStatutory Auditors. At the May
6, 2004 shareholders meeting, at which our current statutory auditors were
appointed, minority shareholders did not exercise this right. Executive Sessions NYSE domestic company standards. Non-executive directors of U.S.
companies listed on the NYSE must meet regularly in executive sessions, and
independent directors should meet alone in an executive session at least once a
year. Our practice. In Italy, neither non-executive directors nor independent
directors are required to meet in executive sessions. The members of our board
of statutory auditors are required to meet at least once every 90 days. Audit Committee and Internal Audit Function NYSE domestic company standards. U.S. companies listed on the NYSE are
required to establish an audit committee that satisfies the requirements of
Rule 10A-3 under the Exchange Act and certain additional requirements set by
the NYSE. In particular, all members of this committee must be independent and
the committee must adopt a written charter. The committees prescribed
responsibilities include (i) the appointment, compensation, retention and
oversight of the external auditors; (ii) establishing procedures for the
handling of whistle blower complaints; (iii) discussion of financial
reporting and internal control issues and critical accounting policies
(including through executive sessions with the external auditors); (iv) the
approval of audit and non-audit services performed by the external 93




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auditors and (v) the adoption of an annual performance evaluation. A
company must also have an internal audit function, which may be out-sourced,
except to the independent auditor. Our practice. Rule 10A-3 under the Exchange Act provides that foreign
private issuers with a board of statutory auditors established in accordance
with local law or listing requirements and meeting specified requirements with
regard to independence and responsibilities (including the performance of most
of the specific tasks assigned to audit committees by the rule, to the extent
permitted by local law), (the Statutory Auditor Requirements) are exempt from
the audit committee requirements established by the rule. As a foreign private
issuer, we must comply with these requirements or qualify for an exemption by
July 31, 2005. We are in the process of evaluating the impact of these rules on
our corporate governance system and have not yet determined whether we will (i)
seek to take advantage, to the extent possible, of the exemption afforded to
issuers having a board of statutory auditors that meets the Statutory Auditor
Requirements, including if need be by expanding the scope of duties of our
board of statutory auditors, to the extent permitted by law; or, alternatively,
(ii) comply with the audit committee requirements by expanding, to the extent
possible under Italian law, the current mandate of our internal control
committee or otherwise. We have an internal audit function, which we have not
out-sourced. Compensation Committee NYSE domestic company standards. Under NYSE standards, the compensation
of the chief executive officer of U.S. domestic companies must be approved by a
compensation committee (or equivalent) comprised solely of independent
directors. The compensation committee must also make recommendations to the
board of directors with regard to the compensation of other officers, incentive
compensation plans and equity-based plans. Disclosure of individual management
compensation information for these companies is mandated by the Exchange Acts
proxy rules, from which foreign private issuers are generally exempt. Our practice. As a matter of Italian law, the compensation of executive
directors is determined by the board of directors, while our shareholders
determine the compensation of non-executive directors. The compensation of our
executive directors, including the chairman and the managing director, is
proposed by our compensation committee and approved by our board of directors.
Our compensation committee also has the authority to determine the remuneration
of our senior managers. See Item 6. Directors, Senior Management and
EmployeesBoard Committees. Our equity-based compensation plans are proposed
by our compensation committee and approved by our board of directors. The
Corporate Governance Code recommends that a majority of the members of the
compensation committee be non-executive directors. All of the five members of
our compensation committee are non-executive directors (two of whom qualify as
independent under the criteria described above). Our compensation committee
does not produce a compensation report. We disclose the compensation of each
of the members of our board of directors (including our managing director) in
our annual financial statements prepared in accordance with Italian GAAP as
well as in item 6 of this Annual Report on Form 20-F. Nominating Committee NYSE domestic company standards. Under NYSE standards, a U.S. domestic
company must have a nominating committee (or equivalent) responsible for
nominating directors comprised solely of independent directors. Our practice. We do not have a nominating committee (or equivalent)
responsible for nominating our directors. Directors may be nominated by any of
our shareholders or our board of directors. See By-LawsBoard of Directors. 94




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Corporate Governance/Code of Ethics NYSE domestic company standards. Under NYSE standards, a company must
adopt governance guidelines and a code of business conduct and ethics for
directors, officers and employees. A company must also publish these items on
its website and provide printed copies on request. Section 406 of the
Sarbanes-Oxley Act requires a company to disclose whether it has adopted a code
of ethics for its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, and if not, the reasons why it has not done so. The NYSE listing
standards applicable to U.S. companies provide that codes of conduct and ethics
should address, at a minimum, conflicts of interest; corporate opportunities;
confidentiality; fair dealing; protection and use of company assets; legal
compliance; and reporting of illegal and unethical behavior. Corporate
governance guidelines must address, at a minimum, directors qualifications,
responsibilities and compensation; access to management and independent
advisers; management succession; director orientation and continuing education;
and annual performance evaluation of the board. Our practice. We have adopted certain corporate governance guidelines
(including with respect to our internal control system and internal dealing).
As noted in Item 16B of this annual report, we have also adopted a code of
conduct and a code of ethics for our directors, employees and others acting on
our behalf which, together with our guidelines for the treatment of
confidential information, constitute a code of ethics as defined in Section
406 of the Sarbanes-Oxley Act. We refer to these documents, collectively, as
our code of ethics. We believe that our code of ethics addresses the relevant issues
contemplated by the NYSE standards applicable to U.S companies noted above.
Our corporate governance guidelines, on the other hand, do not address all of
the issues contemplated by the NYSE standards. As noted above, we must issue an annual report describing our corporate
governance system and disclosing the level of our compliance with the
recommendations of the Corporate Governance Code. Certifications as to Violations of NYSE Standards NYSE domestic company standards. Under NYSE listing standards, the chief
executive officer of a U.S. company must certify annually that he or she is
unaware of any violation by the company of the NYSE corporate governance
standards. This certification must be included in the companys annual report
to shareholders (or, if no annual report is prepared, its Form 10-K). The
chief executive officer must also notify the NYSE in writing if any executive
officer becomes aware of any material non-compliance with the NYSE corporate
governance standards. Our practice. Under the NYSE standards, we are required only to notify
the NYSE in writing if any executive officer becomes aware of any material
non-compliance with NYSE corporate governance standards. Shareholder Approval of Adoption and Modification of Equity Compensation Plans NYSE domestic company standards. Shareholders of a U.S. company listed on
the NYSE must approve the adoption of and any material revision to the
companys equity compensation plans, with certain exceptions. Our practice. Although our shareholders must authorize (i) the issuance
of shares in connection with capital increases, and (ii) the buy back and
resale of our own shares, the adoption of equity compensation plans does not
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Material Contracts On June 29, 2001, we entered into a sale and leaseback transaction with
Locafit S.p.A. with respect to our Bologna production facility. Our agreements
with regard to this transaction are described in Item 5. Operating and
Financial Review and ProspectsOther Financial Transactions. On July 2, 2001, we entered into a Credit-Linked transaction in which we
acquired a  15.0 million note issued by the London branch of Banca Nazionale
del Lavoro. You should read Item 5. Operating and Financial Review and
ProspectsOther Financial Transactions for a description of this transaction. On December 30, 2002, we entered into an agreement pursuant to which we
assigned  26.7 million (nominal value) of our trade receivables to Ducati
Desmo Finance 1 S.r.l. for the year 2002 and  116.0 million (nominal value)
for the year 2003. Our agreements with regard to this transaction are
described in Item 5. Operating and Financial Review and ProspectsOther
Financial Transactions. 
 Exchange Controls No exchange control consent is required in Italy for the transfer to
persons outside of Italy of dividends or other distribution with respect to, or
of the proceeds from the sale of, shares of an Italian company. However, Italian resident and non-resident investors who transfer,
directly or indirectly (through banks or other intermediaries) into or out of
Italy, cash, investments or other securities in excess of  12,500 must report
all such transfers to the Italian Exchange Office (Ufficio Italiano Cambi or
UIC). In the case of indirect transfers, banks or other intermediaries are
required to maintain records of all such transfers for five years for
inspection by Italian tax and judicial authorities. Non-compliance with these
reporting and record-keeping requirements may result in administrative fines
or, in the case of false reporting or in certain cases of incomplete reporting,
criminal penalties. The UIC is required to maintain reports for a period of
ten years and may use such reports, directly or through other government
offices, to police money laundering, tax evasion and any other crime or
violation. Individuals, non-profit entities and partnerships that are residents of
Italy must disclose on their annual tax returns all investments and financial
assets held outside Italy, as well as the total amount of transfers to, from,
within and between countries other than Italy relating to such foreign
investments or financial assets, even if at the end of the taxable period
foreign investments or financial assets are no longer owned. No such tax
disclosure is required if (i) the foreign investments or financial assets are
exempt from income tax; or (ii) the total value of the foreign investments or
financial assets at the end of the taxable period or the total amount of the
transfers effected during the fiscal year does not exceed  12,500. Corporate
residents of Italy are exempt from these tax disclosure requirements with
respect to their annual tax returns because this information is required to be
discussed in their financial statements. We cannot assure you that the present regulatory environment in or outside
Italy will continue or that particular policies presently in effect will be
maintained, although Italy is required to maintain certain regulations and
policies by virtue of its membership in the European Union and other
international organizations and its adherence to various bilateral and
multilateral international agreements. 
 Taxation The following is a summary of certain United States federal and Italian
tax matters. The summary contains a description of the principal United States
federal and Italian tax consequences of the 96




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purchase, ownership and disposition of ADSs by a holder who is a citizen
or resident of the United States or who otherwise will be subject to United
States federal income tax on a net income basis in respect of the ADSs. This
summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a decision to purchase ADSs. In
particular, the summary deals only with beneficial owners who will hold shares
or ADSs as capital assets and does not address the tax treatment of a
beneficial owner who owns 10.0% or more of the voting shares of DMH and does
not discuss the treatment of ADSs that are held in connection with a permanent
establishment or fixed base through which a beneficial owner carries on or
performs personal services in Italy. The summary is based upon tax laws and practice of the United States and
Italy as in effect on the date of this annual report. Prospective purchasers
and current holders of shares or ADSs are advised to consult their own tax
advisors as to the U.S., Italian or other tax consequences of the purchase,
beneficial ownership and disposition of ADSs, including, in particular, the
effect of any state, local or national tax laws. For purposes of the summary, beneficial owners of ADSs who are considered
residents of the United States for purposes of the current income tax
convention between the United States and Italy (the Treaty) and are not
subject to an anti-treaty shopping provision, are referred to as U.S.
holders. Beneficial owners who are citizens or residents of the United
States, corporations organized under U.S. law and U.S. partnerships, estates or
trusts (to the extent their income is subject to U.S. tax either directly or in
the hands of partners or beneficiaries) generally will be considered to be
residents of the United States under the Treaty. Special rules apply to U.S.
holders that are also residents of Italy. A new tax treaty to replace the
current Treaty was signed on August 25, 1999, but has not yet been ratified.
The new treaty would not change significantly the provisions of the current
Treaty that are discussed below (except that it would clarify the availability
of benefits to certain tax-exempt organizations). These laws are subject to
change, possibly on a retroactive basis. For purposes of the Treaty and the United States Internal Revenue Code of
1986, holders of American Depositary Receipts evidencing ADSs will be treated
as the beneficial owners of the underlying shares represented by those ADSs. Withholding Tax on Dividends. Italian law provides for the withholding of
income tax at a 27.0% rate on dividends paid by Italian companies to
shareholders who are not residents of Italy for tax purposes. Accordingly, the
amount initially made available to the Depositary for payment to U.S. holders
will reflect withholding at the 27.0% rate. Under domestic Italian law, a non-resident holder of shares of common
stock may recover up to four-ninths of the tax withheld on dividends by
presenting evidence to the Italian tax authorities that income tax has been
fully paid on the dividends in the non-resident holders country of residence
in an amount at least equal to the total refund claimed. Non-resident holders
seeking such payments from the Italian tax authorities have experienced
extensive delays and incurred expenses. However, the 27.0% withholding tax may be reduced pursuant to an income
tax convention between Italy and the non-resident holders country of
residence. The Treaty provides for a 15.0% withholding tax. Under current Italian law, all shares of Italian listed companies
(including DMHs shares) must be held in a centralized clearing system
authorized by CONSOB. Under applicable tax provisions, if the ordinary shares
are held through the centralized clearing system managed by Monte Titoli (the
only such system currently authorized in Italy), no withholding tax on
dividends is applied by DMH. Instead of the withholding tax, a substitute tax
(imposta sostitutiva) is applied on dividend distributions to non-resident 97




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holders of ordinary shares (or ADSs relating to such shares) at a rate
equal to the withholding tax that would otherwise be due. The substitute tax
is applied by the resident or non-resident Intermediary (as defined by CONSOB
Regulation 11768 of December 23, 1998) with which the ordinary shares are
deposited and which participates in the Monte Titoli system (directly or
through a foreign centralized clearing system participating in the Monte Titoli
system). The procedures to be followed by a non-resident holder in order for
the Intermediary with which the ordinary shares are deposited to apply a
reduced rate of tax pursuant to an applicable income tax convention are as
follows: the Intermediary must receive (i) a declaration of the non-resident
holder that contains certain data identifying the non-resident holder and
indicating the existence of all the conditions necessary for the application of
the relevant income tax convention and the determination of the applicable
treaty rate of withholding and (ii) a certification by the tax authorities of
the non-resident holders country of residence that the holder is a resident of
that country for purposes of the income tax convention and, as far as it is
known to such authorities, the holder has no permanent establishment in Italy
(which certificate will be effective until March 31 of the year following
submission). If the ordinary shares are deposited with a non-resident
Intermediary, such Intermediary must appoint as its fiscal representative in
Italy a bank or an investment services company that is resident in Italy, or
the permanent establishment in Italy of a non-resident bank or investment
services company, or a company licensed to manage a centralized depository and
clearing system, to carry out all duties and obligations relating to the
application and administration of the substitute tax. Since the shares underlying the ADSs will be held by the custodian in the
centralized clearing system managed by Monte Titoli, the substitute tax regime
described above will apply to the ADSs. In order to enable eligible U.S.
holders to obtain a reduction at source or a refund of withholding tax under
the Treaty, DMH and the Depositary have agreed to certain procedures.
According to such procedures, the Depositary will send holders of the ADSs
certain instructions before the dividend payment date specifying the
documentation required and the deadlines for submission. The documentation
generally will include the holders declaration and the tax certification
specified under points (i) and (ii) in the preceding paragraph. In order to
comply with the documentation described under point (ii) above, eligible U.S.
holders must obtain a certificate of residence from the U.S. Internal Revenue
Service (Form 6166) with respect to each dividend payment, unless a previously
filed certification will be effective on the dividend payment date, and produce
it together with a statement whereby the U.S. holder represents to be a U.S.
resident individual or corporation and does not maintain a permanent
establishment or a fixed base in Italy. The time for processing requests for
certification by the Internal Revenue Service normally is six to eight weeks.
Accordingly, holders requiring this certification should submit their requests
to the Internal Revenue Service as soon as possible after receiving
instructions from the Depositary. In the case of ADSs held through a broker or
other financial intermediary, the required documentation should be delivered to
such financial intermediary for transmission to the Depositary. In all other
cases, eligible U.S. holders should deliver the required documentation directly
to the Depositary at least five business days prior to the date set for the
payment of dividends. If the documentation is not provided in the time allotted, or if the
Intermediary (i.e., the custodian in the case of the ADSs) determines that the
documentation does not satisfy the prescribed requirements or that applicable
law does not permit it to apply directly the reduced Treaty rate, the
Intermediary will withhold tax at the 27.0% rate, and eligible U.S. holders may
claim a Treaty refund of 12.0% of the dividend (representing the difference
between 27.0% and the 15.0% Treaty rate) directly from the Italian tax
authorities. U.S. residents seeking refunds from the Italian tax authorities
have encountered extensive delays and incurred expenses. Distributions of profits in kind will be subject to withholding tax. In
that case, prior to receiving the distribution, the holder will be required to
provide DMH with the funds to pay the relevant withholding tax. Distributions
of additional shares issued upon capitalization of reserves to beneficial 98




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owners with respect to their ADSs that are made as part of a pro rata
distribution to all shareholders of DMH generally will not be subject to
Italian tax. However, such additional shares will reduce the tax basis of each
single share for the calculation of the capital gains tax. The gross amount of dividends (that is, the amount before reduction for
Italian withholding tax) paid to U.S. holders of ADSs will be subject to U.S.
federal income taxation as dividend income and will not be eligible for the
dividends-received deduction allowed to domestic corporations. The Italian
withholding tax (less any refunds to which such holder is entitled under the
Treaty) will be treated as a foreign income tax which such holders may elect to
deduct in computing their taxable income or, subject to the limitations on
foreign tax credits generally, credit against their U.S. federal income tax
liability. Subject to certain exceptions for short-term and hedged positions, the
U.S. dollar amount of dividends received by an individual prior to January 1,
2009 with respect to our ADSs will be subject to taxation at a maximum rate of
15% if the dividends are qualified dividends. Dividends paid on our ADSs will
be treated as qualified dividends if we were not, in the year prior to the year
in which the dividend was paid, and are not, in the year in which the dividend
is paid, a passive foreign investment company (PFIC), foreign personal
holding company (FPHC) or foreign investment company (FIC). Based on our
audited financial statements and relevant market and shareholder data, we
believe that we were not treated as a PFIC, FPHC or FIC for U.S. federal income
tax purposes with respect to our 2003 taxable year. In addition, based on our
audited financial statements and our current expectations regarding the value
and nature of our assets, the sources and nature of our income, and relevant
market and shareholder data, we do not anticipate becoming a PFIC, FPHC or FIC
for our 2004 taxable year. Tax on Capital Gains. As of January 1, 2004, capital gains realized by
non-resident shareholders on the disposal of a qualified shareholding held as
a capital asset and not in connection with a permanent establishment or fixed
base through which such shareholders carry on or perform business services in
Italy are no longer subject to Italian capital gain tax (CGT) but are subject
to personal or corporate income tax, for an amount equal to 40% of the overall
gain. Losses can be offset against taxable gains for a corresponding amount
and, if in excess, can be carried forward up to four years.A qualified
shareholding is constituted by ordinary shares or ADSs and/or rights
representing more than 5.0% of a listed companys total share capital or more
than 2.0% of its share capital voting in the ordinary shareholders meeting. A
disposal of a qualified shareholding occurs if in any 12-month period
immediately following the date when a shareholding reaches one of the
thresholds illustrated above, the shareholder engages in disposals of shares or
ADSs that, individually or in aggregate, constitute a qualified shareholding.
The taxable gain realized by a non-resident shareholder who is an individual
would be subject to progressive personal income tax rates (currently, the
marginal tax rate is equal to 45.0%, plus a surcharge of up to 1.4%, depending
on the municipality in which the shareholder resides). The taxable gain
realized by a non-resident corporate shareholder would be subject to corporate
income tax, currently levied at a rate of 33.0%. Generally, CGT, levied at a rate of 12.5%, is imposed on gains realized
upon the transfer or sale of non-qualified shareholdings whether held within
or outside Italy. A non-qualified shareholding is constituted by an interest
in DMH which does not reach the thresholds described above. However, under
domestic law, an exemption applies to gains realized on the disposal of
non-qualified shareholdings in an Italian company the shares of which are
listed on a regulated market, such as the DMH shares, even when such
shareholdings are held in Italy. Furthermore, pursuant to the Treaty, a U.S. holder will not be subject to
Italian CGT unless such U.S. holder has a permanent establishment or fixed base
in Italy to which the ordinary shares or ADSs are effectively connected. To
this end, U.S. holders selling shares or ADSs and claiming Treaty benefits may
be required to produce appropriate documentation establishing that the above
mentioned conditions have 99




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been met. Other countries have executed income tax conventions with Italy
providing for a similar treatment of Italian CGT. No CGT will be imposed on
the deposit or withdrawal of shares in return for ADSs. U.S. holders of ADSs
will be subject to U.S. federal income tax on any capital gains to the same
extent as on other gains from the disposition of stock. Gains realized by U.S. holders on the sale or other disposition of ADSs or
shares generally will be subject to U.S. federal income tax as capital gains.
Such gain will be long-term capital gain if the ADSs or shares were held for
more than one year. The net amount of long-term capital gain recognized by an
individual U.S. holder generally is subject to taxation at a maximum rate of
20.0%; however, net long-term capital gain recognized by an individual U.S.
holder after May 5, 2003 and before January 1, 2009 generally is subject to
taxation at a maximum rate of 15.0%. Deposits and withdrawals of shares by a
U.S. holder in exchange for ADSs will not result in the realization of gain or
loss for U.S. federal income tax purposes. Transfer Tax. An Italian transfer tax is normally payable on the transfer
of shares in an Italian company. The transfer tax will not be payable with
respect to any transfer of shares or ADSs involving non-Italian residents
concluded either on a regulated market or with the intervention of a bank or an
investment services company. Estate and Gift Tax. As of October 25, 2001, the Italian estate and gift
tax has been abolished and consequently any transfer of shares or ADSs
occurring by reason of death or gift as of that date is no longer subject to
any Italian estate and gift tax. However, should a gift of shares or ADSs for a value exceeding 
180,759.91 (the Threshold) occur and the relationship between the donor and
the beneficiary not qualify for the exemption regime applicable to gifts made
in favor of certain family members (e.g., spouse, parents, children,
grandchildren), a registration tax of  129.11 would be due insofar as the gift
agreement is either executed or registered in Italy. The materiality threshold
is increased to  516,456.91 in case the beneficiary is either underage (i.e.,
younger than 18) or a person with a handicap recognized pursuant to applicable
law. 
 Documents on Display We are subject to the information reporting requirements of the Exchange
Act applicable to foreign private issuers. In accordance therewith, we file
reports, including annual reports on Form 20-F, periodic reports on Form 6-K
and other information with the U.S. Securities and Exchange Commission. These
materials, including this annual report on Form 20-F, are available for
inspection and copying at the Commissions Public Reference Room at 450 Fifth
Street, N.W., Washington D.C. 20549, and at the Commissions regional offices
at 175 West Jackson Boulevard, Suite 500, Chicago, Illinois 60604, and 233
Broadway, New York, New York, 10279. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. The Form
20-F and reports and other information filed by us with the Commission will
also be available for inspection by ADS holders at the Corporate Trust Office
of The Bank of New York at 101 Barclay Street, New York, New York 10286. 
 Item 11. Quantitative and Qualitative Disclosures About Market Risk Our primary market risk exposure is foreign currency risk, which can
adversely affect our sales and operating profits. To manage this risk, we
enter into forward exchange contracts. At December 31, 2003, we had  72.3
million in forward exchange contracts, compared to  81.6 million at December
31, 2002. We are also exposed to interest rate risk associated with
approximately  15.3 million of short and long-term bank loans, bearing
variable interest rates, which we obtained in May and October of 2003 to pay
off a portion of the Notes so as to reduce the interest rate costs associated
with the same. To manage 100




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this interest rate risk exposure, we enter into interest rate swap
agreements and interest rate cap agreements. The following discussion should be read in conjunction with Notes 1(c),
18, 29 and 31 to our audited financial statements, which provide more
information on our derivative instruments. Exchange Rate Sensitivity As our sales are denominated in various foreign currencies (primarily the
U.S. dollar, Japanese yen and U.K. pound sterling, in which collectively 28% of
our sales were denominated in 2003), our sales and operating results are
affected by the impact of fluctuations in foreign currency exchange rates on
product prices and certain operating expenses. We estimate that if the average
exchange rate in 2004 of the U.S. dollar, the Japanese yen and the U.K. pound
sterling decreased by 10.0%, our operating income for the year ended December
31, 2003 would have decreased by  8.0 million. We engage in certain foreign exchange transactions to hedge portions of
our transactional exposure to fluctuations in exchange rates between the euro
and these foreign currencies. Our managements policy until December 2003 was
to hedge approximately 75.0% of the estimate of annual sales denominated in
foreign currencies made in connection with our annual budget. Beginning
January 2004, we hedge 100% of the expected cash flow from sales denominated in
foreign currencies for the subsequent 18 months on a rolling basis. We are not
a party to leveraged derivatives and do not hold or issue derivative
instruments for speculative purposes. At December 31, 2003, forward exchange
contracts outstanding were for a notional amount of  72.3 million, relating to
U.S. dollars ( 31.1 million), Japanese yen ( 13.0 million), Swiss francs (
11.1 million), Austrian dollars ( 9.9 million) and U.K. pounds sterling ( 7.2
million). The table below provides information at December 31, 2003 about our
receivables and derivative financial instruments by functional currency and
presents such information in euro. The table summarizes information on
instruments and transactions that are sensitive to foreign currency exchange
rates. The estimated fair value of receivables is considered to approximate
their carrying value because receivables have short maturity. For foreign
currency forward exchange agreements, the table presents the notional amounts
and weighted average exchange rates by expected (contractual) maturity dates.
These notional amounts generally are used to calculate the contractual payments
to be exchanged under the contract. Expected Maturity DateAt December 31, 2003
    
    2004
    
    2005
    
    Beyond 2005
    
    Total
    
    Fair Value(euro equivalent in thousands,except exchange rate information)ReceivablesU.K. Pound Sterling
    
    
    9,791
    
    
    
    
    
    
    
    
    
    
    
    9,791
    
    
    
    9,791U.S. Dollar
    
    
    10,175
    
    
    
    
    
    
    
    
    
    
    
    10,175
    
    
    
    10,175Japanese Yen
    
    
    10,626
    
    
    
    
    
    
    
    
    
    
    
    10,626
    
    
    
    10,626Australian Dollar
    
    
    3,534
    
    
    
    
    
    
    
    
    
    
    
    3,534
    
    
    
    3,534CHF (Swiss francs)
    
    
    3,089
    
    
    
    
    
    
    
    
    
    
    
    3,089
    
    
    
    3,089Forward Exchange ContractsU.K. Pound SterlingNotional Amount
    
    
    7,183
    
    
    
    
    
    
    
    
    
    
    
    7,183
    
    
    
    171Average contract exchange rate
    
    
    0.6961
    
    
    
    
    
    
    
    
    
    
    
    0.6961
    
    
    
    
 101




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Expected Maturity DateAt December 31, 2003
    
    2004
    
    2005
    
    Beyond 2005
    
    Total
    
    Fair Value(euro equivalent in thousands,except exchange rate information)U.S. DollarNotional Amount
    
    
    31,094
    
    
    
    
    
    
    
    
    
    
    
    31,094
    
    
    
    3,216Average contract exchange rate
    
    
    1.1256
    
    
    
    
    
    
    
    
    
    
    
    1.1256Japanese YenNotional Amount
    
    
    13,037
    
    
    
    
    
    
    
    
    
    
    
    13,037
    
    
    
    480Average contract exchange rate
    
    
    128.10
    
    
    
