Edgar Filing: NATUZZI S P A

Form 20-F

LOGO

Natuzzi S.p.A

Annual Report on Form 20-F

2014

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: December 31, 2014

Commission file number: 001-11854

NATUZZI S.p.A.

(Exact name of Registrant as specified in its charter)

Republic of Italy

(Jurisdiction of incorporation or organization)

Via Iazzitiello 47, 70029, Santeramo in Colle, Bari, Italy

(Address of principal executive offices)

Mr. Vittorio Notarpietro

Tel.: +39 080 8820 111; vnotarpietro@natuzzi.com; Via Iazzitiello 47, 70029 Santeramo in Colle, Bari, Italy

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
American Depositary Shares, each representing one Ordinary Share		New York Stock Exchange
Ordinary Shares, with a par value of €1.00 each		New York Stock Exchange (for listing purposes only)

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

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:

As of December 31, 2014 54,853,045 Ordinary Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		Accelerated filer x		Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


		U.S. GAAP ¨		IFRS ¨		Other x

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 x Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

TABLE OF CONTENTS

Page


PART I			3

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE			3
ITEM 3. KEY INFORMATION			3
Selected Financial Data			3
Exchange Rates			5
Risk Factors			6
ITEM 4. INFORMATION ON THE COMPANY			12
Introduction			12
Organizational Structure			14
Strategy			14
Manufacturing			18
Supply-Chain Management			22
Products			24
Advertising			26
Retail Development			26
Markets			27
Customer Credit Management			32
Incentive Programs and Tax Benefits			32
Management of Exchange Rate Risk			33
Trademarks and Patents			34
Regulation			34
Environmental Regulatory Compliance			34
Insurance			34
Description of Properties			35
Capital Expenditures			35
ITEM 4A. UNRESOLVED STAFF COMMENTS			36
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS			36
Critical Accounting Policies and estimates			36
Results of Operations			40
2014 Compared to 2013			42
2013 Compared to 2012			45
Liquidity and Capital Resources			48
Contractual Obligations and Commitments			50
Trend information			52

TABLE OF CONTENTS

Page


Off-Balance Sheet Arrangements			53
Related Party Transactions			53
New Accounting Standards under Italian and U.S. GAAP			53
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			55
Compensation of Directors and Officers			57
Statutory Auditors			58
External Auditors			59
Employees			59
Share Ownership			62
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			63
Major Shareholders			63
Related Party Transactions			64
ITEM 8. FINANCIAL INFORMATION			64
Consolidated Financial Statements			64
Export Sales			64
Legal and Governmental Proceedings			64
Dividends			64
ITEM 9. THE OFFER AND LISTING			65
Trading Markets and Share Prices			65
ITEM 10. ADDITIONAL INFORMATION			66
By-laws			66
Material Contracts			73
Exchange Controls			73
Taxation			74
Documents on Display			79
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			79
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			81
ITEM 12A. DEBT SECURITIES			81
ITEM 12B. WARRANTS AND RIGHTS			81
ITEM 12C. OTHER SECURITIES			81
ITEM 12D. AMERICAN DEPOSITARY SHARES			81

PART II			83

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			83
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			83
ITEM 15. CONTROLS AND PROCEDURES			83

TABLE OF CONTENTS

Page


ITEM 16. [RESERVED]			85
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT			85
ITEM 16B. CODE OF ETHICS			85
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES			85
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.			86
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS			86
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT			86
ITEM 16G. CORPORATE GOVERNANCE			86
ITEM 16H. MINE SAFETY DISCLOSURE.			90

PART III			90

ITEM 17. FINANCIAL STATEMENTS			90
ITEM 18. FINANCIAL STATEMENTS			90
ITEM 19. EXHIBITS			90

iii

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this annual report on Form 20-F (the “Annual Report”), references to “€” or “Euro” are to the Euro and references to “U.S. dollars,” “dollars,” “U.S.$” or “$” are to United States dollars.

Amounts stated in U.S. dollars, unless otherwise indicated, have been translated from the Euro amount by converting the Euro amounts into U.S. dollars at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) for euros on December 31, 2014 of U.S.$ 1.2101. The foreign currency conversions in this Annual Report should not be taken as representations that the foreign currency amounts actually represent the equivalent U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated.

The Consolidated Financial Statements included in Item 18 of this Annual Report are prepared in conformity with accounting principles established by the Italian Accounting Profession (“Italian GAAP”). These principles vary in certain significant respects from generally accepted accounting principles in the United States (“U.S. GAAP”). See Note 31 to the Consolidated Financial Statements included in Item 18 of this Annual Report. All discussions in this Annual Report are in relation to Italian GAAP, unless otherwise indicated.

In this Annual Report, the term “seat” is used as a unit of measurement. A sofa consists of three seats; an armchair consists of one seat.

The terms “Natuzzi,” “Natuzzi Group”, “Company,” “Group,” “we,” “us,” and “our,” unless otherwise indicated or as the context may otherwise require, mean Natuzzi S.p.A. and its consolidated subsidiaries.

FORWARD-LOOKING INFORMATION

The Company makes forward-looking statements in this Annual Report. Statements that are not historical facts, including statements about the Group’s beliefs and expectations, are forward-looking statements. Words such as “believe,” “expect,” “intend,” “plan” and “anticipate” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements. These statements are based on management’s current plans, estimates and projections, and therefore readers should not place undue reliance on them. Forward-looking statements speak only as of the dates they were made, and the Company undertakes no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

Projections and targets included in this Annual Report are intended to describe our current targets and goals, and not as a prediction of future performance or results. The attainment of such projections and targets is subject to a number of risks and uncertainties described in the paragraph below and elsewhere in this Annual Report. See “Item 3. Key Information—Risk Factors.”

Forward-looking statements involve inherent risks and uncertainties, as well as other factors that may be beyond our control. The Company cautions readers that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to: effects on the Group from competition with other furniture producers, material changes in consumer demand or preferences, significant economic developments in the Group’s primary markets, the Group’s execution of its reorganization plans for its manufacturing facilities, significant changes in labor, material and other costs affecting the construction of new plants, significant changes in the costs of principal raw materials, significant exchange rate movements or changes in the Group’s legal and regulatory environment, including developments related to the Italian Government’s investment incentive or similar programs. The Company cautions readers that the foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and events.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

Selected Financial Data

The following table sets forth selected consolidated financial data for the periods indicated and is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and the notes thereto included in Item 18 of this Annual Report and the information presented under “Operating and Financial Review and Prospects” included in Item 5 of this Annual Report. The statement of operations and balance sheet data presented below have been derived from the Consolidated Financial Statements.

The Consolidated Financial Statements, from which the selected consolidated financial data set forth below has been derived, were prepared in accordance with Italian GAAP, which differ in certain respects from U.S. GAAP. For a discussion of the principal differences between Italian GAAP and U.S. GAAP as they relate to the Group’s consolidated net loss and shareholders’ equity, see Note 31 to the Consolidated Financial Statements included in Item 18 of this Annual Report.


	Year Ended At December 31,
	2014			2014			2013			2012			2011			2010
	(millions of dollars, except per Ordinary Share)⁽¹⁾			(millions of euro, except per Ordinary Share)
Statement of Operations Data:
Amounts in accordance with Italian GAAP:
Net sales:
Leather- and fabric-upholstered furniture	$	540.4		€	409.1		€	402.8		€	409.4		€	425.3		€	460.5
Other(2)		69.1			52.3			46.3			59.4			61.0			58.1
Total net sales		609.5			461.4			449.1			468.8			486.3			518.6
Cost of sales		(440.2	)		(333.2	)		(317.3	)		(313.8	)		(326.1	)		(321.5	)
Gross profit		169.4			128.2			131.8			155.0			160.2			197.1
Selling expenses		(170.3	)		(128.9	)		(126.6	)		(132.4	)		(144.3	)		(154.3	)
General and administrative expenses		(48.0	)		(36.3	)		(37.5	)		(39.9	)		(43.3	)		(42.4	)
Operating income (loss)		(48.9	)		(37.0	)		(32.3	)		(17.3	)		(27.3	)		0.4
Operating income (loss) per Ordinary Share		(0.89	)		(0.67	)		(0.59	)		(0.32	)		(0.50	)		0.01
Other income (expense), Net (3) (4)		(13.9	)		(10.5	)		(31.9	)		(4.6	)		17.3			(4.4	)
Income (loss) before taxes and minority interests		(62.7	)		(47.5	)		(64.2	)		(21.9	)		(10.0	)		(4.0	)
Income taxes		(2.4	)		(1.8	)		(4.1	)		(4.1	)		(8.9	)		(7.0	)
Income (loss) before non-controlling interests		(65.1	)		(49.3	)		(68.4	)		(26.0	)		(18.9	)		(11.0	)
Non-controlling interest		0.1			0.1			0.2			0.1			0.7			0.1
Net income (loss)		(65.3	)		(49.4	)		(68.6	)		(26.1	)		(19.6	)		(11.1	)
Net income (loss) per Ordinary Share		(1.19	)		(0.90	)		(1.25	)		(0.48	)		(0.36	)		(0.20	)
Dividends declared per share		—			—			—			—			—			—
Amounts in accordance with U.S. GAAP:
Net sales	$	602.9		€	456.4		€	445.2		€	459.3		€	488.3		€	510.8
Operating income (loss) (5)		(56.1	)		(42.5	)		(55.8	)		(19.5	)		(31.9	)		0.4
Operating income (loss) per Ordinary Share (5)		(1.02	)		(0.77	)		(1.02	)		(0.35	)		(0.58	)		0.01
Net income (loss)		(60.8	)		(46.0	)		(61.8	)		(29.5	)		(12.4	)		(8.8	)
Net income (loss) per Ordinary Share (basic and diluted)		(1.11	)		(0.84	)		(1.13	)		(0.54	)		(0.23	)		(0.16	)
Weighted average number of Ordinary Shares Outstanding		54,853,045			54,853,045			54,853,045			54,853,045			54,853,045			54,853,045
Balance Sheet Data:
Amounts in accordance with Italian GAAP:
Current assets	$	289.5		€	239.2		€	270.2		€	307.5		€	327.3		€	298.6
Total assets		459.8			380.0			421.9			476.1			511.0			503.9
Current liabilities		181.2			149.7			138.2			133.2			122.9			107.8
Long-term debt		7.5			6.2			4.2			7.3			10.8			13.6
Non-controlling interest		3.6			3.0			2.7			2.5			3.0			2.1
Shareholders’ equity attributable to Natuzzi S.p.A. and Subsidiaries(6)		206.9			171.0			208.9			281.1			310.5			323.2
Net Asset		210.6			174.0			211.6			283.7			313.5			325.3
Amounts in accordance with U.S. GAAP:
Total assets	$	461.4		€	381.3		€	428.9		€	480.6		€	511.0		€	508.5
Shareholders’ equity attributable to Natuzzi S.p.A. and Subsidiaries		207.0			171.1			217.1			279.1			308.6			321.7
Net Asset		210.7			174.1			219.8			281.6			311.6			323.8

Income Statement amounts are converted from euros into U.S. dollars by using the average Federal Reserve Bank of New York Euro exchange rate for 2014 of U.S.$ 1.3210 per 1 Euro. Balance Sheet amounts are converted from euros into U.S. dollars using the Noon Buying Rate of U.S.$ 1.2101 per 1 Euro as of December 31, 2014. Source: Bloomberg (USCFEURO Index).

2)	Sales included under “Other” principally consist of sales of polyurethane foam and leather to third parties and sales of living room accessories and beds.

3)	Other income (expense), net in 2014 was negatively affected by the write down of the €1.4 million investment in the share capital of Salena Srl, by impairment losses of €0.4 million related to the Ginosa plant and by impairment losses of long-lived assets in use of €0.7 million.

Other income (expense), net in 2013 was negatively affected by impairment losses of long-lived assets in use of €2.1 million, by the write-off of €6.0 million attributable to an airplane to be sold, by impairment losses of €0.4 million for closed plants, by a provision of €19.9 million for one-time employee termination benefits and by other provisions for contingent liabilities. Other income (expense), net in 2011 was positively affected by the net Chinese relocation compensation and negatively affected by the impairment losses of long-lived assets, a one-time employee termination benefit and the provision for contingent liabilities. See Note 28 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

Under US GAAP, impairment losses of €8.5 million for 2013, have been classified as “general and administrative expenses” and are included as part of operating loss (See Note 31). Impairment losses of €5.9 million for 2011 and of €0.7 million for 2010, respectively, have been reclassified to “general and administrative expenses” from the line “other income/(expenses), net,” where they were classified in 2011 and 2010 under Italian GAAP.

6)	Share capital as of December 31, 2014, 2013, 2012, 2011 and 2010 amounted to €54.9 million, €54.9 million, €54.9 million, €54.9 million and €54.9 million, respectively. Shareholder’s Equity represents the Total Equity attributable to Natuzzi S.p.A. and its subsidiaries.

Exchange Rates

The following table sets forth, for each of the periods indicated, the Noon Buying Rate for the Euro expressed in U.S. dollars per Euro.


Year:	Average⁽¹⁾		At Period End
2010		1.3216		1.3269
2011		1.4002		1.2973
2012		1.2909		1.3186
2013		1.3303		1.3779
2014		1.3210		1.2101


Month ending on:	High		Low
31-Oct-2014		1.2812		1.2517
30-Nov-2014		1.2554		1.2394
31-Dec-2014		1.2504		1.2101
31-Jan-2015		1.2015		1.1279
28-Feb-2015		1.1463		1.1197
31-Mar-2015		1.1212		1.0855

(1)

The average of the Noon Buying Rates for the relevant period, calculated using the average of the Noon Buying Rates on the last business day of each month during the period. Source: Federal Reserve Statistical Release on Foreign Exchange Rates–Historical Rates for Euro Area; Bloomberg (USCFEURO Index).

The effective Noon Buying Rate on April 24, 2015 was U.S.$ 1.0876 to 1 Euro.

Risk Factors

Investing in the Company’s ADSs involves certain risks. You should carefully consider each of the following risks and all of the information included in this Annual Report.

The Group has a recent history of losses; the Group’s future profitability, financial condition and ability to maintain adequate levels of liquidity depend to a large extent on its ability to overcome macroeconomic and operational challenges — The Group reported net losses in 2014 (€49.4 million), 2013 (€68.6 million), 2012 (€26.1 million), 2011 (€19.6 million) and 2010 (€11.1 million), while it reported an operating loss in each of 2014, 2013, 2012 and 2011 (€37.0 million, €32.3 million, €17.3 million and €27.3 million respectively) and operating income of €0.4 million in 2010. In addition, the Group’s net sales declined from €518.6 million in 2010 to €461.4 million in 2014. As evidenced by these financial results, we may not be able to achieve or maintain profitability on a consistent basis.

The Group attributes its negative results in 2014 to a persistently difficult macroeconomic environment affecting the furniture industry as a whole (particularly evident in some mature markets such as Europe), including extreme weakness in economic activity in the Euro-zone, continued strength of the Euro versus major currencies, stagnant or declining disposable income for consumers, particularly in some countries of the EU, continued high prices for raw materials and price competition from low-cost manufacturers. In 2014, the Group launched the Transformation Plan (as defined below), which is aimed at restructuring its operations and which foresees, in particular, a reduction in its Italian workforce, the closure of certain Italian facilities and the implementation of more efficient production processes in all of its manufacturing plants, including those in Italy, that remain in operation. Following the initial phase of the implementation of such plan, the Group faced other operational challenges, especially at the Italian and Chinese plants, that resulted in slower implementation of the Transformation Plan than had been originally foreseen and, consequently, in a lower-than-expected improvement in efficiency, affecting the Group’s overall profitability. In addition, pursuant to our obligations under the Italian Reorganization Agreements (as defined below), we incurred financial obligations in the amount of €13.5million connected to incentive payments designed to induce the voluntary resignation of redundant employees. As a result of the delays encountered in implementing the Transformation Plan and the additional financial burden incurred in connection with the abovementioned incentive payments, the Group experienced a liquidity reduction at the end of 2014, leading to a short postponement in paying employee salaries for work performed in December 2014 and social contributions for November and December 2014. See “Item 5. Operating and Financial Review and Prospects”. These operational challenges and negative trends have been partially offset by moderate signs of sales recovery from the Americas and some fast growing markets, such as those located in Eastern Europe, Asia-Pacific, Latin America and the Middle East. See “Item 5. Operating and Financial Review and Prospects.” The Group has also faced increased labor costs for some of its manufacturing plants operating abroad. See “Item 4. Information on the Company—Manufacturing” for further information.

Our results of operations and ability to maintain adequate levels of liquidity in the future will depend on our ability to overcome these and other challenges. Our failure to achieve profitability in the future could adversely affect the trading price of our shares and our ability to raise additional capital and, accordingly, our ability to grow our business. There can be no assurance that we will succeed in addressing any or all of these risks, and the failure to do so could have a material adverse effect on our business, financial condition and operating results.

The worldwide economic downturn over the past few years has impacted the Group’s business and could continue to significantly impact our operations, sales, earnings and liquidity in the foreseeable future — Although in 2010, the global economy started to show, on the whole, small signs of recovery following the 2008-2009 global financial crisis, there were considerable differences in the rate of recovery (if any) among regions. During 2011, the global economy, after an encouraging first half, subsequently lost momentum, with particular reference to the Euro-zone, as a consequence of the sovereign debt crisis affecting Greece, Portugal, Spain, Italy and Ireland. In 2012 and 2013, the global economy continued to grow at a modest pace, but this growth was curbed by the stagnation of economic activity in parts of Europe, as well as the slow-down of some emerging economies. In 2014 recovery remained gradual and economic developments were different across regions: growth in the United States accelerated, momentum slowed in China, economic activity did not gain traction in Japan, and economic conditions in Russia deteriorated further, but spillovers to other emerging markets remain limited to date.

However, the prospects for the world economy still remain uncertain in the short and medium term, particularly owing to persistent weakness in the Euro area (general weakness in the job market, ongoing vulnerability in the real-estate sector, a decreasing level of savings among families, high levels of public indebtedness in most developed countries, political instability in Greece, austerity measures designed to reduce public expenditures and consequent decreased consumer spending), the protraction of the slowdown in China, and the sharp downturn in Russia.

Furthermore, a resurgence of the sovereign debt crisis in Europe could diminish the banking industry’s ability to lend to the real economy, thus setting in motion a negative spiral of declining production, higher unemployment and a weakening financial sector.

These persistently difficult conditions have resulted in a decline in our sales and earnings over the past few years and could continue to impact our sales and earnings in the future. Sales of residential furniture are impacted by downturns in the general economy primarily due to decreased discretionary spending by consumers. The general level of consumer spending is affected by a number of factors, including, among others, general economic conditions, inflation, consumer confidence and the availability of consumer credit, all of which are generally beyond our control.

The economic downturn also impacts retailers, our primary customers, and may result in the inability of our customers to pay the amounts owed to us. In addition, if our retail customers are unable to sell our products or are unable to access credit, they may experience financial difficulties leading to bankruptcies, liquidations, and other unfavorable events. If any of these events occur, or if unfavorable economic conditions continue to challenge the consumer environment, our future sales, earnings, and liquidity would likely be adversely impacted.

The Group’s ability to generate the significant amount of cash needed to service our debt obligations and comply with our other financial obligations, and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on multiple factors, many of which may be beyond our control—Our ability to make scheduled payments due on our existing and anticipated debt obligations and on our other financial obligations, and to refinance and to fund planned capital expenditure and development efforts will depend on our ability to generate cash. See “—The Group has a recent history of losses; the Group’s future profitability, financial condition and ability to maintain adequate levels of liquidity depend to a large extent on its ability to overcome macroeconomic and operational challenges.” We will require generation of sufficient operating cash flow from our operations to service our current and future projected indebtedness. Our ability to obtain cash to service our existing and projected debts is subject to a range of economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. We may not be able to generate sufficient cash flow from operations to satisfy our existing and projected debt and other financial obligations, in which case, we may have to undertake alternative financing plans, selling assets, reducing or delaying capital investments, or seeking to raise additional capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the financial markets and our financial condition at such time. To the extent we have borrowings under bank overdrafts that are payable upon demand or which have short maturities, we may be required to repay or refinance such amounts on short notice, which may be difficult to do on acceptable financial terms or at all. At December 31, 2014, we had €20.8 million of bank overdrafts outstanding. In addition, while we had €32.8 million of cash and cash equivalents at December 31, 2014, 57% of this amount was held by our Chinese subsidiaries, most of which cannot be paid to us as a dividend without incurring withholding taxes. We cannot assure you that any refinancing or restructuring would be possible, that any assets could be sold, or, if sold, of the timing of the sales or the amount of proceeds that would be realized from those sales. We cannot assure you that additional financing could be obtained on acceptable terms, if at all, or would be permitted under the terms of our various debt instruments then in effect. Our failure to generate sufficient cash flow to satisfy our existing and projected debt obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations.

The Group’s operations have benefited in 2014 and in previous years from a temporary work force reduction program that, if not continued despite management’s desire to do so, may have an impact on the Group’s future performance — Due to the persistently difficult business environment that has negatively affected the Group’s sales performance over the past few years, the Company has in recent years entered into a series of agreements with Italian trade unions and the relevant Italian Ministry pursuant to which government funds have been used to pay a substantial

majority of the salaries of redundant workers who are subject to layoffs or reduced work schedules (as in the case of the Cassa Integrazione Guadagni Straordinaria, or “CIGS,” an Italian temporary lay-off program). On March 3, 2015, the Company, the relevant trade union organizations and local institutions entered into an agreement (the “2015 Italian Reorganization Agreement”) that follows and develops the agreement previously entered into on October 10, 2013 (the “2013 Italian Reorganization Agreement,” incorporated by reference to the Form 20-F filed by Natuzzi S.p.A. with the Securities Exchange Commission on April 30, 2014, file number 001-11854, and together with the 2015 Italian Reorganization Agreement, the “Italian Reorganization Agreements”). The 2013 Italian Reorganization Agreement had paved the way for the restructuring of the Group’s Italian operations. The 2015 Italian Reorganization Agreement is a fundamental tool for the industrial re-launch of Natuzzi’s Italian plants (both from a qualitative and productive standpoint), representing the final step in the production efficiency and work-related cost reduction processes that have been tested over the past few months in the Group’s test laboratory. As a result of the 2015 Italian Reorganization Agreement, the Company will be able to better allocate workers according to efficiency criteria: workers on rotation will not be staffed at our plants (as opposed to the first part of 2014, when the staffing of workers on rotation at our plants led to a decrease in the level of productivity).

