185000000 IT Holding Finance SA

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the majority of our customers, combined with our high levels of customer service, has contributed to our customer retention rates in excess of 90% in recent years. By selling our products primarily on a wholesale basis and producing them mostly to order, we avoid certain of the commercial risks faced by those of our competitors whose distribution strategy is based on selling to retail customers through their own outlets. The most important of these risks is, we believe, the need to estimate customer demand since making incorrect estimates could result in significant inventories of unsold finished goods at the end of a season. We also sell our apparel and accessories on a wholesale basis through a network of 102 franchised stores (including corner shops inside department stores) located in Europe, Asia, North America and the Middle East and 29 directly operated retail boutiques located in major cities and exclusive vacation resorts around the world, with most of these points of sale consisting of single-brand Malo or Ferré boutiques that we acquired together with our purchase of these brands. In connection with our retail rationalization strategy, during 2004 we closed our directly operated Malo stores in London, New York and Chicago, and intend to continue rationalizing our retail operations and are presently evaluating opportunities to convert additional directly operated stores to franchised points of sale on a case-by-case basis. Going forward, we expect to pursue future retail growth exclusively through franchising and similar arrangements. In this way, we believe we can reduce the operating expenses and capital expenditures associated with our directly operated retail stores, improve our profitability and increase our free cash flow. To this end, in February 2005 we entered into an agreement with Arts, a leading Eastern Europe retailer of apparel and accessories, pursuant to which Arts has committed to opening at least 16 new franchised multi-brand accessories stores by the Spring-Summer 2006 season throughout Eastern Europe and Russia, with the possibility of opening up to an additional 125 stores in this region by 2009 if certain conditions and financial targets are met. In order to protect the distinctiveness and exclusive images of our product lines, we require that the stores displaying our products adhere to stringent standards for decor, image and merchandising mix. Before and after each season, we evaluate each of our customers on the basis of sales performance and the quality of its display and promotion. Our credit department monitors the financial condition of our customers and has the capacity to promptly cancel orders and suspend delivery of finished goods if it deems such action to be advisable. Similarly, the design, product presentation and other key factors necessary to ensure that our branded products are properly sold and marketed by our franchised stores are controlled by us and provided for in franchise agreements we enter into with our franchisees. These agreements typically have a term of five years, provide for minimum purchase requirements and give us control over shop design, advertising and other key factors in order to protect the image and prestige of our owned and licensed brands. We begin marketing our new collections to our customers in June and July of each year (for the following year’s Spring-Summer collection) and in January and February (for the following year’s Fall-Winter collection). The marketing phase of the product development cycle typically lasts approximately two months and principally consists of showing sample items in our showrooms to selected customers. We currently operate 10 showrooms located in Milan, Rome, Naples, Vicenza, Bari and Palermo in Italy, and in New York, Paris, Düsseldorf and Hong Kong. In addition, we make use of 18 showrooms operated by third parties located in Bologna, Reggio Calabria and Turin in Italy, and in Antwerp, Athens, Chippendale, Copenhagen, Guadalajara, Madrid, Mexico City, Munich, Porto, Sydney, Tokyo, Seoul, Osaka, Toronto, Vienna and Zurich. Once our customers begin placing orders, we generate sales projections for each garment or accessory in a collection, and we then continuously update these projections as additional orders are received. We confirm orders only for those items whose sales projections justify production; all other items are eliminated from the final collection. We support the marketing of our products with extensive advertising designed to appeal to our target market of youthful, fashion-conscious consumers. In addition, we benefit from brand-name advertising carried out by our licensors. Our advertising expenditures totaled €30.6 million, €44.5 million and €36.3 million in 2002, 2003 and 2004, respectively, representing 4.6%, 6.6% and 5.1% of our net revenues in those years. We advertise principally 28