    
    
    
    
    
    
    
    
    128.10
    
    
    
    Australian DollarNotional Amount
    
    
    9,859
    
    
    
    
    
    
    
    
    
    
    
    9,859
    
    
    
    (49)Average contract exchange rate
    
    
    1.7243
    
    
    
    
    
    
    
    
    
    
    
    1.7243
    
    
    
    CHFNotional Amount
    
    
    11,166
    
    
    
    
    
    
    
    
    
    
    
    11,166
    
    
    
    126Average contract exchange rate
    
    
    1.5224
    
    
    
    
    
    
    
    
    
    
    
    1.5224
    
    
    
    OptionsU.S. Dollar
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Japanese Yen
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 At December 31, 2003, we had forward exchange contracts denominated in
U.K. pounds sterling with a notional amount of  7.2 million (with an average
contract exchange rate of £ 0.6961), in U.S. dollars with a notional amount of
 31.1 million (with an average contract exchange rate of US$ 1.1256), in
Australian dollars with a notional amount of  9.9 million (with an average
contract exchange rate of AUD 1.7243), in Japanese Yen with a notional amount
of  13.0 million (with an average contract exchange rate of JPY 128.10), and
in Swiss franc with a notional amount of  11.2 million (with an average
contract exchange rate of CHF 1.5224). Interest Rate Sensitivity Our primary source of debt financing is the Notes, which are subject to a
fixed interest rate of 6.50% per annum, and mature on May 31, 2005. Because
the interest rate on the Notes is fixed, our exposure to market risk for
changes in interest rates has been substantially eliminated. Nevertheless, we
are exposed to interest rate risk associated with short- and long-term
financings that we obtain under commercial bank credit facilities available to
us on which we are charged a variable interest rate. On May 30, 2003, we
obtained two such short-term bank loans in an aggregate principal amount of 
10.3 million in order to repurchase a portion of the Notes and reduce
associated interest rate costs. These two bank-loans are repayable within 18
months less one day, unless renewed, and bear interest at 3-month Euribor. To
hedge the risk associated with this variable interest rate, we entered into
interest rate swap agreements that fixed the interest rate at 2.95% on  5.3
million and 2.8% on  5.0 million, thereby together equaling the aggregate 
10.3 million principal amount of the short-term loans. On October 27, 2003, we
also obtained a long-term loan in a principal amount of  5.0 million in order
to repurchase another portion of the Notes and further reduce associated
interest rate costs. This loan is repayable within 18 months less one day,
bears interest at 3-month Euribor and is linked to an interest-rate swap that
fixes the interest rate at 2.72%. At December 31, 2003, we had interest rate
swap agreements relating to financial liabilities recorded in our financial
statements for a total principal amount equal to the aggregate principal amount
of  15.3 million in short and long-term loans we had at such date. We
estimate that if the average interest rates applicable to our variable interest
rate debt increased by one percentage point, our interest expense for the year
ended December 31, 2003 would have increased by  1.2 million. 102




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Item 12. Description of Securities Other than Equity Securities Not applicable. 
 PART II 
 Item 13. Defaults, Dividends Averages and Delinquencies None. 
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds Not applicable. 
 Item 15. Disclosure Controls and Procedures As of December 31, 2003, we carried out an evaluation under the
supervision and with the participation of our management, including our
managing director and manager of finance, of the effectiveness of the design
and operation of our disclosure controls and procedures. There are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon and as of the date of our
evaluation, our managing director and manager of finance concluded that the
disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed in the reports we file and
submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported as and when required. There has been no change in our internal control over financial reporting
during 2003 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. 
 Item 16. [Reserved] 
 Item 16A. Audit Committee Financial Expert We are currently not required to, and do not, have an audit committee.
While certain members of our board of directors have varying degrees of
financial and accounting experience, our board has not yet determined that any
of its members is an audit committee financial expert within the meaning of
this Item 16A. We expect that the board will designate an audit committee
financial expert in 2004. 
 Item 16B. Code of Ethics We have adopted a code of ethics, made up of a code of conduct, a code of
ethics and our guidelines for the treatment of confidential information, that,
collectively, constitute a code of ethics as defined in Item 16B of Form 20-F
under the Securities Exchange Act of 1934, as amended. Our code of ethics
applies to our managing director, to our manager of finance and to persons
performing similar functions, as well as to our directors, other officers and
employees. Our code of ethics is available on our website at www.ducati.com.
If we amend the provisions of our code of ethics that apply to our managing
director and to our manager of finance and persons performing similar
functions, or if we grant any 103




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##### Table of Contents



waiver of such provisions, we will disclose such amendment or waiver on
our website at the same address. 
 Item 16C. Principal Accountant Fees and Services Audit and Non-Audit Fees The following table sets forth the fees billed to us by our independent
auditors, KPMG S.p.A., during the fiscal years ended December 31, 2002 and
2003: Year ended December 31,2002
    
    2003Audit fees
    
    
    345,336
    
    
    
    351,516Audit-related fees.
    
    
    6,800
    
    
    
    7,600Tax fees
    
    
    261,240
    
    
    
    174,142Other feesTotal fees
    
    
    613,376
    
    
    
    533,258
 Audit fees in the above table are the aggregate fees billed by KPMG S.p.A.
in connection with the audit of our annual financial statements and the review
of our interim financial statements. Audit-related fees in the above table are
the aggregate fees billed by KPMG S.p.A. for other services of a non-material
amount. Tax fees in the above table are fees billed by KPMG S.p.A. for tax
compliance and tax advice. Audit Committee Approval Policies and Procedures Our audit committee has not established pre-approval policies and
procedures for the engagement of our independent auditors for services. Our
audit committee expressly approves on a case-by-case basis any engagement of
our independent auditors for audit and non-audit services provided to our
subsidiaries or to us. 
 Item 17. Financial Statements Not applicable. 
 Item 18. Financial Statements Independent
Auditors Report of April 14, 2004
    
    
    F-1Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    F-2Consolidated Statements of Operations for the years ended December
31, 2001, 2002 and 2003
    
    
    F-3Consolidated Statements of Changes of Shareholders Equity for the
years ended December 31, 2001, 2002 and 2003
    
    
    F-4Consolidated Statements of Cash Flows for the Years Ended December
31, 2001, 2002 and 2003
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6Schedules:Schedule II  Valuation and Qualifying Accounts For the Years Ended
December 31, 2001, 2002 and 2003
    
    
    F-58
 104




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##### Table of Contents



Item 19. Exhibits ExhibitNumber
    
    Description1.1
    
    By-laws of the Company, amended as of May 6, 2004.2.1
    
    Deposit Agreement among Ducati Motor Holding S.p.A. and The Bank of New
York, as Depositary, and the owners of American Depositary Receipts,
dated March 31, 1999 (incorporated by reference to our Registration
Statement on Form F-6, File No. 333-10026).2.2
    
    Fiscal Agency Agreement dated May 31, 2000, relating to Euro
100,000,000 6.50 percent. Rate Notes due 2005 (incorporated by
reference to our Registration Statement on Form 20-F, dated July 2,
2001, file No. 1-14908).8
    
    Subsidiaries as of the end of the year covered by this annual report:
see Item 4. Information on the CompanyOrganizational Structure12.1
    
    Certification by Federico Minoli, Managing Director, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification by Enrico DOnofrio, Manager of Finance, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.13.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 105




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##### Table of Contents



Signatures The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. DUCATI MOTOR HOLDING S.P.A.
 /s/ Federico MinoliFederico MinoliManaging Director/s/ Enrico DOnofrioEnrico DOnofrioManager of Finance
 Date: June 30, 2004 106




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##### Table of Contents



Report of Independent Public Accounting Firm To the Board of Directors and Shareholders of Ducati Motor Holding S.p.A. We have audited the accompanying consolidated balance sheets of Ducati
Motor Holding S.p.A. and subsidiaries at December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders equity and cash
flows for each of the years in the three-year period ended December 31, 2003.
In connection with our audits of the consolidated financial statements, we have
also audited the related financial statement schedule (Schedule II  Valuation
and Qualifying Accounts). These consolidated financial statements and the
financial statement schedule are the responsibility of the management of Ducati
Motor Holding S.p.A. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits. We conducted our audits in accordance with auditing standards generally
accepted in Italy and in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ducati
Motor Holding S.p.A. and subsidiaries at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in Italy. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements as a whole, present fairly, in all material
respects, the information set forth therein. Established accounting principles in the Republic of Italy vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of such
differences is presented in Notes 29, 30 and 31 to the consolidated financial
statements. /s/ KPMG S.p.A. Bologna, Italy April 14, 2004 F-1




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##### Table of Contents



Ducati Motor Holding S.p.A. and subsidiaries Consolidated Balance Sheets
(expressed in  000) December 31,
    
    December 31,2002
    
    2003ASSETSCurrent assets:Cash and cash equivalents (note 2)
    
    
    23,960
    
    
    
    23,582Trade receivables, net (note 3)
    
    
    82,042
    
    
    
    80,421Inventories (note 4)
    
    
    111,427
    
    
    
    104,774Deferred income tax assets, net (note 27)
    
    
    15,558
    
    
    
    17,111Other current assets (note 5)
    
    
    13,707
    
    
    
    13,695Total current assets
    
    
    246,694
    
    
    
    239,583Non-current assets:Property, plant and equipment, net
    
    
    111,975
    
    
    
    126,758Less accumulated depreciation
    
    
    (45,573
    )
    
    
    (59,591
    )Property, plant and equipment, net (notes 6)
    
    
    66,402
    
    
    
    67,167Intangible assets, net (note 7)
    
    
    130,518
    
    
    
    124,721Equity investments (note 8)
    
    
    12
    
    
    
    12Other long-term assets (note 9)
    
    
    15,616
    
    
    
    25,550Total assets
    
    
    459,242
    
    
    
    457,033LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short term bank borrowings (note 10)
    
    
    39,293
    
    
    
    65,587Current portion of long-term debt (note 10)
    
    
    3,230
    
    
    
    3,740Accounts payable  trade (note 11)
    
    
    95,112
    
    
    
    89,503Accrued expenses and other liabilities (note 12)
    
    
    16,145
    
    
    
    15,930Provisions for risks and charges  current portion (note 13)
    
    
    8,577
    
    
    
    4,011Income and other taxes payable (notes 14 and 27)
    
    
    5,354
    
    
    
    12,212Total current liabilities
    
    
    167,711
    
    
    
    190,983Long-term liabilities:Long-term debt, less current portion (note 10)
    
    
    91,000
    
    
    
    81,882Employees leaving entitlements (note 15)
    
    
    7,126
    
    
    
    8,277Deferred income taxes (note 27)
    
    
    11,874
    
    
    
    35Other long-term liabilities (note 16)
    
    
    17,792
    
    
    
    14,939Provisions for risks and charges-long term portion (note 13)
    
    
    3,998
    
    
    
    2,518Total long-term liabilities
    
    
    131,790
    
    
    
    107,651Total liabilities
    
    
    299,501
    
    
    
    298,634Shareholders equity: (note 17)Share capital
    
    
    82,420
    
    
    
    82,420Share premium
    
    
    19,879
    
    
    
    19,488Other reserves
    
    
    27,491
    
    
    
    49,909Retained earnings
    
    
    28,036
    
    
    
    6,048Foreign currency translation adjustment
    
    
    1,915
    
    
    
    534Total shareholders equity
    
    
    159,741
    
    
    
    158,399Commitments and contingent liabilities (notes 10 and 18)
    
    
    
    
    
    
    Total liabilities and shareholders equity
    
    
    459,242
    
    
    
    457,033
 See accompanying notes to consolidated financial statements. F-2




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##### Table of Contents



Ducati Motor Holding S.p.A. and subsidiaries Consolidated Statements of Operations
(expressed in  000, except per share data which is stated in ) Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003Net sales (note 19)
    
    
    407,815
    
    
    
    412,971
    
    
    
    388,241Cost of goods sold (excluding depreciation) (note 20)
    
    
    (241,266
    )
    
    
    (249,264
    )
    
    
    (253,406
    )Gross profit (excluding
depreciation) (note 19)
    
    
    166,549
    
    
    
    163,707
    
    
    
    134,835Selling, general and administrative expenses
(excluding depreciation) (note 21)
    
    
    (107,968
    )
    
    
    (122,032
    )
    
    
    (112,806
    )Depreciation of property, plant and equipment (note
22)
    
    
    (9,998
    )
    
    
    (11,993
    )
    
    
    (15,013
    )Amortization of intangible assets (note 23)
    
    
    (24,582
    )
    
    
    (21,991
    )
    
    
    (23,876
    )Other operating revenues (note 24)
    
    
    7,547
    
    
    
    10,795
    
    
    
    23,178Operating income
    
    
    31,548
    
    
    
    18,486
    
    
    
    6,318Interest income (note 25)
    
    
    1,264
    
    
    
    1,380
    
    
    
    2,198Interest expense (note 25)
    
    
    (14,014
    )
    
    
    (12,852
    )
    
    
    (11,471
    )Foreign exchange gain/(loss), net
    
    
    677
    
    
    
    1,363
    
    
    
    2,517Other non-operating income/(expense), net (note 26)
    
    
    (28
    )
    
    
    135
    
    
    
    558Profit before income taxes
    
    
    19,447
    
    
    
    8,511
    
    
    
    120Income taxes (note 27)
    
    
    (8,894
    )
    
    
    (1,986
    )
    
    
    (80
    )Net profit
    
    
    10,553
    
    
    
    6,525
    
    
    
    40Net profit per share
    
    
    0.07
    
    
    
    0.04
    
    
    
    Number of shares outstanding (note 17)
    
    
    158,500,963
    
    
    
    158,500,963
    
    
    
    158,500,963
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



Ducati Motor Holding S.p.A. and subsidiaries Consolidated Statements of Shareholders Equity
(expressed in  000, except per share data which is stated in ) ForeignOther
    
    Retained
    
    currency
    
    TotalShare capital
    
    Share
    
    reserves
    
    earnings/
    
    translation
    
    ShareholdersShares
    
    Amount
    
    premium
    
    (note 17)
    
    (deficit)
    
    adjustment
    
    equityBalance at December
31, 2000
    
    
    158,271,963
    
    
    
    81,741
    
    
    
    23,566
    
    
    
    25,474
    
    
    
    9,802
    
    
    
    2,456
    
    
    
    143,039Capital increases
    
    
    229,000
    
    
    
    119
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165Allocation to other
reserves/
reclassification
(note 17)
    
    
    
    
    
    
    560
    
    
    
    (2,296
    )
    
    
    1,918
    
    
    
    (182
    )
    
    
    
    
    
    
    Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    840
    
    
    
    840Net profit of the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,553
    
    
    
    
    
    
    
    10,553Balance at December
31, 2001
    
    
    158,500,963
    
    
    
    82,420
    
    
    
    21,316
    
    
    
    27,392
    
    
    
    20,173
    
    
    
    3,296
    
    
    
    154,597Capital increases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allocation to other
reserves/
reclassification
(note 17)
    
    
    
    
    
    
    
    
    
    
    (1,437
    )
    
    
    99
    
    
    
    1,338
    
    
    
    
    
    
    
    Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,381
    )
    
    
    (1,381
    )Net profit of the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,525
    
    
    
    
    
    
    
    6,525Balance at December
31, 2002
    
    
    158,500,963
    
    
    
    82,420
    
    
    
    19,879
    
    
    
    27,491
    
    
    
    28,036
    
    
    
    1,915
    
    
    
    159,741Capital increases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allocation to other
reserves/
reclassification
(note 17)
    
    
    
    
    
    
    
    
    
    
    (391
    )
    
    
    22,418
    
    
    
    (22,028
    )
    
    
    
    
    
    
    Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,381
    )
    
    
    (1,381
    )Net profit of the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    40Balance at December
31, 2003
    
    
    158,500,963
    
    
    
    82,420
    
    
    
    19,488
    
    
    
    49,909
    
    
    
    6,048
    
    
    
    534
    
    
    
    158,399
 See accompanying notes to consolidated financial statements. F-4




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Ducati Motor Holding S.p.A. and subsidiaries Consolidated Statements of Cash Flows
(expressed in  000) Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003Cash flow from operating activities:Net profit
    
    
    10,553
    
    
    
    6,525
    
    
    
    40Adjustment to reconcile net profit to net cash provided by operating
activitiesForeign exchange translation adjustment
    
    
    840
    
    
    
    (1,380
    )
    
    
    (1,381
    )Amortization of intangible assets
    
    
    24,582
    
    
    
    21,991
    
    
    
    23,876Depreciation
of property, plant and equipment
    
    
    9,998
    
    
    
    11,993
    
    
    
    15,013Employees leaving entitlement
    
    
    944
    
    
    
    1,407
    
    
    
    1,151Deferred taxes
    
    
    5,631
    
    
    
    (1,639
    )
    
    
    (13,392
    )Changes in operating assets and liabilitiesTrade receivables
    
    
    (17,539
    )
    
    
    15,985
    
    
    
    1,621Inventories
    
    
    (8,621
    )
    
    
    (13,791
    )
    
    
    6,653Other current assets
    
    
    (1,908
    )
    
    
    (5,669
    )
    
    
    11,558Payables,
accrued expenses and other current liabilities
    
    
    (10,728
    )
    
    
    9,489
    
    
    
    (16,560
    )Net cash provided by operating activities
    
    
    13,752
    
    
    
    44,911
    
    
    
    28,579Cash flow from investing activitiesNet purchase
of property, plant and equipment
    
    
    (13,464
    )
    
    
    (23,819
    )
    
    
    (15,746
    )Net purchase of intangible assets
    
    
    (15,916
    )
    
    
    (20,509
    )
    
    
    (18,110
    )Sale/(purchase) of equity investments
    
    
    83
    
    
    
    
    
    
    
    Sale/(purchase) of long-term assets
    
    
    (5
    )
    
    
    (17
    )
    
    
    66Net cash used in investing activities
    
    
    (29,302
    )
    
    
    (44,345
    )
    
    
    (33,790
    )Cash flow from financing activitiesProceeds from issuance of ordinary shares
    
    
    165
    
    
    
    
    
    
    
    Movements in
bank borrowings  short term and long term
    
    
    40,326
    
    
    
    (310
    )
    
    
    30,169Other long term assets
    
    
    (15,000
    )
    
    
    
    
    
    
    (25,336
    )Net cash provided/(used) by financing activities
    
    
    (25,491
    )
    
    
    (310
    )
    
    
    4,833Net increase (decrease) in cash and cash equivalents
    
    
    9,941
    
    
    
    255
    
    
    
    (378
    )Cash and cash equivalents at beginning of year
    
    
    13,764
    
    
    
    23,705
    
    
    
    23,960Cash and cash equivalents at end of year
    
    
    23,705
    
    
    
    23,960
    
    
    
    23,582
 See accompanying notes to consolidated financial statements. F-5




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Ducati Motor Holding S.p.A. and subsidiaries
Notes to consolidated financial statements 1. Corporate events, organization and summary of significant accounting
policies 1.a Corporate events in the year ended December 31, 2003 Ducati France S.A. changed its name from Ducati France S.A. to Ducati
France S.A.S. (Società par Actions Simplifieé) on August 20, 2003, when the
0.1% minority interest was acquired by Ducati Motor Holding S.p.A. On January 27, 2004, Ducati Corse S.r.l. transferred 1% of the quota
capital of Ducati.Com S.r.l. to Ducati Motor Holding S.p.A. by private treaty
authenticated by Iacopo Bersani, public notary.
Furthermore, Ducati Benelux B.V. changed its name to Ducati North Europe B.V.
on February 11, 2004. Corporate boards As of December 31, 2003, the Board of Directors is made up of: Federico Minoli
    
    Chairman and Managing Director and member of the Executive CommitteeGiorgio Seragnoli
    
    Vice-Chairman and member of the Executive CommitteeMauro Benetton
    
    DirectorDavid Bonderman
    
    Director and member of the Compensation CommitteeAbel Halpern
    
    Director and member of the Executive Committee and of the Compensation CommitteePaolo Pietrogrande
    
    Director and member of the Compensation Committee and of the Internal Control CommitteeDante Razzano
    
    Director and member of the Executive Committee and of the Compensation CommitteeUlrich Weiss
    
    Director and member of the Compensation Committee and of the Internal Control CommitteeA. M. Marcello Foti
    
    Director and Chairman of the Internal Control CommiteeAndrea Lipparini
    
    DirectorGiles Thoorley
    
    Director
 At the meeting held on March 5, 2003, the Board of Directors of Ducati
Motor Holding S.p.A. (Holding or DMH or the Parent Company) co-opted onto
the Board, pursuant to art. 2386.1 of the Italian Civil Code, Alessandro Marco
Marcello Foti who, replacing Piero Ferrari who had resigned, was also appointed
as a member of the Internal Audit Committee. At that meeting, the Board of
Directors also confirmed Federico Minoli as Chairman of the Board of Directors
and appointed him as Managing Director, granting him all the powers of ordinary
and extraordinary administration exercised by the previous Managing Director,
Carlo Di Biagio, as authorised by the Board of Directors on May 9, 2002
(without prejudice to the concurrent powers granted to the Board and to the
Executive Committee), with the sole exception of those that by law or under the
articles of association cannot be delegated. Pursuant to art. 16.3 of the
articles of association, Federico Minoli, in view of his role as Managing
Director, continues to have the right to sit on the Executive Committee.
Following the resignation of Carlo Di Biagio, the Executive Committee has been
reduced to four members; however, the powers delegated to the Executive
Committee remain the same as those authorised by the Board of Directors on May
9, 2002. The Board also resolved to modify the remuneration and the special
termination indemnity of Federico Minoli (both as Chairman and as Managing
Director) as follows: (i) confirmation of the right to receive the retention
bonuses previously allocated to him by the Board in his role as Chairman; (ii)
confirmation of the allocation of an indemnity on termination as Managing
Director of the Company of US$ 1.2 million; (iii) recognition of compensation
as Managing Director of  250,000; (iv) confirmation of his compensation as
Chairman and CEO of Ducati North America, a subsidiary, of US$ 400,000 (plus
fixed bonus and benefits). At the meeting held on April 8, 2003, the Board of Directors co-opted
Andrea Lipparini onto the Board, pursuant to art. 2386.1 of the Italian Civil
Code. In addition, at the same Board meeting, Paolo Pietrogrande resigned as Chairman
of the Internal Audit Committee since the Board had just asked him to provide
certain consultancy services to the Company. Paolo Pietrogrande remains a
member of the Companys Internal Audit Committee. Subsequently, on July 7,
2003, the Internal Audit Committee appointed Alessandro Foti as Chairman of the
Internal Audit Committee. On May 6, 2003, the Shareholders Meeting appointed as members of the Companys
Board of Directors, until approval of the financial statements as of December
31, 2004, the two Directors (Alessandro Foti and Andrea Lipparini) previously
co-opted at earlier meetings of the Board of Directors. Both new Directors have
accepted their appointments.
At the meeting held on May 7, 2003, the Board of Directors of the parent
company also co-opted Giles Thorley onto the Board, pursuant to art. 2386.1 of
the Italian Civil Code. This Director, who will remain in office until the
next ordinary shareholders meeting, replaced David Choi who had resigned. F-6




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##### Table of Contents



At the meeting held on November 5, 2003, the Board of Directors of the
Parent Company requested Paolo Pietrogrande to provide certain consultancy
services to the Company on arms-length terms. Following publication of a self-regulation code of corporate governance
for quoted companies by Borsa Italiana S.p.A. (the Code), the Company has
adjusted its internal structure to the model of corporate organisation proposed
by the Code; the shareholders were given adequate information regarding the new
system of corporate governance at the meeting held on May 7, 2002 by means of a
report prepared specifically for the purpose and on the basis of the guidelines
provided by Borsa Italiana S.p.A. These documents approved on November 14,
2002, were modified slightly by the Board of Directors on November 5, 2003.
With reference to the model for organisation and management required by Decree
231/2001 (hereafter the Control Model), the Board of Directors of the parent
company approved the Companys draft Control Model, as reviewed and approved by
the Companys Internal Audit Committee, at the meeting held on November 5, 2003
and authorised the above Committee to make changes to details and monitor
implementation of the Model. On November 14, 2002, the Parent Companys Board of Directors decided to
approve the Companys Code of Ethics and related rules of conduct, including
those covering insider dealing, and to grant the Chairman and the Managing
Director Federico Minoli all possible powers to make any amendment to the
approved text that may be thought necessary or opportune to update the rules in
line with international best practice or new legal requirements. These
documents were modified slightly by the Board of Directors on November 5, 2003. Other corporate events In order to improve efficiency, at meetings held on March 5, 2003 (first
part) and April 8, 2003 (second part), the Board of Directors of Ducati Motor
Holding S.p.A. approved a reorganization plan that provided for the termination
by mutual agreement of a certain number of employees in exchange for severance
incentives. All these terminations took place during 2003. This reorganization
plan included the resignation, with effect from March 5, 2003, of Carlo Di
Biagio as Director and Managing Director of the parent company and as director
of various subsidiaries, as well as the termination by mutual agreement of
Carlo Di Biagios employment contract with the Parent Company with effect from
March 31, 2003. Under the terms of these agreements, Carlo Di Biagio retains
all of the option rights (whether vested or not yet vested) granted to him up
to March 5, 2003, which will continue to be governed by the applicable
regulations of the two existing stock option plans. No further options will be
granted to him. In addition, again under the terms of signed agreements, he
will not receive the special indemnity on termination as Managing Director,
approved by the Compensation Committee on September 6, 2000 and authorized by
the Board of Directors on September 14, 2000, since the related conditions do
not apply. The total estimated cost of the severance incentives envisaged in the
above plan was originally about  3.5 million, including costs associated
with the termination by mutual consent of Carlo Di Biagios employment contract
of  2.2 million. Under powers delegated by the Board of Directors, the
Managing Director revised this estimate to about  4 million during 2003,
given the increased number of employees included in the plan and the
consequently greater cost of the severance incentives. The cost of the
reorganization plan relates entirely to the 2003 financial year and has been
recorded as a non-operating expense for that year in accordance with Italian
Accounting Standard No. 19. In particular, paragraph C.V.h of this Standard
establishes that the cost of severance incentives incurred on implementing
reorganization plans relates to the financial year in which the firm formally
decides to implement such plans, and that the related provisions must be
charged to the non-operating expense caption of the statement of operations.
In the circumstances, this reorganization plan was formally approved by the
Board of Directors of the parent company at meetings held on March 5, (first
part) and April 8, 2003 (second part), while the revised estimate of the total
cost was made by the Managing Director, under powers granted by the Board,
during 2003; this latest revision was then ratified at the Board Meeting held
on February 12, 2004. On May 6, 2003, the Shareholders Meeting of the Parent Company resolved
to reclassify to the Extraordinary Reserve the Reserve for Accelerated
Depreciation,  3,311,522, that was previously approved at the Shareholders
Meeting held on May 7, 2002. At that time, in particular, the Meeting had
resolved (i) to allocate 5% ( 98,656) of the net profit of  1,973,110
to the Legal Reserve and the balance ( 1,874,454) to the Reserve for
Accelerated Depreciation and (ii) to reclassify  1,437,068 from the Share
Premium Reserve to the Reserve for Accelerated Depreciation in order to make up
the balance of this last reserve,  3,311,522. In particular, the Meeting
resolved to reclassify the Reserve for Accelerated Depreciation to the
Extraordinary Reserve since the reasons for the earlier reclassification of the
Share Premium Reserve to the Reserve for Accelerated Depreciation, that is the
decision not to make the related change to taxable income in the 2001 income
tax declaration, had ceased to apply. Introduction and adoption of IFRS (International Financial Reporting Standards) Under European Regulation No. 1606 of July 2002, all European companies
with shares listed on a regulated market must prepare their consolidated
financial statements in accordance with IFRS (the new name for International F-7