The new business structure as outlined by the 2015 Italian Reorganization Agreement will allow the Group to reduce the number of redundant employees subject to future lay-offs from 1,506 (previously envisaged in the 2013 Italian Reorganization Agreement) to 516. As a result, the number of employees in Italy will be equal to 1,818 (as opposed to the current number of 2,334 employees). The 2015 Italian Reorganization Agreement provides that the solidarity agreement between the Company and the trade unions which aim to reduce working hours in order to maintain company employment levels during a crisis (the “Solidarity Agreement”) will be applicable to these 1,818 employees (both blue and white collars) for a 24-month period, starting from May 2, 2015. These 1,818 employees will work on a reduced-shift basis (for about five hours on average per day, as opposed to the current eight hour shift per day), which is consistent with the expected order flow that the Company foresees for its Italian productions. The remaining 516 employees will be covered by the Italian temporary lay-off program named “Cassa Integrazione Guadagni.”

Government funds cover the substantial majority of the salaries of redundant workers under the CIGS program and also partially reimburses employees on a reduced-shift program for their lost hours under the Solidarity Agreement.

The extraordinary and temporary layoff programs have been extended several times in the past by the Ministry of Labor and Social Policy, but there is no guarantee that the Group will be able to renew this layoff program, even if management deems ongoing participation in the program to be in the Company’s best interest. If the Italian Government were to cease its financial support for the layoff programs, our labour costs may rise substantially and our ability to streamline our operations may be hindered, any of which could adversely impact our future performance. For more information see “Item 6. Directors, Senior Management and Employees—Employees”.

The Group’s operations may be adversely impacted by strikes, slowdowns and other labor relations matters. Many of our employees, including many of the laborers at our Italian plants, are unionized and covered by collective bargaining agreements. As a result, we are subject to the risk of strikes, work stoppages or slowdowns, particularly in our Italian plants. These collective bargaining agreements also limit our ability to close plants, reduce wages or adjust work schedules in response to market conditions or competition without the agreement of Italian trade union representatives. During 2013 and parts of 2014, we have experienced strikes and slowdowns in connection with our Italian reorganization efforts, which resulted in lower productivity levels for the effected plants. Our operations may also be adversely impacted by future strikes or slowdowns, which we anticipate could occur in the future in connection with the announcement of layoffs and the subsequent termination of redundant employees.

Any strikes, threats of strikes, slowdowns or other resistance in connection with our reorganization plan, the negotiation of new labor agreements or otherwise could adversely affect our business as well as impair our ability to implement further measures to reduce structural costs and improve production efficiencies. A lengthy strike that involves a significant portion of our manufacturing facilities could have an adverse effect on our financial condition, results of operations, and cash flows.

We may not execute our 2014-2016 Business Plan, including reorganization plans for our Italian industrial operations, successfully or in a timely manner, which could have a material adverse effect on our results of operations or on our ability to achieve the objectives set forth in our plans — On February 28, 2014, the Natuzzi board of directors approved the 2014-2016 Business Plan (the “Business Plan” or “Transformation Plan”), which also incorporates the plan for the reorganization of the Group’s Italian operations that was the subject of the Italian Reorganization Agreements. The reorganization of the Group’s Italian operations provides for the reduction in our Italian workforce, the rationalization of certain Italian facilities and the implementation of more efficient production processes. The Business Plan reflects these objectives, while also contemplating efficiency improvements in our worldwide production and back-office procedures, efficiency improvements in our supply chain, rationalization and realignment of our retail network, the streamlining of the number of brands and store insignias within the Group, and optimization of our marketing and commercial investments. Our ability to return our operations to profitability is dependent upon the successful and timely execution of the Business Plan, including, in particular, the successful reorganization of our Italian industrial operations.

As a matter of fact, first half 2014 results highlighted the need to implement certain corrective measures within the Group’s industrial operations, for the performance of our industrial plants in China and Italy has fallen short of our expectations, which may result in slower implementation of the Business Plan than originally envisaged.

The failure to execute these objectives successfully and timely could result in ongoing losses for the Group and a failure to reduce costs and improve sales as contemplated by the Business Plan.

A failure to offer a wide range of products that appeal to consumers in the markets we target and at different price-points could result in a decrease in our future profitability — The Group’s sales depend on our ability to anticipate and reflect consumer tastes and trends in the products we sell in various markets around the world, as well as our ability to offer our products at various price points that reflect the spending levels of our target consumers. While we have broadened the offering of our products in terms of styles and price points over the past several years in order to attract a wider base of consumers, our results of operations are highly dependent on our continued ability to properly anticipate and predict these trends. The potential inability of the Group to anticipate consumer tastes and preferences in the various markets in which we operate, and to offer these products at prices that are competitive to consumers, may negatively affect the Group’s ability to generate future earnings.

In addition, the Group is a leading player in the production of leather-upholstered furniture, with 92.2% of our net sales of upholstered furniture in 2014 derived from the sale of leather-upholstered furniture. Consumers have the choice of purchasing upholstered furniture in a wide variety of styles and materials, and consumer preferences may change. There can be no assurance that the current market for leather-upholstered furniture will grow consistent with our projections under the Business Plan or that it will not decline.

Our Business Plan contemplates the rationalization and realignment of our retail network. If we and our dealers do not execute these plans successfully or if we fail to effectively launch new stores in growing markets, our ability to grow and our profitability could be adversely affected — Our Business Plan contemplates the closure of certain under-performing stores and the opening of new stores and launching of new points of sale in markets with greater growth potential, particularly in the Asia-Pacific region, the Middle East, India, Russia, Eastern Europe and Latin America. Our ability and the ability of our dealers to identify and open new stores in desirable locations and operate such stores profitably is an important factor in our ability to grow successfully. We have in the past and will likely continue in the future to purchase or otherwise assume operation of company-brand stores from independent dealers to the extent that such stores are considered strategic for the promotion of the Natuzzi Italia brand. Increased demands on our operational, managerial, and administrative resources could cause us to operate our business, including our existing and new stores, less effectively, which in turn could cause deterioration in our profitability.

Demand for furniture is cyclical and may fall in the future— Historically, the furniture industry has been cyclical, fluctuating with economic cycles, and sensitive to general economic conditions, housing starts, interest rate levels, credit availability and other factors that affect consumer spending habits. Due to the discretionary nature of most furniture purchases and the fact that they often represent a significant expenditure to the average consumer, such purchases may be deferred during times of economic uncertainty such as those being recently experienced in some of our markets, such as Europe, or the United States some years ago.

In 2014, the Group derived 45.2% of its leather and fabric-upholstered furniture net sales from the EMEA region, 41.8% from the Americas (Brazil included), and 13.0% from the Asia-Pacific region. A failure to recover from the economic slowdown or renewed economic pressures in Europe may have a material adverse effect on the Group’s results of operations.

The furniture market is highly competitive — The Group operates in a highly competitive industry that includes a large number of manufacturers. No single company has a dominant position in the industry. Competition is generally based on product quality, brand name recognition, price and service.

The Group principally competes in the upholstered furniture sub-segment of the furniture market. In Europe, the upholstered furniture market is highly fragmented. In the United States, the upholstered furniture market includes a number of relatively large companies, many of which are larger and have greater financial resources than the Group. Some of the Group’s competitors offer extensively advertised, well-recognized branded products.

Competition has increased significantly in recent years as foreign producers from countries with lower manufacturing costs have begun to play an important role in the upholstered furniture market. Such manufacturers are often able to offer their products at lower prices, which increases price competition in the industry. In particular, manufacturers in Asia and Eastern Europe have increased competition in the lower-priced segment of the market. As a result of the actions and strength of the Group’s competitors and the inherent fragmentation in some markets in which it competes, the Group is continually subject to the risk of losing market share, which may lower its sales and profits.

Market competition may also force the Group to reduce prices and margins, thereby reducing its cash flows.

The highly competitive nature of the industry means that we are constantly at risk of losing market share, which would likely result in a loss of future sales and earnings. In addition, due to high levels of competition, it may not be possible for us to raise the prices of our products in response to inflationary pressures or increasing costs, which could result in a decrease in our profit margins.

Fluctuations in currency exchange rates have adversely affected and may adversely affect the Group’s results — The Group conducts a substantial part of its business outside of the Euro-zone. An increase in the value of the Euro relative to other currencies used in the countries in which the Group operates has in the past, and may in the future, reduce the relative value of the revenues from its operations in those countries, and therefore may adversely affect its operating results or financial position, which are reported in Euro. In addition to this risk, the Group is subject to currency exchange rate risk to the extent that its costs are denominated in currencies other than those in which it earns revenues. In 2014, a significant portion of the Group’s net sales (about 66%), but approximately 45% of its costs, were denominated in currencies other than the Euro. The Group also holds a substantial portion of its cash and cash equivalents in currencies other than the Euro, including a large amount in RMB received as compensation for the relocation of its Chinese manufacturing plant. The Group is therefore exposed to the risk that fluctuations in currency exchange rates may adversely affect its results, as has been the case in recent years. For more information, see Item 11, “Quantitative and Qualitative Disclosures about Market Risk.”

The Group faces risks associated with its international operations — The Group is exposed to risks that arise from its international operations, including changes in governmental regulations, tariffs or taxes and other trade barriers, price, wage and exchange controls, political, social, and economic instability in the countries where the Group operates, inflation and exchange rate and interest rate fluctuations. Any of these factors could have a material adverse effect on the Group’s results.

The price of the Group’s principal raw materials is difficult to predict— In 2014, approximately 88% of the Group’s revenues came from leather-upholstered furniture sales. The acquisition of cattle hides represents approximately 33% of total cost of goods sold. The dynamics of the raw hides market are dependent on the consumption of beef, the levels of worldwide slaughtering, worldwide weather conditions and the level of demand in a number of different sectors, including footwear, automotive, furniture and clothing.

The Group’s past results and operations have significantly benefited from government incentive programs, which may not be available in the future — Historically, the Group derived significant benefits from the Italian Government’s investment incentive programs for under-industrialized regions in Southern Italy, including tax benefits, subsidized loans and capital grants. See “Item 4. Information on the Company—Incentive Programs and Tax Benefits.” In recent years, the Italian Parliament replaced these incentive programs with an investment incentive program for all under-industrialized regions in Italy, which is currently being implemented by the Group through grants, research and development benefits. There are no indications at this time that the Italian Government will implement new initiatives to support companies located in under-industrialized regions in Italy. Therefore, there can be no assurance that the Group will continue to be eligible for such grants, benefits or tax credits for its current or future investments in Italy.

In recent years, the Group has opened manufacturing operations in China, Brazil and Romania and through 2011, was granted tax benefits and export incentives by the respective governmental authorities in those countries. There can be no assurance that the Group will benefit from such tax benefits or export incentives in connection with future investments.

The Group is dependent on qualified personnel — The Group’s ability to maintain its competitive position will depend to some considerable degree upon the personal commitment of its founder, chairman and CEO, Mr. Pasquale Natuzzi, as well as on its ability to continue to attract and maintain highly qualified managerial, manufacturing and sales and marketing personnel. There can be no assurance that the loss of key personnel would not have a material adverse effect on the Group’s results of operations.

Investors may face difficulties in protecting their rights as shareholders or holders of ADSs — The Company is incorporated under the laws of the Republic of Italy. As a result, the rights and obligations of its shareholders and certain rights and obligations of holders of its ADSs (as defined below) are governed by Italian law and the Company’s statuto (or by-laws). These rights and obligations are different from those that apply to U.S. corporations. Furthermore, under Italian law, holders of ADSs have no right to vote the shares underlying their ADSs; however, pursuant to the Deposit Agreement (as defined below), ADS holders do have the right to give instructions to The Bank of New York Mellon, the ADS depositary, as to how they wish such shares to be voted. For these reasons, the Company’s ADS holders may find it more difficult to protect their interests against actions of the Company’s management, board of directors or shareholders than they would if they were shareholders of a company incorporated in the United States.

One shareholder has a controlling stake of the Company — Mr. Pasquale Natuzzi, who founded the Company and is currently Chief Executive Officer and Chairman of the board of directors, beneficially owns, as of April 24, 2015, 30,967,521 Ordinary Shares, representing 56.5% of the Ordinary Shares outstanding (61.6% of the Ordinary Shares outstanding if the Ordinary Shares owned by members of Mr. Natuzzi’s immediate family (the “Natuzzi Family”) are aggregated). As a result, Mr. Natuzzi has the ability to exert significant influence over our corporate affairs and to control the Company, including its management and the selection of its board of directors. Since December 16, 2003, Mr. Natuzzi has held his entire beneficial ownership of Natuzzi S.p.A. shares through INVEST 2003 S.r.l., an Italian holding company wholly-owned by Mr. Natuzzi and with its registered office located at Via Gobetti 8, Taranto, Italy.

In addition, under the Deposit Agreement dated as of May 15, 1993, as amended and restated as of December 23, 1996 and as of December 31, 2001 (the “Deposit Agreement”), among the Company, The Bank of New York Mellon, as Depositary (the “Depositary”), and owners and beneficial owners of American Depositary Receipts (“ADRs”), the Natuzzi Family has a right of first refusal to purchase all the rights, warrants or other instruments which The Bank of New York Mellon, as Depositary under the Deposit Agreement, determines may not lawfully or feasibly be made available to owners of ADSs in connection with each rights offering, if any, made to holders of Ordinary Shares.

Because a change of control of the Company would be difficult to achieve without the cooperation of Mr. Natuzzi and the Natuzzi Family, the holders of the Ordinary Shares and the ADSs may be less likely to receive a premium for their shares upon a change of control of the Company.

Purchasers of our Ordinary Shares and ADSs may be exposed to increased transaction costs as a result of the Italian financial transaction tax or the proposed European financial transaction tax— On 14 February 2013, the European Commission adopted a proposal for a directive on the financial transaction tax (hereafter “EU FTT”) to be

implemented under the enhanced cooperation procedure by eleven Member States initially (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain). Member States may join or leave the group of participating Member States at later stages. The proposal will be negotiated by Member States, and, subject to an agreement being reached by the participating Member States, a final directive will be enacted. The participating Member States will then implement the directive in local legislation. If the proposed directive is adopted and implemented in local legislation, investors in Ordinary Shares and ADSs may be exposed to increased transaction costs.

Italy approved a financial transaction tax in 2012 (the “IFTT”), which, beginning March 1, 2013, applies with respect to trades entailing the transfer of (i) shares or equity-like financial instruments issued by companies resident in Italy, such as the Ordinary Shares; and (ii) securities representing the shares and financial instruments under (i) above (including depositary receipts such as the ADSs), regardless of the residence of the issuer. The IFTT may also apply to the transfer of Ordinary Shares and ADSs by a U.S. resident. The IFTT does not apply to companies having an average market capitalization lower than €500 million in the month of November of the year preceding the year in which the trade takes place. In order to benefit from this exemption, companies whose securities are listed on a foreign regulated market, such as the Company, need to be included on a list published annually by the Italian Ministry of Economy and Finance. As of the date of this Annual Report, the Company is yet to be included on such a list. As a result of the IFTT, investors in the Ordinary Shares and ADSs may be exposed to increased transaction costs. See “Taxation—Other Italian Taxes—The Italian Financial Transaction Tax.”

Our auditors, like other independent registered public accounting firms operating in Italy, are not currently permitted to be subject to inspection by the Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection — U.S. law requires auditing firms that audit U.S. publicly traded companies or that otherwise are registered with the Public Company Accounting Oversight Board, or PCAOB, to undergo regular inspections by the PCAOB to assess its compliance with U.S. Securities and Exchange Commission (the “SEC”) rules and PCAOB professional standards. Because our auditors are a registered public accounting firm in Italy, a jurisdiction where the PCAOB is currently unable under Italian law to conduct inspections, our auditors, like other independent registered public accounting firms in Italy, are currently not inspected by the PCAOB.

Inspections of audit firms that the PCAOB has conducted where allowed have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in Italy prevents the PCAOB from regularly evaluating our auditor’s audits and quality control procedures. As a result, the inability of the PCAOB to conduct inspections of auditors in Italy may deprive investors of the benefits of PCAOB inspections.

ITEM 4. INFORMATION ON THE COMPANY

Introduction

The Natuzzi Group is engaged in designing, manufacturing and distributing upholstered furniture. The Group’s offering primarily includes linear and sectional sofas, including those with reclining and motion functions, armchairs and sofa beds, as well as living room and bedroom furnishings and accessories.

The Group is one of the world’s leading companies for the production of leather-upholstered furniture and according to the World Luxury Tracking survey by Lagardère Global Advertising, the Natuzzi brand was ranked as the best-known global brand within the furniture category, and the second best-known brand if all sectors are considered, based on a sample of 7,700 luxury consumers from six countries (France, UK, Germany, Spain, Italy and the United States) (Source: World Luxury Tracking 2013 (Lagardère Global Advertising/IPSOS)).

Natuzzi began operations in Italy in 1959. The Company first targeted the U.S. market in 1983 and subsequently began entering other European markets. In 2008, Natuzzi started to focus its attention on Brazil, Russia, India and China and other developing markets. Today the distribution network covers approximately 100 countries on five continents.

On February 28, 2014, the Natuzzi Board of Directors approved the 2014-2016 Business Plan, prepared in cooperation with specialized external business advisors. The Business Plan has established a new brand strategy for the Group: the brands—Natuzzi Italia, Natuzzi Editions and Natuzzi Re-vive—will be developed as product lines each targeting a specific type of customer, but all leveraging the strength of the Natuzzi brand name, the Company’s most recognized brand among consumers.

As part of the Business Plan, during 2014 the Group started relabeling the Leather Editions products portfolio as Natuzzi Editions to capitalize on the strength of the Natuzzi name and streamline the offer.

For a detailed description of these brands and their target markets, please see “Strategy—The Brand Portfolio Strategy” and “Products” below.

The Group also offers unbranded and private label products (including the Softaly line) within our dedicated business unit aimed at generating sales volumes, which is designed and manufactured to meet the specific needs of key accounts.

As of March 31, 2015 the Group distributed its products as follows:

•

Natuzzi Italia: 169 Natuzzi Italia stores, 96 Divani & Divani by Natuzzi stores (located solely in Italy and Portugal), 10 Natuzzi Italia concessions (store-in-store points of sale, directly managed by the UK subsidiary of the Group), and 313 Natuzzi Italia galleries (store-in-store points of sales managed by independent partners). 38 of these points of sales (of which 24 are Natuzzi Italia stores and 14 are Divani & Divani by Natuzzi stores) are directly managed by the Group.

•

“Natuzzi Editions”/“Leather Editions”: 87 stores and 376 galleries. 16 of these stores, all of which are located in China, are directly managed by the Group. Consistent with the Business Plan, the Leather Editions stores will be gradually rebranded worldwide into Natuzzi Editions points of sales.

•

Natuzzi Re-vive: Following a well-received launch at the end of 2013 at the High Point Furniture Market (USA) and the furniture fairs in Brussels and Paris, starting in 2014 approximately 150 direct customers have begun distributing the Natuzzi Re-vive recliner in over 25 different markets and through approximately 500 points of sale. In addition, as of the same date there were three mono-brand Natuzzi Re-vive stores located in China and one in United Kingdom.

•

Private label: Includes our unbranded and Softaly products and is currently marketed in North America, Europe, Brazil and Asia-Pacific principally through a selected number of customers, such as IKEA, Costco, Macy’s, The Brick, and American Signature in North America; Furniture Village, Conforama, Begros, BUT and Harvey’s in Europe; Tok&Stok in Brazil; Nitori and The Home in the Asia-Pacific region.

The Natuzzi Group presents its products at the world’s leading furniture fairs: Il Salone del Mobile in Milan, Italy, IMM in Cologne, Germany, Furniture Market in High Point, USA, 100% Design in London, United Kingdom, I Saloni Worldwide in Moscow, Russia, among others.

On June 7, 2002, the Company changed its name from Industrie Natuzzi S.p.A. to Natuzzi S.p.A. The statuto, or by-laws, of the Company provide that the duration of the Company is until December 31, 2050. The Company, which operates under the trademark “Natuzzi,” is a società per azioni (joint stock company) organized under the laws of the Republic of Italy and was incorporated in 1959 by Mr. Pasquale Natuzzi, who is currently the Chairman of the Board of Directors, Chief Executive Officer, and controlling shareholder of the Company. Most of the Company’s operations are carried out through various subsidiaries that individually conduct a specialized activity, such as leather processing, foam production and shaping, furniture manufacturing, marketing or administration.

The Company’s principal executive offices are located at Via Iazzitiello 47, 70029 Santeramo in Colle, Italy, which is approximately 25 miles from Bari, in southern Italy. The Company’s telephone number is: +39 080 882-0111. The Company’s general sales agent subsidiary in the United States is Natuzzi Americas, Inc. (“Natuzzi Americas”), located at 130 West Commerce Avenue, High Point, North Carolina 27260. Natuzzi Americas telephone number is: +1 336 887-8300.