in print (fashion magazines and newspapers) and outdoor advertising media, but also make extensive use of video for point-of-sale displays. Our worldwide advertising efforts, which are developed in agreement with our licensors, are centrally managed by our internal Milan-based advertising and public relations unit, which also manages our public relations efforts (e.g., organizing and publicizing fashion shows, interacting with the fashion press and news media and promoting our products among celebrities). Production and Operations The production process for each collection that we bring to market involves five distinct phases: design, product development, sourcing, manufacturing and distribution. Each phase of this production process is described in more detail below. Design We design all of our owned brand products and assist our licensors in the creation and development of our licensed brand products, in each case through the use of our own design teams. These teams are dedicated to a particular brand or group of related brands and work independently from one another in order to preserve the distinct style, design and image associated with each of our brands. The teams generally consist of designers, tailors, seamstresses and other assistants. We also maintain separate design teams that specialize in accessories. The level of our involvement in the design of our licensed products varies in accordance with each brand. Typically, however, the owner or individual designer behind one of our licensed brands, who is commonly referred to as the maison, will conceive and develop one or more themes and ideas for a collection. These themes and ideas are then communicated to the design team dedicated to the brand in question, who proceeds to create and develop the individual items that go into the making of a collection for approval by the maison and, thereafter, production. Our design teams meet with the designers of each licensor to discuss the basic themes and fashion concepts of each new collection approximately one year before sales to the public can begin. During the design phase of our product development cycle, which lasts approximately eight to ten weeks, our design teams work to refine these themes and concepts so that combinations of styles, colors, patterns and fabrics may be considered and tested before eventually being selected. All of our products are developed using computer-aided design equipment that allows a designer to view and modify two- and three-dimensional images of a new garment. In addition, we maintain computerized pattern archives for each garment that is chosen to form part of a collection to support our design teams. We add all of our new patterns and designs to these archives to facilitate future reference. Moreover, through the use of our management information system, which is linked to our distribution agents around the world, our design teams have access to sales data. This data is used to interpret market trends and refine product designs in order to anticipate changing consumer preferences. We believe that our ability to integrate such market data into the production process gives us a significant advantage over those of our competitors who are not able to do so. Product Development Once the individual products that comprise a collection have been designed, selected and approved, we use facilities located in Pettoranello di Molise (near Isernia) and Campi Bisenzio (near Florence), Bologna and Piacenza, to produce garment prototypes that are used to evaluate the proposed designs. Prototypes for our licensed brands are subject to review and approval by our licensors in order to ensure consistency with each licensor’s overall brand image. Each season, up to approximately 800 prototypes are selected to become part of a final collection for each of our brands and are made up as samples for use in marketing. Typically, 10 to 25 samples are produced of each item included in a final collection for display in showrooms or use in fashion shows around the world. Including accessories, we produce more than 150,000 sample items annually. Samples are manufactured and assembled by contractors selected and monitored by us pursuant to the same procedures that we apply to the production of our finished goods for sale to customers. 29
Page 1 and 2: CONFIDENTIAL Rule 144A Global Note
Page 3 and 4: Definitions In this annual report:
Page 5 and 6: • risks related to our principal
Page 7 and 8: Our Strategic Refocusing Program Du
Page 9 and 10: manufacturing of our products to th
Page 11 and 12: income tax on a consolidated basis
Page 13 and 14: (3) Net working capital is defined
Page 15 and 16: We must anticipate trends and respo
Page 17 and 18: We are subject to significant restr
Page 19 and 20: event of a foreclosure on the secur
Page 21 and 22: • avoid or invalidate all or a po
Page 23 and 24: a maximum of two years); (ii) a pro
Page 25 and 26: • pursuant to article 445 of the
Page 27 and 28: Our Company DESCRIPTION OF BUSINESS
Page 29: Versus is a medium-priced fashion b
Page 33 and 34: We maintain a close working relatio
Page 35 and 36: Licensor and Brands Gianni Versace
Page 37 and 38: Legal proceedings Ordinary Course L
Page 39 and 40: OPERATING AND FINANCIAL REVIEW AND
Page 41 and 42: each year, when payments to our sup
Page 43 and 44: Income taxes In 2004, we incurred a
Page 45 and 46: Facilities and bank overdraft facil
Page 47 and 48: • €150.0 million principal amou
Page 49 and 50: Contractual obligations The followi
Page 51 and 52: An impairment loss in respect of go
Page 53 and 54: Salvatore Vicari has been a directo
Page 55 and 56: PRINCIPAL SHAREHOLDERS The table be
Page 57 and 58: invoiced to us by Pavia e Ansaldo -
Page 59 and 60: The Board of Directors IT Holding S
Page 61 and 62: REPORT OF THE AUDITORS The Board of
Page 63 and 64: IT HOLDING S.p.A. CONSOLIDATED BALA
Page 65 and 66: Acquisition of Subsidiary During 20
Page 67 and 68: IT HOLDING S.P.A. NOTES TO THE CONS
Page 69 and 70: IT HOLDING S.p.A. Notes to the cons
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IT HOLDING S.p.A. Notes to the cons
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