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##### Table of Contents



Accounting Standards) starting from the consolidated financial statements
as of December 31, 2005. This regulation applies to Ducati Motor Holding S.p.A., which is taking
all necessary steps to make this transition to the IFRS. Specifically, plans
are being completed both for the training of employees involved in the
transition and to make technical and accounting resources available so that the
impact of these new standards on the 2004 financial statements can be assessed
as soon as possible, and significant accounting information made public. The
main probable effects on the Italian GAAP financial statements arising from the
adoption of IFRS will relate primarily to the treatment of research and
development expenditure, to stock option expense and to the accounting for
derivative hedging contracts for foreign exchange and interest rate risks. Protection of personal data (Decree no. 196 of June 30, 2003) Ducati Motor Holding S.p.A. and its Italian subsidiaries, Ducati Corse
S.r.l. and Ducati.Com S.r.l., are currently updating their security plans in
accordance with the requirements of Attachment B to Decree no. 196/03, the
Privacy Code, which regulates the technical procedures to be adopted for the
computerised processing of sensitive information. 1.b Organization Ducati Motor Holding S.p.A. is a limited liability company registered in
Italy. Ducati Motor Holding S.p.A. and subsidiaries (Ducati or the Company or
the Group) are engaged in the design, manufacture and sale of motorcycles and
related products under the Ducati brand name. Ducati Motor Holding S.p.A. was
incorporated as TPG S.p.A. on May 29, 1996 to acquire the Ducati motorcycles
business (the Predecessor Business) in a leverage buyout. The Ducati
motorcycle business had been previously carried out by certain subsidiaries of
Cagiva S.p.A. (Cagiva Group). On July 25 and September 26, 1996, Holding entered into certain agreements
with Cagiva Group to acquire the Predecessor Business (the Acquisition) for
consideration of both cash and 49% of the share capital of Holding (6,860,000
ordinary shares, without giving effect to the subsequent share split, with a
nominal value of  35,429 thousand). The Acquisition was accounted for as a
purchase. Accordingly, the purchase consideration was allocated to the assets
acquired and the liabilities assumed based on their fair values as determined
by a court appointed expert. The excess of the purchase consideration
(excluding incidental acquisition costs) over the fair value of the net assets
acquired, as calculated under Italian GAAP, was allocated, first, to
identifiable intangible assets (trademark and the Cagiva Group agreement not to
compete) with the remainder to goodwill. The allocation of the total purchase
consideration was as follows (in thousand of euros): Initial
    
    Adjustments
    
    TotalBook value of liabilities in excess of assets acquired
Adjustments:
    
    
    (39,020
    )
    
    
    
    
    
    
    (39,020
    )- Property, plant and equipment
    
    
    19,847
    
    
    
    
    
    
    
    19,847- Ducati trademark
    
    
    99,263
    
    
    
    12,911
    
    
    
    112,174- Other intangible assets, principally goodwill
    
    
    20,475
    
    
    
    (2,034
    )
    
    
    18,441Total adjustments
    
    
    139,585
    
    
    
    10,877
    
    
    
    150,462Amounts owed to Cagiva Group, settled subsequently
    
    
    (65,136
    )
    
    
    (10,877
    )
    
    
    (76,013
    )Ordinary shares issued as consideration (thousand)
    
    
    68,600
    
    
    
    
    
    
    
    68,600
 On July 30, 1998, the majority shareholders and other parties acquired the
49% interest held by Cagiva Group. Concurrent with this transaction, the
Company entered into certain agreements with the Cagiva Group which provided
for, among other matters, the release of the cash held in escrow (  16,527
thousand) and the settlement of a contingent payment due to Cagiva Group ( 
12,911 thousand) and amounts owed to the Company for the purchase price
adjustment and other claims under the representation and warranty provisions of
the Acquisition agreements (  4,395 thousand). In connection with a re-organization of the Ducati distributorships,
subsidiaries were formed (Ducati Motor Deutschland GmbH and Ducati France S.A.
during 1997, Ducati Japan KK during 1998 and Ducati Benelux B.V. and Ducati
U.K. Limited during 1999) to manage distribution directly in those markets,
when the distributorship rights and inventories were acquired from the third
party distributors; these subsidiaries are all wholly owned. Another
subsidiary, Ducati Corse S.r.l., 99% owned, was formed in 1998 to manage motor
racing activity. On October 24, 2000 by public deed no. 23,088/3,925 registered by notary
public Iacopo Bersani, deposited on October 25, 2000 in the Bologna Companies
Register, Ducati Motor S.p.A. was merged into its parent company Ducati F-8




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##### Table of Contents



Motor Holding S.p.A. The procedures relating to this operation have now been
completed. The whole process, which began on March 3, 2000 with the approval of
the merger plan, ended with the preparation of the merger deed on October 24,
2000. In compliance with the law on such matters, the surviving company took
over, among other things, ownership of the equity investments held at that date
by Ducati Motor S.p.A., namely:  
    
    100% Ducati North America Inc.;  
    
    99% Ducati Corse S.r.l.; and  
    
    40% H.P.E. High Performance Engineering S.r.l. From a statutory point of view, the effects of the merger took effect from
November 1, 2000, being the day after the date on which the last registration
required by art. 2504 sexies of the Civil Code was made, in accordance with
paragraph 2 of art. 2504-bis of the Civil Code. This merger, which has been
carried out in accordance with articles 2501  2504 sexies of the Civil Code,
as modified by Legislative Decree 22 of January 16, 1991, will allow the
Company to rationalize and centralize the Groups finance and treasury
functions, as well as to eliminate legal and administrative structures and
related costs, charges and legal obligations. The merger also aims to transform
the listed company into the Groups main operating company. The process began with the merger plan being approved by the Boards of the
two companies (art. 2501-bis C.C.) on March 3, 2000 and with the merger
resolution approved by the shareholders meetings of Ducati Motor Holding
S.p.A. on May 2, 2000 and Ducati Motor S.p.A. on May 5, 2000, as recorded in
the Bologna Companies Register on July 12, 2000. Transactions carried out by the merged company, Ducati Motor S.p.A., have
been recognized in the financial statements of the surviving company, Ducati
Motor Holding S.p.A., with effect from 00.00 hours on 1 January 2000, in
compliance with article 2404-bis paragraph 3 of the Civil Code. The
aforementioned merger did not result in any accounting impact on the
consolidated financial statements of the group. Considering the new opportunities offered by the Internet and the success
of the MH900 Evoluzione, on 14 July 2000, the Company established a new Group
company, Ducati.Com S.p.A., now Ducati.Com S.r.l., whose present purpose has
been previously indicated. The sole director is Federico Minoli. The Group has 100% control over Ducati.Com S.r.l., whose shares were held
until January 27, 2004, 99% by Ducati Motor Holding S.p.A. and 1% by Ducati
Corse S.r.l.
On January 27, 2004 Ducati Corse S.r.l. transferred 1% to Ducati Motor Holding
S.p.A. 1.c Summary of the significant accounting policies Principles of preparation and consolidation The audited consolidated financial statements of the Company have been
prepared for distribution to its shareholders in conformity with statutory
reporting requirements and accounting standards issued by the Consiglio
Nazionale dei Dottori Commercialisti e dei Ragionieri (National Board of Public
Accountants in Italy), and where these are not exhaustive, the Company has
adopted standards issued by the International Accounting Standard Board
(I.A.S.B.). Hereafter these have been identified as Italian GAAP. Italian
GAAP differs in certain respects from generally accepted accounting principles
in the United States of America (U.S. GAAP). A description of these
differences and their effects on net profit and shareholders equity is set
forth in notes 29, 30 and 31. The financial statements have been reformatted
from the original Italian statutory financial statement presentation to conform
more closely with international presentation and include certain additional
disclosures required by the U.S. Securities and Exchange Commission (the
SEC). The consolidated financial statements include the financial statements of
Ducati Motor Holding S.p.A. and its majority owned subsidiaries: Ducati Corse
S.r.l., Ducati North America Inc., Ducati France S.A.S., Ducati Motor
Deutschland GmbH, Ducati Japan KK, Ducati Benelux B.V., Ducati UK Limited and
Ducati.Com S.r.l.. These subsidiaries have been consolidated from their
respective dates of acquisition. All significant inter-company balances and
transactions are eliminated on consolidation. Cash and cash equivalents The Company considers all highly liquid investments with the original
remaining maturity of three months or less and that are readily convertible to
known amounts of cash to be cash equivalents. Certificates of deposit are
valued at F-9




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##### Table of Contents



the lower of either cost or market value. Accounts receivable Accounts receivable are stated at nominal value net of an allowance for
doubtful accounts. When a receivable is factored with recourse, the
corresponding amount is included as a trade receivable until the receivable is
settled by the principal. Advances received from factoring companies are
presented as a liability in the balance sheet. When a receivable is factored
without recourse, the receivable is considered settled and is discharged as
such. In December 2002, the Parent Company Ducati Motor Holding S.p.A. signed a
contract, pursuant to Law 130/99, for a revolving securitization of trade
receivables, to be sold without recourse, for a period of five years. The information required to be disclosed by CONSOB communication no.
DAC/RM/97003369 of 9/4/1997 on accounting for securitization operations is
given below. The Company completed the first tranche of the securitization operation on
December 30, 2002. Further transfers were made on February 26, March 31, April
22, May 21, June 30, July 28, August 28, September 28, October 24, November 27
and December 23, 2003; being a revolving type of transaction operation, the
other tranches will be completed in 2004 and subsequent years. The receivables
were assigned, without recourse, to Ducati Desmo Finance 1 S.r.l. (DDF1), (a
special purpose vehicle company set up specifically for this purpose in
accordance with Law 130/99). DDF1 is owned by two Dutch foundations, Stichting
Syros and Stichting Kea, in which the Ducati Group does not have any kind of
interest, pact or agreement that might imply its classification as a controlled
or related party. In this initial phase, DDF1 financed the purchase of the
receivables by means of a bridge loan granted by IntesaBCI. During the course
of 2003, DDF1 financed itself by issuing bonds with a nominal value for  43
million, of which  33 million are Class A and  10 million are Class B. The Class A bonds were taken up entirely by Banca Intesa, which then sold
99.5% of them to Romulus Funding Inc., a finance company registered in Delaware
(U.S.A.) that is wholly owned by Global Securitization Services LLC. The Ducati
Group is not linked to these companies by any form of ownership interest, pact
and/or agreement that would require their recognition as subsidiaries and/or
related parties. The Class B bonds were taken up in full,  10 million, by Ducati North
America Inc., the Ducati Groups subsidiary operating in the Canadian and
American markets. The bonds taken up by Ducati North America Inc. on June 30,
2003 were issued with a maturity date of July 28, 2009 and earn interest at
3-month Euribor, paid quarterly in arrears on the 28th day of January, April,
July and October of each year. They are classified as financial fixed assets
since they cannot be sold during the two years subsequent to their subscription
date. The repayment of these bonds is subordinated with respect to the Class A
bonds (issued by D.D.F.1 and mostly taken up by Romulus Funding Inc.). The above bonds replaced the bridge loan granted by Banca Intesa to finance the
transaction up to June 30, 2003.
Certain foreign subsidiaries also became involved in the securitization
arrangements during 2003. Ducati France formally entered the program for the securitization of trade
receivables at the end of June 2003, and made the first disposal in the
following month. Ducati Motor Deutschland and Ducati UK entered the securitization program at
the time of the December 2003 disposal. Currently, four Ducati Group companies
are involved (Ducati Motor Holding, Ducati France, Ducati UK and Ducati Motor
Deutschland). In operational terms, disposals by the foreign branches involve the sale
without recourse of their receivables to Ducati Motor Holding, which then sells
them to the vehicle. The total nominal value of the assigned receivables, the collected amount
and the deferred amount as of December 31, 2003, are the following (in millions
of Euro): F-10




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##### Table of Contents



2003
    
    2002Nominal value of receivables sold to the DDF1 (turnover)
    
    
    116.00
    *
    
    
    26.70Payments received from the DDF1
    
    
    110.10
    
    
    
    20.00Interest and expenses
    
    
    0.80
    
    
    
    0.20Amount deferred
    
    
    5.10
    
    
    
    6.50* inc. AUD 3.8 million and CHF 3.1 millionEFFECT ON THE FINANCIAL POSITIONReceivables not collected by the DDF1 and not yet due
    
    
    34.30
    
    
    
    26.70Receivables not collected by the DDF1 but due
    
    
    3.00
    
    
    
    Total receivables to be collected by DDF1
    
    
    37.30
    
    
    
    26.70Amount deferred
    
    
    (5.10
    )
    
    
    (6.50
    )Receivables collected by DMH on behalf of the DDF1 but
not yet paid over to that entity
    
    
    (0.50
    )
    
    
    Total effect on the financial position
    
    
    31.70
    
    
    
    20.20
 The amount of  31.7 million as of December 31, 2003 ( 20.2 million as
of December 31, 2002) represents the amount already collected by the Group in
relation to receivables that the vehicle company has not yet collected from
customers. Accordingly, in the absence of securitization, the Groups
receivables and net short-term borrowing position as of December 31, 2003 would
have been greater by  31.7 million ( 20.2 million as of December 31,
2002). Since the securitization is without recourse, the nominal value of sold
receivables is deducted from the trade receivables caption at the date of the
disposal, against recognition of the amount collected as liquidity and of the
amount deferred as a receivable from the vehicle company. The amount due from
the vehicle company as of December 31, 2003 is classified among trade
receivables for clearer comparison with prior periods and because of the
commercial nature of the sold receivables. The initial costs associated with
this revolving securitization, totaling  1,052 thousand, have been recorded
as deferred charges and will be amortized over five years. This period reflects
the expected duration of the operation, since the portfolio sold is considered
to be of high quality and, as such, the risk that the revolving securitization
will terminate early is deemed to be remote. Ducati has retained servicing of the receivables (collection, remittance and
other similar activities) sold as part of the securitization transaction.
Amounts collected by Ducati for receivables sold are transferred to DDF1 on a
daily basis. Exchange differences and commissions associated with the securitization are
reflected in the statement of operations. The securitization essentially exposes the Ducati Group to the risk of not
collecting the deferred amount which, under agreements between the vehicle
company and all its creditors, is subordinated to the repayment of the bonds
and the reimbursement of all its operating costs and, therefore, to the
collection of the sold receivables. This risk was taken into account when
determining the allowance for doubtful accounts. In addition, Ducati North America Inc. is exposed to the risk that the Class B
bonds might not be repaid if the sold receivables are not collected, since
Class B bonds are subordinate to Class A bonds. This risk is currently
considered remote by the Group in view of the high quality of the portfolio
sold. Under a commitment letter in favour of the vehicle company signed by Ducati
Motor Holding S.p.A., the latter is committed to covering the operating costs
of DDF1 and to taking all necessary action to ensure that it is not declared
bankrupt and/or wound-up, except for as a result of uncollected receivables. During 2003, as part of the securitization of trade receivables, San Paolo IMI
S.p.A., a financial institution, issued a guarantee on behalf of Ducati Motor
Holding S.p.A. in favour of DDF1 for a maximum amount of  4 million, to
guarantee the commitment of Ducati Motor Holding S.p.A. to reimburse D.D.F.1
for any amounts deducted by debtors, on the settlement of amounts already
transferred, in recognition of rebates granted by the company on the
achievement of their sales targets. F-11




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Own shares In accordance with art. 2424 of the Italian Civil Code, own shares are
either classified as financial fixed assets or as current financial assets,
depending on the reason for holding them. At the time that own shares are
recorded as an asset, a corresponding non-distributable equity reserve is
denominated: Reserve for own shares held. Own shares are originally recorded at purchase cost. Their subsequent valuation depends on whether the directors have
classified them as financial fixed assets or among current assets. In the first
case, the book value of the shares is only written down to reflect any
permanent reductions in their value; in the second case, if applicable, they
are stated at the lower of cost or their estimated realisable value
determined with reference to market conditions in accordance with art. 2426 of
the Italian Civil Code. Any write downs are charged to the statement of operations as a financial
expense and a matching amount is released from the reserve for own shares held. Shares owned at December 31, 2003 are classified among current assets to
the extent that the directors have decided to make them available for trading. The own shares held by Ducati Motor Holding S.p.A. represent about 0.18%
of the total number of issued shares. Accounts payable Payables are recorded at face value, which is considered to represent
their settlement value. Inventories Inventories are stated at the lower of cost, using the first-in, first-out
method, and net realizable value. Work-in progress and finished goods are
valued based upon annual average cost of production, which includes an
allocation for general overheads. Property, plant, and equipment Property, plant, and equipment are stated at historical cost less
accumulated depreciation. Maintenance and repairs are expensed as incurred;
significant improvements are capitalized and depreciated over the useful lives
of the related assets. Depreciation is calculated on the straight-line method over the estimated
useful lives of the assets. The following table summarizes the annual
depreciation rates of the Companys property, plant and equipment: Annual rateBuildings
    
    
    3-10
    %Plant and machinery
    
    
    10-22
    %Industrial and sales tooling /equipment
    
    
    25-30
    %Other
    
    
    10-25
    %
 Assets acquired during the year are depreciated at half the annual rate. Assets acquired under capital leases are recorded in accordance with
International Financial Reporting Standards, which require that where the
necessary conditions are met, such assets are recorded at the present value of
minimum lease payments and the obligation under capital leases is recognized as
a liability. The related assets are then amortized over their useful economic
lives. Intangible assets Intangible assets are carried at purchase/acquisition cost and are
amortized on the straight-line method over the estimated useful lives of the
assets. The following table summarizes the estimated useful lives of the
Companys intangible assets: F-12




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##### Table of Contents



YearsIncorporation and expansion costs
    
    
    5Research and development costs on specific product development projects
    
    
    5Concept costs
    
    
    5-7Ducati trademark
    
    
    20Goodwill
    
    
    5-20Non-compete agreement
    
    
    5-7Incidental costs of share offering
    
    
    5Software, patents and licenses
    
    
    3-5
 The life of the non-compete agreement represents the estimated minimum
non-compete period under the terms of the purchase agreement relating to the
Acquisition. In addition to the above, intangible assets include leasehold improvements
and debt issuance costs incurred in obtaining long term financing. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term and estimated life of the asset. Debt issuance costs are amortized
under the residual balance method over the term of the related financing. Management periodically assesses the recoverability of intangible assets
and, in cases where such an asset is deemed to have no remaining useful
economic life, the carrying value of the asset is written off in full. Investments Investments in non-associated companies are carried at cost and are
written down for any permanent impairment in value. Investments in associated
companies are accounted for under the equity method. Income taxes Current income taxes payable by each of the individual companies included
in the consolidation are calculated according to the tax regulations in force
in the country where each company is based and are classified under income and
other taxes payable. In addition, a provision is made for deferred tax
liabilities of the individual companies, as well as those arising from
consolidation adjustments, net of deferred tax assets where realization of the
benefit is considered reasonably certain on the basis of the particular
companys trading and forecasted performance. Deferred taxes are calculated at the relevant local country tax rates in
force at the balance sheet date, bearing in mind the period in which
differences will presumably reverse, are reviewed annually to reflect changes
in the economic circumstances of the companies and in the tax rates. Deferred
tax assets and liabilities are accounted for in accordance with Accounting
Principle No. 25, issued by the Italian Accounting Profession in March 1999. Revenue and cost recognition Revenues for motorcycle sales are recognized when title passes to the
customer or when substantially all risks and rewards associated with the goods
have been transferred, usually the date of shipment to Ducatis independent
importers or dealers. Revenues from services are recognized when services are
rendered to the independent dealer or other third party. Costs are recognized
on the accruals basis, and the costs of racing pilots and teams being
recognized over the terms of their contracts. Grants The grants envisaged in the contracts between Ducati Motor Holding S.p.A.
and the Ministry for Productive Activities are recorded as other operating
revenues on expiry of the contractually-agreed payment period of 60 days from
the presentation of the related progress reports. Ducati Motor Holding S.p.A.
believes, pursuant to art. 4.5 of Concession nos. 88 of August 5, 2002 and 87
of August 5, 2002, that if 60 days elapse from the date of presenting progress
reports and the related documentation in a formally and technically complete
fashion, without any objection from the Ministry for Productive Activities or
the Program Manager (San Paolo IMI), then it is entitled to collect the grants
as their receipt has become certain, even though they will only be paid out
when the related liquidity becomes available to the Ministry of the Productive
Activities. F-13




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##### Table of Contents



Advertising costs Advertising costs are expensed as incurred. Research and development Research and development costs, comprising principally the cost of
personnel, materials and external consultants employed in that activity, are
capitalized as an intangible asset for specific product development projects;
otherwise, such costs are expensed as incurred under cost of goods sold
(excluding depreciation). Capitalized research and development costs for the
years ended December 31, 2001, 2002 and 2003 amounted to  13,307 thousand,
 16,529 thousand and  12,969 thousand respectively; these include
projects in progress not yet amortized at the year end. Expensed research and
development costs for the years ended December 31, 2001, 2002 and 2003 amounted
to  3,893 thousand,  4,879 thousand and  5,024 thousand
respectively. Concept costs Concept costs incurred in the development of the Ducati image are
capitalized as an intangible asset and amortized on a straight line basis,
depending on the nature of the cost, over estimated useful lives of five to
seven years. Capitalized concept costs for the years ended December 31, 2001,
2002 and 2003 amounted to  27 thousand,  0 thousand and  0
thousand, respectively. Employee benefit plans Leaving entitlements principally reflect the liability to employees in
Italy when they leave their employment, calculated in conformity with current
Italian legislation, and are based on a percentage of remuneration. The full
amount of the employees vested benefits is accrued. The liability is adjusted
on the basis of the official inflation rate. There is no funding requirement
associated with this liability. Leaving entitlements charged in the years ended
December 31, 2001, 2002 and 2003 amounted to  1,954 thousand,  2,298
thousand and  2,375 thousand, respectively. Provision for risks and charges Provision for risks and charges are recorded when it is probable that a
liability has been incurred and the amount of the loss can be reasonably
estimated. Product warranty Product warranties are accrued based upon the estimated warranty cost per
unit sold and recognized as part of selling, general and administrative
expenses (excluding depreciation). Product warranty expense for the years
ended December 31, 2001, 2002 and 2003 amounted to  8,505 thousand and 
11,121 thousand and  4,738 thousand, respectively. Foreign currency transactions Foreign currency transactions are recorded at the exchange rates
applicable at the transaction dates. Assets and liabilities denominated in
foreign currencies are re-measured at exchange rates applicable at the balance
sheet date unless the transaction has been hedged. The resulting gains and
losses on current assets and liabilities are recorded in the statement of
operations. The resulting net loss on long term assets and liabilities is
recorded in the statement of operations, while a net gain is deferred and
subsequently released as the underlying assets and liabilities become
short-term. At the balance sheet date, assets and liabilities denominated in
foreign currencies and hedged by means of a forward exchange contract are
re-measured at the spot rates applicable at the date of the contract plus an
additional amount for the portion of forward exchange premium recognized in the
accounting period. The resulting foreign exchange gains and losses are recorded
in the statement of operations. Translation The functional currency of the Companys foreign subsidiaries is the
respective local currency of that foreign subsidiary. The financial statements
of the Companys subsidiaries are translated into Euro based on: F-14




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##### Table of Contents



 the exchange rate at balance sheet date for assets and liabilities;  the historical exchange rate for share capital and equity reserves;  the average exchange rate in each period for statement of operations. The resulting translation difference is recorded as foreign currency
translation adjustments, directly in shareholders equity. Derivative financial instruments: Interest rate swap agreements Interest rate swap agreements designated to change the interest
characteristics of long-term debt are accounted for on an accrual basis. The
interest differential between the amounts received and paid is classified as
interest expense. Forward exchange contracts Gains and losses on forward exchange contracts are deferred where the
contract is designated on stipulation to a commitment or a forecasted sale
transaction. The premium or discount of forward exchange contracts is recognized as an
expense/income over the term of the contract. Bonds Bonds are recorded at their nominal value at the time of subscription, net
of buybacks. The related issue discount, being the difference between nominal
value and the amount collected, is charged to financial section of the
statement of operations on an accruals basis. Net profit/(loss) per share While, under Italian GAAP, the presentation of net profit/(loss) per share
is not compulsory, the Company has elected to disclose net profit/(loss) per
share on the face of the consolidated statement of operations. Net profit/(loss) per share is computed by dividing the net profit/(loss)
by the number of ordinary shares outstanding at the year-end; the year-end
number of shares is applied rather than the weighted-average number of ordinary
shares outstanding during the year since, under Italian law, only shareholders
at year-end are entitled to the dividend distribution for that year. The number
of ordinary shares outstanding gives effect to the share split described in
note 17; however this does not reflect the effect of incremental shares, if
any, that would have been outstanding under the Companys share option plans. 2. Cash and cash equivalents At December 31, cash and cash equivalents were comprised of the following
items: December 31,
    
    December 31,2002
    
    2003( 000)Bank and postal accounts
    
    
    23,837
    
    
    
    23,541Cash on hand
    
    
    95
    
    
    
    41Certificates of deposit and
securities purchased under
resale agreements
    
    
    28
    
    
    
    23,960
    
    
    
    23,582
 Certificates of deposit and securities purchased under resale agreements
represented cash equivalents derived from ongoing treasury management
activities. F-15




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##### Table of Contents



3. Trade receivables, net At December 31, trade receivables, net, were comprised of the following
items: December 31,
    
    December 31,2002
    
    2003( 000)Trade accounts receivable
    
    
    86,230
    
    
    
    83,735Allowance for doubtful accounts
    
    
    (4,188
    )
    
    
    (3,314
    )82,042
    
    
    