Organizational Structure

Natuzzi S.p.A. is the parent company of the Natuzzi Group. As of March 31, 2015, the Company’s principal operating subsidiaries were:


Name	Percentage of ownership		Registered office	Activity
Italsofa Nordeste S/A		100.00	Salvador de Bahia, Brazil		(1	)
Italsofa Shanghai Ltd		96.50	Shanghai, China		(1	)
Natuzzi China Ltd		100.00	Shanghai, China		(1	)
Italsofa Romania		100.00	Baia Mare, Romania		(1	)
Natco S.p.A.		99.99	Santeramo in Colle, Italy		(2	)
I.M.P.E. S.p.A.		100.00	Bari, Italy		(3	)
Nacon S.p.A.		100.00	Santeramo in Colle, Italy		(4	)
Lagene S.r.l.		100.00	Santeramo in Colle, Italy		(4	)
Natuzzi Americas Inc.		100.00	High Point, NC, USA		(4	)
Natuzzi Iberica S.A.		100.00	Madrid, Spain		(4	)
Natuzzi Switzerland AG		100.00	Dietikon, Switzerland		(4	)
Natuzzi Benelux S.A.		100.00	Hereentals, Belgium		(4	)
Natuzzi Germany Gmbh		100.00	Köln, Germany		(4	)
Natuzzi Japan KK		100.00	Tokyo, Japan		(4	)
Natuzzi Services Limited		100.00	London, UK		(4	)
Natuzzi Trading Shanghai Ltd		100.00	Shanghai, China		(4	)
Natuzzi Oceania PTI Ltd		100.00	Sydney, Australia		(4	)
Natuzzi Russia OOO		100.00	Moscow, Russia		(4	)
Natuzzi India Furniture PVT Ltd		100.00	New Delhi, India		(4	)
Italholding S.r.l.		100.00	Bari, Italy		(5	)
Natuzzi Netherlands Holding		100.00	Amsterdam, Holland		(5	)
Natuzzi Trade Service S.r.l.		100.00	Santeramo in Colle, Italy		(6	)
SALENA SRL		49.00	Milan, Italy		(7	)

(1)	Manufacture and distribution

(2)	Intragroup leather dyeing and finishing

(3)	Production and distribution of polyurethane foam

(4)	Services and distribution

(5)	Investment holding

(6)	Transportation services

(7)

Dormant

See Note 1 to the Consolidated Financial Statements included in Item 18 of this Annual Report for further information on the Company’s subsidiaries.

Strategy

The negative performance of the Group in 2014 and in recent years has largely been the result of several challenges specific to the furniture industry and prevalent in the economy at large. For instance, the discretionary spending of consumers on furnished goods has been negatively impacted in recent years by the persistent effects of the global economic downturn, largely as a result of lower home values, high levels of unemployment and personal debt, and austerity measures to consolidate public imbalances in advanced economies (within the EU in particular).

On February 28, 2014, the Company’s board of directors approved its 2014-2016 Business Plan (the “Business Plan”), prepared in cooperation with specialized external business advisors, which seeks to address and counteract

these trends. The Business Plan, which is anchored by the company’s foundational values of ethics and social responsibility and based on its points of strength (high brand awareness, innovation, industrial know-how and a global presence), has the following primary objectives: regaining market competitiveness and spurring a new phase of growth in revenues, with a return to breakeven EBITDA, originally expected in 2014.

During 2014, the Group experienced some operating difficulties in the implementation of Business Plan, especially in Italy and in China, that caused delays and inefficiencies in achieving the financial objectives set forth by the Business Plan.

Due to the delays associated with the introduction of the “moving line” production system in Group plants, the continued weak operating performance (when compared against forecasts) and the actions being undertaken envisaged in the Plan, Natuzzi management prepared the 2015 budget, adopted by the Board of Directors on December 19, 2014, that foresees a gradual reduction in the operating loss, as a consequence of the positive contribution from measures to improve efficiency, which have already been implemented, but not completed by December 31, 2014

The company will seek to regain market competitiveness and eliminate losses through a restructuring phase that envisions:

Strong recovery of the competitiveness of its Italian operations, through the joint efforts of the Company, unions, government and Italian regions of Puglia and Basilicata in implementing the 2015 Italian Reorganization Agreement, following and developing upon the 2013 Italian Reorganization Agreement that had paved the way for the restructuring of the Group’s Italian operations according to the guidelines included in the Group’s Transformation Plan. The 2015 Italian Reorganization Agreement contemplates both investments to support principally Italian production (in the aggregate amount of €25 million, to be allocated to marketing, R&D and industrial enhancement) and a reduction in production costs.

Strong recovery of worldwide productive efficiency, which will be accomplished through the adoption of industrial product platforms, which are the result of the re-engineering of existing models and the design of new models according to the new moving-line production process; and the complete implementation of the moving-line production process in all of the Group’s factories worldwide (in Italy, China, Romania and Brazil).

Efficiency improvements in back office processes on a worldwide basis, through the implementation of a centralized shared service structure that has been designed to reduce costs and address unemployment among white-collar workers in the Company’s home region.

Efficiency improvements in the supply chain, through a reduction in inventory levels, optimization of transportation and a new logistics organization.

Rationalization of the retail network through the foreseen closure of 18 under-performing stores that are owned and managed directly by the Group (of which 12 have already closed as of the date of this Annual Report).

Beginning in 2015, the Business Plan foresees a gradual growth in revenues, through the implementation of:

A marketing and distribution strategy aimed at:

capitalizing on investments in the Natuzzi brand, which has become the sole brand within the Group;

organizing its offerings into three lines of products: Natuzzi Italia, Natuzzi Editions and Natuzzi Re-vive;

expanding the distribution of the Natuzzi brand through wholesale distribution channels and through the strengthening of the retail network;

reinforcing the division dedicated to the sale of private label products to mass-market dealers.

A commercial strategy that is focused on increasing sales in markets with high growth rates (primarily Asia, the Middle East, India, Russia, Eastern Europe and Latin America) and on reorganizing our operations to promote sales in those mature markets where the Natuzzi brand is most recognized (including the U.S. and Canada), as well as defending market share in Western Europe and Italy.

Strengthening investments in marketing and communications, during the term of the Business Plan.

A new commercial organization, both at a centralized level and in local markets, that is calibrated based on growth forecasts.

The Brand Portfolio Strategy —The Group competes in all price segments of the upholstered furniture market with a complementary offer of furnishings and accessories divided into different business propositions each one with a specific name, identity, target and positioning. This differentiated offering is designed to address all market segments and increase sales and profitability.

Precise market segmentation, clear brand positioning and clearly defined customer and consumer targets are intended to enhance the Group’s competitive strengths in all market segments to gain market share:

a) Natuzzi Italia is the most established consumer brand within the Group’s portfolio. It is sold exclusively through the retail channel in mono-brand stores, concessions and galleries in multi-brand specialized stores and high-end department stores. The offer includes sofas designed and manufactured in Italy at the Company’s factories, positioned in the high end of the market, with unique and customized materials, workmanship and finishes thanks to the Natuzzi heritage of fine craftsmanship in the leather sofas segment. The Natuzzi Italia product line includes complementary furnishings and accessories for the living room and, starting from 2014, also beds, bed linens and bedroom furnishings to further expand its product offerings. We believe that the brand benefit consists in helping consumers make their home a harmonious, beautiful environment. Through the style and quality of its products and the merchandising in its stores, the Group aims to position this product line in the premium segment of the market. From the identification of market trends to the delivery to the consumer’s home, Natuzzi directly controls the upholstered production and distribution value chain with the aim of ensuring ultimate quality at competitive prices.

b.1) Natuzzi Editions dates back to 2005 and at the beginning it was specifically designed for the U.S. market. The collection includes a wide range of leather upholstery products targeting the medium/medium-high segment of the market and leveraging the know-how and the high credibility of Natuzzi in the leather upholstery industry. Natuzzi Editions products are manufactured at the Group’s overseas plants (Romania, China and Brazil) and sold solely in the Americas where the Natuzzi Group historically has a notable market share. These stores are provided with a specific display system and merchandising materials designed to emphasize the brand’s core values of “Leather & Craftsmanship.”

b.2) Leather Editions was officially launched in 2010. It is similar to Natuzzi Editions in terms of offer, target consumers, distribution channel and merchandising. Until 2014, the primary difference between Natuzzi Editions and Leather Editions was distribution: Leather Editions was distributed in Europe and the rest of the world, excluding the Americas, while Natuzzi Editions was sold only in the Americas. Under the Business Plan, in 2014 the Group has started to gradually relabel its Leather Editions products and stores as Natuzzi Editions.

c) Natuzzi Re-vive is the Group’s first performance recliner. In this product line, innovative technology meets Natuzzi high craftsmanship to offer complete support as well as intuitively respond to movement. Natuzzi Re-vive is positioned in the medium/medium-high segment of the market targeting a wide range of consumers who we see as culturally open to innovation, sensitive to their well-being and willing to rediscover the human-dimension of their lives. The distribution of this product, which began in 2014, will mainly be through points of sale and galleries within Natuzzi stores, department stores and multi-brands stores.

d) Private label production was introduced by the Group in 2011 as a key-account program to compete in low-end segments of the market. The objective was to recover business from large distributors and develop additional volumes. The Group aims to replicate the best practices applied in connection with the most demanding customers in terms of quality, service and price. These products are also occasionally sold under the Softaly brand name. Each account is managed by dedicated key-account teams under the following guidelines to maintain efficiency:

• accurate forecasting;

• product offerings to create production efficiency through synergies on raw materials, components and coverings, resulting in a focused collection with few models, versions and coverings;

• dedicated manufacturing plants: China for Asia-Pacific and American accounts (other than those located in Brazil), Romania for European accounts and Brazil for Brazilian accounts;

• dedicated supply chain and transportation service (full truck or full container).

The Group’s brand portfolio also included the Italsofa brand that was launched in 2007 with the objective of positioning it as a higher market alternative to very low-cost Chinese competitors, specifically targeting young consumers. With the aim of better rationalizing its product offering, the Group has decided not to make further investments in the Italsofa brand. All the models thus far developed will be progressively absorbed by the Group’s other brand offerings. The Group will continue to assist those partners that have opened Italsofa points of sale and to convert the existing Italsofa stores or galleries into new projects of the Group.

Improvement of the Group’s Retail Program and Brand Development — The Group has made significant investments to improve its existing distribution network and strengthen its Natuzzi brand, primarily through an increase in the number of Natuzzi stores and galleries worldwide. See “Item 4. Information on the Company—Markets.”

The high level of recognition of the Natuzzi brand among luxury consumers from developed countries is the result of investments the Company has made over the past decade in its products, communication, in-store experience and customer service, thus securing a premium inherent in the brand itself. This consumer brand awareness encourages the Company to carry on its brand development, through the rationalization of the Group’s brand portfolio and enhancement of the Group’s distribution network, in order to further increase consumers’ familiarity with the Natuzzi brand, and their association of it as a luxury brand.

The premium brand within the portfolio, Natuzzi Italia, has undergone a rationalization process throughout 2014, in an effort to focus on the very high-end retail segment and to properly exploit opportunities in terms of profitability for the Group and its partners. During 2014, the Group opened 14 mono-brand Natuzzi Italia stores, 10 of which are located in China, as well as 17 Natuzzi Italia galleries. As of March 31, 2015 there were 169 Natuzzi Italia stores, of which 24 were directly owned by the Group, and 10 were concessions in the United Kingdom. The concessions are a store-in-store concept managed directly by a subsidiary of the Company located in the United Kingdom. As of March 31, 2015, there were 313 Natuzzi Italia galleries worldwide (store-in-store concepts managed by independent partners).

The mid–high level cluster of the upholstery business is the main target of the Natuzzi Editions product line as well as the Divani&Divani by Natuzzi retail chain in Italy. As of March 31, 2015, there were 376 Natuzzi Editions galleries (some formerly known as Italsofa galleries were converted into Natuzzi Editions galleries), 79 Leather Editions stores in China (of which 16 stores were directly operated by the Group), seven Natuzzi Editions stores in Brazil, one Natuzzi Editions store in Israel, as well as 96 Divani&Divani by Natuzzi stores (of which 85 were in Italy and 11 in Portugal).

In 2014, significant focus was put on the development of the Natuzzi brand’s new product line, Re-vive, addressing the recliner chair market segment. This effort led the Group to achieve, in one year only, a sustainable presence in this market segment, with sales in 537 store-in-store points-of-sale across the countries in which we offer our products. In addition, we opened three directly operated stores (“Directly Operated Stores” or “DOS”) for Re-vive in Shanghai as a means to test market reaction as well as address unexploited potentialities of Re-vive in China.

Product Diversification and Innovation— The Group believes that it is important to offer consumers carefully developed, coordinated products at competitive prices through its “Total Look” offer, which was first introduced in 2006. The Total Look offer is conceived in accordance with the latest trends in design, materials and colors, and includes high quality sofas, furnishings (including wall units, dining tables and chairs) and accessories, all of which are

developed in-house and presented in harmonious and personalized solutions. The Group has taken a number of steps to broaden its product lines, including the development of new models, such as modular and motion frames, and the introduction of new materials and colors, including exclusive fabrics and microfibers. The Group believes that expanding its Total Look offerings will strengthen its relationships with the world’s leading distribution chains, which are interested in offering branded packages. The Group has also invested in the Natuzzi Style Center in Santeramo in Colle, Italy, to serve as a creative hub for the Group’s design activities.

Beginning in 2014, The Group also began distributing beds, bed linens and bedroom furnishings to further expand its product offerings.

Manufacturing

Our manufacturing facilities are located China, Romania, Brazil and Italy.

Our Chinese plant is located in Shanghai, extending over 88,000 square meters, and has been in operation since 2011. As of December 31, 2014, our Chinese plant employed 1,552 people, of whom 1,459 were laborers. It manufactures Natuzzi Editions and private label products for the Americas (apart from Brazil) and for the Asia-Pacific market. In 2014, the Chinese plant produced about 41% of the Group’s total consolidated upholstery revenue.

Our Romanian plant is located in Baia Mare, extending over 75,600 square meters, and has been in operation since 2003. As of December 31, 2014, our Romanian plant employed 1,286 people, of whom 1,130 were laborers. It produces Natuzzi Editions and private label products for the EMEA region. In 2014 the plant generated about 24% of the Group’s total consolidated upholstery revenue.

Our Brazilian plant is located in Salvador De Bahia, extending over 28,700 square meters, and has been in operation since 2000. As of December 31, 2014, our Brazilian plant employed 196 people, of whom 157 were laborers. It produces Natuzzi Editions and private label products exclusively for the local market. In March 2015 the Group set up a new moving line dedicated to the Re-vive production to be sold exclusively for the Brazilian market. In 2014 the plant generated almost 3% of the Group’s total consolidated upholstery revenue. In 2014 the Group sold its owned dormant plant in Brazil. The sale of such plant, for a total consideration of €5.0 million, is expected to be completed in 2015. In February 2015, the Group received the first payment of €1.5 million.

Our three Italian plants dedicated to the production of upholstered products and two warehouses are located in Santaremo Iesce, Matera Iesce and Laterza, all of which are located either in or within a 25 kilometer radius of Santeramo in Colle, where the Group’s headquarters are located. Collectively these sites extend over 120,000 square meters. As of December 31, 2014, these sites (together with the Group’s headquarters) employed 1,892 laborers, the majority of whom were subject to the layoff program. See “Item 6. Directors, Senior Managers and Employees—Employees.” The Italian plants are the exclusive producers of Natuzzi Italia products for the world market and, beginning in the first quarter of 2014, these plants also began producing the Re-vive performance recliner. In 2014 these plants generated about 32% of the Group’s total consolidated upholstery revenue. If orders exceed production capacity at the foreign plants, Natuzzi Editions products are also manufactured in the Company’s Italian plants. In addition to these three Italian plants, we have two plants elsewhere in Italy: one dedicated to the production of leather and another dedicated to the production of flexible polyurethane foam, as further described below.

These operations retain many characteristics of hand-crafted production coordinated through a management information system that identifies by number (by means of a bar-code system) each component of every piece of furniture and facilitates its automatic transit and traceability through the different production phases up to the warehouse.

Since June 2010, the Group has been investing in the reorganization of its production processes, following the “Lean Production” approach. We believe that ongoing implementation of these more efficient production processes will allow us to regain competitiveness by reducing costs (both in terms of labor and consumption of materials) and improving the quality of our services (by reducing defects and lead time for production).

In December 2010, a new prototype for our more efficient production process was introduced in our Matera Iesce plant. This new prototype was developed through an alignment of industrial phases and the implementation of moving-line production processes, from assembly through to packaging of the final product on the same line, within the same production facility. This initial prototype did not incorporate the leather cutting and sewing phases.

The industrialization of the prototyped product lines was further defined in May 2011, and in December 2011, three new production lines were completed in a new dedicated plant in Matera Iesce. We also moved the manufacturing of wooden frames that was originally carried out in the production site located in Santeramo in Colle, Italy, to the Matera Iesce plant, thus further optimizing both productivity and logistics costs through a direct, in-loco integration of sofa assembly.

During 2012, these new moving lines were gradually introduced in all of the Group’s production facilities. In 2013, the Group integrated the following production phases in the moving-line production process within our plants:

• direct integration with wood and foam suppliers to serve each plant according to daily needs (“just in time” supplying) with the advantage of reducing the stock level for semi-finished goods; and

• leather cutting and sewing

This upgrade in the industrial process allows us to better control every stage in the moving-line sequence in terms of quality, since every worker at every stage supervises the quality of the piece he receives from the immediately previous stage as well as the piece he passes forward; should a quality issue arise, it must be resolved immediately before getting re-introduced into the production chain. This on-the-spot product quality monitoring should significantly reduce our defect claims rate.

Testing of limited model samples produced with the moving-line process demonstrated a nearly 7% decline in cost of goods sold for certain Natuzzi Editions and private label products and a decline in cost of goods sold of nearly 12% for certain Natuzzi Italia products. Following these tests, management confirmed its decision to transform all the Group’s plants, substituting the old “Isle Production” models, with a roll out of moving-line production processes to all plants. As of March 31, 2015 the following number of moving lines were implemented and completed: 24 moving lines in China; 11 moving lines in Romania; 4 moving lines in Italy; 4 moving lines in Brazil. Each moving line has an estimated production capacity of up to 130 seats per day when utilized for two eight-hour shifts per day.

Beginning in 2014, we have also been designing a software program in cooperation with the University of Lecce that assists in assigning models to the moving line to which they are best-suited and where production would be most efficient. We are considering deploying this software starting from May 2015 as we are testing it in our Matera Jesce plant.

Consistent with its commitments under the Italian Reorganization Agreements, the Company has reorganized its Italian operations by deciding to close its plant located in Ginosa, effective January 2014. This closure has allowed us to concentrate all upholstered furniture production activities within just three facilities with the aim of reducing logistics costs and industrial costs.

The Company initially also planned to close its warehouse in Matera-La Martella, but, following the decision to execute the covering-cutting phase within all of the Italian plants, thus reducing space available for products assembled, it decided not to close it and continue utilizing the Matera-La Martella plant as a general warehouse of sofas and accessory furnishings.

Furthermore, the Group also utilizes two facilities for the processing of leather (NATCO, located in Udine), and for the production of polyurethane foam (IMPE, located near Naples).

The Group processes leather hides to be used as upholstery in its Udine plant whose main activities are leather dyeing and finishing. The Udine facility, which had 156 employees as of December 31, 2014, of whom 130 were laborers, receives both raw and tanned cattle hides, sends raw cattle hides to subcontractors for tanning, and then dyes and finishes the hides. Hides are tanned, dyed and finished on the basis of orders given by the Group’s central office in

accordance with the Group’s “on demand” planning system, as well as on the basis of estimates of future requirements. The movement of hides through the various stages of processing is monitored through our management information system. See “Item 4. Information on the Company—Manufacturing—Supply-Chain Management.”

The Group produces, directly and by subcontracting, ten grades of leather in approximately 40 finishes and 280 colors. The hides, after being tanned, are split and shaved to obtain uniform thickness and separated into “top grain” and “split.” Top grain leather is primarily used in the manufacture of most Natuzzi Italia-branded leather products, while split leather is used, in addition to top grain leather, in the manufacture of some Natuzzi Italia-branded products and most Natuzzi Editions products. The hides are then colored with dyes and treated with fat liquors and resins to soften and smooth the leather, after which they are dried. Finally, the semi-processed hides are treated to improve the appearance and strength of the leather and to provide the desired finish. The Group also purchases finished hides from third parties.

The Group’s facility for the production of polyurethane foam, IMPE S.p.A. (“IMPE”), employed 33 workers as of December 31, 2014, and is engaged in the production of flexible polyurethane foam, and also sells foam to third parties because the facility’s production capacity is in excess of the Group’s needs. In 2012, IMPE obtained ISO 14001 certification in accordance with the environmental policy of the Natuzzi Group and also improved safety conditions at the plant. As part of the Group’s efforts to improve its production process, we have substituted some chemical compounds with more ecologically-friendly materials.

As a result of intensive research and development activity, the Company has developed a new family of highly resilient materials. The new polymer matrix is safer than others available in the market because of its improved flame resistance, and it is more environmentally-friendly because it can be disposed of without releasing harmful by-products and because the raw materials used to make it cause a less harmful environmental impact during handling and storage.

