185000000 IT Holding Finance SA

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Sourcing We purchase substantially all of the fabrics and other materials used in our apparel production process directly from suppliers and undertake quality control procedures on all such materials before we deliver them to the third-party contractors who will undertake the cutting, sewing and assembly. Materials used in our production of accessories, underwear, leather apparel and certain knitwear typically are purchased directly by contractors from suppliers designated by us, although we also purchase directly certain materials used in the production of accessories. We maintain an in-house fabrics research unit that develops new fabrics and other materials. We often commission exclusive production runs of these and other custom fabrics for use in our collections. In an average season, we source materials from more than 1,000 suppliers, more than 90% of which are located in Italy. We have never experienced any significant difficulty in contracting with suppliers or receiving adequate supplies of fabrics or other materials. Our planning process takes into account supply of raw materials, production lead times and customer orders. Suppliers typically make deliveries within 30 days of receiving a purchase order, with certain special materials requiring up to 90 days for delivery. Although, from time to time, we experience brief delays in shipments from suppliers, none of these delays has ever had a material effect on our results of operations. We maintain online links with many of our principal suppliers in order to enhance further the flexibility and efficiency of our sourcing function and production process. The most important raw material used in the manufacturing of our Malo knitwear is cashmere. We purchase our cashmere directly from its place of origin, typically Mongolia or China, in either raw “flock” or processed “yarn” form. Flock accounts for approximately one-third of our total purchases of cashmere. Purchasing cashmere in flock form allows us to more easily monitor the quality and cost of the cashmere we use in our production process. The cost of cashmere typically accounts for approximately one-third of the total direct costs of producing our Malo knitwear. Other raw materials used in our Malo knitwear include cotton and wool. The market price of cashmere has fluctuated widely in recent years, and is at present relatively low. In order to benefit from these cyclical fluctuations in cashmere prices, we have adopted a policy of purchasing excess raw material at times when prices are low. We maintain relationships with several suppliers of cashmere and do not believe that we are dependent on any single supplier, either in flock or in yarn. We purchase cashmere from the same group of suppliers used by most producers of cashmere knitwear. See the section entitled “Risk Factors—Risks Related to Our Business— Increases in the cost of materials used to manufacture our products can decrease our profitability”. Manufacturing In general, we rely on a network of third-party contractors to manufacture our finished goods, showroom samples and accessory prototypes. We contract out the manufacture of our goods to a large number of apparel and accessory manufacturing companies, the great majority of which are located in Italy. These contractors typically are specialized in the production of a particular garment or accessory, for example, shirts or shoes, or in a particular process, such as printing or cutting. Certain of our contractors may in turn outsource part of their production to subcontractors. Our first-line Ferré-branded products are manufactured at our directly operated facility in Bologna, Italy. In addition, we conduct approximately 40% of the weaving (typically the initial and more complex phases) involved in the production of our Malo knitwear at our directly operated manufacturing facilities in Campi Bisenzio and Piacenza. We outsource the remaining part of this weaving and a greater percentage of the tailoring and finishing for our Malo knitwear products to approximately 50 to 60 specialized third-party contract manufacturers. Due to the high level of sophistication and specific manufacturing expertise required for the production of high-end cashmere knitwear products, our Malo knitwear products have traditionally relied more heavily on internal production capabilities than our other apparel and accessories. In the future, however, we intend to increase our use of third-party contractors to produce our Malo-branded apparel and accessories lines, subject to our close direction and quality control. 30
We maintain a close working relationship with our third-party contractors. Our production quality technicians regularly visit the production facilities of each contractor to offer technical support, monitor adherence to our production standards and check production quality. Finished goods manufactured by these contractors and rejected by our quality control procedures typically amount to less than 1% of total production. In addition, we collaborate with our third-party contractors in a continuous effort to increase production efficiency. For example, by providing our contractors with computer-generated tracing sheets for fabric cutting machines, we are able to minimize scrap waste in the fabric cutting process, thereby reducing our fabric costs. As a result of the flexibility and efficiency of our production network, we are able to deliver finished goods to clients as rapidly as 150 to 180 days after the start of production or, in the case of our Malo products, from as soon as 70 to 100 days after the start of production. This production cycle permits us to issue production orders on the basis of existing purchase orders, thereby limiting our commercial and inventory management risks. Since the delivery of our various products is staggered through the season, we can react quickly to evolving consumer preferences by changing the mix and composition of the collections we produce. Although from time to time we have experienced brief delays in shipments from our contractors, none of these delays has ever had a material effect on our results of operations. We do not enter into exclusive relationships with third-party contractors. We evaluate each of our contractors after the production of each season’s collections is finished on the basis of quality and timeliness of delivery. We then determine the amount of work, if any, we will give to these contractors in the next season based upon these rankings. In general, we seek to account for no more than 40% to 60% of the total revenues of any contractor. We believe that, in view of the fragmented and highly competitive nature of the garment manufacturing industry, we would not face material difficulties should we be required to replace our existing contractors or increase our total number of contractors in the future. We purchase accessories from third-party manufacturers such as Sergiolin S.p.A for the Extè and GF Ferré brands and then market, advertise and distribute them ourselves. See “Certain Relationships and Related Party Transactions” We have also established a pilot program to provide for the manufacture in China of approximately 150,000 items of apparel and accessories (representing approximately 1.8% of our total production) for our 2004/2005 Fall- Winter collections. We expect that the number of items manufactured in such low-cost regions will eventually increase to comprise up to 10% of the total number of items we produce each year. Distribution Within Italy, which is our most important market in terms of net sales, we distribute apparel and accessories, other than our Malo and Gianfranco Ferré products, to customers principally through our showrooms in Milan, Rome, Naples, Vicenza, Bari and Palermo showrooms. The most important of these is our Milan showroom, which occupies approximately 3,500 square meters and features, on separate floors, self-contained product display facilities dedicated to each of our product lines. We use agents to operate our Bologna, Reggio Calabria and Turin showrooms. We have established wholly-owned distribution companies in the United States, Germany, France and China. We reacquired control of the U.S. distribution arrangements for products distributed in our Versace collection from Versit LLC, a joint venture formerly controlled 60% by the Versace Group and 40% by us beginning with the 2005 Spring-Summer collection. We are evaluating whether to establish direct distribution capability in any of our other principal markets. In the rest of the world, we work with both third-party importer-distributors and distribution agents who typically place their orders through us. Importer-distributors acquire products from us at a discount and assume the commercial risks associated with reselling such goods to retailers within a defined territory, whereas distribution agents assist us in marketing our products to retailers within a defined territory in exchange for a commission, so that the commercial risks associated with such sales are retained by us. 31
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 and 30: Versus is a medium-priced fashion b
Page 31: in print (fashion magazines and new
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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185000000 IT Holding Finance SA

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