    80,421
 The allowance for doubtful accounts at December 31, 2003 refers to the
collection risk related to the group customers including in particular those of
Ducati North America Inc, Ducati Corse S.r.l., Ducati France S.A.S. and Ducati
UK Ltd.. The decrease in the allowance for doubtful accounts refer to a foreign
customer that went bankrupt in 2003; that receivable has been written off to
the statement of operations and the related allowance provided for in previous
years has been reversed. The comparison between the trade receivables balances as of December 31,
2003 and 2002 is affected by the securitization transaction described above.
The net effect of the securitization on trade receivables at December 31, 2003
and 2002 is  31.7 million and  20.2 million, respectively. The amount due from DDF1 of  5.1 million at December 31, 2003 (
6.5 million as of December 31, 2002) represents the deferred purchase price of
the securitization transaction; it is classified under trade receivables so as
to provide a better comparison with the previous year, as the receivables
assigned are trade-related. 4. Inventories At December 31, inventories were comprised of the following items: December 31,
    
    December 31,2002
    
    2003( 000)Raw materials, ancillary materials and consumables
    
    
    8,341
    
    
    
    7,386Work in progress
    
    
    16,357
    
    
    
    14,985Finished products and goods, and spare parts
    
    
    92,115
    
    
    
    89,464Allowance for slow-moving and obsolete inventory
    
    
    (5,386
    )
    
    
    (7,061
    )111,427
    
    
    
    104,774
 The allowance for slow-moving and obsolete inventory primarily relates to
spare parts, supplies of which are in general retained for a period of ten
years subsequent to sale. As a result, the quantity of spare parts in inventory
may be greater than requirements and an allowance has been established to cover
the probable losses on such inventory. The company is obliged by current regulations to carry sufficient spare
parts for an after-sales period of at least 10 years and therefore the
allowance reflects an estimate of the extent to which inventories exceed actual
requirements. An allowance for accessories is calculated based on an analysis,
which takes into account the real market value of the inventories concerned and
expected requirements, considering the historical levels of usage and sales. 5. Other current assets At December 31, other current assets were comprised of the following
items: F-16




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##### Table of Contents



December 31,
    
    December 31,2002
    
    2003( 000)VAT receivable
    
    
    3,768
    
    
    
    2,200Tax authorities
    
    
    2,038
    
    
    
    2,319Suppliers
    
    
    2,191
    
    
    
    1,401Own shares
    
    
    
    
    
    
    391Other amounts receivable
    
    
    1,074
    
    
    
    2,111Prepaid expenses
    
    
    4,636
    
    
    
    5,27313,707
    
    
    
    13,695
 Receivables from the tax authorities mainly comprise withholding taxes on
interest earned by the Company and on dividends received, as well as
corporation tax for those subsidiaries, which have paid amounts in excess of
their tax liability for the year and other receivables from foreign
subsidiaries. Receivables from suppliers comprise primarily advance payments on
imports. Other amounts receivable at December 31, 2003 include  1,274
relating to grant due from the Ministry for Productive Activities. Prepaid
expenses mainly refer to insurance policies, sponsorship contracts, prepaid
bank charges and interest and prepaid rent. Prepaid expenses include also a
deferred loss of  3,492 thousand ( 3,194 thousand as of December 31,
2002) relating to forward hedging contracts. Ducati Motor Holding S.p.A. purchased own shares during June 2003. These
purchases were made in accordance with the shareholders authorisation dated
May 7, 2002 and were disclosed to Consob on a timely basis. As of December 31,
2003, the company holds a total of 293,235 own shares at purchase price, valued
at the lower of cost or market value, determined with reference to their market
price at year-end of  1.3334 per share. As the cost of acquisition is lower
than market value at year-end, no adjustment was made. 6. Property, plant and equipment, net At December 31, property, plant and equipment, net, were comprised of the
following items: December 31,
    
    December 31,2002
    
    2003( 000)Land and buildingsCost
    
    
    29,302
    
    
    
    30,153Accumulated depreciation
    
    
    (5,298
    )
    
    
    (6,499
    )Net book value
    
    
    24,004
    
    
    
    23,654Plant and machineryCost
    
    
    28,288
    
    
    
    31,180Accumulated depreciation
    
    
    (12,985
    )
    
    
    (15,780
    )Net book value
    
    
    15,303
    
    
    
    15,400Industrial and sales tooling/equipmentCost
    
    
    42,299
    
    
    
    54,023Accumulated depreciation
    
    
    (23,056
    )
    
    
    (31,656
    )Net book value
    
    
    19,243
    
    
    
    22,367OtherCost
    
    
    9,730
    
    
    
    10,350Accumulated depreciation
    
    
    (4,234
    )
    
    
    (5,656
    )Net book value
    
    
    5,496
    
    
    
    4,694Construction in
progress and payments
    
    
    2,356
    
    
    
    1,05266,402
    
    
    
    67,167
 Property, plant and equipment include  2,055 thousand for leasehold
improvements. These improvements refer to a building involved in a sale and
lease-back transaction, as explained in the note Leasing and are amortized
over their estimated useful life. Ducati Motor Holding S.p.A. and, starting from year 2002, its subsidiary
Ducati Corse S.r.l. have entered into capital lease agreements for machines and
machining centers and industrial buildings. The original cost of these assets
amounted to approximately  6,923 thousand at December 31, 2003 for machines
and machining and  23,622 thousand for industrial buildings. F-17




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##### Table of Contents



Leasing As of December 31, 2003, the Group has entered the following lease
contracts relating to:  
    
    machinery and work stations; and  
    
    an industrial building for  23,622 thousand. These assets have been recorded in the statutory financial statements of
Ducati Motor Holding S.p.A. and its subsidiary Ducati Corse S.r.l. according to
current Italian legislation, by which lease installments are charged to the
statement of operations as incurred with the commitment for residual
installments appearing in the memorandum account commitments and contingent
liabilities. The related assets are recorded among property, plant and
equipment only when they are redeemed. This practice is in line with current
fiscal legislation. As of June 29, 2001, the Parent Company completed a sale and lease-back
transaction involving an industrial building. This refers to a part of a
building complex used for production purposes located in Via A. Cavalieri
Ducati 3, Bologna. The transaction involved selling the building at around book
value to Locafit Locazione Macchinari Industriali S.p.A., a leasing company,
for  20,710 thousand, with a sale contract notarised by Iacopo Bersani
(notary public) on June 29, 2001, repertory no. 24473/4192, and signing a lease
contract with the same company. This contract has a duration of 8 years from
the date it was signed. By way of consideration for the finance lease on the building, Ducati
Motor Holding S.p.A. will pay Locafit SpA  24,767 thousand plus VAT in 32
quarterly installments, as established in the contract. This lease back
transaction has been accounted for as a borrowing. Effective 2001, the Group has chosen to use the recommended accounting
principle for the consolidated financial statements, considering the
significance of the sale and lease-back transaction. The accounting principle
currently adopted is described note 1.c. 7. Intangible assets, net At December 31, intangible assets, net, were comprised of the following
items: December 31,
    
    December 31,2002
    
    2003( 000)Incorporation and expansion costs
    
    
    468
    
    
    
    240Research and development costs
    
    
    21,416
    
    
    
    24,938Concept costs
    
    
    77
    
    
    
    21Patents and rights on inventions
    
    
    4,087
    
    
    
    3,239Licenses, trademarks and similar rights
    
    
    76,825
    
    
    
    71,248Goodwill due to 1996 transaction
    
    
    14,765
    
    
    
    13,643Non Compete agreement
    
    
    1,378
    
    
    
    346Goodwill on consolidation
    
    
    959
    
    
    
    814Deferred charges and advances
    
    
    6,054
    
    
    
    6,738Incidental costs of share offering
    
    
    2,311
    
    
    
    427Other
    
    
    2,178
    
    
    
    3,067130,518
    
    
    
    124,721
 Incorporation and expansion costsrelate principally to incidental costs
of the incorporation of the Parent Company and the Acquisition. These are
amortized on a straight-line basis over five years. Research and development costsrelate to development of new models and
engines and are amortized over five years from when incurred. Concept costsrelate to costs incurred for the development of the Ducati
image, and are amortized on a straight-line basis over a useful life of five to
seven years. Patents and rights on inventionsmainly consist of software licenses and
the costs of patent rights maintenance. These are amortized on a straight-line
basis over three or five years. F-18




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##### Table of Contents



Licenses, trademarks and similar rightsrepresent principally the purchase
of the Ducati trademark in the Acquisition. This item, in previous years,
was reduced by  465 thousand on the sale of the Moto Morini trademark,
which had been purchased at the Acquisition, and sold at a small loss. During 2003, the Parent Company took advantage of Law 342 dated November
21, 2000, as modified by art. 2.25 of Law 350 dated December 24, 2003 (the 2004
Finance Law) regarding the revaluation of assets. In particular, the Parent Company increased as of December 31, 2003 the
net book value of the brand name recorded in its statutory accounts to reflect
the value reported in the consolidated financial statements at that date. The
alignment of the two net book values will also remain for the future since,
following the abrogation from 2004 of art. 2426.2 of the Italian Civil Code
(exceptions for fiscal purposes), the Parent Company will no longer be able to
justify for tax reasons the provision of amortisation in excess of that charged
in the consolidated financial statements using economic-technical rates.
Accordingly, the revaluation pursuant to Law 350 of December 23, 2003 recorded
in the statutory financial statements of the Parent Company has not affected
the net book value of the brand name reported in the consolidated financial
statements. The resulting value does not exceed the economic life expressly referred
to in Law 342/2000, since it is not greater than the value determined as of 31
December 2003 of the effective future economic benefit to the company deriving
from use of the brand name. At the request of the Parent Company, an opinion on
the fairness of this revaluation dated February 9, 2004 was obtained from Paolo
Penzo, certified accountant. After deducting 19% flat-rate taxation amounting to  5,167 thousand
from the revaluation surplus of  27,194 thousand, the Parent Company has
credited the net balance,  22,027 thousand, to a specific revaluation
reserve which cannot be used for any other purpose. The resulting impact on the 2003 consolidated financial statements of the
revaluation of the trademark was an increase of  5,167 thousand in current
taxes due for the substitutive tax to be paid on revaluation, a decrease of
 10,401 thousand in deferred tax liabilities previously recorded on the
temporary difference between the trademark value on the consolidated financial
statements and its tax basis, and an increase of  5,234 thousand in other
non-operating income (see note 26). Amortization on trademark is calculated in the consolidated financial
statements over a period of 20 years. The useful life of the Ducati trademark
is difficult to determine with accuracy as it is dependent on the expected life
and development of the business, even though these are forecast to span over a
long period of time. For this reason, amortization has been calculated over 20
years, which is the maximum period currently allowed under Italian accounting
principles for the amortization of intangible fixed assets such as trademarks. Goodwill Relating to the 1996 transaction: this represents the additional value
attributed at the time of the Acquisition to the Ducati business in excess
of the identifiable assets and liabilities of the Predecessor Business and as
adjusted for certain related costs incurred after the Acquisition. The useful
life of this goodwill is difficult to determine with accuracy as it is
dependent on the expected life and development of the business, even though
these are forecast to span over a long period of time. For this reason,
amortization has been calculated over 20 years. Goodwill on consolidation:  1,291 thousand was incurred in 1998 when
the distribution networks in France and Germany were acquired; this is being
amortized over a period of 15 years, according to expected useful economic
life. Goodwill of  91 thousand was incurred in the year ended December 31,
1999 when the distribution network in the Benelux countries was acquired; this
is being amortized over a period of 5 years, its expected useful economic life.
The increase of  152 thousand during the year ended December 31, 2000
relates to the goodwill paid for the acquisition of the UK sales network, to be
amortized over 3 years. This item also includes  129 thousand of goodwill
of Gio.ca Moto International S.r.l. (now merged with Ducati Motor Holding
S.p.A.) which is being amortized over 5 years. Non compete agreement: a non-competition agreement was signed by the
Parent Company and the holding company of the Cagiva Group in connection with
the acquisition of the Ducati business in 1996. This amount is being amortized
on a straight line basis of 7 years and 6 months and amounts to  346
thousand at December 31, 2003, net of accumulated amortization. Deferred charges and advancesat December 31, 2003 relate to research and
development capital work in progress of  4,021 thousand and other advances
for  2,717 thousand. F-19




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##### Table of Contents



Incidental costs of the share offering, comprising underwriters
discounts, commissions, consultant/auditor fees and other offering expenses,
are being amortized for a period of 5 years from the date that the Company
listed for trading on a public stock exchange. Other intangiblesat December 31, 2003 include:  
    
     266 thousand relating to bank commissions incurred for the notes
issued by the Parent Company on May 31, 2000, with maturity on May 31,
2005. The cost is being amortized on a straight-line basis over the life
of the bond which is scheduled to be repaid in a lump-sum on May 31,
2005.
    
     772 thousand reflecting the capitalization of costs incurred on
the securitization project described above. The estimated useful life of
these costs is 5 years, being the duration of the project.
    
     2,029 thousand relating to amounts granted to certain Ducati
suppliers in order to finance their acquisition of moulds and machinery.
These amounts are amortized over the life of the contract with the
related suppliers, typically five years. Other intangible assets are amortized on a straight-line basis over 3, 5 and
7-year periods. 8. Equity investments At December 31, equity investments were comprised of the following items: December 31,
    
    December 31,2002
    
    2003( 000)Associated companies:Other Shareholdings:ANCMAAssociazione Nazionale
Costruttori Motocicli e
Accessori (National Association
of Motorcycle Constructors)
    
    
    2
    
    
    
    2Consorzio Diamante
    
    
    10
    
    
    
    1012
    
    

    
    12
 9. Other long-term assets At December 31, other long-term assets were comprised of the following
items: December 31,
    
    December 31,2002
    
    2003( 000)Credit Link
    
    
    15,000
    
    
    
    15,000Asset-backed securities
    
    
    
    
    
    
    10,000Prepaid tax payments on employees leaving entitlement
    
    
    198
    
    
    
    110Other long-term assets
    
    
    418
    
    
    
    44015,616
    
    
    
    25,550
 Credit Link.During 2001, Ducati Motor Holding S.p.A. initiated a
financial operation called Credit Link for  15.0 million which is
strictly connected to the issuance of the Bond Loan and in particular, to the
risk of default on this loan. The risk of default refers to the non-
performance by Ducati Motor Holding S.p.A. of financial obligations related to
the loan up to a maximum of  15.0 million. This transaction, the purpose of
which was to maximize the benefit of liquid funds generated during 2001, was
formalized by acquiring a bond issued by the Dutch subsidiary of Banca
Nazionale del Lavoro, which yields an annual deferred coupon of 5.89%. It was
issued on July 2, 2001 with expiry on May 31, 2005. Maturities of the Credit
Link and related interest installments are tied to those of the Bond Loan. As of December 31, 2003, Asset-backed Securities relate to the Class B
notes purchased by Ducati North America Inc. These notes, which are subordinate
to the Class A notes, are part of the securitization transaction described
above. These notes were issued with a maturity date of July 28, 2009 and earn
interest at 3-month Euribor, paid quarterly on the 28th day of January, April,
July and October of each year. They are classified among financial fixed
assets since they cannot be sold for two years subsequent to the date of
subscription. Prepaid tax payments on employees leaving entitlementsrelate to payroll
taxes prepaid on the entitlements accrued at the balance sheet date, as per Act
28/05/97 no.140 implementing Law-Decree D.L. 28/03/97 n.79. F-20




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##### Table of Contents



Other long-term assetsmainly consist of deposits for rented properties
and utilities. 10. Borrowings At December 31, short-term bank borrowings were comprised of the following
items: December 31,
    
    December 31,2002
    
    2003( 000)Revolving credit facility
    
    
    39,287
    
    
    
    65,576Other
    
    
    6
    
    
    
    1139,293
    
    
    
    65,587
 At December 31, long-term debt was comprised as follows: December 31,
    
    December 31,2002
    
    2003( 000)Current portion
    
    
    3,230
    
    
    
    3,740Non-current portion
    
    
    91,000
    
    
    
    81,88294,230
    
    
    
    85,622
 At December 31, 2003 the amount due to banks within 12 months was 
65,587 thousand. This relates for  65,576 thousand to the bank borrowings
of Ducati Motor Holding S.p.A., the Parent Company, and for  11 thousand to
Ducati U.K. Ltd. On May 31, 2000, DMH issued notes in the aggregate principal amount of
 100 million. The notes, which mature on May 31, 2005, bear interest at a
fixed rate of 6.50% per annum, with the total principal amount being repayable
at maturity. The net proceeds to DMH from the sale of the notes was 
99,186,000 after deduction of the issue price discount and the combined
management and underwriting commission and the selling concession. Proceeds of
the notes were used to prepay in full all amounts owed under the Credit
Agreement. As a result, the Credit Agreement has been terminated. The terms and
conditions of the notes do not include any financial coverage ratios or
performance covenants, but do limit the ability to create liens on assets to
secure (i) indebtedness represented by bonds, notes, debentures or other
negotiable instruments or (ii) any guarantee of such indebtedness. Events of
default under the terms and conditions of the notes, which would entitle the
note holders to declare the notes to be immediately due and payable, include,
but are not limited to, failure to pay interest or principal under the notes
when due, failure to comply with any obligations under or in respect of the
notes, failure to pay other indebtedness when due, acceleration of other
indebtedness and the occurrence of certain bankruptcy or other insolvency
events. The notes are listed on the Luxembourg Stock Exchange and were sold
exclusively to institutional investors in Italy and abroad, excluding the
United States of America. On May 18, 2001, Ducati Motor Holding S.p.A. repurchased two tranches of
this bearer bond on the market at a nominal value of  4 million and 5
million respectively with payment taking place on May 23, 2001. The first
tranche of  4 million was purchased at  101.23, with a purchase
discount of  49,200; the second tranche of a nominal 5 million was
purchased at  101.25, with a purchase discount of  62,500. During 2003, Ducati Motor Holding S.p.A. also repurchased three further
tranches of the bearer bond issued on May 31, 2000 with maturity on May 31,
2005, as follows: Nominal value
    
    Payment date
    
    Value dateFirst tranche
    
    
    5,000,000
    
    
    
    26/03/2003
    
    
    
    31/03/2003Second tranche
    
    
    5,336,000
    
    
    
    03/04/2003
    
    
    
    08/04/2003Third tranche
    
    
    5,000,000
    
    
    
    24/10/2003
    
    
    
    28/10/2003
 F-21




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##### Table of Contents



The first tranche with a nominal value of  5,000,000 was acquired at a
price of 103.15 with a purchase premium of  157,500; the second tranche
with a nominal value of  5,336,000 was acquired at a price of 102.4 with a
purchase premium of  128,064; the third tranche was acquired at a price of
102.9 with a purchase premium of  145,000.
The related costs have been reclassified as financial charges. The Company has cancelled all securities repurchased, so the bond is shown
net of repurchases. Long-term debt includes also a medium-term loan of  5 million and this
loan, obtained on October 27, 2003, is repayable within 18 months less one day
(that is May 26, 2005) and bears interest at 3-month Euribor + 85 basis points.
Simultaneously, the Company entered into an interest rate swap to pay fixed
interest at 2.72% and receive interest at Euribor. The net effect of this swap
is that the Company has fixed its interest rate at 3.57% p.a.. See also the note on Other securities in connection with the Credit
Link operation. Current portion of long-term debt and other short-term borrowings at
December 31, are detailed below: December 31,
    
    December 31,2002
    
    2003( 000)Short-term borrowing
    
    
    39,287
    
    
    
    65,576Current portion of the term loan
    
    
    3,230
    
    
    
    3,740Other
    
    
    6
    
    
    
    1142,523
    
    
    
    69,327
 11. Accounts payabletrade At December 31, accounts payable to suppliers were comprised of the
following items: December 31,
    
    December 31,2002
    
    2003( 000)Accounts payable to Italian suppliers
    
    
    29,454
    
    
    
    48,768Accounts payable to foreign suppliers
    
    
    18,118
    
    
    
    12,583Accrued invoices (mostly due from Italian suppliers)
    
    
    47,540
    
    
    
    28,15295,112
    
    
    
    89,503
 12. Accrued expenses and other liabilities At December 31, accrued expenses and other current liabilities were
comprised of the following items: December 31,
    
    December 31,2002
    
    2003( 000)Advances received
    
    
    2,806
    
    
    
    3,137Social security payable
    
    
    2,415
    
    
    
    2,697Other liabilities
    
    
    6,074
    
    
    
    6,562Accrued expenses
    
    
    4,850
    
    
    
    3,53416,145
    
    
    
    15,930
 Other liabilities mainly represent amounts due to employees, directors and
insurance brokers. Accrued expenses include accrued interest of  2,869 thousand on the
notes issued on May 31, 2000, as more fully explained in note 10. The interest
accrual has been calculated in accordance with the terms and conditions of the
note agreement, namely a coupon rate of 6.5% per annum. This balance also includes deferred income for the grant received by the
former subsidiary Ducati Motor S.p.A., now merged with Ducati Motor Holding
S.p.A., from the Ministry of Industry under Law 140 by way of automatic
incentives for innovation. The full amount of the grant,  421 thousand, was
booked as other income in 2000, with deferral of the portion relating to
subsequent years. This item includes also  11 thousand related to contributions
recognized to Ducati Corse S.r.l. by the Ministries of Education, University
and Research and relates to contracts between Ducati Corse S.r.l. and the
universities of Padova, F-22




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##### Table of Contents



Bologna and Perugia. These contributions represent 60% of costs incurred and
are shown under other income and revenues and deferred for the portion
pertaining to the amortization period. 13. Provisions for risks and charges Provisions for risks and charges include provisions for the following: Product warranty for 6,296 thousand as of December 31, 2003, of which
 2,518 thousand relates to medium/long-term amounts, derives from an
historical analysis of the labour and material costs incurred in relation to
individual models, having regard for the related number of motorcycles still
under warranty (sold to the end market over the last 24 months), and from an
estimate of the cost of recall campaigns that might be required in future. The
decrease over the year was mainly due to the following reasons:  
    
    lower sales and consequent decrease in the number of motorcycles covered by warranty;
    
    lower warranty costs experienced in relation to 2002 and 2003 models (currently under warranty) with
respect to the models sold in prior years;
    
    improved management of warranty costs as part of the wider programme of cost reductions implemented by the
Group;
    
    more precise analysis of the historical trends in warranty costs and spare parts depreciations used to
determine the size of the provisions.Legal actions 222 thousand as of December 31, 2003, comprises:
    
     23 thousand for legal disputes with an importer. A temporary executive order dated September 14, 1998
from the Commercial Court of Liege ordered the Company to pay 50,575,794 Belgian Francs (equal to 
1,254 thousand) to its previous distributor, Performance S.A. (Performances), following the cancellation
of the distribution contract. In execution of this requirement, Performances seized and sold at auction
106 motorcycles belonging to the Company that were in its possession. The proceeds of the sale were
27,835,078 Belgian Francs, including expenses and VAT (equal to  690 thousand). With a ruling dated
May 27, 1999, later confirmed by an unappealable judgement from the Belgian Supreme Court dated June 21,
2001, the Appeal Court of Liege declared that the Belgian judge had no jurisdiction and annulled the
sentence of the Commercial Court dated September 14, 1998. As a consequence, the Company took a series of
actions against Performances designed to recover the proceeds of the auction sale, excluding VAT and part
of the legal expenses, totalling about 23 million Belgian Francs (equal to about  570 thousand).
Performances and Jet Set Car were declared bankrupt on October 14, 1999 and October 23, 2000,
respectively. At the present date, it appears very probable that, in consideration of the presence of
privileged creditors in the allocation of the bankruptcy assets, the Company will not recover the proceeds
mentioned. For this reason, no receivables have been recorded in relation to the counterparty since the
likelihood of recovering the auction proceeds is considered to be somewhat remote. The provision as of
December 31, 2003 is deemed to be adequate to cover expected legal costs.
    
     102 thousand for legal risks recorded by the German subsidiary in relation to a dispute with a dealer.
    
     37 thousand relating to the M. Hailwood agreement. Ducati Motor Holding S.p.A. and its subsidiary
Ducati North America Inc. have been called before the New Jersey District Court by the widow of the famous
motorcyclist Mike Hailwood, acting presumably as a trustee of his estate. Mrs Hailwood maintains that by
marketing and selling a model called the MH900e, using Mike Hailwoods initials as a tribute to his memory
and his career, the Company has violated the brand license that protected his name and initials, and the
related promotion rights, both of which belong to Mr Hailwoods estate. Mrs Hailwood has asked for
compensation for the damages resulting from this alleged violation, together with an injunction to prevent
the Company from using Mike Hailwoods name and initials any more. In order to settle the dispute, an
agreement has been reached between the Company and the counterparty. This agreement, which envisages
paying  375 thousand to the counterparty for the definitive closure of the dispute, in addition to
other agreements for future collaboration with the heir D. Hailwood;  338 thousand has already been
paid to the counterparty as of December 31, 2003. The remaining  37 thousand is awaiting payment.
    
     60 thousand recorded by Ducati North America Inc. as a provision for claims from former Cagiva Group
employees to cover risks associated with the legal action taken by a former Cagiva group employee seconded
to Cagiva North America, Inc. (now Ducati North America Inc.). In addition, Ducati Motor S.p.A. was also
involved in a dispute with the same former Cagiva group employee which was settled in May 2003 without
cost to the Company.The Ducati Group is also party to several legal proceedings that have arisen
in the ordinary course of business. In particular, the Ducati Group is party
to a legal dispute with Virginio Ferrari Racing, one of the two racing teams F-23




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##### Table of Contents



sponsored by Ducati in the 1998 Superbike World Championship. Ducati Motor
S.p.A. decided not to sponsor the Virginio Ferrari Racing team for the 1999
Superbike World Championship. Virginio Ferrari Racing served a writ on Ducati
Motor S.p.A. claiming around  6,714 thousand (Lire 13 billion) in alleged
damages suffered by Virginio Ferrari Racing and by Mr. Virginio Ferrari
following the claimed failure of Ducati Motor S.p.A. to honour its supposed
obligation to sponsor the racing team for three years. The Ducati Group
believes that this claim is unfounded and, consequently, has not made any
related provisions in the consolidated financial statements as of December
31, 2003.  
    