Chinese Production: The original Chinese plant owned by the Group was subject to an expropriation process by local Chinese authorities, since the plant was located on land that was intended for public utilities. Negotiations involving the expropriation process began in 2009 and were concluded in 2011. The agreement setting forth the payment of compensation for the expropriated plant was signed with Chinese authorities on January 26, 2011. As compensation for this expropriation, the parties agreed upon a total indemnity of Chinese Yuan (CNY or RMB, hereafter) 420 million, which was equivalent to approximately €46.7 million based on the Yuan-Euro exchange rate as of December 31, 2011. The Company collected the full amount of the indemnity payment from the local Chinese authorities in 2011. During 2013, a second supplementary agreement was signed between the Company and the Shanghai Municipality, by which the Company obtained the reimbursement (€8.7 million) of taxes due and paid on the 2011 relocation compensation.

The Group’s current production plant in Shanghai was made available in January 2011 to compensate for the reduction in production capacity caused by the expropriation. The relocation process began in February 2011 and was completed, as planned, by the end of May 2011, after equipment and machinery were moved to the new plant. The relocation resulted in worker turnover of approximately 20% because of the distance of the new plant to the old one (approximately 35 kilometers). In response, management hired new personnel, fully eliminating the turn-over effect by the end of April 2011.

Brazilian Production: The Group owns two plants in Brazil that, in the past, have been used for the production of furnishings for the Americas region. Due to the overall appreciation of the Brazilian Reais against the U.S. dollar since these plants were opened and a consequent decline in competitiveness, the Group decided to temporarily close the Pojuca plant (putting it up for sale in 2010) and reduced the production capacity of the Salvador de Bahia plant to a level that is sufficient to serve only the Brazilian market. In July 2014 the Group reached an agreement to sell the Pojuca plant to a Brazilian company. The buyer has already paid a deposit and the complete transfer of the plant’s property is expected to occur by the end of 2015.

In March 2015 the Group set up a new moving line dedicated to the Re-vive production to be sold exclusively for the Brazilian market.

In order to minimize the potential future effects of currency fluctuations, our Brazilian subsidiary began to increase its local sourcing in 2014.

After frequent interactions between the Group and top local retailers in the past few years, as well as in light of the high level of fragmentation of the Brazilian market, which consists primarily of small producers with low levels of know-how, the Group believes that the Latin American region currently represents a very good opportunity for the development of additional business.

Therefore, the Group intends to continue investing in the Latin American market, with a particular focus on Brazil, by better organizing operating, sales and marketing activities, by developing the current distribution channel of Natuzzi Editions points-of-sale and by improving relations with the most important local key accounts through a dedicated private label production.

Raw Materials — The principal raw materials used in the manufacture of the Group’s products are cattle hides, polyurethane foam, polyester fiber and wood.

The Group purchases hides from slaughterhouses and tanneries located mainly in Italy, Brazil, Germany, Paraguay, other countries in South America and Europe. The hides purchased by the Group are divided into several categories, with hides in the lowest categories being purchased mainly in South America. The hides in the middle categories are purchased in Europe or South America and hides in the highest-quality categories are purchased in Germany and the United Kingdom. A significant number of hides in the lowest categories are purchased at the “wet blue” stage — i.e., after tanning — while some hides purchased in the middle and highest categories are unprocessed. The Group has implemented a leather purchasing policy according to which a percentage of leather is purchased at a finished or semi-finished stage. Therefore, the Group has had a smaller inventory of “split leather” to sell to third parties. Approximately 80% of the Group’s hides are purchased from 10 suppliers, with whom the Group enjoys long-term and stable relationships. Hides are generally purchased from the suppliers pursuant to orders given every one to two months specifying the number of hides, the purchase price and the delivery date.

Hides purchased from Europe are delivered directly by the suppliers to the Group’s leather facilities near Udine, while those purchased outside of Italy are delivered to an Italian port and then sent to Udine and inspected by technicians of the Group. Management believes that the Group is able to purchase leather hides from its suppliers at reasonable prices as a result of the volume of its orders, and that alternative sources of supply of hides in any category could be found quickly at an acceptable cost if the supply of hides in such category from one or several of the Group’s current suppliers ceased to be available or was no longer available on acceptable terms. The supply of raw cattle hides is principally dependent upon the consumption of beef, rather than on the demand for leather.

During 2014, the prices for hides increased about 15% compared to 2013. Due to the volatile nature of the hides market, there can be no assurance that current prices will remain stable or that price trends will not rise in the future. See “Item 3. Key Information—Risk Factors—The price of the Group’s principal raw materials is difficult to predict.”

The Group also purchases fabrics and microfibers for use in coverings. Both kinds of coverings are divided into several price categories. Most fabrics are purchased in Italy from about a dozen suppliers which provide the product at the finished stage. Microfibers are purchased in Italy, South Korea and China through suppliers who provide them at the finished stage. Fabrics and microfibers are generally purchased from suppliers pursuant to orders given every week specifying the quantity (in linear meters) and the delivery date.

Fabrics and microfibers for the Natuzzi Italia branded products that are purchased from Italian suppliers are delivered directly by the suppliers to the Group’s facility in Laterza, while those that are purchased outside of Italy are delivered to an Italian port and then sent to the Laterza facility.

Fabrics and microfibers for the Natuzzi Editions/Leather Editions and private label products are delivered directly by the suppliers to Chinese, Romanian and Brazilian ports and then sent to the Group’s Shanghai, Bahia Mare and Salvador de Bahia facilities.

The Group continuously searches for alternative supply sources in order to obtain the best product at the best price.

Price performance of fabrics is quite different from that of microfibers, depending on the different range of the products’ quality.

Because fabrics are purchased predominantly in Italy and are composed of natural fibers, their prices are influenced by the cost of labor and the quality of the product.

The price of microfibers, in contrast, is mainly influenced by the international availability of high-quality products and raw materials at low costs, especially from Asian markets.

The Group obtains the chemicals required for the production of polyurethane foam from major chemical companies located in Europe (including Germany, Italy and the United Kingdom) and the polyester fiber filling for its polyester fiber-filled cushions from several suppliers located mainly in Indonesia, China, Taiwan and India. The chemical components of polyurethane foam are petroleum-based commodities, and the prices for such components are therefore subject to, among other things, fluctuations in the price of crude oil, which remained high through the middle of 2014, after which it declined sharply. Within our Romanian industrial plant, we have a woodworking facility that provides wooden frames for all our plants worldwide.

The Group also offers a collection of home furnishing accessories (tables, lamps, rugs, home accessories and wall units in different materials). Most of the suppliers are located in Italy and other European countries, while some hand-made products (such as rugs) are made in India and China. On April 9, 2014, the Company officially presented its new collections of beds, bedroom furniture and bed linens in Milan. They will be produced by Italian companies that are external to the Group. Before any items are introduced into our collection, they are tested in accordance with European and world safety standards. In the design phase particular attention is paid to the choice of innovative technological solutions that add value to the product and ensure long lasting quality. We believe that the Group’s product packaging adheres to a higher standard than the average product packaging marketed by its competitors; we prioritize our high standard of packaging in an effort to ensure better customer service.

Supply-Chain Management

Procurement Policies and Operations Integration — In order to improve customer service and reduce industrial costs, the Group in 2009 established a policy for handling suppliers and supply logistics. All of the sub-departments working in the Logistics Department were reorganized to maximize efficiency throughout the supply-chain. The Logistics Department coordinates periodic meetings among all of its working groups in order to identify areas of concern that arise in the supply-chain, and to identify solutions that will be acceptable to all groups. The Logistics Department is responsible for monitoring the proposed solutions in order to ensure their effectiveness. Additionally, in order to improve access to supply-chain information throughout the Group, the Logistics Department utilizes a portal that allows it and other departments (such as Customer Service and Sales) to monitor the movement of goods through the supply-chain. The Company continues to invest in this area so as to continuously improve supply-chain tools and processes.

Production Planning (Order Management, Warehouse Management, Production, Procurement) — The Group’s commitment to reorganizing procurement logistics has led to:

1) the development of a logistics-production model to customize the level of service to customers;

2) a stable level of the size of the Group’s inventory of raw materials and/or components, particularly those pertaining to coverings. This positive impact was made possible by both the development of software that allows more detailed production programming and broader access by suppliers themselves, and a more general reorganization of supplier relationships. Suppliers are now able to provide assembly lines at Italian plants with requested components within four hours. At the same time, a procedure was implemented for the continuous monitoring of global finished products inventories in order to determine which in-stock goods are currently not being sold as part of our existing collections (as a result of being phased-out) and enable the different commercial branches to promote specific sales campaigns of these goods;

3) the planning and partial completion of the industrial reorganization of the local production center; and

4) the implementation of the SAP system since January 2009, throughout the organization.

The Group also plans procurements of raw materials and components:

i) “On demand” for those materials and components (which the Group identifies by code numbers) that require a shorter lead time for order completion than the standard production planning cycle for customers’ orders. This system allows the Group to handle a higher number of product combinations (in terms of models, versions and coverings) for customers all over the world, while maintaining a high level of service and minimizing inventory size. Procuring raw materials and components “on demand” eliminates the risk that these materials and components would become obsolete during the production process; and

ii) “Upon forecast” for those materials and components requiring a long lead time for order completion. The Group utilizes a forecast methodology that balances the Group’s desire to maintain low inventory levels against the Sales Department’s needs for flexibility in filling orders, all the while maintaining high customer satisfaction levels. This methodology was developed together with the Group’s Information Systems Department, in order to create an intranet portal, called Advanced Planning and Optimization (“APO”). APO was launched in March 2011 for sales coming from the North American and Asia Pacific markets, under the supervision of a forecast manager and, beginning in June 2011, was implemented worldwide. This tool currently supports corporate logistics, operations managers and sales managers in our efforts to better forecast the future demand for the Group’s products and to improve communication between the Sales Department and the Logistics Department, therefore reducing inventory levels and improving the availability of raw materials.

Since 2012, a new methodology concerning furnishing management has been introduced. A more efficient cooperation with suppliers enabled the Group to handle furnishings components without storing them in our warehouses, resulting in improved service and reducing inventory levels.

Lead times can be longer than those mentioned above when a high number of unexpected orders are received. Delivery times vary depending on the place of discharge (transport lead times vary widely depending on the distance between the final destination and the production plant).

All planning activities (finished goods load optimization, customer order acknowledgement, production and suppliers’ planning) are synchronized in order to guarantee that during the production process, the correct materials are located in the right place at the right time, thereby achieving a maximum level of service while minimizing handling and transportation costs.

Load Optimization and Transportation — The Group delivers goods to customers by common carriers. Those goods destined for the Americas and other markets outside Europe are transported by sea in 40-foot high cube containers, while those produced for the European market are generally delivered by truck and, in some cases, by railway. In 2014, the Group shipped 9,550 containers overseas and approximately 4,060 full load mega-trailer trucks to European destinations, serving more than 3,700 different delivery points.

With the aim of decreasing costs and safeguarding product quality, the Group uses software developed through a research partnership with the University of Bari and the University of Copenhagen that permits us to manage load optimization.

As far as the load composition by truck is concerned, the Group uses software designed to minimize total transport costs by taking into account volume, route and optimization of carriers for customer orders in defined areas. To maintain service levels, we use a supplier vendor rating that measures the performance of carriers and distributors providing direct service over land.

The Group relies principally on several shipping and trucking companies operating under “time-volume” service contracts to deliver its products to customers and to transport raw materials to the Group’s plants and processed materials from one plant to another. In general, the Group prices its products to cover its door-to-door shipping costs, including all customs duties and insurance premiums. Some of the Group’s overseas suppliers are responsible for delivering raw materials to the port of departure; therefore transportation costs for these materials are generally under the Group’s control.

Products

Products are mainly designed in the Company’s Style Center, but the Group also collaborates with acclaimed international designers for the conception and prototyping of certain products in order to enhance brand visibility, especially with respect to the Natuzzi Italia product line.

New models are the result of a constant information flow from the market, in which preferences are analyzed, interpreted and turned into a brief for designers in terms of style, function and price point. Designers draw the sketches of new products in accordance with the guidelines they are provided and, through collaboration with the prototype department, approximately 70 new sofa models are generally introduced each year. The diversity of customer tastes and preferences as well as the Group’s inclination to offer new solutions results in the development of products that are increasingly personalized. More than 100 highly-qualified employees conduct the Group’s research and development efforts from its headquarters in Santeramo in Colle, Italy.

The Group’s wide range of products includes a comprehensive collection of sofas and armchairs with particular styles, coverings and functions, with more than two million combinations.

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The Natuzzi Italia collection stands out for high quality in the choice of materials and finishes, as well as for the creativity and details of its design. As of December 31, 2014, this line of products offered around 100 models of sofas and six models of beds. With respect to coverings, the Natuzzi Italia collection has 15 leather articles in 76 colors and 19 softcover articles in 108 colors. The collection also includes a selection of additional furniture (wall units, coffee tables, tables, chairs, lamps and carpets) and accessories (vases, mirrors, magazines racks, trays and decorative objects) to offer complete furnishings with the aim of enabling the Group to become a “lifestyle company.”

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The Natuzzi Editions/Leather Editions collection, as of December 31, 2014, consisted of 153 models. The vast range of models cover all styles from casual/contemporary to more traditional, suitable for all markets from Europe to Americas to Asia. Natuzzi Editions/Leather Editions focus is leather, offering a wide range of 10 leather articles available in 71 colors; nevertheless, during the last October Market a broad collection of three new fabric articles were added to the line and have since then received positive feedback from the market.

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The Natuzzi Re-vive armchair was designed by Formway Design Studio of New Zealand and is the subject of two patents, one covering the design and one covering the unique mechanism made of 120 different parts. Natuzzi Re-vive armchairs are available in seven styles (Quilted, Linear, Tailored, Casual, Club, Lounge, Suit), two sizes (King and Queen), four configurations (with/without headrest—basic chair/complete with ottoman), seven leather articles in 42 colors, and four softcover articles in 23 colors, four basic spine/base finishing and two special spine/base finishing. The finished product and each of its components are subject to rigorous quality controls.

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The private label collection, as of December 31, 2014 was composed of about 70 models, including exclusive models for key accounts. These products are sometimes sold under the Softaly brand name, depending upon client requests, and the products are mainly leather and split and leather match (or leather matched with Next Leather^®, a bonded leather that contains a minimum of 17 per cent of leather). During 2013 all the products already in the collection were re-engineered in order to meet the requirements of the moving-line manufacturing process and all the new products have been designed according to this production system. This investment has improved quality, while reducing industrial costs.

The Group operates in accordance with strict quality standards and has earned the ISO 9001 certification for quality and the ISO 14001 certification for its low environmental impact. The ISO 14001 certification also applies to the Company’s tannery subsidiary, Natco S.p.A., located near Udine, Italy. The Group’s plants in Laterza and the Santeramo in Colle headquarters have also received an ISO 9001 certification for their roles in design and production.

Innovation—The Company has been implementing since the end of 2013 a new production model based on the Lean Production principles.

The sofa production model, under which sofas were traditionally assembled in a department-based factory (or “Isle Production” model), was subject to rigorous review with a view toward implementing moving line-based manufacturing processes, which would lead to improvements in efficiency, quality, and lead time. The moving line production model improves job area ergonomics by splitting products into lighter pieces at individual phases and also coordinates workers by ensuring that they work at a similar pace. The finished product tends to be of higher quality and produced more quickly. Tests and development of the moving-line production model at all stages of the production process still continue and are coordinated with our products design.

In the field of process and product innovation, the Group implemented the Modular Industrial Platform System in late 2013, aimed at reducing manufacturing costs. Industrial platforms represent an industrial base common to many models that can be technically and aesthetically modified in order to meet customers’ requests. The utilization of such platforms grants substantial benefits in terms of product simplification (easy assembly), management (fewer codes to be managed), quality (fewer production failures), and production costs (economies of scale), leading to an increase in competitiveness.

Management continues to encourage innovation and new products, as evidenced by the recently introduced armchair, Re-vive, officially launched in October 2013, and presented worldwide thorough 2014.

We began to implement the moving-line production system in our plants at the beginning of 2014 and expect the system to be fully implemented across all of our plants by the end of 2015. As of March 31, 2015 the following number of moving lines were implemented and completed: 24 moving-lines in China; 11 moving-lines in Romania; and four moving-lines in each of Italy and Brazil.

As for the Chinese plant in particular, during the first part of 2014, the installation of the moving-line production system was not simultaneously accompanied by the development of an appropriate IT system to support moving-line production. It also lacked an appropriate training plan for workers who had to adapt their skills with the new moving line-based production model. For these reasons and several others, namely, the need for a reduction in complexity, the unavailability of complete and functioning moving lines, together with a production planning not adequate in terms of mix of products, has caused a sharp decline in the overall production efficiency and productivity of our Chinese plant. Starting from July 2014, as a result, we have created a dedicated team (the “lean-team”) whose main goal is to increase productivity, in particular through the:

•

analysis of the main product platforms produced in different plants of the Group;

•

diagnosis of these platforms, resulting in the elimination of underperforming models;

•

simplification of production complexity, through the elimination of models, versions, coverings that turned out to be underperforming;

•

test and implementation, in collaboration with the University of Lecce, of a new software able to program the production of all of the Group’s plants, with the ultimate goal of increasing the degree of repetitiveness in production, so as to reduce the complexity of production not only in individual plants but also in each production moving lines;

•

use of an additional software necessary to define the best production sequence of models belonging to the same “family of products” (i.e., having similar components and similar production times) to be assembled and determine a correct balance between the various stations of the line.

We formally launched the above-mentioned activities in December 2014, but most of them have been undertaken since September 2014. The results have been very encouraging with a gradual recovery in production efficiency and productivity.

Furthermore, beginning in July 2014, an experimental laboratory for simulating all single phases within a typical moving line was designed and built at the headquarters in Santeramo in Colle. In this laboratory, our experts have been testing all ideas that the lean-team proposes with the aim of improving production efficiency, productivity, quality of finished products and workstation ergonomics. The results turned out to be better than expected, thanks also to the proactive involvement of people within this project. All the ideas that have been tested successfully in this laboratory are expected to be implemented in all of the Group’s industrial plants.

In 2014 our R&D department completed, as scheduled, the re-engineering of models representing about 80% of the consolidated turnover so that they can now be produced through a moving line production process, thus contributing to a reduction in COGS. New models need to be designed so that they can fulfill platform technical requirements (as of December 31, 2014 there were 50 platforms).

In 2014 the Group set up a dedicated moving line at JESCE 1 plant, Italy, for the production of the Re-vive armchair.

The Group continues its cooperation with Italian research centers aimed at identifying alternative product materials. Through this cooperation, we have identified a new wood material and a way to recycle other wood-based products, having mechanical properties suitable for use in sofa production. The relevant industrialization phase is still ongoing.

Research and development expenses, which include labor costs for the research and development department, design and modeling consultancy expenses and other costs related to the research and development department, were €5.8 million in 2014, €7.9 million in 2013 and € 7.9 million in 2012.

Advertising

The Group’s Communications System was developed to regulate all methods used in each market to advertise the Natuzzi brand and it operates simultaneously on different levels: the “brand-building level” establishes the brand’s philosophy, while the “traffic-building level” aims to attract consumers to points-of-sale using various kinds of initiatives, such as presentations of new collections, new store openings and promotional activities.

In particular, the Company approach to communication campaigns is specific to each product line: the Natuzzi Italia home philosophy is narrated with the support of famous international photographers; the advertising of Natuzzi Editions products conveys, thanks to the collaboration with local professionals in those markets where the products are sold, the value of the unique comfort of such products coupled with a style suitable to local market tastes; Natuzzi Re-vive advertising primarily focuses on innovation in support of its global retail launch.

Advertising for galleries is carried out with the help of the “Retail Advertising Kit,” a collection of templates that enable direct advertising of consumer brands or the advertising of such brands in conjunction with the retailer’s brand.

The Group has also invested heavily in its online digital channel that represents and, given the trends in recent years, will represent to a greater degree the future of communication worldwide.

Retail Development

The Group’s expansion, with particular focus on fast developing markets, continued also in 2014. In terms of mono-brand stores, in 2014, in total, the Group opened 14 Natuzzi Italia stores (of which 10 are in China and one in each of the USA, India, Romania and Spain), three Natuzzi Re-vive stores (all located in China), four Divani & Divani by Natuzzi stores (all located in Italy) as well as 42 Natuzzi Editions stores (of which 36 are in China and six in Brazil). Moreover, during 2014 the Group opened 17 Natuzzi Italia galleries together with 64 Natuzzi Editions galleries.

Among the particularly notable Natuzzi Italia stores opened in 2014 were the flagship store in Madison Av., New York, NY (USA), opened in June 2014, which replaces the one previously located in Soho, New York, and the brand new stores in Pune (India), Bucharest (Romania) and Lanzhou, China. In addition, a 500 sqm stand-alone Natuzzi Italia flagship store within the unique environment of the Miami Design District, Florida, USA, was opened in February 2015.

On the other hand, a rationalization strategy with respect to existing, nonperforming DOS has been put into place in order to cut costs, increase turnover and reduce losses in the shortest time. In Western Europe, eight DOS were closed during 2014, but sales overall increased by + 11.4 % compared to 2013, with losses having been nearly halved.

The Natuzzi product offering is increasingly oriented towards the concept of “total living.” Therefore, single-brand Natuzzi Italia points-of-sale have been recently refurnished in order to recreate a complete living room environment, matching the “Home Philosophy” global strategy of the Natuzzi Italia Brand including the use of interior decorations tools.

“To give the Sales/Interior Design Consultant all the sales tools needed in one room” is the objective of the ‘Design Studio,’ originally launched in October 2013 and shown at the Cologne 2015 IMM Fair stand. We have now put into operation 37 Design Studio installations globally (in store spaces which include a number of sales support tools as well as design kits for on-site use by designers (at home consultation) or in-store use by store staff). The Design Studios are a great way to allow end customers to make the correct decision by matching colour schemes and textures during the room design process.