    Provision for corporate reorganization:  11 thousand: as discussed
above, at meetings held on March 5, 2003 (first part) and April 8, 2003
(second part), the Board of Directors of Ducati Motor Holding S.p.A.
approved a reorganization plan designed to improve efficiency that
provided for the termination by mutual agreement of a certain number of
employees in exchange for severance incentives. These terminations took
place during 2003.
The total estimated cost of the severance incentives envisaged in the above
plan was originally approximately  3.5 million. Under powers delegated by
the Board of Directors, the Managing Director revised this estimate to
approximately  4 million during 2003, given the increased number of
employees included in the plan and the consequently greater cost of the
severance incentives. The cost of the reorganisation plan relates entirely to
the 2003 financial year and has been recorded as a non-operating expense for
that year in accordance with Italian Accounting Standard No. 19. In
particular, paragraph C.V.h of this Standard establishes that the cost of
severance incentives incurred on implementing reorganisation plans relates to
the financial year in which the firm formally decides to implement such
plans, and that the related provisions must be charged to the non-operating
expense caption of the statement of operations. In the circumstances, this
reorganization plan was formally approved by the Board of Directors of the
Parent Company at meetings held on March 5 (first part) and April 8, 2003
(second part), while the revised estimate of the total cost of the plan was
made by the Managing Director, under powers granted by the Board, during
2003; this latest revision was then ratified at the Board Meeting held on
February 12, 2004. The provision of  11 thousand reflects residual
amounts relating to the plan as of December 31, 2003. Movements in the total of provisions for risks and charges for the periods
presented were as follows: Short-term portion
    
    Long-term portion
    
    Total( 000)December 31, 2001
    
    
    9,148
    
    
    
    3,305
    
    
    
    12,453Increases
    
    
    7,831
    
    
    
    3,998
    
    
    
    11,829(Decreases)
    
    
    (8,128
    )
    
    
    (3,305
    )
    
    
    (11,433
    )Foreign exchange net
    
    
    (274
    )
    
    
    
    
    
    
    (274
    )December 31, 2002
    
    
    8,577
    
    
    
    3,998
    
    
    
    12,575Increases
    
    
    6,274
    
    
    
    2,518
    
    
    
    8,792(Decreases)
    
    
    (14,546
    )
    
    
    
    
    
    
    (14,546
    )Reclassifications
    
    
    3,998
    
    
    
    (3,998
    )
    
    
    Foreign exchange net
    
    
    (292
    )
    
    
    
    
    
    
    (292
    )December 31, 2003
    
    
    4,011
    
    
    
    2,518
    
    
    
    6,529
 14. Income and other taxes payable Income and other taxes payable mainly include the income, property and
other non-income taxes due by each company in the Ducati group and withholdings
of tax made by the Company yet to be reimbursed at the balance sheet date. The
balance also includes the amount of  5,167 thousand due for substitutive
tax to be paid on the revaluation, as described above. 15. Employees leaving entitlements The movements in this account, which primarily relates to the entitlement
under Italian law as outlined in note 1, were as follows: F-24




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##### Table of Contents



December 31,
    
    December 31,2002
    
    2003( 000)Balance at the beginning of the year
    
    
    5,719
    
    
    
    7,126Charge for the year
    
    
    2,298
    
    
    
    2,375Foreign exchange, net
    
    
    (13
    )
    
    
    (18
    )Payments
    
    
    (878
    )
    
    
    (1,233
    )Other reclassifications
    
    
    
    
    
    
    27Balance at the end of the year
    
    
    7,126
    
    
    
    8,277
 16. Other long-term liabilities At December 31, other long-term liabilities were comprised of the
following items: December 31,
    
    December 31,2002
    
    2003( 000)Other finance obligations
    
    
    17,792
    
    
    
    14,939
 The decrease as of December 31, 2003 is due to the lease installments
repayment falling in the year 2003. This item includes amounts due beyond
December 31, 2008 of  1,602 thousand. 17. Shareholders equity Share capital The share capital of the Parent Company, Ducati Motor Holding S.p.A., as
of December 31, 2003 is unchanged versus December 31, 2002. Share premium reserve The share premium reserve, detailed below, as of December 31, 2002
amounted to  19,879 thousand and  19,488 thousand as of December 31,
2003. The gross value of the share premium reserve has been formed over the
years as follows: Par value
    
    Share premium
    
    TotalBalance at December 31, 2001
    
    
    10,117
    
    
    
    21,316
    
    
    
    31,433Allocation to accelerated depreciation reserve
    
    
    
    
    
    
    (1,437
    )
    
    
    (1,437
    )Balance at December 31, 2002
    
    
    10,117
    
    
    
    19,879
    
    
    
    29,996Allocation to reserve for own shares held
    
    
    
    
    
    
    (391
    )
    
    
    (391
    )Balance at December 31, 2003
    
    
    10,117
    
    
    
    19,488
    
    
    
    29,605
 The decrease compared with the previous year of  391 thousand reflects
the reclassification to the reserve for own shares held, as described in the
related note. At December 31, 1999, the shareholders have authorized a share capital of
up to 165,148,148 shares, including future split share capital increases
excluding pre-emptive rights, to service 8,148,148 share options granted
under the 1997 Plan described in note 18 (approved at the extraordinary
shareholders meeting of Ducati Motor Holding S.p.A. held on September 7,
1998). Subsequently, at a meeting on May 2, 2000, the shareholders authorized
the issuance of up to 12,000,000 shares, excluding preemptive rights, in
connection with the granting of stock options in the years 1999 through 2002
under the 1999 Plan, as described in note 18. Furthermore: F-25




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##### Table of Contents




    
    the by-laws of the Parent Company provide that the Board of Directors
is authorized to resolve, by majority vote of its members, a share
capital increase of up to  25,822,845 (Lit. 50,000,000,000) by one
or more issues of ordinary or preference shares to be offered to the
Companys shareholders by August 30, 2003, with the power to establish
the issue price on each occasion, including any premium for the shares
and the date from which they carry dividend rights. The above
mentioned authorization expired on August 31, 2003.  
    
    the shareholders at the extraordinary meeting of
September 7, 1998 voted to grant the Board of
Directors the power to issue in one or more blocks,
but in any case by and not beyond August 30, 2003,
bearer or registered bonds (convertible or
non-convertible) and/or warrants, up to a maximum
amount equal to the subscribed and paid-in share
capital, shown in the latest financial statements to
be approved at the date of the Board of Directors
meeting approving the bond issue in question. This
amount may be increased, pursuant to the resolution of
the Inter-ministerial Committee on Credit and Savings
on March 3, 1994 adopted on the basis of article 11 of
Decree 385/93, if the Companys shares are traded on a
regulated market at this date, by the amount of any
equity reserves shown in the same financial
statements, and in the case of an issue of convertible
bonds or with warrants, with the further restriction
resulting from the conditions set out below. The Board
of Directors was granted the widest power to establish
the bonds issue price and all its conditions on each
occasion, including the exchange ratio, the period and
the procedures for converting convertible bonds and
all the conditions for exercising the warrants. The
Board of Directors was also granted the power to
determine the extent and all the procedures for the
capital increase destined to cover any conversion of
these bonds and the exercise of these warrants, but
with the limitation that such an increase may be
approved by the Board of Directors using the power to
increase share capital granted it exclusively under
article 7.2 of the by-laws, and so respecting the
maximum amounts and all the terms indicated therein,
such that the Board of Directors may not authorize any
other capital increase, other than that authorized
under article 7.2 of the by-laws. The above mentioned
authorization expired on August 31, 2003.  At December 31, 2003, the following entities held an interest in the Parent
Company in excess of 2% of the issued share capital: Number of share
    
    %TPG Motorcycle Acquisition, L.P.
    
    
    52,657,750
    
    
    
    33.22
    %Harris Associated L.P.
    
    
    11,999,776
    
    
    
    7.57
    %Giorgio Seragnoli
    
    
    7,815,692
    
    
    
    4.93
    %
 Other reserves The Company has certain other reserves, comprised of: December 31,
    
    December 31,2002
    
    2003( 000)Legal reserve
    
    
    287
    
    
    
    287Statutory reserve
    
    
    146
    
    
    
    146Extraordinary reserve
    
    
    2,820
    
    
    
    2,820Own shares reserve
    
    
    
    
    
    
    391Revaluation reserve Law 342 (see note 7)
    
    
    24,238
    
    
    
    46,26527,491
    
    
    
    49,909
 These reserves have been allocated or reclassified from retained earnings
and share premium to provide a more appropriate presentation of the Companys
shareholders equity. Reconciliation of statutory net profit / (loss) and shareholders equity of the
Parent Company to consolidated net profit / (loss) and shareholders equity The statutory financial statements of the Parent Company, stated in
accordance with Italian civil and tax law, indicate distributable reserves
which differ from retained earnings / (losses) as presented in these
consolidated statements. The principal adjustments made in the consolidation of
Holding and its subsidiaries are shown in the following reconciliation of net
profit/(loss) and shareholders equity as reported in the statutory financial
statements of the Parent Company to those reported in the consolidated
financial statements for the years ended December 31, 2002 and 2003. F-26




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##### Table of Contents



Net profit
    
    
    
    
    
    Net profitfor the year
    
    
    
    
    
    for the yearended
    
    Shareholders equity
    
    ended
    
    Shareholders equityDecember 31,
    
    at December 31,
    
    December 31,
    
    at December 31,2003
    
    2003
    
    2002
    
    2002( 000)Per the statutory financial
statements of the Parent
Company
    
    
    (5,430
    )
    
    
    148,759
    
    
    
    (2,955
    )
    
    
    132,161Adjustments to conform with
Company accounting principles
    
    
    (22
    )
    
    
    153
    
    
    
    (525
    )
    
    
    209Elimination of tax-driven items
    
    
    (5,001
    )
    
    
    14,042
    
    
    
    2,968
    
    
    
    46,215Elimination of unrealized
inter-company profits
    
    
    1,084
    
    
    
    (8,356
    )
    
    
    1,503
    
    
    
    (9,440
    )Higher (lower) value of
consolidated investments with
respect to their carrying
value
    
    
    1,751
    
    
    
    3,736
    
    
    
    5,535
    
    
    
    3,334Other
    
    
    1,402
    
    
    
    3,247
    
    
    
    1,679
    
    
    
    1,870Tax effects recorded on the
consolidation adjustments
    
    
    6,526
    
    
    
    (3,182
    )
    
    
    (1,680
    )
    
    
    (14,608
    )Total consolidation adjustments
    
    
    5,470
    
    
    
    9,640
    
    
    
    9,480
    
    
    
    27,580Shareholders equity and net
profit (loss) of the Company
as per consolidated financial
statements
    
    
    40
    
    
    
    158,399
    
    
    
    6,525
    
    
    
    159,741
 18. Commitments and contingent liabilities The Company had, at December 31, certain other commitments, comprised of: December 31,
    
    December 31,2002
    
    2003( 000)Guarantees (1)
    
    
    511
    
    
    
    4,553Forward exchange contracts and interest rate swaps (2), (3)
    
    
    81,574
    
    
    
    87,675Contractual commitments (4)
    
    
    2,146
    
    
    
    1,781Total
    
    
    84,231
    
    
    
    94,009
  (1)
    
    At December 31, 2003, this amount included guarantees in favor of SNAM for the supply of natural gas (  70 thousand), of
Thermal, the lessor for Companys facilities, for leasing agreements (  483 thousand) and guarantees given in favour of
Ducati Desmo Finance 1 S.r.l. ( 4,000 thousand), and expires in June 2004.  (2)
    
    Hedges against receivables and sales orders principally in US dollars, Japanese yen and pounds sterling.  (3)
    
    At nominal value (see note 10)(4)
    
    The caption relating to Contractual commitments refers to a contract signed by the subsidiary Ducati Corse S.r.l. which
provides for commitments that have been delayed; if they are not met, this would give rise to liabilities versus the other party
to the contract. Based on the current outlook, the Group is of the opinion that it will be able to meet these commitments
without any liability. During 1999, the Companys Compensation Committee approved an end of
mandate entitlement of US$1,200,000, which would be payable to Mr. Minoli if
not re-appointed as Chairman of DMH or dismissed from office for reasons other
than just cause ( giusta causa or  giustificato motivo soggettivo) before
the officers 60th birthday. Subsequent to December 31, 1999, the Board of Directors also approved the
Compensation Committees proposal for an extension to the retention bonus
granted to certain senior officers, for another 3 years as approved by the
Committee on February 14, 2002. The amount will be based on the annual
percentage increase in measures of the Companys financial performance for
2002, 2003, and 2004, and will only be paid if the managers concerned
(including the F-27




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##### Table of Contents



Chairman and the Managing Director) are still working for the Company 12 months
after the approval of the consolidated financial statements (see note 12 for
the related liability accrued at December 31, 2003). Upon termination by the
Company of their employment for reasons other than just cause, the Company is
obligated to pay such officers three times the amount they are entitled. First Stock Option Plan On September 7, 1998, the extraordinary shareholders meeting of Ducati
Motor Holding S.p.A., approved, among other things, a stock option plan (the
1997 Plan) by means of a split capital increase excluding pre-emption rights,
pursuant to article 2441 of the Italian Civil Code, of up to Lire 8,148,148,000
at par, to be issued in one or more separate annual tranches by and not beyond
August 4, 2007. The maximum number of new ordinary shares to be issued is
8,148,148 with par value Lire 1,000 each and a share premium of Lire 400 each.
They are to be offered exclusively to DMHs then managing director and certain
senior officers and independent consultants of the Company (the
Beneficiaries) within a stock option plan as described below, The list of
beneficiaries, the exact number of newly-issued ordinary shares attributed, the
relevant dates of maturity and subscription rights, were approved by the Board
of Directors on August 4, 1998 and included in the Companys official corporate
records. Given the particular circumstances relating to this capital increase,
the long period established for its implementation and the fact that it is
nevertheless divisible, this share capital increase is considered to be
completed, for all legal purposes, year by year for the amount which is
effectively subscribed each year, with a consequent updating of the related
article in the articles of association and acquisition of voting and dividend
rights for the new shares issued. 1997 Plan Year ended December 31, 2003Number of shares
    
    Exercise price
    
    Market price
    
    Options outstanding at December 31, 2000
    
    
    6,831,741
    
    
    
    0.723
    
    
    
    1,965Options granted in period
    
    
    
    
    
    
    Options exercised in period
    
    
    229,000
    
    
    
    0.723Options forfeited in period
    
    
    65,148Options outstanding at December 31, 2001
    
    
    6,537,593
    
    
    
    0.723
    
    
    
    1,804Options granted in period
    
    
    
    
    
    
    Options exercised in period
    
    
    
    
    
    
    Options forfeited in period
    
    
    Options outstanding at December 31,
2002 (to be exercised by 2007)
    
    
    6,537,593
    
    
    
    0.723
    
    
    
    1,797Options granted in period
    
    
    
    
    
    
    Options exercised in period
    
    
    
    
    
    
    Options forfeited in period
    
    
    Options outstanding at December 31,
2003 (to be exercised by 2007)
    
    
    6,537,593
    
    
    
    0.723
    
    
    
    1,333Of which exercisable
    
    
    6,537,593
    
    
    
    0.723
    
    
    
    1,333
 In the opinion of the Directors, to the best of their knowledge, the 1997
Plan will not give rise to any liabilities for the Company since the Company
will deliver shares in settlement of share options under an approved share
capital increase. As a result, no provision was made in these financial
statements. The regulations of the 1997 Plan provide for the following: Attribution of rights to subscribe to the Companys ordinary shares.
Subscription rights to the Companys ordinary shares (as assigned above to
the beneficiaries) (the rights) accrue (i.e. the individual beneficiary
accrues the right to exercise the option, in accordance with the conditions set
out in the paragraph below) as of 31 December 2001. The extraordinary
shareholders meeting held on September 7, 1998 also passed resolutions
concerning the rules on cessation and transfer of the rights. Exercising the Rights. Without prejudice to the expiration of the
Rights provided by the Plan, once accrued, the Rights may be exercised, wholly
or partially (and so, the beneficiary may subscribe and pay up all or part of
the ordinary shares offered for subscription), on the occurrence of one of the
following events: (a) at the time of approving the Companys financial
statements for the 2003 financial year; or (b) when the Company TPG Acquisition
L.P. ceases to possess, directly or indirectly, at least 41% of the Companys
fully subscribed and paid-in share capital (in this case, F-28




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##### Table of Contents



the rights maturing by that date may be exercised in proportion to the
percentage of subscribed and paid-in share capital that TPG Acquisition
currently holds, directly or indirectly, in the Company, putting the percentage
corresponding to the 41% above, equal to 100% for the purposes of the related
calculation). After the occurrence of the events indicated in letters (a) or (b) above,
the Beneficiaries may exercise the Rights that they have matured, notifying the
Company during the period between the date the shareholders approve the annual
financial statements and 30 days thereafter, and in any case not beyond 4
August 2007. Following the transfer by TPG Acquisition of its stake when the
Company was listed on March 1999, 20% of the accrued rights become exercisable,
of which 1,500,963 were exercised. In the event that the shares are not quoted at the time the options are
exercised or the Company simply intends to fulfil its liability by disbursing
cash, the beneficiaries will receive this cash payment for an amount equal to
the difference between the market value per share (calculated on the basis of
the EBITDA shown in the latest approved financial statements prepared according
to the US accounting principles, multiplying by 5.0 less the net debt and then
divided by the number of shares outstanding at the date when the Options are
exercised) and the strike price, multiplied by the number of options matured
and exercised. Should the Company settle in cash, in full or in part, the
liabilities deriving from the exercise of the Options, the Company will pay any
additional amount to guarantee that the value received from the beneficiary
(net of the relevant income taxes) is not lower than the net value he would
have received if the Company had decided to give Shares and (where possible
pursuant to applicable tax laws) if the beneficiary had timely sold them on the
market. Second Stock Option Plan In addition, in order to reward the results achieved and at the same time
to give the Companys management an incentive, the Compensation Committee
passed a resolution on September 6, 1999 (ratified by the Board of Directors at
their next meeting on 13 September) laying down the details of a Stock Option
Plan including stock appreciation rights, with the following main
characteristics: a) the beneficiaries of the plan are the executive directors and managers
(whether employees or consultants and independent professionals) of the Company
and its subsidiaries as identified by the Compensation Committee, without
prejudice to compliance with the provisions of art. 2389 of the Italian Civil
Code; b) the beneficiaries under the terms below are offered rights that allow
them to subscribe or acquire ordinary shares in the Company, if it continues to
be listed on the Stock Exchange and upon approval of the Shareholders Meeting
in order to increase the share capital or to purchase parent company shares; or
an equivalent amount cash if there is not such resolution or in case the
Company is not listed; or a combination of these two factors; c) the number of Options to be attributed every year is fixed by the Board
of Directors. Starting from 2002, the Options can be attributed to the
beneficiaries by the Compensation Committee or by the Board of Directors,
pursuant to article 2381, clause 2 of the Italian Civil Code, with a resolution
to be passed within 60 days from the date of approval of the Companys
preliminary consolidated the income statement and balance sheet for the prior
fiscal year (the Consolidated Financial Statements). The maximum number of
Options to be assigned in a single year cannot exceed 2% of the Companys share
capital represented by outstanding shares (the Shares). In 2002, the Board
decided to grant Options representing approximately 2.5% of DMHs shares
capital due to the prior expiration of 1,190,638 unexercised Options under the
plan before 2002; d) the Options attributed accrue in three equal installments, unless
decided otherwise by the Board of Directors or by the Compensation Committee,
with an annual frequency, starting on 31 December of the year immediately
following the year of attribution; these Options can be exercised by the
beneficiaries from year to year, by sending a communication to the Company
within 30 days of the date of approval of the most recent Consolidated
Financial Statements. As concerns the Options relating to 1999, 2000 and 2001,
this communication must be sent within 30 days from the approval by the Board
of Directors of the Companys Consolidated Financial Statements and the Report
on Operations for the prior fiscal year. The options will become null and void
if they are not exercised within 7 years of assignment; e) At the meeting held on March 3, 2000, the Board of Directors resolved
to make an amendment to the Plan as adopted by the Compensation Committee in
September 1999 in light of the changes that have taken place in the tax
regulations governing income from employment, with specific reference to stock
option plans. It has been laid down that for the purpose of calculating the
Strike Price (as defined in the Plan), the value of the Shares which from now
on is defined as the value of the Companys ordinary shares at the date of the
offer of the related Options calculated on the basis of the tax rules in force
at the date of the offer (but without prejudice to the provision of the Plan
according to F-29




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##### Table of Contents



which the Strike Price cannot be lower than the consolidated net equity per
share at the date that the beneficiaries exercise their Options). We would
point out that the value of the Shares according to current tax rules is
determined on the basis of a straight average of the prices posted on the Stock
Exchange in the last month prior to the offer (the Finance Minister has
clarified that last month should be understood as the period that goes from
the day of reference (i.e. the day on which the Options are allocated) to the
same day of the previous calendar month), while the previous text of the Plan
made reference to the the average market price of the Shares on the Stock
Exchange during the six months prior to the month of allocation. An amendment is therefore needed to avoid the setting of the Strike Price
in a way that does not comply with the tax rules unintentionally generating
taxable income in the hands of those beneficiaries who, being employees, could
otherwise take advantage of the tax exemption foreseen in art. 48.2.g-bis) of
the Income Tax Consolidation Act. That amendment is applicable only to the
Options subsequent to those attributed for year 1999. f) in the event that the shares are not quoted at the time the options are
exercised, the beneficiaries will receive this cash payment for an amount equal
to the difference between the Market Value per Share (calculated on the basis
of the EBITDA shown in the latest approved financial statements based on, the
Italian accounting principles, multiplied by 10 less the consolidated net debt
and then divided by the number of shares outstanding at the date when the
Options are exercised) and the strike price, multiplied by the number of
options exercised. Should the Company settle in cash, in full or in part, the
liabilities deriving from the exercise of the Options, the Company (or the
subsidiary company for whom the beneficiary works) will pay any additional
amount to guarantee that the value received from the beneficiary (net of the
relevant income taxes) is not lower than the net value he would have received
if the Company had decided to give Shares and (where possible pursuant to
applicable tax laws) if the beneficiary had sold the Shares at Market Value per
Share as defined above. With the said resolutions of the Compensation Committee and Board of
Directors dated, respectively, September 6 and 13, 1999, the Company has
allocated a total of 1,000,000 Options to two beneficiaries (Federico Minoli
and Carlo Di Biagio) for the year 1999, according to the terms and methods laid
down in the Plan. Subsequently, as foreseen by these resolutions, the Managing
Director allocated, by 31 December 1999, a total of 2,159,259 Options to 51
other beneficiaries, as indicated in the list filed with the deeds of the
Company. The strike price laid down for all the options allocated for 1999
amounts to  2.879 per share, representing the average of the mean monthly
official price of the Companys shares quoted on the Italian Stock Exchange for
the months of June, July and August 1999. At the meeting held on March 3, 2000, the Board of Directors also decided
to allocate Options for the year 2000 as well according to the terms and
methods laid down in the Plan as indicated above subject to the maximum limit
foreseen therein of 3,159,259 Options. The Options were distributed with a
strike price of Euro 2.810 per share as follows: 500,000 options to the
Managing Director, Mr. Minoli, and the remaining 2,659,259 options to be
distributed at the discretion of the Compensation Committee (bearing in mind
that no beneficiary can have more than 500,000 options). The Committee assigned
these options to 71 other beneficiaries. The Options resolved in accordance
with this resolution will fall due in three instalments of 50%, 25% and 25%
with an annual maturity starting on 31 December 2001. Also as a result of these distributions of Options for the years 1999 and
2000, the shareholders meeting  held on May 2, 2000  approved the increase in
capital needed to service the allocations of Options already carried out for
1999 and 2000, fixing the exercise price for these grants at Euro 2.879 and
Euro 2.810, as well as the allocations of Options for the years 2001 and 2002,
in compliance with the Plan, with total exclusion of the option right pursuant
to art. 2441.5&8 of the Italian Civil Code, as its purpose is to act as an
incentive for the employees to hold shares in the Company, while being in the
Groups interest as far as the Groups consultants and external collaborators
are concerned. In particular, given that this is a divisible increase in
capital for cash, for a maximum number of 12 million ordinary shares (and
therefore with a nominal increase in the share capital up to a maximum of Euro
6,197,482) to be issued after the exercise of the Options by the respective
beneficiaries and with interest running from 1 January of each year in which
subscription and issuance of each of the shares in accordance with the law;
this increase can be carried out by the Board of Directors in various separate
tranches at annual intervals, in the terms and conditions laid down in the
Plan. This increase in capital can be carried out by no later than July 31,
2009, so as to permit issuance of Shares also to cover exercise (at latest 7
years after the offer) of any Options allocated in 2002. No more than 200
beneficiaries per year were offered options between 1999 and 2002. On May 2, 2000, the shareholders convened in an ordinary and extraordinary
meeting which resolved, among other things to give a mandate to the Board of
Directors or to the company body specifically delegated by the Board of
Directors or by the articles of association to implement the increase in
capital as described above. On March 15, 2001, the Board of Directors decided to assign options for
the year 2001, again under the terms and conditions listed above, for a total
number of 3,165,000 options. The options were allocated with a strike price of
 F-30




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##### Table of Contents



1.9882 in the following manner:  
    
    the Chairman of the Board of Directors, Federico Minoli, and the
Managing Director, Carlo Di Biagio, were each assigned 500,000
options,  
    
    the remaining 2,165,000 options were allocated at the discretion of
the Compensation Committee, which assigned them to 73 other
beneficiaries. These options fall due in three installments of 50%, 25% and 25% with an
annual maturity starting on December 31, 2002. On February 14, 2002, the Board of Directors decided to assign options for
the year 2002, under the terms and conditions listed above, for a total number
of 3,960,000 options. The options were allocated with a strike price of 
1.8069 in the following manner:  
    
    the Chairman of the Board of Directors, Federico Minoli, and the
previous Managing Director, Carlo Di Biagio, were each assigned 500,000
options,  
    
    the remaining 2,960,000 options were allocated to 90 other beneficiaries. These options will fall due in three installments of 50%, 25% and 25% with
an annual maturity starting on December 31, 2003. On February 13, 2003, in view of the stock market prices for the Companys
shares, the Board of Directors resolved to replace by a multiple of 5 the
multiple of 10 used in the formula to calculate the value of Ducati shares
should the Options be paid out in cash with the Company no longer listed on the
Stock Exchange. This modification relates to Options granted subsequent to the
date of the above resolution. The Board of Directors did not make any assignment of options for 2003. On March 11, 2004, the Board of Directors authorised the granting of
3,170,000 Options in relation to 2004, on the terms described above. These
Options were granted with an exercise price of  1.3170 as follows:  
    
    500,000 Options to the Chairman of the Board of Directors and Managing Director Federico Minoli;  
    
    the remainder, 2,670,000 Options, were granted to a further 65 beneficiaries. These Options vest in three annual instalments commencing from December 31,
2005 in the following proportions: 50%, 25% and 25%. F-31




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##### Table of Contents



1999 Plan Year ended December 31, 2003Number of shares
    
    Exercise price
    
    Market price
    
    Options outstanding at December 31, 2000 (**)
    
    
    6,073,518
    
    
    
    2.846
    
    
    
    1.965Options granted in period
    
    
    3,165,000
    
    
    
    1.9882
    
    
    
    n.a.Options forfeited in period
    
    
    (945,638
    )
    
    
    
    
    
    
    Options exercised in period
    
    
    
    
    
    
    
    
    
    
    Options outstanding at December 31, 2001 (***)
    