The development of new tools for enabling partners to increase quantity as well as quality of sales is always a top priority for us. For example, we have made available at the retail level the D-Sales tool, which is a tablet application focused on providing instantly updated figures on sales and products. In addition, the Retail Community Social Network, which is focused on fostering the sharing of best practices among Natuzzi Retailers, is always updated; the NARES order management system is now relying on a new platform and Your Design by Natuzzi Configuration System has been installed at 126 locations worldwide.

All these digital tools are expected to be fully integrated in the first half of 2015 in an effort to provide our sales force with the most efficient sales tools.

Within the first quarter of 2015, a complete upgrade of the Revive Display System was implemented as well, which takes into account the feedback received from Sales Managers during the past year’s implementation phase.

Markets

The Group markets its products internationally as well as in Italy. Thanks to its international presence, the seasonality does not significantly influence the Group’s operations. Outside Italy, the Group sells its furniture principally on a wholesale basis to major retailers and furniture stores. In 1990, the Group began selling its leather-upholstered products in Italy and abroad through franchised Divani & Divani by Natuzzi and Natuzzi (now Natuzzi Italia) furniture stores. Since 2001, the Group has also sold its furniture through directly owned Natuzzi (now Natuzzi Italia) stores and Divani & Divani by Natuzzi stores. In 2005 the Group introduced the Natuzzi Editions brand to the U.S. market, and it continues to be sold in the Americas through galleries and concessions. The Leather Editions brand targets a similar customer to Natuzzi Editions and was introduced in markets outside the Americas in 2010 and also is sold through galleries and concessions. As part of the Business Plan, the Group has started its plan to re-label the Leather Editions portfolio of products as Natuzzi Editions to capitalize on the strength of the “Natuzzi” name and streamline its offerings. Consequently, the Leather Editions stores, including those stores located in China, will be gradually rebranded worldwide into Natuzzi Editions points of sales. The Italsofa brand was introduced in 2007 with the intent of competing with low-priced competitors. In 2013, the Group decided not to make further investments in the Italsofa brand. All the Italsofa models thus far developed will be progressively absorbed by the Group’s other brand offerings. In October 2013, the Group officially launched Re-vive, its innovative performance recliner, and began its distribution in the first half of 2014 in 25 markets through approximately 150 direct customers and about 500 points of sale.

The Company has almost completed its commercial and distribution re-organization in all its commercial regions, consistent with the Business Plan, in order to better exploit market opportunities all over the world. This reorganization includes expanding its retail presence in large department stores to increase visibility of the Natuzzi brand’s product lines as well as establishing a separate business unit, aimed at generating sales volumes and developing new key accounts through its private label offerings.

The following tables show the number of Group stores and galleries as of March 31, 2015 according to our principal geographical areas and brands.


Stores	Natuzzi Italia		Divani & Divani by Natuzzi		Re-vive		Natuzzi Editions /Leather Editions**		Italsofa		TOTAL
Americas⁽¹⁾		15		—		—		7		2		24
U.S. and Canada		9		—		—		—		—		9
Latin America		6		—		—		7		2		15
EMEA		84		96		1		1		7		189
Europe		64		11		1		—		—		76
Italy		3		85		—		—		—		88
Middle East & Africa		17		—		—		1		7		25
Asia-Pacific		70		—		3		79		1		153
Asia		64		—		3		79		1		147
Oceania		6		—		—		—		—		6

TOTAL		169		96		4		87		10		366


Galleries/Concessions*	Natuzzi Italia		Private label		Natuzzi Editions / Leather Editions**		Italsofa		TOTAL
Americas⁽¹⁾		71		6		208		10		295
U.S. and Canada		50		—		153		1		204
Latin America		21		6		55		9		91
EMEA		239		—		157		15		411
Europe		232		—		153		10		395
Italy		—		—		—		—		—
Middle East & Africa		7		—		4		5		16
Asia-Pacific		13		—		11		14		38
Asia		13		—		11		14		38
Oceania		—		—		—		—		—

TOTAL		323		6		376		39		744

⁽¹⁾	Includes the United States, Canada and Latin America (including Brazil) (collectively, the “Americas”).

*	The concessions are store-in-store concept selling Natuzzi Italia branded products, and are managed directly by a subsidiary of the Company located in the United Kingdom. As of March 31, 2015 there were 10 Natuzzi Italia concessions, all located in United Kingdom.

As part of the Business Plan, the Group has begun to re-label the Leather Editions portfolio of products as Natuzzi Editions to capitalize on the strength of the “Natuzzi” name and streamline its offerings. Consequently, the Leather Editions stores, including those stores located in China, will be gradually rebranded worldwide into Natuzzi Editions points of sales.

The following tables show the leather and fabric-upholstered furniture net sales and number of seats sold of the Group broken down by geographic market for each of the years indicated:

Leather and Fabric Upholstered Furniture, Net Sales (in millions of Euro)


	2014				2013				2012
Americas⁽¹⁾		171.0	41.8	%		162.5	40.3	%		169.9	41.5	%
Natuzzi⁽²⁾		96.5	23.6	%		101.0	25.0	%		112.9	27.6	%
Private label		74.5	18.2	%		61.5	15.3	%		57.0	13.9	%
EMEA		184.8	45.2	%		189.7	47.1	%		193.6	47.3	%
Natuzzi⁽²⁾		142.1	34.8	%		145.4	36.1	%		150,7	36.8	%
Private label		42.7	10.4	%		44.3	11.0	%		42.9	10.5	%
Asia-Pacific		53.3	13.0	%		50.6	12.6	%		45.9	11.2	%
Natuzzi⁽²⁾		48.4	11.8	%		46.4	11.5	%		41.2	10.1	%
Private label		5.0	1.2	%		4.2	1.1	%		4.7	1.1	%

Total		409.1	100.0	%		402.8	100.0	%		409.4	100.0	%

(1)	Includes the United States, Canada and Latin America (including Brazil) (collectively, the “Americas”).

(2)	Consistent with the Business Plan, the “Natuzzi” brand includes the Group’s three lines of product: Natuzzi Italia, Natuzzi Editions and Natuzzi Re-Vive. Figures for 2012 and 2013 have been reclassified accordingly.

Starting from the second half of 2014, upholstered net sales under the “Natuzzi” brand also includes net sales of beds sold under the Natuzzi Italia line.

Leather and Fabric Upholstered Furniture, Net Sales (in seats)


	2014				2013				2012
Americas⁽¹⁾		842,263	50,7	%		809,310	48.0	%		832,977	49.6	%
Natuzzi⁽²⁾		374,787	22.6	%		425,502	25.2	%		492,007	29,3	%
Private label		467,476	28.1	%		383,808	22.8	%		340,970	20.3	%
EMEA		644,681	38,8	%		703,368	41.7	%		685,771	40.8	%
Natuzzi⁽²⁾		396,327	23.9	%		430,367	25.5	%		426,276	25,4	%
Private label		248,354	14.9	%		273,001	16.2	%		259,495	15.4	%
Asia-Pacific		175,351	10,5	%		173,669	10.3	%		162,023	9.6	%
Natuzzi⁽²⁾		139,966	8.4	%		143,548	8,5	%		129,634	7,7	%
Private label		35,385	2.1	%		30,121	1.8	%		32,389	1.9	%

Total		1,662,295	100.0	%		1,686,347	100.0	%		1,680,770	100.0	%

(1)	Includes the United States, Canada and Latin America (including Brazil) (collectively, the “Americas”).

(2)	Consistent with the Business Plan, the “Natuzzi” brand includes the Group’s three lines of product: Natuzzi Italia, Natuzzi Editions and Natuzzi Re-Vive. Figures for 2012 and 2013 have been reclassified accordingly.

Starting from the second half of 2014, upholstered net sales under the “Natuzzi” brand also includes net sales of beds sold under the Natuzzi Italia line.

1. The Americas.

In 2014, net sales of leather and fabric-upholstered furniture in the United States and the rest of the Americas (including Brazil) were €171.0 million, up 5.2% from €162.5 million, reported in 2013, and the number of seats sold increased by 4.1%, from 809,310 in 2013 to 842,263 in 2014.

The Group’s principal customers are major retailers. The Group advertises its products to retailers and, recently, to consumers in the United States, Canada, and Latin America (excluding Brazil) both directly and through the use of various marketing tools. The Group also relies on its network of sales representatives and on the furniture fairs held at its High Point, North Carolina offices each spring and fall to promote its products. The Group also takes part in the Las Vegas Furniture Fair.

The Group’s sales in the United States, Canada and Latin America (excluding Brazil) were handled by Natuzzi Americas until June 30, 2010. Starting July 1, 2010, as a part of a general reorganization of the Group’s commercial activities, world-wide third-party sales have been handled by the parent company, Natuzzi S.p.A.

Natuzzi Americas maintains offices in High Point, North Carolina, the heart of the most important furniture manufacturing and distribution region in the United States, and provides Natuzzi S.p.A with agency services. The staff at High Point provides customer service, trademarks and products promotions, credit collection assistance, and generally acts as the customers contact for the Group. As of March 31, 2015, the High Point North Carolina operation had 52 employees, including 25 independent sales representatives.

All of our commercial activities in Brazil are overseen from our Salvador de Bahia facility. The Group’s commercial structure in Brazil has been reinforced by an increase in personnel, from 12 representatives in 2012 to 19 as of the end of 2014. Sales in Brazil grew from €6.6 million in 2012 to €8.5 million in 2013 and €10.7 million in 2014. Nevertheless, Brazilian operations remain unprofitable, reflecting sales volumes that were inconsistent with our overall cost structure and production capacity in that market. In this regard, the Company has already begun targeted due diligence to quickly identify those measures that are necessary to eliminate losses in that country.

In July 2014, the Group reached an agreement to sell the Pojuca plant to a Brazilian company. In particular, a rental agreement with a sale-promise clause was signed, followed by a preliminary sale agreement signed in February 2015. The sale of such plant, for a total consideration of €5.0 million, is expected to be completed in 2015. In February 2015, the Group also received the first payment of €1.5 million.

In 2014, we opened 43 new Natuzzi Editions galleries in the Americas region (of which, 28 in Brazil, 11 in the U.S.A. and four in Canada), and two Natuzzi Italia galleries (one in the U.S.A. and one in Canada).

As noted above, in February 2014, we opened a new, directly-operated Natuzzi Italia flagship store in New York City on Madison Avenue, with the aim of anchoring the Group’s expansion in the New York-Connecticut-New Jersey Tristate area. We closed our New York City store located in Soho in June 2014. In addition, as of March 31, 2015, there were also 14 Natuzzi Italia single-brand stores operating in the Americas that are owned by local dealers (six in the United States, four in Mexico, and one each in Canada, Dominican Republic, Panama and Venezuela). Furthermore, as of the same date, there were seven Natuzzi Editions stores, all located in Brazil and two Italsofa single-brand stores (one each in Brazil and Venezuela).

2. EMEA

During 2014, the Group continued to consolidate its position in Western Europe, and increase its presence in Eastern Europe, the Middle East and Africa (collectively, “EMEA”), by investing in stores and galleries. Net sales of leather and fabric-upholstered furniture in EMEA (including Italy) decreased by 2.6% in 2014 to €184.8 million (from €189.7 million in 2013), with the number of seats sold decreasing by 8.3%, from 703,368 in 2013 to 644.681 in 2014.

2a) Italy. Since 1990, the Group has sold its upholstered products within Italy principally through the Divani & Divani by Natuzzi franchised network of furniture stores. As of March 31, 2015 there were 85 Divani & Divani by Natuzzi stores, and three Natuzzi Italia stores located in Italy. The Group directly owns 17 of these stores, including the three stores operating under the Natuzzi Italia name.

2b) Europe (Outside Italy). The Group expands into other European markets mainly through single-brand stores (local dealers, franchisees or directly operated stores). As of March 31, 2015, 75 single-brand stores were operating in Europe: 11 under the Divani & Divani by Natuzzi franchise brand, all located in Portugal; 64 were under the Natuzzi Italia name (11 in Spain, 10 in France, seven in Russia, six in Switzerland, five in the United Kingdom, four in each of Poland and the Czech Republic, three in Cyprus, two in each of Hungary and Ukraine, and one in each of Armenia, Bosnia, Croatia, Estonia, Germany, Latvia, Malta, Romania, Serbia and Slovenia), and one mono brand Natuzzi Re-vive store located in the United kingdom (Wales). Of these stores, 20 were directly owned by the Group as of March 31, 2015 and all were operated under the Natuzzi Italia name: 10 in Spain, six in Switzerland and four in the United Kingdom. Apart from the Natuzzi Italia stores, the Group also operates 10 concessions in the United Kingdom.

Given the size of the Russian market and its strategic relevance to the Group’s future growth, a local representative office was opened in Moscow in February 2010, with the aim of managing sales, marketing and customer service for Russia and the Ukraine, and to supervise the opening of new single-brand stores in the Russian market.

2c) Middle East & Africa. As of March 31, 2015, the Group had a total of 17 Natuzzi Italia stores in the Middle East & Africa region: five in Israel, three in Saudi Arabia, two each in Turkey and United Arab Emirates, and one each in Algeria, Côte d’Ivoire, Egypt, Lebanon and Qatar. In addition, seven single-brand stores under the Italsofa brand and one under the Natuzzi Editions brand were operating, all located in Israel.

In January 2012, following the worsening of the European Union’s diplomatic relations with Iran and Syria, the Company decided to cease all business relations with these two countries. No impairment issue arose following the interruption of business relations with those two countries.

Considering that the combined sales for Iran and Syria have never exceeded one-fifth of one-percent of Natuzzi total upholstery net sales, and that there were no sales in these countries in each of 2014 and 2013, our sales in and contacts with Iran and Syria are not a material part of our operations. Furthermore, our prior interests and activities in Iran or Syria are not a material investment risk, either from an economic, financial or reputational point of view.

The Group has not had, nor does it plan to have, any commercial contacts with the governments of Iran or Syria, or with entities controlled by such governments. To the best of Natuzzi’s knowledge, the Group was in business with independent Iranian dealers that were not controlled by, owned or otherwise related to the governments of Iran. The Group has never generated sales in Sudan or North Korea or Cuba.

3. Asia-Pacific Region.

In 2014, net sales of leather and fabric-upholstered furniture in the Asia-Pacific region increased by 5.3% to €53.3 million from €50.6 million in 2013, and the number of seats sold increased 1.0%, from 173,669 in 2013 to 175,351 in 2014.

Natuzzi Trading (Shanghai) Co., Ltd. acts as a regional office and manages the commercial part of the business throughout the region. Furthermore, the Group also controls a subsidiary in Japan, an agency in South Korea and an agency for Australia and New Zealand. All of these offices report to the regional office in Shanghai. The general strategy for the Natuzzi brand is to further expand the store network throughout the region, with a strong emphasis on the Chinese market.

As of March 31, 2015, 70 single-brand Natuzzi Italia stores were operating in the Asia-Pacific market: 42 in China, seven in India, six each in Australia and Taiwan, two each in South Korea and Vietnam, and one each in Indonesia, Malaysia, Philippines, Singapore and Thailand. In addition, as of the same date, the Group had 79 single-brand Leather Editions stores located in China (of which 16 were operated by the Group), three Natuzzi Re-vive stores (all located in China), and one Italsofa store located in India. The Group also maintains 38 galleries in the Asia-Pacific region, of which 13 are under the Natuzzi Italia name (eight located in Japan, two each in Thailand and India, and one in Singapore), 14 under the Italsofa name (seven located in India, six in Taiwan, and one in Japan), and 11 under the Natuzzi Editions name (eight located in India and three in Taiwan).

The Group is currently planning to further expand its presence in China, specifically with single-brand stores located in medium-sized cities across the country.

As part of the Business Plan, the Group has started to relabel the Leather Editions portfolio of products as Natuzzi Editions to capitalize on the strength of the Natuzzi name and streamline its offerings. Consequently, the Leather Editions stores, including those stores located in the Asia Pacific region, China in particular, will be gradually rebranded into Natuzzi Editions points of sales. The relabeling has already started.

The Group continues to search for opportunities for further investment in the Indian market. A local representative office was opened in New Delhi in the beginning of 2010 to manage sales, marketing and customer service and supervise the Natuzzi stores and Italsofa retail roll-out in the Indian market.

Customer Credit Management

The Group maintains an active credit management program. The Group evaluates the creditworthiness of its customers on a case-by-case basis according to each customer’s credit history and information available to the Group. Throughout the world, the Group utilizes “open terms” in 85% of its sales and obtains credit insurance for 60% of this amount; less than 11% of the Group’s sales are commonly made to customers on a “cash against documents” and “cash on delivery” basis; and lastly, about 4% of the Group’s sales are supported by a “letter of credit” or “payment in advance.”

Incentive Programs and Tax Benefits

Historically, the Group derived benefits from the Italian Government’s investment incentive program for under-industrialized regions in Southern Italy, which includes the area that serves as the center of the Group’s operations. The investment incentive program provides tax benefits, capital grants and subsidized loans. There can be no assurance that the Group will continue to be eligible for such grants, benefits or tax credits for its current or future investments in Italy.

In December 1996, the Company and the “Contract Planning Service” of the Italian Ministry of Industrial Activities signed a “Program Agreement” with respect to the “Natuzzi 2000 project.” In connection with this project, the Group prepared a multi-faceted program of industrial investments for the increase of the production capacity of leather and fabric upholstered furniture in the area close to its headquarters in Italy. According to this “Program Agreement,” the Company was required to make investments of €295.2 million and the Italian government was required to contribute €145.5 million in the form of capital grants. In 1997, the Company received, under the aforementioned project, capital grants of €24.2 million. During 2003, the Company revised its growth and production strategy due to strong competition from competitors in countries like China and Brazil. Therefore, as a consequence of this change in the economic environment, in 2003 the Company requested a revision to the original “Program Agreement” from the Italian Ministry of Industrial Activities as follows: reduction of the investment to be made from €295.2 million to €69.8 million, and reduction of the related capital grants from €145.5 million to €35.0 million. In April 2005, the Company received the final approval of the “Program Agreement” from the Italian Government confirming these revisions. In 2010, a committee appointed by the Ministry of Industrial Activities prepared the final technical report according to which the overall industrial investments acknowledged under the last version of the “Program Agreement” as agreed in 2005 changed from €69.8 million to the final amount of €66.0 million. Accordingly, the related total capital grants under the “Program Agreement” changed from €35.0 million to the final amount of €33.3 million. Therefore, the receivable for capital grants still due to the Company as of that time totaled €9.1 million. However, in 2010, the Ministry of Industrial Activities determined that the Company was entitled to a net receivable grant of only €7.1 million, claiming that interest in arrears of €1.8 million had accrued on capital grants paid in advance in 1997 for investments originally planned and subsequently not included in the final version of the “Program Agreement”, as agreed in 2005. The remaining part of the reduction of €0.2 million was attributable to fees owed to the Committee appointed by the Ministry.

On November 5, 2013, the Company and the Ministry of Economic Development reached an Agreement (Atto di Compensazione Volontaria) according to which the total amount of the capital grant under the “Program Agreement” was re-determined and set equal to €33.1 million (from €33.0 million) and the residual receivable for capital grants still due to the Company was equal to €4.8 million. The €4.8 million still due to the Company was thus composed of €33.1 million for the initial capital grant, adjusted to reflect €24.2 million that was already paid to the Company in 1997, €3.9 million for interest accrued on sums actually collected by the Company but for investments that were not approved, and €0.2 million for fees owed to the Committee appointed by the Ministry. As a consequence of the new amount to be collected, the Company has accrued €2.3 million as extraordinary contingent liabilities. The Company collected €4.8 million on October 14, 2014.

In 2006, the Company entered into an agreement with the Italian Ministry of Industrial Activities for the incentive program entitled “Integrated Package of Benefits—Innovation of the working national program ‘Developing Local Entrepreneurs’” for the creation of a centralized information system in Santeramo in Colle that will be utilized by all Natuzzi points-of-sale around the world. This agreement anticipated costs of €7.2 million and €1.9 million for the development and industrialization program, respectively. On March 20, 2006, the Italian Industrial Ministry issued a concession decree providing for a provisional grant to the Company of €2.8 million and a loan of €4.3 million, to be repaid at a rate of 0.74% over 10 years. Between December 2006 and September 2008, the Company provided the aforementioned Committee with the list of expenses to be recognized under this project and that have been incurred between July 2005 and November 2007 (date of completion of the program) totaling €10.8 million. In April 2009, the Italian Government provided, as advance payment, a €3.9 million subsidized loan and a €1.9 million operating subsidy to the Company. These payments were approved in 2010 by the Ministry Committee, and operating subsidies of €0.6 million and €0.2 million were paid in April 2012 and October 2013, respectively, as well as the residual subsidized loan amount of €0.4 million in October 2013. The Company is still awaiting receipt of €0.1 million of operating grants.

During 2008, the Italian Ministry of Industrial Activities approved a new incentive program, entitled “Made in Italy – Industry 2015.” The objective of this program is to facilitate the realization and development of new production technologies and services with high innovation value in order to stimulate awareness for products that are made in Italy. In December 2008, the Company submitted to the Italian Ministry of Industrial Activities its proposal, entitled “i-sofas.” The “i-sofas” program envisions a total investment of €3.9 million, up to €1.7 million of which may be contributed as a grant by the Italian Ministry of Industrial Activities. In October 2011, the Italian Ministry of Industrial Activities issued a concession decree reducing the total investment from €3.9 to €1.9 million and, accordingly, capital grants from up to €1.7 million to €0.7 million. No capital grant was collected in 2013. The Company collected €0.2 million of grants on April 1, 2014, and €0.1 million of grants on December 16, 2014. The program is still under revision by the Italian Ministry of Industrial Activities. The Company anticipates a possible final collection under this program of €0.2 million in the following months.

In April 2010, Natuzzi S.p.A., as the leader of a coalition of 19 institutions (including universities, research centers and other industrial companies), submitted to the Italian Ministry of Education, University and Research a project proposal entitled “Future Factory,” which hopes to be financed using National Operating Plan (Piano Operativo Nazionale) funds. This project concerns the research and development of technologies and advanced applications for the control, monitoring and management of industrial processes. This project anticipates an overall cost of €17.4 million, of which Natuzzi is supposed to bear €3.3 million (€2.6 million as industrial research-related costs, and €0.7 million as experimental activity-related costs). In March 2011, the Ministry informed the Company that it was included on a short list of companies being considered for the grant. In April 2012 the Ministry approved the Feasibility Study, but during 2013 and 2014 the Company did not receive an update from the Ministry. There can be no guarantee that the Company will receive the aforementioned grant from the Italian Government.

Management of Exchange Rate Risk

The Group is subject to currency exchange rate risk in the ordinary course of its business to the extent that its costs are denominated in currencies other than those in which it earns revenues. Exchange rate fluctuations also affect the Group’s operating results because it recognizes revenues and costs in currencies other than Euro but publishes its financial statements in Euro. The Group also holds a substantial portion of its cash and cash equivalents in currencies other than the Euro, including a large amount in RMB received as compensation for the relocation of its Chinese manufacturing plant. The Group’s sales and results may be materially affected by exchange rate fluctuations. For more information, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

Trademarks and Patents

The Group’s products are sold under the Natuzzi, Leather Editions, Natuzzi Editions, Natuzzi Re-vive, Softaly and Italsofa trademarks. These trademarks and certain other trademarks, such as Divani & Divani by Natuzzi, have been registered in all jurisdictions in which the Group has a commercial interest, such as Italy, the European Union and elsewhere. In order to protect its investments in new product development, the Group has also undertaken the practice of registering certain new designs in most of the countries in which such designs are sold. The Group currently has more than 1,300 design patents and patents pending. Applications are made with respect to new product introductions that the Group believes will enjoy commercial success and have a high likelihood of being copied.

The Natuzzi Group has recently launched Re-vive^®, an innovative armchair that was the result of a collaborative effort between Natuzzi’s Style Center and the Formway Design Studio of Wellington, New Zealand. The Re-vive recliner combines style and comfort, Italian artisan expertise and innovative New Zealand design. This innovative armchair is internationally protected by several patents covering both its shape and all of its components. In particular, the design patent was filed in 39 countries, while the mechanism patent was filed in 44 countries. Natuzzi has entered into a 20-year licensing agreement, signed in January 2011, with Formway that allows it to utilize the design and mechanisms developed for the Re-vive armchair in exchange for a licensing fee, payable in installments, and royalties representing a percentage of sales of the armchair.

As for the distribution of the products that are manufactured in the Group’s plants and identified under various names (Natuzzi Italia, Natuzzi Editions, Natuzzi Re-vive), the Group has in place with its customers (retailers and/or wholesalers) business agreements under the form of a sales license (product supply and brand usage license).

Furthermore, the Group also has supply agreements in place with large wholesalers for the supply of private label products that are manufactured by the Group’s industrial plants outside of Italy.

Regulation

The Company is incorporated under the laws of the Republic of Italy. The principal laws and regulations that apply to the operations of the Company—those of Italy and the European Union—are different from those of the United States. Such non-U.S. laws and regulations may be subject to varying interpretations or may be changed, and new laws and regulations may be adopted, from time to time. Our products are subject to regulations applicable in the countries where they are manufactured and sold. Our production processes are regularly inspected to ensure compliance with applicable regulations. While management believes that the Group is currently in compliance in all material respects with such laws and regulations (including rules with respect to environmental matters), there can be no assurance that any subsequent official interpretation of such laws or regulations by the relevant governmental authorities that differs from that of the Company, or any such change or adoption, would not have an adverse effect on the results of operations of the Group or the rights of holders of the Ordinary Shares or the owners of the Company’s ADSs. See “Item 4. Information on the Company—Environmental Regulatory Compliance,” “Item 10. Additional Information—Exchange Controls” and “Item 10. Additional Information—Taxation.”

Environmental Regulatory Compliance

The Group, to the best of its knowledge, operates all of its facilities in compliance with all applicable laws and regulations.

Insurance

The Group maintains insurance against a number of risks. The Group insures against loss or damage to its facilities, loss or damage to its products while in transit to customers, failure to recover receivables, certain potential environmental liabilities, product liability claims and Directors and Officer Liabilities. While the Group’s insurance does not cover 100% of these risks, management believes that the Group’s present level of insurance is adequate in light of past experience.

Description of Properties

The location, approximate size and function of the principal physical properties used by the Group as of March 31, 2015 are set forth below:

Country

Location

Size
(approximate
square meters)

Function

Production
Capacity per
day

Unit of

Measure

Italy

Santeramo in Colle (BA)

27,000

Headquarters, prototyping, showroom (Owned)

N.A.

Italy

Santeramo in Colle (BA)

2,000

Experimental laboratory within the headquarters (Owned)

Seats

Italy

Santeramo in Colle, Iesce (BA)

28,000

Sewing and product assembly (Owned)

1,400

Seats

Italy

Matera La Martella

38,000

General warehouse of sofas and accessory furnishing (Owned)

N.A.

Italy

Matera, Iesce

10,000

Leather cutting, Sewing, manufacturing of wooden parts for frame, product assembly (Owned)

200 /

500

Seats /

Wooden Frames

Italy

Laterza (TA)

11,000

Leather cutting (Owned)

7,500

Square Meters

Italy

Laterza (TA)

13,000

Fabric and lining cutting, leather warehouse (Owned)

6,000

Linear Meters

Italy

Laterza (TA)

20,000

Accessory Furnishing Packaging and Warehouse (Owned)

N.A.

Italy

Qualiano (NA)

12,000

Polyurethane foam production (Owned)

Tons

Italy

Pozzuolo del Friuli (UD)

21,000

Leather dyeing and finishing (Owned)

14,000

Square Meters

U.S.A.

High Point, North Carolina

10,000

Office and showroom for Natuzzi Americas (Owned)

N.A.

Romania

Baia Mare

75,600

Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production and wood and wooden product manufacturing (Owned)

1,800

Seats

China

Shanghai

88,000

Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production (Leased)

3,000

Seats

Brazil

Salvador de Bahia – Bahia

28,700

Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production (Owned)

700

Seats

The Group believes that its production facilities are suitable for its production needs and are well maintained.

Capital Expenditures

The following table sets forth the Group’s capital expenditures for each year for the three-year period ended December 31, 2014:


	Year ending December 31, (millions of Euro)
	2014		2013		2012
Land and plants		0.0		0.1		0.1
Equipment		6.6		7.0		7.4
Intangible assets		0.0		1.1		0.3

Total		6.6		8.2		7.8

Capital expenditures during the last three years were primarily made to make improvements to property, plant and equipment, for the expansion of the Company’s retail network as well as for SAP implementation. In 2014, capital expenditures were primarily made to make improvements at the Group’s existing facilities, in particular in China and in Brazil, for the implementation of the moving line production process.

The Group expects that capital expenditures in 2015 will range from €9.5 million to €11.5 million, which is expected to be financed through the improved cash flow from operations and bank facilities. The Group plans to utilize such capital expenditures mainly to complete the lean production plan in its existing plants (in particular in Italy) and to carry on the updating and implementation of the SAP system.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of the Group’s results of operations, liquidity and capital resources is based on information derived from the audited Consolidated Financial Statements and the notes thereto included in Item 18 of this Annual Report. These financial statements have been prepared in accordance with Italian GAAP, which differ in certain respects from U.S. GAAP. For a discussion of the principal differences between Italian GAAP and U.S. GAAP as they relate to the Group’s consolidated net losses and shareholders’ equity, see Note 31 to the Consolidated Financial Statements included in Item 18 of this Annual Report. All information that is not historical in nature and disclosed under “Item 5—Operating and Financial Review and Prospects” is deemed to be a forward-looking statement. See “Item 3. Key Information—Forward Looking Information.”

Critical Accounting Policies and estimates

Use of Estimates — The significant accounting policies used by the Group to prepare its financial statements are described in Note 3 to the Consolidated Financial Statements included in Item 18 of this Annual Report. The application of these policies requires management to make estimates, judgments and assumptions that are subjective and complex, and which affect the reported amounts of assets and liabilities as of any reporting date and the reported amounts of revenues and expenses during any reporting period. The Group’s financial results could be materially different if different estimates, judgments or assumptions were used. The following discussion addresses the estimates, judgments and assumptions that the Group considers most material based on the degree of uncertainty and the likelihood of a material impact if a different estimate, judgment or assumption were used. Actual results could differ from such estimates, due to, among other things, uncertainty, lack or limited availability of information, variations in economic inputs such as prices, costs, and other significant factors including the matters described under “Risk Factors.”

Long-lived Assets — Management reviews long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable and would record an impairment charge if necessary. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the recoverable amount, which is the higher of the estimated fair value less cost to sell of future undiscounted and discounted net cash flows expected to be generated by the asset and are significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its estimated recoverable amount, in relation to its use or realization, as determined by reference to the most recent corporate plans. The Company analyzes its overall valuation and performs an impairment analysis of its long-lived assets in accordance with Italian GAAP and U.S. GAAP (long-lived assets have to be tested for impairment whenever the events or changes in circumstances indicate that the carrying amount of an asset may be not recoverable).

Due to a market capitalization that falls below the carrying amount of the company, and history of operating loss and revenues decline, management has performed impairment tests on certain long-lived assets where losses have been generated.

The fair value analysis of each long-lived asset in use is unique and requires that management use estimates and assumptions that are deemed prudent and reasonable for a particular set of circumstances. Management believes that the estimates used in the analyses are reasonable; however, changes in estimates could affect the relevant valuations and the recoverability of the carrying values of the assets. The cash flows employed in our 2014 undiscounted and discounted cash flow analyses for impairment analysis of long lived assets in use were based on the Business Plan 2014-2016, adopted by the Board of Directors on February 28, 2014, as updated by management for the period 2015-2020 to reflect the roll-forward of the Plan in the next years.

While management believes its estimates are reasonable, many of these matters involve significant uncertainty, and actual results may differ from the estimates used. The key inputs and assumptions that were used in performing the 2014 impairment test for long-lived assets in use are as follows:

Year Ended Dec. 31, 2014

Long lived assets (in use)

located in

Cash flows

Net book value
of the asset
after impairment
test
(thousands of €)

WACC

Sales
CAGR
2015-19

Italy (Production site)

Undiscounted

49,881

n/a

Italy (Retail site)

Undiscounted + Third party independent appraisal

311

n/a

Brazil (Production site)

Third-party independent appraisal

6,207

n/a

China (Production site)

Undiscounted

11,766

n/a

U.K. (Retail site)

Discounted

159

0.5

Total assets tested

68,324

n/a – Not Applicable

G – estimated long term growth rate from “Damodaran Online” at http://pages.stern.nyu.edu/~adamodar/

WACC – Weighted Average Cost of Capital

Sales CAGR – Sales Compound Annual Growth Rate

The fair value analysis of each long-lived asset not in use/to be disposed of is determined by means of third party independent appraisal. An impairment loss of €0.4 million was recognized in 2014 with respect to the Ginosa plant in Italy. Also, in 2013 the Company recorded and impairment loss on assets not in use of €0.4 million.

The compound annual growth rate for sales for Italian production sites is based on the five- year business plan.

The deterioration of the macroeconomic environment, retail industry and the deterioration of our performance, could affect our Italian production long lived assets. In performing the impairment analysis management has performed a sensitivity analysis, which results in an undiscounted cash flow exceeding the carrying amount of long lived assets with an adequate cushion.

During 2014 the Company performed an impairment review of its retail fixed assets: an impairment loss of €0.7 million was recorded for the assets related to retail stores in the UK. During 2013 the Company performed an impairment review of its retail fixed assets: an impairment loss of €0.7 million was recorded for the assets related to retail stores in Italy, an impairment loss of €0.6 million was recorded for the assets related to retail stores in Spain and an impairment loss of €0.8 million was recorded for the German retail assets. Also, in 2013 the company recorded an impairment loss of €6.0 million for a specific asset (airplane) and €0.4 million for plants not in use/to be disposed of. During 2012, the Company recorded an impairment loss of €0.9 million for the assets related to retail stores in Spain. During 2011 the Company recorded an impairment loss of €1.0 million for its Pojuca plant in Brazil. No impairment losses arose in 2010.

For a discussion of the differences between Italian GAAP and U.S. GAAP with respect to the above impairment analysis and the effect on net loss and shareholders’ equity as of December 31, 2014, please see Note 31(g) of the Consolidated Financial Statements included in item 18 of this Annual Report.

Goodwill and intangible assets — Management tests goodwill and intangible assets for impairment by reporting unit at least once a year or whenever the events or changes in circumstances indicate that the carrying amount of goodwill and intangible assets may be not recoverable.

The Company analyzes its overall valuation and performed the impairment analysis of its goodwill and intangible assets in accordance with Italian and U.S. GAAP. Under Italian GAAP the Company amortizes the goodwill and intangible assets arising from business acquisition on a straight-line basis over a period of five years.

Under U.S. GAAP goodwill and intangible assets are not amortized but annually tested for impairment. At December 31, 2014, 2013 and 2012, the Company recorded an impairment loss for its goodwill and intangible assets of nil, nil, and €0.9 million respectively and the net book value of goodwill as of December 31, 2014 under Italian GAAP and U.S. GAAP was nil, respectively (see notes 12 and 31(d) of the Consolidated Financial Statements included in Item 18 of this Annual Report).

For a discussion of the differences between Italian GAAP and U.S. GAAP with respect to the above impairment analysis and the effect on net loss and shareholders’ equity as of December 31, 2014, please see Note 31(d) of the Consolidated Financial Statements included in Item 18 of this Annual Report.

Although management believes its estimates in relation to such impairments are reasonable, actual results may differ, and future downward revisions to management’s estimates, if any, may result in further charges in future periods.

Recoverability of Deferred Tax Assets — Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the accounting in the consolidated financial statements of existing assets and liabilities and their respective tax bases, as well as for losses available for carrying forward in the various tax jurisdictions. Deferred tax assets are reduced by a valuation allowance to an amount that is reasonably certain to be realized. Deferred tax assets and liabilities are calculated using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

In assessing the feasibility of the realization of deferred tax assets, management considers whether it is reasonably certain that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and the tax loss carry forwards are utilized. Estimating future taxable income requires estimates about matters that are inherently uncertain and requires significant management judgment, and different estimates can have a significant impact on the outcome of the analysis.

In 2013 and 2014, because most of the Italian and foreign subsidiaries realized significant pre-tax losses and were in a cumulative loss position, management did not consider it reasonably certain that the deferred tax assets of those companies would be realized in the scheduled reversal periods (see Note 18 to the Consolidated Financial Statements included in Item 18 of this Annual Report). In making its determination that a valuation allowance was required, management considered the scheduled reversal of deferred tax liabilities and tax planning strategies but was unable to identify any relevant tax planning strategies available to reduce the need for a valuation allowance.

Changes in the assumptions and estimates related to future taxable income, tax planning strategies and scheduled reversal of deferred tax liabilities could affect the recoverability of the deferred tax assets. If actual results differ from such estimates and assumptions the Group financial position and results of operation may be affected.

One-Time Termination Benefits — In September 2011, the Company renewed its agreement with the Italian trade unions and the Ministry of Labor and Social Policy that permitted it to participate in a temporary workforce

reduction program and to benefit from the “Cassa Integrazione Guadagni Straordinaria,” or CIGS, for a period of 24 months beginning on October 16, 2011. Pursuant to the CIGS, government funds pay a substantial majority of the salaries of redundant workers who are subject to layoffs or reduced work schedules. For the 2011-2013 period, an average of 1,273 employees from the Group’s headquarters and production facilities were covered by the program, which contemplated a surplus of 1,060 employees at the end of the period on October 15, 2013.

Pursuant to this agreement, as of December 31, 2011, the Company, accrued a one-time termination benefits reserve with an accrual of €5.4 million (for the 1,060 employees to be dismissed) recorded as a non-operating expense, under the line “Other Income/(Expense), Net” of the consolidated statement of operations for the year ended December 31, 2011, of which €1.4 million has been paid.

The Company anticipated making incentive payments to induce the voluntary resignation of up to 600 employees at the conclusion of the period covered by the CIGS program. As a result, in 2013, the Company increased the one-time termination benefits reserve (reflecting both voluntary payments and those that must be made under Italian law in the event of employee terminations) with an accrual of €19.9 million, which was recorded as a non-operating expense, under the line “Other Income/(Expense), Net.”

During 2014, the Company granted incentive payments to 429 workers, for an amount of €13.5 million, further to the individual agreements reached during the year. Also, the Company obtained a further one-year extension of its participation in the CIGs program (expiring on October 16, 2015) for 1,550 workers. In the meantime, negotiations started with social parties to obtain a solidarity agreement aimed to avoid layoffs by reducing the number of daily work hours for all employees, and reduce the labor and social contribution costs. The 2015 Italian Reorganization Agreement was finally signed on March 3, 2015 and refers to a total of 1,818 workers. Remaining redundant workers amount to 516. Based on the new estimate of the number of redundancies, no accrual was posted in 2014 to the one-termination benefit reserve, since the remaining provision has been deemed sufficient enough to cover the cost of future layoffs.

In accordance with Italian GAAP, the costs connected to one-time termination benefits were recognized in 2011 and 2013, due to the fact that in those years the Company formally decided to adopt the termination plans (which were approved by the Company’s board of directors) and was able to reasonably estimate the related one-time termination benefits. Under Italian GAAP, the communication or announcement to third parties of the plan of termination of workers is not relevant to the recognition of the cost for the termination benefits related to the terminated workers.

Although management believes its estimates of the one-time termination benefits are reasonable, different assumptions regarding the number of employees to be laid off, the outcome of the negotiations with the trade unions and the relevant Italian Ministries, and other factors, could lead to different conclusions, which could have a significant impact on the figures determined.

Under U.S. GAAP, considering the guidance of ASC 420, the one-time termination benefits have to be recorded in the consolidated statement of operations when the termination plan is communicated to the employees and meets all the criteria indicated in paragraph 420-10-25-4. The effects of this different accounting treatment are indicated in Note 31(f) of the Consolidated Financial Statements included in Item 18 of this Annual Report.

Allowances for Returns and Discounts — The Group records revenues net of returns and discounts. The Group estimates sales returns and discounts and creates an allowance for them in the year of the related sales. The Group makes estimates in connection with such allowances based on its experience and historical trends in its large volumes of homogeneous transactions. However, actual costs for returns and discounts may differ significantly from these estimates if factors such as economic conditions, customer preferences or changes in product quality differ from the ones used by the Group in making these estimates.

Allowance for Doubtful Accounts — The Group makes estimates and judgments in relation to the collectability of its accounts receivable and maintains an allowance for doubtful accounts based on losses it may experience as a result of failure by its customers to pay amounts owed. The Group estimates these losses using consistent methods that take into consideration, in particular, insurance coverage in place, the creditworthiness of its customers and general economic conditions. Changes to assumptions relating to these estimates could affect actual results. Actual results may differ significantly from the Group’s estimates if factors such as general economic conditions and the creditworthiness of its customers are different from the Group’s assumptions.

Revenue Recognition — Under Italian GAAP, the Group recognizes sales revenue, and accrues associated costs, at the time products are shipped from its manufacturing facilities located in Italy and abroad. A significant part of the products are shipped from factories directly to customers under sales terms such that ownership, and thus risk, is transferred to the customer when the customer takes possession of the goods. These sales terms are referred to as “delivered duty paid,” “delivered duty unpaid,” “delivered ex quay” and “delivered at customer factory.” Delivery to the customer generally occurs within one to six weeks from the time of shipment. The Group’s revenue recognition under Italian GAAP is at variance with U.S. GAAP. For a discussion of revenue recognition under U.S. GAAP, see Note 31(c) to the Consolidated Financial Statements included in Item 18 of this Annual Report.

Results of Operations

Summary — During 2014, the Company dedicated significant efforts and resources to the implementation of the Business Plan, approved by the Board of Directors on February 28, 2014, to reorganize its operations, and optimize and streamline processes to reduce costs and recover efficiency.

While most of the activities included in the Business Plan (namely, new brand and distribution strategy; product innovation; the controlling and reduction of fixed costs; rationalization of the Directly Operated Stores network; new commercial organization) have been carried out, as of the date of this Annual Report, substantially in line with the scheduled timing, the implementation of the industrial process innovation project included in the Business Plan has generated, during the first part of 2014, some unexpected difficulties, highlighting, therefore, the need for certain corrective measures within the Group’s industrial operations, which may result in a slower implementation of the Plan than originally envisaged.

The corrective measures introduced in the second half of 2014 as a means to recover efficiency in our industrial plants have allowed, indeed, the Group to gradually improve quarterly industrial margins during 2014, but not in a sufficient measure to return to profitability. In particular, the Group’s operating performance for 2014 was strongly affected mainly by the following events:

1. inefficiencies, as anticipated, experienced during the first part of 2014 within our Chinese plant following the introduction of radical changes to our manufacturing process. While these changes have led to steadily improving production trends through the first months of 2015, they contributed an additional €5.2 million in cost of sales for 2014. This was due to the adoption of what we believe were certain one-off extraordinary measures that were necessary in order to meet agreed delivery times and not compromise our customer service;

2. low productivity in our Italian plants, due to the staffing of workers on a rotational basis as required by the 2013 Italian Reorganization Agreement. In March 2015, we entered into the 2015 Italian Reorganization Agreement, which allows us, among others, to stabilize our Italian workforce, and that should result in improvements in productivity.