    
    8,292,880
    
    
    
    2.5368
    
    
    
    1.804Options granted in period
    
    
    3,960,000
    
    
    
    1.8069
    
    
    
    Options forfeited in period
    
    
    (382,500
    )
    
    
    
    
    
    
    Options exercised in period
    
    
    
    
    
    
    
    
    
    
    Options outstanding at December 31, 2002 (****)
    
    
    11,844,130
    
    
    
    2.3066
    
    
    
    1.7970Options granted in period
    
    
    
    
    
    
    
    
    
    
    Options forfeited in period
    
    
    (500,000
    )
    
    
    
    
    
    
    Options exercised in period
    
    
    
    
    
    
    
    
    
    
    Options outstanding at December 31, 2003 (*****)
    
    
    11,344,130
    
    
    
    2.3250
    
    
    
    1.333Of which exercisable
    
    
    8,954,130
    
    
    
    2.4487
    
    
    
    1.333
  **
    
    of which 3,044,259 will expire by the end of 2006 and 3,029,259 by the end of 2007.***
    
    of which 2,717,880 will expire by the end of 2006, 2,590,000 by the end of 2007 and 2,985,000 by the end of 2008.****
    
    of which 2,695,380 will expire by 2006, 2,525,000 by 2007, 2,860,000 by 2008 and 3,810,000 by 2009.*****
    
    of which 2,689,130 will expire by 2006, 2,475,000 by 2007, 2,800,000 by 2008 and 3,380,000 by 2009. Logically, the development of the plan will depend not only on how the
Options are exercised, but also on the decisions that the Company will make
from year to year regarding whether to offer newly-issued shares for
subscription or to pay out the corresponding amount of money. At the time of preparation of the financial statements as of December 31,
2003, no provision was made regarding the stock option plans, as the Company
intends to service the Plans by means of the increases in capital mentioned
above. Employee Stock Ownership Plan On February 14, 2002, the board approved an Employee Stock Ownership Plan
(ESOP) to facilitate the purchase of our ordinary shares by non-director
Ducati employees (including part-time employees) under indefinite contracts who
are resident in Italy. In each year, our managing director must decide to
implement the ESOP for it to be effective. Under the ESOP, each employee in any year through 2006 in which the ESOP
is implemented can request to purchase, at a discount, a number of our ordinary
shares not to exceed an amount equal to  3,000. The request must be
submitted within 20 days after the approval of our annual unconsolidated
financials statements. To satisfy purchases of shares made under the ESOP, we
will instruct a broker appointed by us to purchase on the Telematico on our
behalf the number of shares equal to the total euro amount so requested for
purchase by employees under the ESOP. On the same day of such purchase, we
assign the shares them to employees upon payment of the purchase price minus a
discount (funded by us) of one-third of such purchase price. To be able to
purchase our shares for delivery to the employees under the ESOP, we must
obtain authorization by our shareholders of a buy-back plan pursuant to which
we may repurchase shares for purposes of the ESOP. On May 7, 2002, the shareholders authorized DMH to purchase up to six
million shares on the Telematico within the subsequent 18 months, including to
deliver shares to employees under the ESOP. Shares are purchased at current
market prices within 20 days of receiving an employees request, provided that
such prices are not more than 10.0% above or below the market price of the
shares on the Telematico on the day prior to such purchase. Only shares
purchased as described above are used to satisfy purchases of shares under the
ESOP. The shares purchased by the employees under the ESOP may not be
transferred for a period of three years; as a result, under Italian tax law,
the discount we offer under the ESOP is not considered taxable income for the
employees. Pursuant to the provisions applicable to share buy-back plans, we
may not purchase our shares, including for delivery under the ESOP, unless,
among other things, the amount of distributable or available reserves in our
unconsolidated financial statements as approved for the prior year (after any
distribution of dividends or repurchase of our shares for purposes other than
as related to the ESOP that we may decide to make) is equal to or greater than
the aggregate euro amount that represents all shares that ESOP beneficiaries
would be entitled to purchase. If the amount of distributable and available
reserves is F-32




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##### Table of Contents



less than such aggregate euro amount, we may, at our discretion, implement the
ESOP at a per-beneficiary subscription limit that is less than  3,000. On May 7, 2002, the shareholders of the Parent Company convened in an
ordinary and extraordinary meeting which resolved, among other things:  1.
    
    to authorise, pursuant to articles 2357 of the Civil Code and 132 of
D. Lgs 58/1998, the purchase of parent company shares up to a maximum
of 6,000,000 (six million) shares of par value  0.52 each,
corresponding to around 3.8% of the share capital currently subscribed
and paid in, to be carried out in one or more tranches within 18
months of the date of the resolution for a total amount not exceeding
 10.8 million, equal to the amount of the retained earnings
available for distribution as shown in the financial statements as of
December 31, 2001; bearing in mind that the minimum purchase price of
each share must not be more than 10% (ten percent) lower than the
reference price of the shares posted on the Electronic Equity Market
by Borsa Italiana S.p.A. the day prior to each purchase and not more
than 10% (ten percent) higher than the reference price of the shares
posted on the Electronic Equity Market by Borsa Italiana S.p.A. the
day prior to each purchase;2.
    
    to authorise, pursuant to art. 2357 of the Civil Code, the sale of
parent company shares, in one or more tranches, of up to 6,000,000
shares of par value  0.52 each, corresponding to around 3.8% of
the share capital currently subscribed and paid in, purchased on the
basis of the above resolution;3.
    
    to grant a mandate to the Board of Directors and/or to the Managing
Director appointed by the Board, to purchase and sell parent company
shares as authorised above, with the widest possible powers and
rights, but in full compliance with the limit resolved and with
current laws on such matters. During 2003 the above authorisation from the shareholders has not been put
into effect and, consequently, no own shares have been acquired to service this
plan. Accordingly, no provision has been made as of December 31, 2003 in
relation to the above Share Plan. During 2003, the Parent Company has however acquired own shares for
purposes other than to service the above plan. These purchases were made in accordance with the shareholders
authorisation referred to above and were disclosed to Consob on a timely basis.
As of December 31, 2003, the parent company holds a total of 293,235 own
shares. 19. Net sales The Company operates predominantly in a single industry segment: the
design, manufacture and sale of motorcycles and related products. The Company
offers a wide product range of items for sale, manufactured in Italy and
marketed by a common sales force. Net sales by product class can be analyzed as follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Motorcycles
    
    
    345,475
    
    
    
    341,529
    
    
    
    315,959Other including principally parts/ components
    
    
    62,340
    
    
    
    71,442
    
    
    
    72,282407,815
    
    
    
    412,971
    
    
    
    388,241
 Net sales can be analyzed by geographic area as following: F-33




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##### Table of Contents



Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Italy
    
    
    92,448
    
    
    
    106,595
    
    
    
    112,896United States
    
    
    93,345
    
    
    
    70,115
    
    
    
    51,015France
    
    
    34,133
    
    
    
    33,650
    
    
    
    32,092United Kingdom
    
    
    34,614
    
    
    
    31,716
    
    
    
    32,560Germany
    
    
    46,453
    
    
    
    49,773
    
    
    
    42,454Japan
    
    
    41,074
    
    
    
    44,843
    
    
    
    38,254Other countries
    
    
    65,748
    
    
    
    76,279
    
    
    
    78,970407,815
    
    
    
    412,971
    
    
    
    388,241
 Gross margin (excluding depreciation) by product class can be analyzed as
follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Motorcycles
    
    
    125,858
    
    
    
    117,335
    
    
    
    90,605Other including principally parts/ components
    
    
    40,691
    
    
    
    46,372
    
    
    
    44,230166,549
    
    
    
    163,707
    
    
    
    134,835
 20. Cost of goods sold (excluding depreciation) Cost of goods sold (excluding depreciation) comprises principally costs of
materials, parts and components for production, personnel (both direct and
indirect), other manufacturing costs and variations in inventory (including
work-in-progress and finished goods). This item also includes expensed research
and development costs, which, for the years ended December 31, 2001, 2002 and
2003 amounted to  3,893 thousand,  4,879 thousand and  5,024
thousand respectively; the amounts for the years ended December 31, 2001, 2002
and 2003 include such costs incurred specifically for the racing program for
 1,472 thousand,  1,497 thousand, and  1,400 thousand. This item
excludes depreciation of the property, plant and equipment employed in the
production cycle. 21. Selling, general and administrative expenses (excluding depreciation) Selling, general and administrative expenses (excluding depreciation)
comprises principally variable sales costs, related personnel costs,
commercial, advertising and promotion costs, expenses relating to the Companys
racing program, product warranty expense and charges for doubtful accounts.
Advertising and promotion costs of the Ducati brand name for the years ended
December 31, 2001, 2002 and 2003 amounted to  7,804 thousand,  9,494
thousand and  7,856 thousand, respectively. Expenses incurred on the racing
program for the years ended December 31, 2001, 2002 and 2003 amounted to 
6,115 thousand,  6,540 thousand and  15,532 thousand, respectively.
Selling, general and administrative expenses exclude the depreciation of the
property, plant and equipment employed in the commercial and administrative
areas of the Companys activities. 22. Depreciation of property, plant and equipment This item comprises the depreciation of property, plant and equipment
(note 6) as follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Land and buildings
    
    
    911
    
    
    
    1,068
    
    
    
    1,201Plant and machinery
    
    
    2,857
    
    
    
    2,882
    
    
    
    3,384Industrial and sales tooling/equipment
    
    
    5,061
    
    
    
    6,461
    
    
    
    8,776Other
    
    
    1,169
    
    
    
    1,582
    
    
    
    1,6529,998
    
    
    
    11,993
    
    
    
    15,013
 The caption Cost of goods sold is not defined under Italian GAAP and,
therefore, the Companys underlying F-34




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##### Table of Contents



accounting records do not contain an allocation of depreciation between cost
of goods sold and selling, general and administrative expenses. As such, the
charge for depreciation has been presented as a separate line item on the face
of the consolidated statement of operations. However, on the basis of its own
cost accounting, management has estimated that depreciation for the periods
presented could be analyzed as follows (unaudited): Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Cost of goods sold
    
    
    6,559
    
    
    
    9,733
    
    
    
    11,307Selling, general and administrative expenses
    
    
    3,439
    
    
    
    2,260
    
    
    
    3,7069,998
    
    
    
    11,993
    
    
    
    15,013
 23. Amortization of intangible assets This item comprises the amortization of intangible assets (note 7) as
follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Incorporation and expansion costs
    
    
    2,363
    
    
    
    231
    
    
    
    231Research and development costs
    
    
    7,556
    
    
    
    8,929
    
    
    
    10,964Concept costs
    
    
    117
    
    
    
    90
    
    
    
    51Patents and rights on inventions
    
    
    3,572
    
    
    
    1,710
    
    
    
    1,739Licenses, trademarks and similar rights
    
    
    5,576
    
    
    
    5,577
    
    
    
    5,576Goodwill due to the 1996 transaction
    
    
    1,009
    
    
    
    1,009
    
    
    
    1,009Goodwill ex Gio.ca Moto Srl
    
    
    13
    
    
    
    13
    
    
    
    6Non competition 1996 transaction
    
    
    1,033
    
    
    
    1,033
    
    
    
    1,033Goodwill subsidiaries
    
    
    159
    
    
    
    152
    
    
    
    105Goodwill on consolidation
    
    
    144
    
    
    
    144
    
    
    
    145Incidental costs of share offering
    
    
    1,884
    
    
    
    1,884
    
    
    
    1,884Other
    
    
    1,156
    
    
    
    1,219
    
    
    
    1,13324,582
    
    
    
    21,991
    
    
    
    23,876
 Patents and rights on inventions comprised, for the year ended December
31, 2001, the write downs of fixed assets for  1,720 thousand and refer to
software belonging to Ducati.Com S.p.A. (see note 7). 24. Other operating revenues Other operating revenues mainly relate to rental and sponsorship income,
sales of scrap and sundry materials and licensing revenues. The increase of
 12,383 thousand is primarily due to higher sponsorship revenues and
essentially reflects the signing of new sponsorship contracts for  12.3
million consequently to the debut of Ducati Corse S.r.l. in the MotoGP
championship. Other operating revenues include also  1,682 thousand of
government grants for research and development projects. 25. Interest income and expense The composition of interest income is as follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Income from certificates of deposit and
securities repurchased under resale
agreements
    
    
    114
    
    
    
    212
    
    
    
    Interest earned at banks and on tax refund
    
    
    669
    
    
    
    1,102
    
    
    
    1,619Other
    
    
    481
    
    
    
    66
    
    
    
    5791,264
    
    
    
    1,380
    
    
    
    2,198
 F-35




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##### Table of Contents



The composition of interest expense is as follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Interest on borrowings (see note 10): short-term debt
    
    
    (776
    )
    
    
    (594
    )
    
    
    (934
    ) long-term debt
    
    
    
    
    
    
    Other financial charges
    
    
    (7,092
    )
    
    
    (6,269
    )
    
    
    (5,175
    )Interest expense on notes
    
    
    (6,146
    )
    
    
    (5,989
    )
    
    
    (5,362
    )(14,014
    )
    
    
    (12,852
    )
    
    
    (11,471
    )
 Interest on short and long-term debt relates to loans granted by credit
institutions (see note 10). Other financial charges mainly relate to charges
and fees on current bank accounts, on export and import transactions, charges
on factoring arrangements and cash discounts. The interest expense on the bond, booked to accrued expenses is shown net
of the interest income linked to the repurchase of two tranches of the bond
loan as explained in the note on Borrowings. 26. Other non-operating income/(expense), net Other non-operating income comprise: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Income:Trademark revaluation (see note 7)
    
    
    
    
    
    
    
    
    
    
    5,234Gains on the disposal of fixed assets
    
    
    
    
    
    
    262
    
    
    
    Other
    
    
    151
    
    
    
    26
    
    
    
    98151
    
    
    
    288
    
    
    
    5,332
 Other non operating income for 2002 shows the gain realized on the sale of
the building owned by Ducati North America Inc. Ltd. The building was sold
because the Company transferred its head office from New Jersey to California. Other non operating income for 2003 includes  5,234 thousand related
to the reversal of deferred tax liabilities accrued in previous years, as a
result of the revaluation of trademark (see note 7). Other non-operating expenses comprise: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003(  000)Expenses:Losses on disposal of fixed assets
    
    
    (46
    )
    
    
    (3
    )
    
    
    Out of period taxation
    
    
    
    
    
    
    
    
    
    
    (587
    )Restructuring costs
    
    
    
    
    
    
    
    
    
    
    (4,036
    )Other
    
    
    (132
    )
    
    
    (150
    )
    
    
    (151
    )(179
    )
    
    
    (153
    )
    
    
    (4,774
    )Net other
non operating income/(expenses)
    
    
    (28
    )
    
    
    135
    
    
    
    558
 Non operating expenses for the year 2003 include  4,036 thousand relating
to the reorganization plan described in note 1.a paragraph Other corporate
events. F-36




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##### Table of Contents



27. Income taxes Current taxes The Company and its Italian subsidiaries are subject to two income taxes:
(i) IRPEG (corporate income tax) and (ii) IRAP. IRPEG was levied at a rate of 37% for 2000. Legislation was enacted in
December 2000 that reduced the rate to 36% for 2001 and 2002 and to 35% for
2003. Additional legislation was enacted in December 2002 that reduced the rate
to 34% for 2003. In this regard, Decree 344 dated December 12, 2003 (the
Tremonti reform) reduced the ordinary IRPEG corporate tax rate (now renamed
IRES) from the current 34% to 33%, commencing from the 2004 tax year.
On the other hand, in 2000, 2001 and 2002, the Company and its Italian
subsidiaries were eligible for beneficial regimes entailing the application of
a lower rate of IRPEG on a portion of corporate income determined in accordance
with the criteria described below, which are no longer available. Italian companies listed on an E.U. stock exchange as of January 21, 1998,
such as the Company, were able to benefit  for the three year period following
the year of the listing  from the application of a reduced IRPEG rate equal to
7% on a portion of their business income (such regime is commonly referred to
as Super DIT). That portion of the business income is equal to 7% of 120%
(140% as of 2001 and 2002) of the sum of (i) the overall shareholder cash
contribution and (ii) the retained earnings and profits net of any
distribution, as reflected in the Companys balance sheet as of the end of each
accounting period following that pending on September 30, 1996 (the Eligible
Income). Such benefit is conditioned upon the Companys net equity not
exceeding  258 million in the year preceding the one in which the benefit
is claimed. Italian
companies subject to IRPEG, such as the Companys Italian
subsidiaries, are eligible for a regime similar to the Super DIT described
above (such regime is commonly referred to as DIT or Dual Income Tax) with
the following differences: (i) the reduced IRPEG rate equals 19% and (ii) the
average IRPEG rate applicable to the overall companies business income cannot
be lower than 27%. When calculating the current taxes of the subsidiaries
Gio.ca.Moto and Ducati Corse S.r.l., these companies took advantage of the Dual
Income Tax for the year ended December 31, 2001. The calculation of income taxes in the consolidated financial statements
for the year ended December 31, 2003 also takes into consideration the tax
effects of tax loss carryforwards for Italian companies, available for income
tax purposes. The Company has applied the provisions of Accounting Principle
No.25 on income taxes, issued by the Italian Accounting Profession in March
1999. On January 1, 1998, pursuant to Decree 466 dated December 15, 1997, the
IRAP tax (regional tax on production activities) was introduced into the
Italian tax system. This replaced a number of other taxes such as local income
taxes (ILOR), the capital tax, etc. The tax is determined on the basis of net
value of production, in accordance with criteria laid down in above mentioned
Decree. Since January 1, 1998, the previous rate structure has been replaced by
a corporate income tax of 37% plus IRAP of 4.25%. For IRAP purposes, certain
costs are not considered deductible (for example payroll costs and financial
charges) and, accordingly, in order to quantify deferred taxes at December 31,
2003, rates of 33% or 37.25% have been used according to whether certain costs
are deductible or not for IRAP purposes. Important reforms to the Italian tax system were also introduced by the
Governments decree law concerning its initial measures to relaunch the economy
(the so-called First 100 Days Law), as follows:  
    
    Exemption from taxation of part of the profits reinvested in fixed
assets used in the business (Tremonti-bis).This benefit is applicable
in the tax period during which the law came into effect, after June
30, 2001, and in the subsequent period, excluding from taxable income
50% of the net capital investments made during the said periods that
are over and above the average investments made during the previous
five years, with the chance to exclude from this calculation the
highest period of investment.  
    
    With reference to the DIT system, the First 100 Days Law introduced
the possibility of choosing between this and the exemption of
reinvested profits, offering the chance for businesses that have
already carried out sizeable increases in capital that are relevant
for DIT purposes can continue to take advantage of this benefit. The
D.I.T. would be cancelled as far as the provision is concerned but
would not be completely cancelled from an operating point of view. In
fact, the provision in question lays down the following: F-37




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##### Table of Contents




    
    the capital increases which remain relevant for DIT purposes are those carried out as of 30 June 2001;  
    
    the businesses that carried them out will continue to enjoy the related benefits.  
    
    Extension of the category of tax-deductible investments to
staff training and education expenses. The
benefit involves 50% of the entire amount of the expenses incurred without having to make any
comparison with the average amount spent in previous years. As regards the Tremonti-bis law and their deductibility of investments in
fixed assets, the Company and partially its subsidiary Ducati Corse S.r.l. took
advantage of this benefit during the year ended December 31, 2002. The benefit
is recognized as a reduction of income tax expense in the year in which the
credit is claimed for tax purposes. Deferred tax liabilities (assets) The increase in deferred tax assets during the year ended December 31,
2003 is mainly related the effect the revaluation of the brand name pursuant to
Law 250 of December 24, 2003, which reversed certain tax entries recorded in
the statutory financial statements of certain group companies that were
previously eliminated on consolidation with recognition of the related deferred
tax charge, as well as recognition of the tax losses carried forward by Ducati
Motor Holding S.p.A. and Ducati North America Inc., as well as to adjustments
made for tax purposes to the statutory accounts of individual Group companies
which are reversed in the consolidation, booking the related deferred taxes;
the increase is also due to revised tax planning on the part of the Parent
Company. Deferred tax assets and liabilities as of December 31, 2003 were
calculated at current tax rates at the balance sheet date, bearing in mind the
period when they will presumably reverse as allowed by the above mentioned
accounting principle No. 25. The difference between the taxes calculated by applying the normal tax
rate to pre-tax profit and the actual net taxes shown in the consolidated
statement of operations is mainly due to different rates applied in the various
countries where the foreign subsidiaries operate, as well as to the application
of IRAP only to the Parent Company and the Italian subsidiaries; IRAP can be
applied at varying rates up to a maximum of 5.25%. Deferred income taxes have not been calculated on the undistributed
earnings of foreign subsidiaries, as these earnings have been substantially
reinvested and there are no plans to initiate any action that would precipitate
payment of income taxes thereon. The overall tax charge amounts to the following: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Current taxation
    
    
    3,197
    
    
    
    4,106
    
    
    
    3,378Deferred taxation
    
    
    5,697
    
    
    
    (2,120
    )
    
    
    (3,298
    )8,894
    
    
    
    1,986
    
    
    
    80
 The expected income tax charge, determined pursuant to the applicable tax
rates to profits, differs from the actual tax item shown in the consolidated
Statement of Operations as a result of the following:  
    
    the use of carry-forward net operating losses accumulated at Ducati
Motor Holding S.p.A.s level until 1999 which were offset against the
income of Ducati Motor S.p.A. merged into the Company in 2000 and the
income of Gio.Ca Moto International S.r.l. merged into the Company in
2001;  
    
    benefits arising from the tax-driven write-off of investments in
Ducati North America Inc. in Ducati Motor Holding S.p.A.s own
statutory financial statements;  
    
    the effect of certain permanently non deductible expenses;  
    
    the partial reversal of a valuation allowance previously recorded on
the tax benefits of operating loss carry forwards. In the financial statements for the year ended December 31, 2003, the
Company recognized deferred tax assets relating to the carry-forward net
operating losses of the subsidiary Ducati.Com S.r.l., Ducati Japan and Ducati
North F-38




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##### Table of Contents



America Inc.. given the reasonable certainty of such companies profitability in
future years. The tax benefit was calculated at the rates applicable at the
balance sheet date in the country concerned. Movements in the total of deferred income tax (assets)/liabilities for the
periods presented are as follows: Assets
    
    Liabilities
    
    Total( 000)December 31, 2001
    
    
    (3,076
    )
    
    
    1,031
    
    
    
    (2,045
    )Increases/decreases
    
    
    (1.134
    )
    
    
    (996
    )
    
    
    (2,130
    )Foreign exchange net
    
    
    221
    
    
    
    
    
    
    
    221Other movements
    
    
    270
    
    
    
    
    
    
    
    270December 31, 2002
    
    
    (3,719
    )
    
    
    35
    
    
    
    (3,684
    )Increases/decreases
    
    
    (1,655
    )
    
    
    (6,877
    )
    
    
    (8,532
    )Foreign exchange net
    
    
    138
    
    
    
    169
    
    
    
    307Other movements *
    
    
    
    
    
    
    (5,202
    )
    
    
    (5,202
    )December 31, 2003
    
    
    (5,236
    )
    
    
    (11,875
    )
    
    
    (17,111
    )
 * Other movements mainly relate to the surplus arising from the revaluation
pursuant to Law 350 of December 23, 2003, that is subject to flat-rate taxation
at 19%; as a result, deferred taxes previously provided in the consolidated
financial statements as of December 31, 2002 totaling  5,167 thousand have
been reclassified as amounts due to the tax authorities, since they represent
the flat-rate taxation payable on the revaluation. The difference between this
flat-rate taxation and the deferred tax provided in the consolidated financial
statements as of December 31, 2002 using the income rate of 38.25%,  5,234
thousand, has been released to the statement of operations for 2003 as
non-operating income. This is because the net book value of the brand name
reported in the consolidated financial statements as of December 31, 2003 is
the same as that reported in the statutory financial statements of
the Parent
Company, which will be used to calculate the amortization deductible for fiscal
purposes. Accordingly, there are no longer any timing differences in relation
to the brand name that would give rise to a deferred tax liability. Deferred tax assets and liabilities have been accounted for in accordance with
Accounting Principle No. 25. Fiscal periods since 1998 or since the incorporation date of the companys
Italian subsidiaries if later, for which December 31 of each year represent the
statutory closing date, are still open to assessment for both income tax and
Value Added Tax (VAT) purposes; for the overseas subsidiaries fiscal periods
are open as follows:  
    
    Ducati North America, Inc. from 1998;  
    
    Ducati Deutschland G.m.b.H. and Ducati France SA from 1998;  
    
    Ducati Japan K.K from 1998;  
    
    Ducati Benelux B.V. and Ducati U.K. Limited from 1999. At December 31, 2003, there are no significant tax claims with respect to
either the Company or the Companys subsidiaries, except for a tax audit
currently in process in Ducati Deutchland G.m.b.H. from which the Group does
not expect significant liabilities. The other tax provision for  35 thousand refers to  9 thousand
relating to Ducati France S.A. and  26 thousand relating to a tax risks
pertaining to Gio.Ca Moto International S.r.l., merged with the Parent Company
on December 31, 2001. 28. Transactions with related parties During the three year period ended December 31, 2003, transactions with
related parties included only transactions with the members of Board of
Directors, as follows: Year ended December 31, 2001  -
    
    Consulting fees and expense reimbursements to a member of the
Board of Directors, Abel Halpern,  16 thousand.-
    
    Emoluments and consulting fees paid to Federico Minoli, in
addition to remuneration,  1,645 thousand. F-39




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##### Table of Contents



-
    
    Compensation to Carlo Di Biagio for acting as Managing Director
and Head of Investor Relations,  1,130 thousand.-
    
    A commercial services agreement worth  232,000 was signed
with Dream Engine S.r.l. (Sole Director, Federico Minoli) for the
organisation of an event in June 2001 called the Motogiro dItalia
(Motorbike Tour of Italy) involving owners of vintage motorbikes
(Ducati or otherwise). These transactions were carried out on an arms-length basis. Year ended December 31, 2002  -
    
    Emoluments and consultancy fees to Federico Minoli for 
934 thousand.-
    
    Compensation to Carlo Di Biagio for acting as Managing
Director and Head of Investor Relations for  1,096 thousand.-
    
    Compensation for the year 2002 for acting as Director of
 20,000 to each of the following: U. Weiss, M. Benetton, D.
Razzano, G. Seragnoli, P. Ferrari and P. Pietrogrande.-
    
    In addition, an accrual for 2002 directors fees of Euro
15,000 was made for each of the following Directors: U. Weiss, A.
Halpern, J. Choi, D. Bonderman, P. Pietrogrande, P. Ferrari, G.
Seragnoli, M. Benetton and D. Razzano.  -
    
    A commercial services agreement worth  232 thousand was signed
for 2002 with the company Dream Engine S.r.l., whose Sole Director is
Federico Minoli, for the organisation of an event called the Motogiro
dItalia (Motorbike Tour of Italy) involving owners of vintage
motorbikes (Ducati or otherwise), which took place in June 2002. Dream
Engine S.r.l. is also held 50% by Federico Minoli. The following
agreements have also been signed with the same company: (i) A
sponsorship agreement worth  207 thousand for the organisation of
the Motogiro dItalia involving owners of vintage motorbikes (Ducati
or otherwise), which took place in July 2003; (ii) a sponsorship
agreement worth  135 thousand for Ducati Motor Holding S.p.A. to
sponsor an event called Centopassi (One Hundred Steps) which Dream
Engine S.r.l. organized in 2003 involving the owners of Ducati and
other makes of motorcycle. These transactions were carried out on an arms-length basis. Year ended December 31, 2003 CollaborationDirectors
    
    and/or
    
    Expensesemoluments
    
    remuneration
    
    reimbursedEuro
    
    Euro
    
    EuroFederico Minoli
    
    
    *250,000
    
    
    
    872,288
    
    
    
    58,683Giorgio Seragnoli
    
    
    15,000
    
    
    
    
    
    
    
    Mauro Benetton
    
    
    15,000
    
    
    
    
    
    
    
    David Bonderman
    
    
    15,000
    
    
    
    
    
    
    
    Alessandro M. M. Foti
    
    
    12,500
    
    
    
    
    
    
    
    Abel Halpern
    
    
    15,000
    
    
    
    
    
    
    
    13,423Andrea Lipparini
    
    
    11,250
    
    
    
    
    
    
    
    Paolo Pietrogrande
    
    
    15,000
    
    
    
    289,725
    
    
    
    Dante Razzano
    
    
    15,000
    
    
    
    
    
    
    
    Giles Thorley
    
    
    10,000
    
    
    
    
    
    
    
    Ulrich Weiss
    
    
    15,000
    
    
    
    
    
    
    
    
  *
    
    Waived emoluments of  15,000 by Minoli. The emoluments of the directors Alessandro M. M. Foti, Andrea Lipparini
and Giles Thorley have been recorded on an accruals basis with reference to
their dates of appointment being, respectively, March 5, 2003, April 8, 2003
and May 7, 2003. F-40




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##### Table of Contents



At the Board Meeting held on April 8, 2003, the directors also voted to
make a voluntary contribution of  1,000 each out of their annual
remuneration to a no-profit organisation for projects to be carried out in
certain areas of central Africa. Two commercial services agreements were signed with Dream Engine S.r.l.,
whose sole director and indirect controlling quotaholder is Federico Minoli.
These agreements involved, respectively, the organisation of the Motogiro
dItalia and the Centopassi events which were held during the months of July
and September 2003, respectively, at a total cost of  392 thousand. A commercial services agreement has been signed with Contemporanea
Progetti S.r.l., in which a relation of Paolo Pietrogrande holds a 30%
interest. Work on this agreement to brighten up the assembly line was
completed by December 2003 at a cost of  17 thousand. The Board of Directors has granted a contract for the training of
personnel to Knowledge Lab S.r.l., in which Andrea Lipparini holds a 22.5%
interest. The value of this work, to be completed by December 2004, is about
 12,000. These transactions were carried out at market conditions. For more information,
refer to the section entitled Commitments not disclosed in the balance sheet
and in this report under Stock Option Plans. At December 31, 2003, members of the Board of Directors held shares in
Ducati Motor Holding S.p.A. as follows: Year endedDecember 31,2003Giorgio Seragnoli
    
    
    7,815,692Federico Minoli
    
    
    225,000Alessandro M. M. Foti
    
    
    1,000
 Refer to notes 17 and 18 in relation to share option plans and other
entitlements involving the Directors. 29. Application of generally accepted accounting principles in the United
States of America The consolidated financial statements of the Company as presented have
been prepared in conformity with Italian GAAP, which differ in certain
significant respects from U.S. GAAP. Following is a description of the
principal valuation and measurement differences between Italian GAAP and U.S.
GAAP. (a) Business combination The Acquisition has been accounted for under Italian GAAP as a purchase.
Accordingly, the purchase consideration was allocated to the assets acquired
and the liabilities assumed based on their fair values as determined by a court
appointed expert. The excess of the purchase consideration (excluding
incidental acquisition costs) over the fair value of the net assets acquired,
as calculated under Italian GAAP, was allocated, first, to identifiable
intangible assets (trademark and the Cagiva agreement not to compete) with the
remainder to goodwill. Acquisition costs are separately capitalized as an
intangible asset and amortized over a period of five years. Under U.S. GAAP,
the acquisition has been accounted for under the purchase method and in
conformity with the provisions of EITF Issue No. 88-16, Basis in Leverage
Buyout Transactions. Acquisition costs are considered part of the purchase
consideration in the calculation of the excess of purchase consideration over
the fair value of the net assets acquired. Under U.S. GAAP, the total purchase
consideration consisted of the following: F-41




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##### Table of Contents



Initial
    
    Adjustment
    
    Total(  000)Ordinary shares issued
    
    
    35,429
    
    
    
    
    
    
    
    35,429Cash paid
    
    
    72,253
    
    
    
    
    
    
    
    72,253107,682
    
    
    
    
    
    
    
    107,682Subsequent purchase price adjustments
    
    
    (2,034
    )
    
    
    12,911
    
    
    
    10,877Purchase consideration
    
    
    105,648
    
    
    
    12,911
    
    
    
    118,559Incidental costs of the Acquisition
    
    
    14,048
    
    
    
    
    
    
    
    14,048Total purchase consideration under U.S. GAAP
    
    
    119,696
    
    
    
    12,911
    
    
    
    132,607
 Under the provisions of EITF Issue No. 88-16, the accounting basis of the
assets and liabilities of the Ducati motorcycle business has been assigned a
value that is part fair value (51%) and part predecessor cost (49%). The effect
of the U.S. GAAP accounting is to eliminate the fair value adjustment under
Italian GAAP (primarily relating to buildings, goodwill and trademark)
associated with the 49% interest in the Company retained by Cagiva and
establish related deferred taxes. For U.S. GAAP purposes, the allocation of
Holdings investment in the individual assets and liabilities of the
Predecessor Business has been determined in accordance with EITF Issue No.
90-12, Allocating Basis to Individual Assets and Liabilities for Transactions
Within the Scope of Issue No. 88-16. The allocation of the total purchase consideration under U.S. GAAP is as
follows: Initial
    
    Adjustment
    
    Total(  000)Book valueliabilities in excess of assets at
September 25, 1996 under Italian GAAP
    
    
    (39,020
    )
    
    
    
    
    
    
    (39,020
    )U.S. GAAP adjustments
    
    
    (2,086
    )
    
    
    
    
    
    
    (2,086
    )Book value of liabilities in excess of assets acquired
    
    
    (41,106
    )
    
    
    
    
    
    
    (41,106
    )Adjustments:o            Property, plant and equipment
    
    
    10,122
    
    
    
    
    
    
    
    10,122o            Non-compete agreement
    
    
    7,746
    
    
    
    
    
    
    
    7,746o            Deferred taxes
    
    
    3,899
    
    
    
    
    
    
    
    3,899o             Brand name
    
    
    67,793
    
    
    
    6,585
    
    
    
    74,378o            Predecessor basis adjustment
    
    
    71,242
    
    
    
    6,326
    
    
    
    77,568119,696
    
    
    
    12,911
    
    
    
    132,607
 This accounting under U.S. GAAP has resulted in a book value of the brand
name lower than its basis for Italian tax purposes. Over subsequent accounting
periods, the tax benefit associated with deducting the excess of tax-deductible
brand name is recognized when realized in the tax return as a reduction to the
carrying value of the brand name. Furthermore, this accounting has resulted in the recognition of an
additional gain on disposal (classified as other non-operating income) on the
sale of a fixed asset, gross value of  628 thousand, in 1999, which was
acquired at the time of Acquisition. (b) Research and development Under Italian GAAP certain costs, principally research and development
expenditures on specific product development projects, are deferred and
amortized over the estimated useful lives of the respective assets. Under U.S.
GAAP, such costs are expensed as incurred, as these costs do no meet the
requirement of capitalization under U.S. GAAP. (c) Costs associated with initial public offering Under Italian GAAP, costs associated with the Companys initial public
offering, including underwriting discounts, commissions, offering expenses and
registration taxes are capitalized as an intangible asset and are being
amortized over a period of five years from the date of the offering. Under U.S.
GAAP, these costs are considered to be directly associated with the capital
increase from such an offering and consequently have been deducted from the
share premium account within shareholders equity, net of the expected income
tax benefit from the deductibility of these costs over its amortization period
for fiscal purposes. (d) Derivative financial instruments The Company utilizes forward exchange contracts to hedge foreign currency
risks on export sales and forecasted F-42




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##### Table of Contents



transactions. Under Italian GAAP, gains and losses on forward exchange
contracts are deferred where the contract is designated to a forecasted
transaction. In addition, the Company utilizes interest rate swaps to hedge the
risk associated with variability in interest rates associated to its short term
borrowings; under Italian GAAP, interest cost is calculated and charged to the
income statement at the hedged interest rate, while the derivative instrument
is recorded as an off-balance sheet item. Also, under Italian GAAP,
premiums/discounts are amortized on a straight line basis. Under U.S. GAAP, the Company has adopted SFAS No. 133, as amended by SFAS
No. 138 and SFAS No. 149, Accounting for Derivative Financial Instruments,
(SFAS 133) as of January 1, 2001, as required. The cumulative effect of the
adoption of SFAS 133 resulted in a gain of approximately  1,906 thousand,
net of income taxes  1,283 thousand. The Company does not qualify for hedge
accounting provisions in accordance with SFAS 133 for its hedging derivatives,
as it does not have the required contemporaneous documentation; therefore all
derivative instruments (forward contracts and interest rate swaps) are recorded
at fair value, with adjustments to fair value at each reporting date recorded
in the consolidated statement of operations. (e) Dealer incentivesoperating costs and financial expenses Under Italian GAAP, the Companys financing of dealers flooring as an
incentive and cash discounts granted to customers are treated as a financial
expense as interest matures. In addition, bonus payments granted to dealers
completion of a certain volume of purchases are recorded as selling expenses.
Under U.S. GAAP, flooring incentives and cash discounts are accrued at the time
of grant and are classified as a reduction of revenue, in accordance with EITF
01-09, Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendors Products), (issue 1), and the amount of such
reduction in 2001, 2002 and 2003 was  4,291 thousand,  2,095 thousand
and  2,451 thousand, respectively. In addition, under U.S. GAAP volume
bonuses are accrued at the time of revenue recognition and are classified as a
reduction of revenue, in accordance with EITF 01-09 (issue 6), and the amount
of such reduction in 2001, 2002 and 2003 was  16,436 thousand,  16,500
thousand and  14,455 thousand, respectively. (f) Software capitalization Under Italian GAAP, costs relating to the preliminary project and post
implementation phases of software projects may be capitalized and amortized
over their useful economic life. Under U.S. GAAP, more specifically the
provisions of SOP 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use, such costs are expensed as incurred. (g) Deferred taxes Under Italian GAAP, deferred taxes are recognized on the entire difference
between the reported amount of a brand name (see note (a)) and its tax basis. Under U.S. GAAP, the reported amount of a brand name and its tax basis are
separated into two components as of the date of the Acquisition. The first
component of each equals the amount of a brand name for financial reporting
purposes. The second component equals the remainder of the amount of
tax-deductible brand name. Any difference that arises between the amount for
financial reporting and the tax basis of the first component in future years is
considered a temporary difference. The second component is an excess of
tax-deductible brand name over its reported amount for which no deferred taxes
have been recognized. The tax benefit for the excess of a tax-deductible brand
name is recognized when realized, first, to reduce the carrying value of brand
name, then, to reduce the carrying value of other non-current intangible assets
related to the Acquisition. Under Italian GAAP, a deferred tax liability is not recognized for a
taxable temporary difference that is essentially permanent in duration. Under
Italian GAAP, the net tax effect of  6,657 thousand resulting from the
trademark revaluation recognized in 2000, was credited to the statement of
operations as non-operating income. Similarly, under Italian GAAP, the net tax
effect of  5,234 thousand resulting from the trademark revaluation
recognized in 2003, was credited to the statement of operations as
non-operating income. Under U.S. GAAP, in accordance with EITF 93-16, a deferred tax liability
of  5,087 thousand was recorded for the amount of taxes to be paid in case
of distribution of the revaluation reserve or liquidation of he Company,
created as a result of the trademark revaluation recognized in 2000, and an
additional deferred tax liability of  3,807 was recorded for the amount of
taxes to be paid in case of distribution of the revaluation reserve or
liquidation of the Company, created as a result of the trademark revaluation
recognized in 2003. Thus due to the revaluations of trademark in 2000 and 2003,
the Company recorded a net regional tax (IRAP) benefit in 2000 and 2003 of 
1,570 thousand and  1,427, respectively, in the U.S. GAAP financial
statements. This benefit has been classified as part of income tax expense, in
accordance with EITF 98-11. F-43




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(h) Stock Based Compensation Under Italian GAAP, compensation expense related to stock based
compensation plans is only recorded in the Companys statement of operations
when it is probable that a cash payment will occur. In relation to the
Companys share option plans, no compensation is recorded at either the date of
grant or at the date when such options are exercised once the Company will
serve the plans from share capital increases approved by the Companys
shareholders and, consequently, no cash payment will occur. Under U.S. GAAP, the provisions of Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation,
allow entities to continue to apply the provisions of APB Opinion No. 25
Accounting for Stock Issued to Employees for the accounting of compensation
expense for its stock based compensation plans, and requires certain pro-forma
disclosures for employee share options granted as if the fair-value-based
methods defined in SFAS No. 123 had been applied. For U.S. GAAP purposes, the
Company has elected to apply the provisions of APB Opinion No. 25 and related
interpretations and provide the pro-forma disclosure provisions of SFAS No. 123
for its share option plans. For a fixed plan, compensation expense is recorded
in the financial statements on the grant (and a measurement) date only if the
market value of the underlying shares exceeds the exercise price. SFAS No. 148
amended SFAS No. 123 and the disclosure provisions of SFAS No. 148 are
applicable for fiscal periods beginning after December 15, 2002. Under the terms of the 1997 Plan, 8,148,148 options were granted during
1997 with an exercise price of  0.723 per share. The terms of the 1997 Plan
provide a cash-out provision until such time the Companys shares are traded in
a recognized stock market. As a result, the Company has accounted for the 1997
Plan under U.S. GAAP in a manner similar to the accounting for stock
appreciation rights. No compensation expense was recorded in the financial
statements for the accounting periods up to and including December 31, 1998, as
the formula price did not exceed the exercise price per share. Upon the
Companys initial public offering, the 1997 Plan was considered to be a fixed
plan. However, the Companys initial public offering resulted in a measurement
date and a non-cash compensation expense of  17,641 thousand, which is
being amortized over the vesting period. All the options granted under this
plan are vested and exercisable as of December 31, 2002 and 2003, and the
amount of amortization for 2001 was  118 thousand, net of forfeitures. Under the terms of the 1999 Plan, the Company issued options to various
employees during 1999, 2000, 2001 and 2002. No options were issued under this
Plan during 2003. The options issued in 1999 and 2000 were accounted as stock
appreciation rights under U.S. GAAP until the shareholders have approved both
the share capital increase to satisfy these options and elected not to apply
the cash-out provisions. The shareholders approval in 2000 also resulted in
fixing the exercise price for the options issued in 1999 and 2000. The
approval resulted in a measurement date for these options and stock
compensation expense of  413, amortized over the vesting period, and
options issued in 1999 and 2000 were accounted as fixed stock options. The
amount of amortization expense, net of forfeitures, recognized during 2001,
2002 and 2003 was  86,  101 and  67, respectively. Assuming that
the Company continues to not apply cash-out provisions, which subsequent to the
share capital increase are applicable only at the discretion of the Company, no
further compensation expense shall be recorded in future periods in relation to
these options. In addition, the Company has evaluated, in accordance with EITF
00-23, the mandatory cash-out provisions in the event of the contingency that
the Companys share are not traded on the Italian Stock Market on the date of
relevant stock exercise. Based on the guidance of EITF 00-23, the Company does
not believe the existence of cash-out provisions based on the occurrence of the
contingency is probable and the Company will continuously evaluate the
probability during the contingency period. The exercise price of options
granted in 2001 and 2002 is considered variable as it cannot be lower than the
consolidated net worth per share at the time of exercise; hence the company
accounted for these new options in accordance with the variable method. Under
this method, compensation expense is measured at each reporting date and
calculated as the difference between the market price of the shares at the
reporting date and the exercise price. No compensation expense was recorded for
grants during 2002 and 2003 as the exercise price is higher than the market
value of the underlying shares as of December 31, 2002 and December 31, 2003. Under current Italian tax legislation, issuance of shares to satisfy stock
based compensation plans does not result in a deduction for tax purposes and,
as such, no deferred taxation impacts have been recognized for U.S. GAAP. Under U.S. GAAP, the total amount of compensation expense recognized is
credited directly to additional paid in capital to shareholders equity since
no cash-out payment will occur; the portion of this expense deferred to future
years has been shown separately within shareholders equity. (i) Earnings per share Under Italian GAAP, there is no requirement to present earnings per share
nor any accounting standards that regulate its calculation. F-44




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Under U.S. GAAP, earnings per share are calculated and presented in
accordance with the provisions of Statement of Financial Accounting Standards
No. 128, Earnings per Share, which requires the presentation of both basic and
diluted earnings per share information for all periods presented; in case of
change in accounting principles or extraordinary items, basic and diluted
earnings per share must be presented before and after the cumulative effect of
change in accounting principles or extraordinary item, on a pro forma basis.
Basic net profit per share is computed by dividing net profit, as calculated in
accordance with U.S. GAAP, by the weighted average number of shares outstanding
in the period; diluted net profit per share includes the effect of incremental
shares, if any, that would have been outstanding under the share option plans
or other obligations to issue such shares. (j) Business combinations, goodwill and intangible assets In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, which requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS No. 141 also
specifies the criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocated to an assembled workforce
may not be accounted separately. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. Adoption of SFAS No. 142 did not result in reclassification
of existing goodwill and intangible assets. As required by SFAS No. 142, the Company identified its reporting units
and assigned assets and liabilities, including goodwill to the reporting units
on the date of adoption. Subsequently, the Company compared the fair value of
the reporting unit to its carrying value, to determine whether goodwill is
impaired at the date of adoption. This transitional impairment evaluation did
not indicate an impairment loss. Subsequent to the adoption of SFAS No. 142, the Company does not amortize
goodwill but instead tests goodwill for impairment at least annually. The
carrying value of the goodwill for U.S. GAAP purposes on the date of adoption
was  1,100 thousand. In addition, the goodwill that is being reflected in
the Italian GAAP financial statements relating to the 1996 transaction (see
note 29(a) and 1(a)) is not considered as goodwill under U.S. GAAP but is
reflected as part of Brand name, and therefore continues to be amortized. (k) Securitization As explained in Notes 1(c) and 3, the Company has sold some of its
accounts receivable to DDF1. Under Italian GAAP, the transfer of such
receivables qualified for sale accounting. However, under U.S. GAAP, in
accordance with SFAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities,some of the transfers did not qualify
for sale accounting, as they were not isolated from the transferor (Ducati) as
of December 31, 2003, due to non-fulfillment of certain legal formalities such
as publication in the Italian Gazette. In addition, due to contractual
requirements imposed on DDF1 by the senior note holders, to which Ducati is a
party to the agreement, DDF1 cannot pledge or exchange the transferred assets
(namely, the accounts receivable). In addition, DDF1 does not meet the
requirements of qualified special purpose entity (QSPE). The Company has not
yet adopted the provisions of FIN 46R, Consolidation of Variable Interest
Entities,therefore an evaluation whether to consolidate DDF1 was performed in
accordance with EITF Topic D-14, Transactions Involving Special Purpose
Entities, and EITF 90-15, Impact of Nonsubstantive Lessors, Residual Value
Guarantees, and Other Provisions in Leasing Transactions. Based on the criteria
set forth in the above literature, the Company has concluded that DDF1 needs to
be consolidated as of and for the year ended December 31, 2003. The effect of
such consolidation on the assets was an increase of cash and cash equivalents
by  10 million, decrease of investments of  10 million (as Ducati has
subordinated Class B Notes issued by DDF1), and increase in accounts receivable
of  33 million. The effect of such consolidation on the liabilities was an
increase of long term liabilities of  33 million, represented by Senior
Class A Noted issued by DDF1 and a corresponding decrease in current
liabilities. There was no effect on the Statement of Operations as all expenses
of DDF1 were reimbursed by Ducati and such reimbursements were already
reflected in the Statement of Operations under Italian GAAP. In addition, start
up costs of  680 thousand at December 31, 2003, capitalized and not yet
amortized under Italian GAAP, have been expensed for U.S. GAAP purposes. On December 30, 2002, the Company transferred receivables of approximately
 26 million to DDF1 and received  20 million for return. DDF1 borrowed
 20 million for a financial institution, secured against the receivables.
As the transaction did not constitute as a sale, under SFAS 140, it was
accounted for as a secured borrowing under U.S. GAAP. The amount of secured
borrowing was reflected as a current liability. Under Italian GAAP, the
transaction was accounted for as a sale. (l) Implementation of New Accounting Pronouncements F-45




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In
December 2003, the FASB issued FASB Interpretation No. 46R (revised
December 2003), Consolidation of Variable Interest Entities, which addresses
how a business enterprise should evaluate whether is has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, which was issued in
January 2003. The Company will be required to apply FIN 46R to variable
interest in VIEs created after December 31, 2003. For variable interest in VIEs
created before January 1, 2004, the Interpretation will be applied beginning on
January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were
created before January 1, 2004, the assets, liabilities and non-controlling
interests of the VIE initially would be measured at their carrying amounts with
any difference between the net amount added to the balance sheet and any
previously recognized interest being recognized as the cumulative effect of an
accounting change. If determining the carrying amounts is not practicable, fair
value at the date FIN 46R first applies may be used to measure the assets,
liabilities and non-controlling interest of the VIE. The Company has evaluated
that DDF1, a non-qualified special purpose entity, needs to be consolidated
under FIN 46R. This entity, DDF1, has already been consolidated under existing
literature, therefore the Company believes that the implementation of FIN 46R
relating to DDF1 will not have a material impact ion the financial statements. FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement will be effective for the Company on January 1, 2005. The effective
date has been deferred indefinitely for certain other types of mandatorily
redeemable financial instruments. The Company currently does not have any
financial instruments that are within the scope of this Statement. In June 2001, FASB Statement No. 143, Accounting for Asset Retirement
Obligations, was issued. Statement 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development,
and/or normal use of the assets. The Company also would record a corresponding
asset that is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation would be
adjusted at the end of each period to reflect the passage of time and changes
in the estimated future cash flows underlying the obligation. The Company was
required to adopt Statement 143 on January 1, 2003. The adoption of Statement
143 had no effect on the Companys financial statements. In April 2002, the FASB Statement No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Correction,
was issued. Statement 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part
of the risk management strategy of many companies. Statement No. 145 also
amends FASB Statement No. 13, Accounting for Leases, to require sale-leaseback
accounting for certain lease modifications that have economic effects similar
to sale-leaseback transactions. The provisions of Statement 145 related to the
rescission of FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, were applied in fiscal years beginning after May 15,
2002. The provisions of Statement 145 related to Statement 13 were effective
for transactions occurring after May 15, 2002. The adoption of Statement 145
had no effect on the Companys financial statements. In June 2002, the FASB Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, was issued. Statement 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of
Statement 146 were effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. During 2003, the Company
has communicated and terminated certain employees, including the Managing
Director, and incurred certain employee termination benefits. All of the
employees were notifies and terminated in 2003, with all related termination
severance paid in 2003; under Italian GAAP, the residual amount of  11
thousand, accrued in 2003 but not paid at December 31, 2003 has been recorded
as Provision for corporate reorganization. As this amount does not meet the
recognition criteria prescribed by Statement 146, the adoption of Statement 146
resulted in the reversal to the statement of income of the residual amount
accrued in the Italian GAAP financial statements, for  11 thousand. In
addition, under Italian GAAP these amounts are shown as non-operating expense
and the US GAAP they are part of operating expenses. In November 2002, FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34, was issued. This Interpretation
enhances the disclosures to be F-46




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made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation were applicable to guarantees
issued or modified after December 31, 2002 and the disclosure requirements were
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 had no effect on the Companys
financial statements. In December 2002, FASB Statement No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123, was issued. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, Statement 148 amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements. Disclosures required by this standard are
included in the notes to these consolidated financial statements. In December 2003, FASB Statement No. 132 (revised), Employers Disclosures
about Pensions and Other Postretirement Benefits, was issued. Statement 132
(revised) prescribes employers disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or recognition
of those plans. The Statement retains and revises the disclosure requirements
contained in the original Statement 132. It also requires additional
disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pensions plans and other postretirement benefit plans.
The Statement generally is effective for fiscal years ending after December 15,
2003. 30. Reconciliation of net profit/(loss) and shareholders equity determined
under Italian GAAP with those under U.S. GAAP The calculation of net profit/(loss) and shareholders equityin conformity
with U.S. GAAP is as follows: Reconciliation of net profit/(loss): Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000, except per share data which is stated in )Net profit under Italian GAAP
    
    
    10,553
    
    
    
    6,525
    
    
    
    40Adjustments increasing (decreasing) reported net profit:o Reduction of gross revenues (see note 29(e))
    
    
    (20,727
    )
    
    
    (18,595
    )
    
    
    (16,939
    )o Selling, general and administrative expenses
(excluding depreciation) (i)
    
    
    16,148
    
    
    
    16,500
    
    
    
    14,466o Interest (ii)
    
    
    3,313
    
    
    
    2,890
    
    
    
    2,484o Depreciation of property, plant and equipment (iii)
    
    
    322
    
    
    
    320
    
    
    
    312o Amortization of intangible assets (iv)
    
    
    5,191
    
    
    
    (193
    )
    
    
    5,255o Stock-based compensation (see note 29(h))
    
    
    (204
    )
    
    
    (101
    )
    
    
    (67
    )o Derivative financial instruments (see note 29(d))
    
    
    (3,172
    )
    
    
    642
    
    
    
    (358
    )o Other
    
    
    (10
    )
    
    
    
    
    
    
    226o Income taxes (v)
    
    
    858
    
    
    
    (1,022
    )
    
    
    (6,029
    )o Cumulative effect of a change in accounting
principle, net of taxes (see note 29(d))
    
    
    1,906
    
    
    
    
    
    
    