Due to the weak operating performance in 2014 (when compared against forecasts) and on the basis of the actions being undertaken, as envisaged in the Plan, during the second part of 2014 Natuzzi management prepared the 2015 budget, approved by the Board of Directors on December 19, 2014, that foresees a gradual reduction in the operating loss, as a consequence of the positive contribution from measures to improve efficiency, which have already been implemented, but not completed by December 31, 2014.

In 2014, the Group had net losses of €49.4 million (compared to a net loss of €68.6 million in 2013). Group net sales increased by 2.7%, from €449.1 million in 2013 to €461.4 million in 2014. Total upholstery net sales increased by 1.6% to €409.1 million due primarily to a positive contribution from sales-mix, a generalized increase in the price list in the second part of 2014 that more than offset the negative exchange rate fluctuations, and the 1.4% decrease in terms of seats sold, from 1,686,347 in 2013 to 1,662,295 in 2014. The increase in the “Other sales” item (+13.0%) relates to the sales of furnishings, polyurethane and other minor revenues.

In 2014, net sales of the “Natuzzi” branded products (which include the Group’s three lines of product: Natuzzi Italia, Natuzzi Editions and Natuzzi Re-Vive) decreased by 2.0%, from €292.8 million in 2013 to €287.0 million in 2014, with the number of seats sold decreasing by 8.8% to 911,080 as compared to 2013.

Net sales of private label products (including Softaly) increased by 11.1% to €122.2 million, with the number of seats sold increasing by 9.4% to 751,215. See “Item 4. Information on the Company—Markets” for tables setting forth the Group’s net leather- and fabric-upholstered furniture sales and seats sold, which are broken down by geographic market, for the years ended December 31, 2012, 2013 and 2014.

The overall Group performance in 2014 was strongly affected by the continuing poor trend in sales from Europe in particular, which suffered from weak household consumption, that were further burdened by austerity-driven policies in place in certain countries, but also by the continuation of the slowdown in some emerging economies.

The general recessionary climate that the Group has operated within over the past few years, especially in those markets that have historically been important to us, such as Europe, has had an adverse effect on consumers’ disposable incomes, which has also contributed to a change in consumer preferences towards products within the medium-to-lower end of the market. See “Item 4. Information on the Company—Markets”

The Group, during 2014, carried on with the innovation and cost controlling program as envisaged by the Group’s Transformation Plan, despite encountering delays in the original schedule, as previously described:

the re-engineering of our best-selling models into a moving-line based design, was completed by the end of 2014: starting from the end of March 2015, 80% of the Group’s products can be manufactured through moving lines;

ii)

a significant reduction in the number of models and number of coverings, contributing to a reduction in the overall industrial complexity;

iii)

as for innovations in industrial processes, we have developed and tested in our experimental plant located in Matera a new integrated production cycle and production planning software. First tests results are very encouraging in terms of improved efficiency, reduction of workers not directly involved in production and a new labor organization;

iv)

the closure of underperforming stores (11 from January 2014 through the date of this Annual Report), with six more Directly Operated Stores planned for closure during the course of 2015;

the creation of a centralized structure to oversee certain back-office activities and to right-size our trading subsidiaries abroad so to reduce costs;

vi)

a reduction in the managerial structure, particular in our headquarters.

In 2014 sales activity was characterized by a positive development in late spring, as a result of the overall review of our product collections and their presentations in the main world fairs (Milan, Guangzhou, High Point).

Overall order intake in 2014 was up +6.8% (€436.5 million in 2014 compared to €408.8 million in 2013), thanks to the renewed product collection. We have been able to consistently improve our average sell-in price in 2014 compared to 2013.

From a geographical standpoint, while the North American market showed positive sales growth, European sales continued to slowdown. Asia Pacific presented mixed results with positive and consistent growth in China, in part due to the opening of 49 new stores.

We expect the improving trend in our industrial operations that has started during the second part of 2014 to continue into 2015.

Specifically, the Group will continue to invest in product and process innovations according to “Lean Production” principles. In addition, we have nearly finished the review of our commercial organization in an effort to more effectively respond to market demands, with particular attention on fast-growing markets. The Company will also continue to further implement cost-saving measures aimed at lowering overhead costs and to develop our business relations with important customers by leveraging our capability in offering quality service and competitive products.

The following table sets forth certain statement of operations data expressed as a percentage of net sales for the years indicated:


	Year Ended December 31,
	2014			2013			2012
Net sales		100.0	%		100.0	%		100.0	%
Cost of sales		72.2			70.7			66.9
Gross profit		27.8			29.3			33.1
Selling expenses		27.9			28.2			28.2
General and administrative expenses		7.9			8.3			8.5
Operating margin		(8.0	)		(7.2	)		(3.7	)
Other income (expense), net		(2.3	)		(7.1	)		(1.0	)
Income taxes		0.4			0.9			0.9
Net loss		(10.7	)		(15.2	)		(5.6	)

2014 Compared to 2013

Total net sales for 2014, including sales of leather and fabric-upholstered furniture and other sales (principally sales of polyurethane foam and leather sold to third parties as well as of accessories), increased 2.7% to €461.4 million, as compared to €449.1 million in 2013.

Net sales for 2014 of leather and fabric-upholstered furniture increased 1.6% to €409.1 million, as compared to €402.8 million in 2013. The 1.6% increase was due principally to a generalized price-list increase in the second part of the year, a positive sales mix contribution, both more than offsetting a negative currency translation effect and a reduction in seats sold (from 1,686,347 in 2013 to 1,662,295 in 2014).

Net sales of Natuzzi branded products (which include sales of the Group’s three lines of product: Natuzzi Italia, Natuzzi Editions and Natuzzi Re-Vive) accounted for 70.1% of our total upholstery net sales in 2014 (as compared to 72.7% in 2013); net sales of the private label production accounted for 29.9% of our total upholstery net sales in 2014 (as compared to 27.3% in 2013). These trends reflect a shift, year-over-year, toward the lower end of our market segment of products.

Net sales for 2014 of leather-upholstered furniture decreased 2.0% to €374.4 million, as compared to €382.2 million in 2013, and net sales for 2014 of fabric-upholstered furniture increased 68.3% to €34.7 million, as compared to €20.6 million in 2013, reflecting a change in consumer preferences for lower-priced products and those with fabric (as opposed to leather) upholstery. We anticipate expanding the range of fabric-upholstered offerings, which were not over the past few years an area of strategic focus, under the Business Plan to reflect these trends.

According to a geographic breakdown in total upholstery net sales, in the Americas (Brazil included), 2014 net sales increased by 5.2% to €171.0 million, as compared to €162.5 million in 2013, and seats sold increased by 4.1% to 842,263, reflecting in particular the 21.1% increase for our medium-low segment Private label sales, that more than offset the 4.4% decrease in the Natuzzi branded products sales for that region.

In EMEA, net sales of upholstered furniture in 2014 decreased by 2.6% to €184.8 million, as compared to €189.7 million in 2013, due to a 2.3% decrease in Natuzzi branded offerings, and a 3.7% decrease in sales of our Private Label offerings. Seats sold in the region in 2014 decreased by 8.3% to 644,681 units.

In the Asia-Pacific region, net sales of upholstered furniture increased by 5.3% to €53.3 million, as compared to €50.6 million in 2013. Seats sold increased by 1.0% in that region to 175,351. This growth was mainly attributable to the Group’s expansion in the Chinese market, where we opened 36 new Natuzzi Editions stores, 10 new Natuzzi Italia stores and three Natuzzi Re-vive mono-brand stores during 2014.

According to a breakdown by brand, net sales for 2014 of the Natuzzi branded furniture decreased by 2.0% over 2013 to €287.0 million, and the number of seats sold decreased by 8.8% to 911,080. Net sales of private label products in 2014 increased by 11.1% over 2013 to €122.2 million and the number of seats sold increased by 9.4% to 751,215.

In 2014, total seats sold decreased by 1.4% to 1,662,295 from 1,686,347 units sold in 2013.

See “Item 4. Information on the Company—Markets” for tables setting forth the Group’s net leather- and fabric-upholstered furniture sales and seats sold, which are broken down by geographic market, for the years ended December 31, 2012, 2013 and 2014.

The following provides a more detailed country-by-country examination of the changes in volumes in our principal markets, according to the Group’s main sales categories:

• Natuzzi. In terms of seats sold under the Natuzzi brand, the Group recorded positive results in Italy (+5.8%), China (+30.6%), Spain (+10.2%), Israel (+15.2%), Ireland (+12.3%), United Arab Emirates (+6.2%); Switzerland (+9.4%), Lebanon (+23.3%), Singapore (+54.8%). Negative results were reported in the United States (-5.9%), Canada (-14.8%), United Kingdom (-4.7%), Germany (-17.3%), Australia (-15.1%), South Korea (-1.0%), Belgium (-14.2%), Japan (-23.5%), France (-45.4%), Brazil (-11.4%), Russia (-26.3%), Mexico (-30.6%), Taiwan (-6.8%).

• Private label production. In 2014 the Group reported positive results in the United States (+20.2%), Canada (+29.7%), United Kingdom (+47.0%), Brazil (+29.6%), Japan (+174.4%), Italy (+53.1%), Israel (+25.3%), Finland (+24.9%), Russia (+90.1%), Mexico (+141.6%), Romania (+49.7%). Negative results we reported in France (-4.6%), Germany (-29.2%), Switzerland (-43.4%), Belgium (-6.0%), China (-27.9%), Austria (-6.1%), Sweden (-32.8%), United Arab Emirates (-3.2%), Spain (-49.5%), The Netherlands (-34.3%).

Other Net Sales, principally sales of polyurethane foam and leather sold to third parties, as well as of accessories and other revenues, increased by 13.0% to €52.3 million, as compared to €46.3 million in 2013. The 13.0% increase was mainly due to revenues such as sales of raw materials, VAT incentives achieved in Brazil, and other minor revenues.

Cost of Sales in 2014 increased by 5.0% to €333.2 million (representing 72.2% of net sales), as compared to €317.3 million (or 70.7% of net sales) in 2013. In particular, consumption costs (defined as purchases plus beginning stock minus final stock and plus leather processing) increased as a percentage of total net sales, passing from 46.4% in 2013 to 47.2% in 2014. This increase was mainly due to higher leather prices we suffered in 2014 (approximately 11% price increase compared to 2013) partially offset by the generalized pricelist increase in sofas products achieved in the second part of 2014, and by the positive impact of efficiency measures that have been introduced in 2014, including better management of outsourced materials and components. In addition cost of sales was negatively affected by higher transformation costs because of the following events occurred in 2014:

•

inefficiencies experienced during the first part of 2014 within our Chinese plant following the introduction of radical changes to our manufacturing process. As a consequence we were obliged to adopt one-off extraordinary measures that were necessary in order to meet agreed delivery times and not compromise our customer service;

•

low productivity in our Italian plants, due to the staffing of workers on a rotational basis as required by the 2013 Italian Reorganization Agreement.

Gross Profit. The Group’s gross profit in 2014 amounted to €128.2 million (27.8% of net sales), as compared to €131.8 million in 2013 (29.3% of net sales) as a result of the factors described above.

Selling Expenses increased in 2014 to €128.9 million (27.9% of net sales), as compared to €126.6 million in 2013 (28.2% of net sales). The increase was mainly due higher advertising costs and wages costs partially offset by saving from the closure of 10 DOS in 2014 (in addition to one store having been closed in September 2013).

General and Administrative Expenses. In 2014, the Group’s general and administrative expenses decreased by €1.2 million to €36.3 million, from €37.5 million in 2013, and, as a percentage of net sales, from 8.4% in 2013 to 7.9% in 2014, due to cost control measures implemented in 2014.

Operating Income (Loss). As a result of the factors described above, in 2014 the Group had an operating loss of €37.0 million, compared to an operating loss of €32.3 million in 2013.

Other Income (expenses), net. The Group registered “Other expense, net,” of €10.6 million in 2014 as compared to “Other expense, net,” of €31.9 million in 2013. The change against 2013 is primarily due to the accrual for one-time termination benefit posted in 2013 of €19.9 million.

Net interest expense, included in other expense, net, in 2014 was €1.9 million, as compared to net expenses of €0.5 million in 2013. See Note 28 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

The Group recorded a €2.4 million foreign-exchange net loss in 2014 (included in other income (expense), net), as compared to a net loss of €2.9 million in 2013. The foreign exchange loss in 2014 primarily reflected the following factors:

•

a net realized loss of €0.3 million in 2014 (as compared to a net realized gain of €2.1 million in 2013) on domestic currency swaps due to the difference between the forward rates of the domestic currency swaps and the spot rates at which the domestic currency swaps were closed (the Group uses forward rate contracts to hedge its price risks against unfavorable exchange rate variations);

•

a net realized loss of €0.3 million in 2014 (compared to a loss of €2.6 million in 2013), from the difference between invoice exchange rates and collection/payment exchange rates;

•

a net unrealized loss of €1.5 million in 2014 (compared to an unrealized loss of €2.9 million in 2013) on accounts receivable and payable; and

•

a net unrealized loss of €0.3 million in 2014 (compared to an unrealized gain of €0.5 million in 2013), from the mark-to-market evaluation of domestic currency swaps.

The Group does not use hedge accounting and records all fair value changes of its domestic currency swaps in its statement of operations. See Note 28 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

The Group recorded expenses of €6.3 million during 2014 that were recorded under “Other, net,” compared to “Other, net” of €28.5 million reported in 2013. The €6.3 million under “Other, net” mainly reflected the following factors:

•

€2.6 million related to the impairment of long-lived assets and non-current investments;

•

€0.9 million accrual for one-time employee termination benefits granted to laid off employees of some subsidiaries, for which no provision had been posted in previous years;

•

€2.8 million mainly related to contingent liabilities with our customers and the disposal of assets.

As previously described, the caption included in 2013 the accrual for one-time termination benefit of €19,9 million.

Income Taxes. In 2014, the Group had an effective tax rate of 3.8% on its losses before taxes and non-controlling interests, compared to the Group’s effective tax rate of 6.4% reported in 2013.

For the Group’s Italian companies the effective tax rate (i.e., the obligation to accrue taxes despite reporting a loss before taxes) was, in part, due to the regional tax known as “IRAP” (Imposta Regionale sulle Attività Produttive; see Note 18 to the Consolidated Financial Statements included in Item 18 of this Annual Report). This regional tax is generally levied on the gross profits determined as the difference between gross revenue (excluding interest and dividend income) and direct production costs (excluding labor costs, interest expenses and other financial costs). As a consequence, even if an Italian company reports a pre-tax loss, it could still be subject to this regional tax. In 2014, some Italian companies within the Group reported losses but had to pay IRAP.

As in 2014, because most of the Italian and foreign subsidiaries realized significant pre-tax losses and were in a cumulative loss position, management did not consider it reasonably certain that the deferred tax assets of those companies would be realized in the scheduled reversal periods (see Note 18 to the Consolidated Financial Statements included in Item 18 of this Annual Report).

Net Loss. Reflecting the factors above, the Group reported a net loss of €49.4 million in 2014, as compared to a net loss of €68.6 million in 2013. On a per-Ordinary Share, or per-ADS basis, the Group had net losses of €0.9 in 2014, as compared to net losses of €1.25 in 2013.

As disclosed in Note 31 to the Consolidated Financial Statements included in Item 18 of this Annual Report, established accounting principles in Italy vary in certain significant respects from generally accepted accounting principles in the United States. Under U.S. GAAP, the Group would have had net losses of €46.0 million and €62.0 million in 2014 and 2013, respectively, compared to net losses of €49.4 million and €68.6 million in 2014 and 2013, respectively under Italian GAAP.

2013 Compared to 2012

Total net sales for 2013, including sales of leather- and fabric-upholstered furniture and other sales (principally sales of polyurethane foam and leather sold to third parties as well as of accessories), decreased 4.2% to €449.1 million, as compared to €468.8 million in 2012.

Net sales for 2013 of leather- and fabric-upholstered furniture decreased 1.6% to €402.8 million, as compared to €409.4 million in 2012. The 1.6% decrease was due principally to the general strengthening of the Euro versus major currencies, such as the United States Dollar, Canadian Dollar, British Pound, Japanese Yen, Australian Dollar, and Brazilian Reais (for an overall contribution of -3.0% on sales), partially offset by an increase of seats sold (+0.3% over 2012) and unit prices.

Net sales of Natuzzi Italia branded furniture accounted for 32.8% of our total upholstery net sales in 2013 (as compared to 33.6% in 2012); net sales of Natuzzi Editions/Leather Editions accounted for 39.9% in 2013 (as compared to 40.8% in 2012); net sales of the private label production accounted for 27.3% of our total upholstery net sales in 2013 (as compared to 25.5% in 2012). These trends reflect a shift, year-over-year, toward the lower end of our market segment of products.

Net sales for 2013 of leather-upholstered furniture decreased by 1.9% to €382.2 million, as compared to €389.8 million in 2012, and net sales for 2013 of fabric-upholstered furniture increased by 5.1% to €20.6 million, as compared to €19.6 million in 2012, reflecting a change in consumer preferences for lower-priced products and those with fabric (as opposed to leather) upholstery.

According to a geographic breakdown of total upholstery net sales, in the Americas (Brazil excluded), net sales in 2013 decreased by 5.7% to €154.0 million, as compared to €163.3 million in 2012, and seats sold decreased by 4.0% to 768,038. This decline in sales reflects a shift within the middle of the market toward private label sales, and a decline mainly in purchases of Natuzzi Editions products.

In Brazil, total upholstery net sales increased by 30.1% to €8.5 million, and the number of seats sold increased by 26.5% to 41,272 units, reflecting increased sales and marketing activity by our Brazil commercial office and an improvement in the sales mix.

In EMEA, net sales of upholstered furniture in 2013 decreased by 2.0% to €189.7 million, as compared to €193.6 million in 2012, due primarily to a decrease of 5.5% in Natuzzi Italia branded offerings, which was partially offset by an increase of 3.1% in sales of our private label offerings, while sales for the Natuzzi Editions/Leather Editions brands were essentially flat year over year. Seats sold in the region in 2013 increased by 2.6% to 703,368 units, although these trends reflected a shift toward lower-priced models.

In the Asia-Pacific region, net sales of upholstered furniture increased 10.3% to €50.6 million, as compared to €45.9 million in 2012. Seats sold increased by 7.2% in that region to 173,669. This growth was mainly attributable to the Group’s expansion in the Chinese market, where we opened 22 new Leather Editions and five new Natuzzi Italia stores during 2013.

According to a breakdown by brand, net sales for 2013 of the Natuzzi Italia branded furniture decreased 4.1% over 2012 to €132.1 million, and the number of seats sold increased by 2.5%. Net sales of Natuzzi Editions/Leather Editions decreased by 3.8% to €160.7 million over 2012, and the number of seats sold decreased by 7.7%. Net sales of the private label production increased by 5.2% over 2012 to €110.0 million and the number of seats sold increased by 8.5% to 686,930.

In 2013, total seats sold increased 0.3% to 1,686,347 from 1,680,770 units sold in 2012.

The following provides a more detailed country-by-country examination of the changes in volumes in our principal markets, according to the Group’s main sales categories:

• Natuzzi Italia. In terms of seats sold under the Natuzzi Italia brand, the Group recorded negative results in the United Kingdom (-10.5%), Germany (-15.7%), Canada (-14.0%), the United States (-8.2%), France (-21.9%), South Korea (-11.5%), Belgium (-28.3%), Australia (-10.0%), Mexico (-9.0%) and India (-6.4%). Positive results were reported in Italy (+14.9%), the Netherlands (+32.9%), Spain (+2.3%), China (+24.5%), Russia (+17.9%), Saudi Arabia (+34.6%), Israel (+29.8%), Switzerland (+3.4%), United Arab Emirates (+40.4%), Taiwan (+6.2%), and Austria (+24.7%).

• Natuzzi Editions/Leather Editions. The Group recorded a decrease over 2012 in terms of seats sold in countries such as the United States (-16.0%), Canada (-15.9%), Australia (-1.2%), Belgium (-28.1%), South Korea (-5.9%), Spain (-13.1%), Chile (-10.1%) and Puerto Rico (-29.9%). Positive results were reported in the United Kingdom (+11.1%), Japan (+13.6%), China (+112.8%), Germany (+17.4%), France (+14.5%), Brazil (+34.0%), Russia (+6.2%), Mexico (+63.2%) and Israel (+3.6%).

• Private label production. In 2013 the Group reported negative results in Germany (-10.3%), United Kingdom (-18.0%), Norway (-25.2%), Spain (-25.2%), Austria (-20.1%), the Netherlands (-16.9%), and Japan (-35.0%). Positive results were recorded in the United States (+2.6%), France (+13.1%), Canada (+90.0%), Brazil (+21.1%), Switzerland (+13.7%), China (+73.8%), Sweden (+20.8%), Belgium (+34.2%), Israel (+806.4%), and United Arab Emirates (+47.4%).

Other Net Sales, principally sales of polyurethane foam and leather sold to third parties, as well as of accessories, decreased 22.2% to €46.3 million, as compared to €59.4 million in 2012.

Cost of Sales in 2013 increased by 1.1% to €317.3 million (representing 70.7% of net sales), as compared to €313.8 million (or 66.9% of net sales) in 2012. In particular, consumption costs (defined as purchases plus beginning stock minus final stock and plus leather processing) increased as a percentage of total net sales, from 44.6% in 2012 to 46.4% in 2013. These increases were mainly due to a different sales mix (more private label products sold), higher raw material costs and higher production costs, deriving from a lower level of productivity, especially in the Group’s Italian plants. In addition, we experienced six days of labor strikes in June and July 2013, and a slowdown campaign by Italian labor from July through September 2013 in reaction to the announcement of the reorganization of the Group’s Italian operations on July 1, 2013. These negative trends were partially offset by the positive impact of efficiency measures that have been introduced, including better management of outsourced materials and components. Transformation costs (defined as manufacturing labor costs and industrial costs) increased slightly from 22.4% in 2012 to 23.8% in 2013 mainly because of a negative sales mix and increased costs of labor in China and Romania.