    Net profit/(loss) in conformity with U.S. GAAP
    
    
    14,178
    
    
    
    6,966
    
    
    
    (610
    )
 F-47




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Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000, except per share data which is stated in )Net profit/(loss) per share
in conformity with U.S.Net profit/(loss) per share
before cumulative effects
of a change in accounting
principle
    
    
    0.077
    
    
    
    0.044
    
    
    
    (0.004
    )Cumulative effects of a
change in accounting
principle
    
    
    0.012
    
    
    
    
    
    
    
    Net profit /(loss) per share
    
    
    0.089
    
    
    
    0.044
    
    
    
    (0.004
    )Weighted average number of
shares (basic) (see note 29
(i))
    
    
    158,417,632
    
    
    
    158,500,963
    
    
    
    158,500,963Net profit/(loss) per share
before cumulative effects
of a change in accounting
principle
    
    
    0.076
    
    
    
    0.043
    
    
    
    (0.004
    )Cumulative effects of a
change in accounting
principle
    
    
    0.012
    
    
    
    
    
    
    
    Net profit/(loss) per share
    
    
    0.088
    
    
    
    0.043
    
    
    
    (0.004
    )Weighted average number of
shares (diluted) (see note
29(i))
    
    
    162,355,535
    
    
    
    162,359,032
    
    
    
    158,500,963
 In computing diluted profit per share for the years ended December 31, 2001 and
2002, the dilutive effect of share equivalents under the 1997 share option plan
has been included, resulting in an increase of the weighted number of shares of
3,937,903 and 3,858,069, respectively. The dilutive effect of the share
equivalents under the 1997 share option plan is not considered in 2003, due to
the net loss for the year.  (i)
    
    The breakdown of the adjustments to selling, general and administrative expenses (excluding depreciation) is summarized below: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Lease installments
    
    
    (81
    )
    
    
    
    
    
    
    Volume bonus to dealers (see note 29 (e))
    
    
    16,436
    
    
    
    16,500
    
    
    
    14,455Restructuring costs (see note 29 (l))
    
    
    
    
    
    
    
    
    
    
    11Other
    
    
    (207
    )
    
    
    
    
    
    
    16,148
    
    
    
    16,500
    
    
    
    14,466
  (ii)
    
    The breakdown of the adjustments to interest expense is summarized below: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Cash discounts (see note 29 (e))
    
    
    1,494
    
    
    
    728
    
    
    
    443Interest on dealer incentives (see note 29(e))
    
    
    1,819
    
    
    
    2,162
    
    
    
    2,0413,313
    
    
    
    2,890
    
    
    
    2,484
  (iii)
    
    The breakdown of the adjustments to depreciation of property, plant and equipment is summarized below: F-48




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Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Revaluation on business combination (see note 29(a))
    
    
    260
    
    
    
    258
    
    
    
    250Software capitalization (see note 29(f))
    
    
    62
    
    
    
    62
    
    
    
    62322
    
    
    
    320
    
    
    
    312
  (iv)
    
    The breakdown of the adjustments to amortization of intangible assets is summarized below: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Brand name on business combination (see note 29(a))
    
    
    7,236
    
    
    
    5,469
    
    
    
    5,813Research and development (see note 29(b))
    
    
    (3,973
    )
    
    
    (7,888
    )
    
    
    (1,965
    )Cost associated with initial public offering (see note 29(c))
    
    
    1,928
    
    
    
    1,928
    
    
    
    1,928Reversal goodwill amortization (see note 29 (j))
    
    
    
    
    
    
    296
    
    
    
    250Costs incurred in connection with securitization
    
    
    
    
    
    
    
    
    
    
    (680
    )Other
    
    
    
    
    
    
    (108
    )
    
    
    (128
    )Advertising costs
    
    
    
    
    
    
    110
    
    
    
    375,191
    
    
    
    (193
    )
    
    
    5,255
  (v)
    
    The breakdown of the adjustments to income taxes is summarized below: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Deferred taxes related to revaluation surplus (see
note 29(g))
    
    
    
    
    
    
    
    
    
    
    (3,807
    )Income tax effect of US GAAP adjustments
    
    
    858
    
    
    
    (1,022
    )
    
    
    (2,222
    )858
    
    
    
    (1,022
    )
    
    
    (6,029
    )
 Reconciliation of shareholders equity: As of December 31,
    
    As of December 31,2002
    
    2003( 000)Shareholders equity under Italian GAAP
    
    
    159,741
    
    
    
    158,399Adjustments increasing (decreasing) reported shareholders equity:o Property, plant and equipment (vi)
    
    
    (7,208
    )
    
    
    (6,894
    )o Intangible assets (vii)
    
    
    (102,670
    )
    
    
    (100,507
    )o Accrued expenses and other current liabilities, including derivatives
(see note 29(d) and (viii))
    
    
    251
    
    
    
    (133
    )o Deferred taxes (see note 29(g) and (ix))
    
    
    33,332
    
    
    
    30,542o Own shares
    
    
    
    
    
    
    (391
    )o Other
    
    
    37
    
    
    
    138Shareholders equity in conformity with U.S. GAAP
    
    
    83,483
    
    
    
    81,154
  (vi)
    
    The breakdown of the adjustments to property, plant and equipment is summarized below: F-49




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As of December 31,
    
    As of December 31,2002
    
    2003( 000)Revaluation on business combination (see note 29(a))- cost
    
    
    (9,157
    )
    
    
    (9,156
    )- accumulated depreciation
    
    
    2,010
    
    
    
    2,262Software capitalization (see note 29(f))
    
    
    (61
    )
    
    
    (7,208
    )
    
    
    (6,894
    )
  (vii)
    
    The breakdown of the adjustments to intangible assets is summarized below: As of December 31,
    
    As of December 31,2002
    
    2003( 000)Brand name on business combination (see note 29(a))- cost
    
    
    (72,968
    )
    
    
    (72,968
    )- tax benefit on brand name (see note 29(g))
    
    
    (41,541
    )
    
    
    (44,742
    )- accumulated amortization
    
    
    41,059
    
    
    
    46,872Advertising costs
    
    
    (37
    )
    
    
    Research and development (see note 29(b))
    
    
    (27,014
    )
    
    
    (28,979
    )Costs associated with initial public offering (see note 29(c))- cost
    
    
    (9,640
    )
    
    
    (9,640
    )- accumulated amortization
    
    
    7,283
    
    
    
    9,211Goodwill
    
    
    296
    
    
    
    546Costs incurred in connection with securitization
    
    
    
    
    
    
    (680
    )Other
    
    
    108
    
    
    
    (127
    )(102,670
    )
    
    
    (100,507
    )
  (viii)
    
    The breakdown of the adjustments to accrued expenses and other current liabilities is summarized below: As of December 31,
    
    As of December 31,2002
    
    2003( 000)- Derivative financial instruments (see note 29(d))
    
    
    567
    
    
    
    209- Dealer incentives (see note 29(e))
    
    
    (316
    )
    
    
    (233
    )- Other
    
    
    
    
    
    
    (109
    )251
    
    
    
    (133
    )
  (ix)
    
    The breakdown of the adjustments to income taxes is summarized below: As of December 31,
    
    As of December 31,2002
    
    2003( 000)- Deferred taxes for tax basis in brand name
    
    
    (6,009
    )
    
    
    (3,201
    )- Deferred taxes related to revaluation surplus
    
    
    (5,087
    )
    
    
    (7,996
    )- Income tax effects of US GAAP adjustments
    
    
    44,428
    
    
    
    41,73933,332
    
    
    
    30,542
 F-50




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##### Table of Contents



Condensed consolidated balance sheetU.S. GAAP December 31,
    
    December 31,2002
    
    2003( 000)AssetsCurrent assets
    
    
    289,217
    
    
    
    294,094Property, plant and equipment, net
    
    
    63,210
    
    
    
    62,908Intangible assets, net
    
    
    23,383
    
    
    
    21,531Deferred tax assets, net of valuation
allowance (excluding current portion)
    
    
    21,608
    
    
    
    32,793Other long-term assets
    
    
    622
    
    
    
    562Total Assets
    
    
    398,495
    
    
    
    411,888Liabilities and Shareholders EquityCurrent liabilities
    
    
    188,252
    
    
    
    190,119Long term debt, less current
    
    
    91,000
    
    
    
    114,882Obligations under capital leases,
excluding current Installments
    
    
    17,792
    
    
    
    14,939Other long-term liabilities
    
    
    17,968
    
    
    
    10,794Total Liabilities
    
    
    315,012
    
    
    
    330,734Shareholders equityShare capital
    
    
    82,420
    
    
    
    82,420Additional Paid in Capital
    
    
    32,524
    
    
    
    32,511Stock-based compensation
    
    
    (79
    )
    
    
    Own shares
    
    
    
    
    
    
    (391
    )Predecessor basis adjustment
    
    
    (77,568
    )
    
    
    (77,568
    )Retained earnings
    
    
    44,114
    
    
    
    43,504Accumulated other comprehensive income
    
    
    2,072
    
    
    
    678Total Shareholders Equity
    
    
    83,483
    
    
    
    81,154Total Liabilities and Shareholders Equity
    
    
    398,495
    
    
    
    411,888
 The additional paid in capital includes approximately  18 million for
the stock based compensation relating to the 1997 and 1999 plans. Condensed consolidated statement of operationsU.S. GAAP With regard to the consolidated statements of operations, the Companys
operating income, profit before income taxes, minority interest and
extraordinary items, income taxes, extraordinary items and net profit/(loss) as
determined under U.S. GAAP would have been as follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Operating income
    
    
    33,691
    
    
    
    16,148
    
    
    
    6,321Profit before income taxes
    
    
    20,308
    
    
    
    9,973
    
    
    
    852Income taxes
    
    
    (8,036
    )
    
    
    (3,007
    )
    
    
    (1,462
    )Cumulative effect of
adoption of new
accounting principle, net
of taxes
    
    
    1,906
    
    
    
    
    
    
    
    Net profit/(loss)
    
    
    14,178
    
    
    
    6,966
    
    
    
    (610
    )
 Condensed consolidated statement of cash flowsU.S. GAAP Had statements been prepared under U.S. GAAP, the key captions in the condensed
consolidated statement of cash flows would have been as follows: F-51




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##### Table of Contents



Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Net cash provided by/(used in) operating
activities
    
    
    (3,444
    )
    
    
    4,679
    
    
    
    (2,231
    )Net cash used in investing activities
    
    
    (9,759
    )
    
    
    (23,889
    )
    
    
    (14,019
    )Net cash provided by/(used in) financing
activities
    
    
    23,093
    
    
    
    19,890
    
    
    
    16,333Effect of exchange rate changes on cash
    
    
    51
    
    
    
    (425
    )
    
    
    (461
    )Net
increase/(decrease) in cash and cash equivalents
    
    
    9,941
    
    
    
    255
    
    
    
    (378)
 Furthermore, the supplemental disclosure for the consolidated statement of
cash flows required by U.S. GAAP is as follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Cash paid during the year for:Interest
    
    
    5,472
    
    
    
    9,187
    
    
    
    6,441Income taxes
    
    
    4,938
    
    
    
    4,336
    
    
    
    3,357
 Statement of comprehensive income/(loss) Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Net income/(loss)
    
    
    14,178
    
    
    
    6,966
    
    
    
    (610
    )Foreign currency translation adjustment
    
    
    824
    
    
    
    (1,223
    )
    
    
    (1,394
    )Comprehensive income/(loss)
    
    
    15,002
    
    
    
    5,743
    
    
    
    (2,004
    )
 Impairment of long-lived assets and long-lived assets to be disposed of In August 2001, the FASB issued Statement No. 144, Accounting For The
Impairment Or Disposal Of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
amends existing guidance on asset impairment and provides a single accounting
model for long-lived assets to be disposed of. SFAS No. 144 also changes the
criteria for classifying an asset as held-for-sale and broadens the scope of
businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations. The
Company adopted Statement No. 144 on January 1, 2002. The adoption of Statement
No. 144 did not affect the Companys financial statements. 31. Additional Financial Statements Disclosures required by U.S. GAAP The following information is presented on a U.S. GAAP basis. Income taxes Profit before income taxes consists of: F-52




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##### Table of Contents



Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Domestic
    
    
    35,255
    
    
    
    15,575
    
    
    
    709Foreign
    
    
    (14,947
    )
    
    
    (5,602
    )
    
    
    14320,308
    
    
    
    9,973
    
    
    
    852
 Income tax (expense)/benefit consists of: Current tax benefitapplied to reduceCurrent
    
    Deferred
    
    brand name
    
    Total( 000)Year ended December
31, 2001:Domestic
    
    
    (3,074
    )
    
    
    (1,363
    )
    
    
    (5,342
    )
    
    
    (9,779
    )Foreign
    
    
    (123
    )
    
    
    1,866
    
    
    
    
    
    
    
    1,743(3,197
    )
    
    
    503
    
    
    
    (5,342
    )
    
    
    (8,036
    )Year ended December
31, 2002:Domestic
    
    
    (3,363
    )
    
    
    8,702
    
    
    
    (5,491
    )
    
    
    (422
    )Foreign
    
    
    (473
    )
    
    
    (2,112
    )
    
    
    
    
    
    
    (2,585
    )(4,106
    )
    
    
    6,590
    
    
    
    (5,491
    )
    
    
    (3,007
    )Year ended December
31, 2003:Domestic
    
    
    (2,931
    )
    
    
    2,766
    
    
    
    (3,201
    )
    
    
    (3,366
    )Foreign
    
    
    (447
    )
    
    
    2,351
    
    
    
    
    
    
    
    1,904(3,378
    )
    
    
    5,117
    
    
    
    (3,201
    )
    
    
    (1,462
    )
 The significant components of deferred income tax (expense)/benefit
consist of: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Deferred tax (expense)/benefit
(exclusive of the effects of other
components below)
    
    
    (1,630
    )
    
    
    10,001
    
    
    
    1,846Benefits of operating loss carry forwards
    
    
    2,133
    
    
    
    
    
    
    
    1,461Change in valuation allowance
    
    
    
    
    
    
    (3,217
    )
    
    
    2,329Adjustments to deferred tax liabilities
and assets for enacted changes in tax
laws and rates
    
    
    
    
    
    
    (194
    )
    
    
    (519
    )503
    
    
    
    6,590
    
    
    
    5,117
 The reported amount of income taxes differs from the amount that would result
from applying the statutory IRPEG tax rate of 34% (36% in 2001 and 2002, 33%
starting from 2004) to profit before income taxes as a result of the following: F-53




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##### Table of Contents



Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003( 000)Computed expected tax expense
    
    
    (7,310
    )
    
    
    (3,590
    )
    
    
    (290
    )Non deductible expenses
    
    
    (1,447
    )
    
    
    (828
    )
    
    
    (402
    )Tax rate differential for foreign subsidiaries
    
    
    1,068
    
    
    
    207
    
    
    
    (14
    )Tax-driven write-off of investment in subsidiaries (see note 27)
    
    
    6,120
    
    
    
    3,685
    
    
    
    Regional corporate income tax (IRAP) (see note 27)
    
    
    (3,508
    )
    
    
    (3,184
    )
    
    
    (2,233
    )Change in valuation allowance
    
    
    (3,235
    )
    
    
    (3,217
    )
    
    
    2,329Tremonti law investment incentive
    
    
    
    
    
    
    2,622
    
    
    
    Change in tax laws and rates
    
    
    
    
    
    
    (194
    )
    
    
    (519
    )Other minor adjustments
    
    
    276
    
    
    
    1,492
    
    
    
    (333
    )Actual income taxes
    
    
    (8,036
    )
    
    
    (3,007
    )
    
    
    (1,462
    )
 The tax effects of each type of temporary differences and carry forward
that gives rise to significant portions of the deferred tax assets and
liabilities at December 31, are presented below: December 31,
    
    December 31,2002
    
    2003Total
    
    Total( 000)Deferred tax assets:- Inventories
    
    
    4,746
    
    
    
    5,029- Brand name
    
    
    8,976
    
    
    
    21,795- Accrued liabilities
    
    
    9,039
    
    
    
    6,371- Net operating loss and tax credit carry forwards
    
    
    16,792
    
    
    
    18,253- Deferred research and development expenses
    
    
    10,421
    
    
    
    10,795- Other
    
    
    1,249
    
    
    
    94Deferred tax assets before valuation allowance
    
    
    51,223
    
    
    
    62,337Valuation allowance
    
    
    (9,017
    )
    
    
    (6,688
    )Total deferred tax assets
    
    
    42,206
    
    
    
    55,649Deferred tax liabilities:- Revaluation reserve
    
    
    (5,087
    )
    
    
    (7,996
    )Net deferred tax assets
    
    
    37,119
    
    
    
    47,653
 The valuation allowance for deferred tax assets as of January 1, 2002 was 
5,800 thousand. The net change in the total valuation allowance for the years
ended December 31, 2002 and 2003 was in increase of  3,217 thousand and a
decrease of  2,329 thousand, respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies. At December 31, 2003, total amount
of future taxable income necessary to realize the net deferred tax asset is
approximately  135 million. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences and
tax carryforwards, net of the existing valuation allowance at December 31,
2003. As explained in note 27, deferred taxes have not been provided on the
excess in the amount of  3,286 thousand for financial reporting over the
tax basis of investments in foreign subsidiaries. The amount becomes taxable
upon repatriation of earnings or a sale or liquidation of the subsidiary. It is
not practicable to estimate the amount of the related unrecognized deferred tax
liability. At December 31, 2003, the Company had net operating loss and tax credit
carry forwards for Italian, Japanese, U.S., Dutch and U.K. income taxes of
approximately  57 million, which are available to offset future taxable
income. Of this amount,  7.7 million have no expiry while the remainder
expires as follows: F-54




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##### Table of Contents



2004
    
     14.0 million2005
    
     1.6 million2006
    
     1.0 million2007
    
     1.4 million2008
    
     7.8 million2009 to 2022
    
     23.5 million
 Under Italian and U.S. GAAP, the Company effected a quasi reorganization
as of January 1, 2000, by eliminating the deficit in retained earnings as of
January 1, 2000 of  4,057 thousand with a corresponding reduction in
contributed capital. Under U.S. GAAP, the tax benefits that had not been
recognized at the date of the quasi reorganization, amounting to  2,125
thousand, will be booked as direct addition to contributed capital when
realized. Use of estimates Management has made a number of assumptions relating to the reporting of
assets and liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these estimates. Business segments and foreign operations The following table provides information about long-lived assets by
geographical location. Long-lived assets comprise property, plants and
equipment as calculated under U.S. GAAP. December 31,
    
    December 31,2002
    
    2003( 000)Italy
    
    
    61,847
    
    
    
    66,175United States
    
    
    587
    
    
    
    279France
    
    
    40
    
    
    
    61Germany
    
    
    34
    
    
    
    26Holland
    
    
    156
    
    
    
    121Japan
    
    
    48
    
    
    
    25UK
    
    
    498
    
    
    
    48063,210
    
    
    
    67,167
 Similar information is presented under note 19 for net sales which have
been attributed to countries based on the location of the customer. Leasing The Company is obliged under capital leases for buildings, machinery and
equipment that expire at various dates through 2009. At December 31, 2002 and
2003, the gross amount and related accumulated amortization of such leases
amounted to  27.4 million and  27.7 million, and  4.4 million and
 6.1 million, respectively.  23.0 million has been included in
property, plant and equipment, net, as of December 31, 2003 (2002:  23.0
million) in the Italian GAAP consolidated balance sheet. Future minimum capital
lease payments as of December 31 are: F-55




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December 31,
    
    December 31,2002
    
    2003( 000)- 2003
    
    
    4,136
    
    
    
    - 2004
    
    
    4,136
    
    
    
    4,232- 2005
    
    
    3,792
    
    
    
    3,853- 2006
    
    
    3,601
    
    
    
    3,662- 2007 and subsequent years
    
    
    8,002
    
    
    
    8,078Total minimum lease payments
    
    
    23,667
    
    
    
    19,825Less amount representing interest
    
    
    (2,645
    )
    
    
    (1,632
    )Present value of the minimum capital lease payments
    
    
    21,022
    
    
    
    18,193Current installments
    
    
    3,230
    
    
    
    3,254Long-term portion
    
    
    17,792
    
    
    
    14,93921,022
    
    
    
    18,193
 Commitments and contingencies The Company is involved in various claims and legal actions arising in the
ordinary course of business. Litigation is subject to many uncertainties, and
the outcome of individual matters is not predictable with assurance. It is
reasonably possible that the final resolution of some of these matters may
require the Company to make expenditures, in excess of established reserves,
over an extended period of time and in a range of amounts that cannot be
reasonably estimated. Although the final resolution of any such matters could
have a material effect on the Companys consolidated operating results or cash
flows for a particular reporting period in which an adjustment of the estimated
reserve is recorded, management believes that any resulting adjustment should
not materially affect its consolidated financial position. Derivative financial instruments and fair value of financial instruments The Company is a limited user of derivative financial instruments. It
primarily utilizes interest rate swap and cap agreements and forward exchange
contracts to manage exposures to interest rate and foreign currency
fluctuations. The Company is not party to leveraged derivatives and does not
hold or issue derivative instruments for speculative purposes. The notional/contract amount of derivatives do not represent the amount
exchanged by the parties and thus are not a measure of the exposure of the
Company through its use of derivatives. The amounts exchanged during the term
of the derivatives are calculated on the basis of the notional/contract amounts
and the other contractual conditions of the derivatives. Management actively evaluates the credit worthiness of the financial
institutions which are counter parties to derivative instruments, and it does
not expect any counter parties to fail to meet their obligations. The credit
exposure of derivative instruments is represented by the unrealized gain in the
underlying instrument. The estimated fair value of on-balance sheet financial instruments (cash,
receivables, payables, accrued expenses, other liabilities and long-term debt)
are considered to approximate their carrying value because such instruments,
except for long-term debt, have short maturity. In the case of long-term debt,
interest may be revised periodically to current market rates. At December 31,
the estimated fair value of derivative financial instruments, which have been
accounted for pursuant to SFAS 133, is as follows: December 31,
    
    December 31,2002
    
    2003( 000)Forward exchange contracts
    
    
    3,744
    
    
    
    3,945Interest rate swaps
    
    
    
    
    
    
    (94
    )
 Concentration of credit risk Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. Management believes, however, that the loss due to credit risk to
be incurred by the Company if parties to these financial instruments fail
completely to perform according to the terms of the contracts is not material.
Cash is placed with high-credit quality financial institutions in Italy and the
United States. The Company F-56




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##### Table of Contents



does not require collateral and all their accounts receivable are unsecured;
while management believes the trade receivables will be collected, it
anticipates that in the event of default they will follow normal collection
procedures. The Company estimates an allowance for doubtful accounts based on
the credit worthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those factors could affect estimates of bad
debts. Sales to the Companys two largest customers accounted for approximately
7.5%, 5.3% and 5.9% of 2001, 2002 and 2003 net sales, respectively. However,
management believes that overall credit risk related to the Company is limited
due to its broad customer base in different geographic areas. Share option plans In relation to the 1997 Plan, pursuant to the provisions of SFAS No. 123,
the Company calculated the estimated fair value of the options granted during
1997 using the minimum value method. This calculation did not result in any
value attributable to the options on their original grant date. As discussed in
note 29(h), under APB Opinion No. 25, as a consequence of the Companys initial
public offering, the 1997 Plan is deemed to have become a fixed plan under US
GAAP, resulting in a new measurement date on the date of the initial public
offering. As such, a non-cash compensation expense was recorded in the US GAAP
reconciliation for the year ended December 31, 1999. As compensation costs
related to the 1997 Plan determined pursuant to the provisions of SFAS No. 123
is based upon the original grant date, compensation expense recognized on the
new measurement date under APB Opinion No. 25 would not be recognized under
SFAS 123. The outstanding share options under the 1997 Plan have a weighted
average remaining contractual life of approximately 3.6 years as at December
31, 2003. In relation to the 1999 Plan, pursuant to the provisions of SFAS No. 123,
the fair value of these options has been estimated on the grant date using the
Black Scholes option pricing model with the following assumptions: risk free
interest rate of 2.5%  4.6%, dividend yield of 0%  0.13%, volatility factors
of the expected market price of the Companys share of 30%  50% and expected
life of the options of 4.5  7 years. On this basis, the weighted average fair
value of these outstanding options amounted to  0.53 per share as of
December 31, 2003. The outstanding share options have a weighted average
remaining contractual life of approximately 3.9 years as of December 31, 2003. The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because of the Companys employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in managements opinion the existing models do not
necessarily provide a reliable single measure of the fair value of the employee
stock options. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized over their vesting period. Had compensation cost related to the options granted under the 1999 Plan
been based on the fair value at the grant date, pursuant to the provisions of
SFAS No. 123, the Companys pro forma net profit/(loss) for the years ended
December 31, 2001, 2002 and 2003 would have been  13,299 thousand, 
5,430 thousand and  (930) thousand, respectively. The pro forma basic and
diluted profit/(loss) per share at December 31, 2001 would have been  0.084
and  0.082, respectively, while at December 31, 2002 they would have been
 0.034 and  0.033, respectively, and at December 31, 2003 they would
have been  (0.006) and  (0.006), respectively. 32. Subsequent events A further tranche of the outstanding bond with a nominal value of 
10,000,000 was bought back on February 10, 2004, value date February 13, 2004.
No adjustments to the consolidated financial statements are made for these
subsequent events. F-57




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##### Table of Contents



Schedule II Ducati Motor Holding S.p.A.
Valuation and Qualifying Accounts
For the Years Ended December 31, 2001, 2002 and 2003 AdditionsBalance at
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atthe beginning of
    
    cost and
    
    other accounts
    
    
    
    
    
    the end ofDescription
    
    the period
    
    expenses
    
    (foreign exchange)
    
    Deductions
    
    the period( 000)Allowance for doubtful accounts:Year ended December 31, 2001
    
    
    3,204
    
    
    
    1,037
    
    
    
    135
    
    
    
    (54
    )
    
    
    4,322Year ended December 31, 2002
    
    
    4,322
    
    
    
    1,333
    
    
    
    (214
    )
    
    
    (1,253
    )
    
    
    4,188Year ended December 31, 2003
    
    
    4,188
    
    
    
    1,320
    
    
    
    (124
    )
    
    
    (2,070
    )
    
    
    3,314Allowance for obsolete/slow
moving inventory:Year ended December 31, 2001
    
    
    3,155
    
    
    
    1,670
    
    
    
    33
    
    
    
    (571
    )
    
    
    4,287Year ended December 31, 2002
    
    
    4,287
    
    
    
    1,959
    
    
    
    (119
    )
    
    
    (741
    )
    
    
    5,386Year ended December 31, 2003
    
    
    5,386
    
    
    
    2,558
    
    
    
    111
    
    
    
    (994
    )
    
    
    7,061
 F-58