Gross Profit. The Group’s gross profit in 2013 amounted to €131.8 million (29.3% of net sales), as compared to €155.0 million in 2012 (33.1% of net sales) as a result of the factors described above.

Selling Expenses decreased in 2013 to €126.6 million, as compared to €132.4 million in 2012, and, as a percentage of net sales, was the same as in 2012, at 28.2%.

General and Administrative Expenses. In 2013, the Group’s general and administrative expenses decreased by €2.4 million to €37.5 million, from €39.9 million in 2012, and, as a percentage of net sales, from 8.5% in 2012 to 8.4% in 2013, due to cost control measures implemented over the past few quarters.

Operating Income (Loss). As a result of the factors described above, the Group had an operating loss of €32.3 million for 2013, compared to an operating loss of €17.3 million in 2012.

Other Income (expenses), net. The Group registered “Other expense, net,” of €31.9 million in 2013 as compared to “Other expense, net,” of €4.6 million in 2012.

Net interest expense, included in other expense, net, in 2013 was €0.5 million, as compared to net expenses of €0.2 million in 2012. See Note 28 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

The Group recorded a €2.9 million foreign-exchange net loss in 2013 (included in other income (expense), net), as compared to a net loss of €2.5 million in 2012. The foreign exchange loss in 2013 primarily reflected the following factors:

•

a net realized gain of €2.1 million in 2013 (as compared to a net realized loss of €1.1 million in 2012) on domestic currency swaps due to the difference between the forward rates of the domestic currency swaps and the spot rates at which the domestic currency swaps were closed (the Group uses forward rate contracts to hedge its price risks against unfavorable exchange rate variations);

•

a net realized loss of €2.6 million in 2013 (compared to a gain of €2.3 million in 2012), from the difference between invoice exchange rates and collection/payment exchange rates;

•

a net unrealized loss of €2.9 million in 2013 (compared to an unrealized loss of €4.6 million in 2012) on accounts receivable and payable; and

•

a net unrealized gain of €0.5 million in 2013 (compared to an unrealized gain of €0.9 million in 2012), from the mark-to-market evaluation of domestic currency swaps.

The Group recorded expenses of €28.5 million during 2013 that were recorded under “Other expenses, net,” compared to “Other expenses, net” of €1.9 million reported in 2012. The €28.5 million under “Other expenses, net” mainly reflected the following factors:

•

€1.4 million of other provisions for contingent liabilities mainly related to claims and legal actions;

•

€8.5 million related to the impairment of long-lived assets;

•

€19.9 million accrual for one-time employee termination benefits;

•

€8.7 million as extraordinary gain on fixed asset disposal and related to the second supplementary agreement that was signed between the Company and the Shanghai Municipality, pursuant to which the Company obtained the reimbursement of taxes due on relocation compensation; and

•

€6.1 million as other expenses, net, of which €2.3 million consists of extraordinary contingent liabilities related to the partial write-off of certain government capital grants receivables and €1.7 million of extraordinary costs related to the restructuring of the Group.

Income Taxes. In 2013, the Group had an effective tax rate of 6.44% on its losses before taxes and non-controlling interests, compared to the Group’s effective tax rate of 19.08% reported in 2012.

For the Group’s Italian companies the effective tax rate (i.e., the obligation to accrue taxes despite reporting a loss before taxes) was, in part, due to the regional tax known as “IRAP” (Imposta Regionale sulle Attività Produttive; see Note 18 to the Consolidated Financial Statements included in Item 18 of this Annual Report). This regional tax is generally levied on the gross profits determined as the difference between gross revenue (excluding interest and dividend income) and direct production costs (excluding labor costs, interest expenses and other financial costs). As a consequence, even if an Italian company reports a pre-tax loss, it could still be subject to this regional tax. In 2013, some Italian companies within the Group reported losses but had to pay IRAP.

As in 2012, because most of the Italian and foreign subsidiaries realized significant pre-tax losses and were in a cumulative loss position, management did not consider it reasonably certain that the deferred tax assets of those companies would be realized in the scheduled reversal periods (see Note 18 to the Consolidated Financial Statements included in Item 18 of this Annual Report).

Net Loss. Reflecting the factors above, the Group reported a net loss of €68.6 million in 2013, as compared to a net loss of €26.1 million in 2012. On a per-Ordinary Share, or per-ADS basis, the Group had net losses of €1.25 in 2013, as compared to net losses of €0.48 in 2012.

As disclosed in Note 31 to the Consolidated Financial Statements included in Item 18 of this Annual Report, established accounting principles in Italy vary in certain significant respects from generally accepted accounting principles in the United States. Under U.S. GAAP, the Group would have had net losses of €62.0 million and €29.5 million in 2013 and 2012, respectively, compared to net losses of €68.6 million and €26.1 million in 2013 and 2012, respectively under Italian GAAP.

Liquidity and Capital Resources

In the ordinary course of business, our principal uses of funds are for the payment of operating expenses, working capital requirements, capital expenditures. The Group’s principal source of liquidity has historically been its existing cash and cash equivalents and cash flow from operations, supplemented to the extent needed to meet the Group’s short term cash requirements by accessing the Group’s existing lines of credit.

During 2014, the Group experienced some operating difficulties in the implementation of the Group Business Plan. The Business Plan foresees, in its main guidelines, product innovation initiatives, with the introduction of the “moving line” production system in Group plants and subsequent re-engineering of existing models, and a sharp decrease in fixed and production costs. See “Item 3. Key Information – Risk Factors – The Group has a recent history of losses; the Group’s future profitability, financial condition and ability to maintain adequate levels of liquidity depend to a large extent on its ability to overcome macroeconomic and operational challenges,” “Item 3. Key Information – Risk Factors – The Group’s ability to generate the significant amount of cash needed to service our debt obligations and comply with our other financial obligations and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on multiple factors, many of which may be beyond our control”.

The operating difficulties connected to the implementation of the “moving line” caused certain delays and inefficiencies, and, consequently, Group’s weak economic performance, with associated higher than usual absorption in operating cash flows. Furthermore, following the start of the reorganization of the Italian operations, the Company incurred significant financial disbursements connected to the incentive payments set forth by the agreements signed with the trade unions and relevant Italian Ministries in October 2013. This caused a short postponement in paying employee salaries for work performed in December 2014 and social contributions for November and December 2014.

In light of the above, during the second part of 2014 Natuzzi management prepared the 2015 budget, approved by the Board of Directors on December 19, 2014, that foresees a gradual reduction in the operating loss, as a consequence of the positive contribution from corrective measures to improve efficiency, which have already been implemented, but not completed by December 31, 2014. The 2015 budget also foresees a higher level of net indebtedness to be funded mainly by existing bank credit lines.

The Group’s management has been working on the update of the Business plan, to be formally presented to the Board of Directors in the following months, reflecting the gradual profitability recover and achievement of the economic and financial equilibrium in the medium term.

As of December 31, 2014, the Group had cash and cash equivalents on hand of €32.8 million, and unsecured lines of credit for cash disbursements totaling €46.9 million (€47.0 million as of December 31, 2013). The Group uses these lines of credit to manage its short-term liquidity needs. The unused portions of these lines of credit amounted to approximately €0.2 million (see Note 15 to the Consolidated Financial Statements included in Item 18 of this Annual Report) as of December 31, 2014. At December 31, 2014, we had €20.8 million in bank overdrafts outstanding. Amounts borrowed by the Group under these credit facilities are not subject to any restrictions on their use, but are repayable either on demand (for bank overdrafts) or on a short-term basis (for other bank borrowings under existing credit lines). In March 2015, €20.0 million of such bank overdrafts were renewed. Given their nature, these lines of credit may be terminated by the banks at any time. If these lines of credit are terminated on short notice, we would need to find alternative sources of liquidity or refinance these amounts on short notice, which could be difficult to do on favorable terms. See “Item 3 – Key Information – Risk Factors.” The Group’s borrowing needs generally are not subject to significant seasonal fluctuations.

Although we had €32.8 million in cash and cash equivalents on hand at December 31, 2014, €18.9 million of this amount are located in our Chinese subsidiaries, and could not be available in timely terms. To the extent management intends to move the cash from China by a dividend distribution, a withholding tax of 10% and the income taxes in Italy (equal to 27.5% of 5% of the dividends distributed) would have to be paid. Tax liabilities that would result from repatriation of cash from China have been recorded in the financial statements.

Management believes that the Group has sufficient sources of liquidity to fund working capital expenditures and other contractual obligations for the next 12 months. If necessary, certain changes to the Group’s plans to raise liquidity could be met in the near term through:

•

a trade receivables securitization agreement, which we expect to finalize for an expected amount of Euro 35 million;

•

additional long-term loans currently being negotiated;

•

extraordinary disposal of assets.

In light of the downturn of the global economy and the continuing uncertainty about these conditions in the foreseeable future, we are focused on effective cash management, controlling costs, and preserving cash in order to continue to make necessary capital expenditures.

Cash Flows—The Group’s cash and cash equivalents were €32.8 million as of December 31, 2014 as compared to €61.0 million as of December 31, 2013. The most significant changes in the Group’s cash flows between 2014 and 2013 are described below.

Net Cash used by operating activities was -€37.2 million in 2014 (of which -€13.5 million was related to the lay-off of 429 Italian workers), as compared to net cash used in operations of -€2.2 million in 2013.

As at December 31, 2014, we had an extraordinary increase in inventory levels of €11.2 million compared with December 31, 2013, due mostly to allow our facilities to speed up on production in order to meet agreed delivery times and not compromise our customer service. The result was the achievement of the maximum level of turnover in the last quarter of 2014. The inventory level is gradually slowing down. For the reasons reported above receivables increased by €20.5 million compared to December 31, 2013. These negative effects were offset by a positive contribution to operating cash flow derived from the more efficient management of payables and from the collection of other receivables, such as the utilization of the receivable from Italian National Institute for Social Security that was offset by €13.9 million during 2014 against the payment of taxes and social contributions.

Net cash by investment activities in 2014 was +€5.8 million compared to net cash used for -€8.2 million in 2013. In 2014 cash used for investment was €6.6 million (compared to €7.1 million in 2013) and cash provided by disposal was 6.8 million (due mainly to the sale of our aircraft) as compared to €0.2 million in 2013. Moreover, in 2014 we realized a cash-in of €5.2 million as capital grants connected with the project “Natuzzi 2000” for the investments made in the period 1993-2000 (Please see Item 4 –Incentive Programs and Tax benefits).

In 2014, capital expenditures were primarily made to make improvements at the Group’s existing facilities, in particular in China and in Brazil, in connection with the implementation of the moving line production process.

Cash used by financing activities in 2014 totaled -€2.5 million, as compared to -€5.2 million of cash used by financing activities in 2013; this change is mainly due to a decrease in short term borrowings offset by a new loan of €5.0 million received in 2014.

Management believes that the Group has sufficient sources of liquidity to fund working capital expenditures and other contractual obligations for the next 12 months. The Group’s principal source of liquidity is its existing cash and cash equivalents, supplemented to the extent needed to meet the Group’s short term cash requirements by accessing the Group’s existing lines of credit. The Group has the ability to renew the various lines of credit available; in fact, as indicated previously, in March 2015 €20.0 million of expiring bank overdrafts were renewed. Moreover, management highlights that the Group’s cash liquidity is sufficient for its normal course of business, even if a significant portion of the cash is in China and, in that management decides to move this cash from China by means of a dividend distribution, a withholding tax of 10% has to be paid, according to the Chinese law currently in force, in addition to income taxes in Italy (equal to 27.5% of 5% of the distributed dividends). Tax liabilities that would result from repatriation of cash from China have been recorded in the financial statements.

As of December 31, 2014, the Group’s long-term contractual cash obligations amounted to €105.7 million, of which €38.3 million comes due in 2015. See “Item 5. Operating and Financial Review and Prospects — Contractual Obligations and Commitments.” The Group’s long-term debt represented than 5.3% of shareholders’ equity as of December 31, 2014 (3.6% as of December 31, 2013) (see Note 20 to the Consolidated Financial Statements included in Item 18 of this Annual Report). As of December 31, 2014 and 2013 there were no covenants on the above long-term debt. The Group’s principal uses of funds are expected to be the payment of operating expenses, working capital requirements, capital expenditures and restructuring of operations. See “Item 4. Products” for further description of our research and development activities. See “Item 4. Incentive Programs and Tax Benefits” for further description of certain government programs and policies related to our operations. See “Item 4. Capital expenditure” for further description of our capital expenditures.

Contractual Obligations and Commitments

The Group’s current policy is to fund its cash needs, accessing its cash on hand and existing lines of credit, consisting of short-term credit facilities and bank overdrafts, to cover any short-term shortfall. The Group’s policy is to procure financing and access credit at the Company level, with the liquidity of Group companies managed through a cash-pooling zero-balancing arrangement with a centralized bank account at the Company level and sub-accounts for each subsidiary. Under this arrangement, cash is transferred to subsidiaries as needed on a daily basis to cover the

subsidiaries’ cash requirements, but any positive cash balance at subsidiaries must be transferred back to the top account at the end of each day, thus centralizing coordination of the Group’s overall liquidity and optimizing the interest earned on cash held by the Group.

As of December 31, 2014, the Group’s long-term debt consisted of €9.3 million (including €3.1 million of the current portion of such debt) outstanding under subsidized loans granted by the Italian government (see “Item 4. Incentive Programs and Tax Benefits”) and its short-term debt consisted of €20.7 million outstanding under its existing lines of credit, comprised entirely of bank overdrafts. This compares to €25.0 million of short-term debt as of December 31, 2013. In March 2015 €20.0 million of expiring bank overdrafts were renewed.

As of December 31, 2014, all of the Group’s long-term debt and short-term debt were denominated in euro. For the maturity profile of the Group’s long-term debt, please consult the table labeled “Contractual Obligations” below. Short-term overdrafts are payable on demand. Other bank borrowings under existing lines of credit have other short-term maturities. 53.7% of the group’s long-term debt bears interest at a 6-months Euribor (360) plus a 3.9% spread, 20.9% of the group’s long-term debt bears interest at 3-months Euribor (360) plus a 1.0% spread, with 22.1% of its long-term debt bearing interest at 0.74% per annum and 3.2% of its long-term debt bearing interest at 2.25% per annum. The Group’s short-term debt bears interest at floating rates, with a weighted average interest rate per annum of 4.50% on the Group’s overdraft borrowing as of December 31, 2014, compared to 3.89% as of December 31, 2013. The Group does not have outstanding any other debt instruments, except that it has into entered derivative instruments to reduce its exposure to the risk of short-term declines in the value of its foreign currency denominated revenues and not for speculative or trading purposes. For additional information on these derivative instruments, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Exchange Rate Risks.”

The Group maintains cash and cash equivalents in the currencies in which it conducts its operations, principally Chinese Yuan, U.S. dollars, euro, New Romanian Leu, British pounds and Canadian dollars.

The following table sets forth the material contractual obligations and commercial commitments of the Group (of the type required to be disclosed pursuant to Item 5F of Form 20-F) as of December 31, 2014:


	Payments Due by Period (thousands of euro)
Contractual Obligations	Total		Less than 1 year		2-3 years		4-5 years		After 5 years
Long-term debt		9,303		3,141		3,456		2,706		—
Bank overdrafts		20,708		20,708		—		—		—
Total Debt⁽¹⁾		30,011		23,849		3,456		2,706		—
Interest due on Total Debt ⁽²⁾		1,669		1,119		294		256		—
Operating Leases ⁽³⁾		74,015		13,329		25,893		26,222		8,571
Total Contractual Cash Obligations		105,695		38,297		29,643		29,184		8,571

⁽¹⁾	Please see Note 20 to the Consolidated Financial Statements included in Item 18 of this Annual Report for more information on the Group’s long-term debt. See Notes 15 and 20 of the Consolidated Financial Statements included in Item 18 of this Annual Report on Form 20-F.

⁽²⁾	Interest due on Total debt has been calculated using rates contractually agreed with lenders.

⁽³⁾	The leases relate to the leasing of manufacturing facilities and stores by several of the Group’s companies.

Under Italian law, the Company and its Italian subsidiaries are required to pay a termination indemnity to their employees when these cease their employment with the Company or the relevant subsidiary. Likewise, the Company and its Italian subsidiaries are required to pay an indemnity to their sales agents upon termination of the sales agent’s agreement. As of December 31, 2014, the Group had accrued an aggregate employee termination indemnity of €20.9 million. In addition, as of December 31, 2014, the Company had accrued an aggregate sales agent termination indemnity of €1.1 million and a one-time termination indemnity benefit of €11.2 million. The one-time termination benefit includes the amount to be paid on the separation date to certain workers to be terminated on an involuntary basis. See Notes 3(o) and 21 of the Consolidated Financial Statements included in Item 18 of this Annual Report. These amounts are not reflected in the table above. It is not possible to determine when the amounts that have been accrued will become payable.

In September 2011, the Company renewed its agreement with the trade unions and the Ministry of Labor and Social Policy that permitted it to participate in a temporary workforce reduction program and to benefit from the “Cassa Integrazione Guadagni Straordinaria,” or CIGS, for a period of 24 months beginning on October 16, 2011. Pursuant to the CIGS, government funds pay a substantial majority of the salaries of redundant workers who are subject to layoffs or reduced work schedules. For the 2011-2013 period, an average of 1,273 employees from the Group’s headquarters and production facilities were covered by the program, which contemplated a surplus of 1,060 employees at the end of the period on October 15, 2013.

On October 10, 2013, shortly before the expiration of the 2011 agreement, the Company entered into the 2013 Italian Reorganization Agreement with local institutions, Italian trade unions, the Ministries of Economic Development and of Labor and Social Policy and the regions of Puglia and Basilicata governing the reorganization plan for the Group’s Italian operations. The plan contemplated by the 2013 Italian Reorganization Agreement anticipated future layoffs of 1,506 employees (instead of the 1,060 contemplated by the agreement signed in 2011). Due to the complexity of the measures envisioned by the plan and in order to better manage workforce reductions, the Company and the trade unions obtained a one-year extension of the Company’s participation in the CIGS through October 15, 2014. The Company anticipated making incentive payments to induce the voluntary resignation of up to 600 employees at the conclusion of the period covered by the CIGS program. As a result, in 2013, the Company increased the one-time termination benefits reserve with an accrual of €19.9 million, which was recorded as a non-operating expense, under the line “Other Income/(Expense), Net”. During 2014, the Company granted incentive payments to 429 workers, for an amount of €13.5 million, further to the individual agreements reached during the year. Also, the Company obtained a further one-year extension of its participation in the CIGs program (expiring on October 16, 2015) for 1,550 workers. In the meantime, negotiations started with social parties to obtain a Solidarity agreement aimed to avoid layoffs by reducing the number of daily work hours for all employees, and reduce the labor and social contribution costs. The 2015 Italian Reorganization Agreement was finally signed on March 3, 2015 and refers to a total of 1,818 workers. Remaining redundant workers amount to 516. Based on the new estimate of the number of redundancies, no accrual was posted in 2014 to the one-termination benefit reserve, since the remaining provision has been deemed sufficient enough to cover the cost of future layoffs. Please See Notes 3(o) and 21 of the Consolidated Financial Statements included in Item 18 of this Annual Report.

The Group is also involved in a number of claims (including tax claims) and legal actions arising in the ordinary course of business. As of December 31, 2014, the Group had accrued provisions relating to these contingent liabilities in the amount of €7.0 million. See “Item 8. Financial Information—Legal and Governmental Proceedings” and Notes 21 and 28 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

Trend information

Prospects for the world economy still remain uncertain in the short and medium term, particularly owing to persistent difficulties in the Euro area (general weakness in the job market, ongoing vulnerability in the real-estate sector, a decreasing level of savings among families, high levels of public indebtedness in most developed countries, political instability in Greece, austerity measures designed to reduce public expenditures and consequent decreased consumer spending), the protraction of the slowdown in China, and the sharp economic downturn in Russia. Furthermore, a resurgence of the sovereign debt crisis in Europe could diminish the banking industry’s ability to lend to the real economy, thus setting in motion a negative spiral of declining production, higher unemployment and a weakening financial sector.

The drastic fall in oil prices, together with overall low interest rates in the Euro area (reflecting weak growth momentum and subdued inflation dynamics), may help to sustain growth in the medium term.

The order flow for the first 14 weeks of 2015 (week ended on April 3, 2015) was up 4.1% under current foreign exchange rates over the same comparable period last year, with different dynamics across the regions.

The Asia Pacific region reported double digit growth in terms of order flow, both for Private Label products and Natuzzi branded products (the latter also supported by retail penetration in China through the opening of new Natuzzi Editions stores).

The East Europe region was up 6.5% as compared to the first 14 weeks of 2014, notwithstanding the deterioration in relations between Russia and Ukraine and the depreciation of the Ruble against the Euro, which has rendered our made-in-Italy products less competitive in that region.

The domestic market, Italy, was down 4.0%, mainly due to the closure of one directly operated store in March of last year and the strategic decision to close four more Directly Operated Stores during the course of 2015.

Our Western Europe region showed a 3.8% increase in order flow compared to first 14 weeks of 2014, notwithstanding the persistent economic stagnation and fragile consumption still impacting certain mature European countries, and the Group’s strategic decision to rationalize its distribution network, which includes the closure of 12 Directly Operated Stores (from September 30, 2013 through the date of this Annual report), including the concession within the Harrods department store in London, United Kingdom.

Despite the appreciation of the U.S. dollar against the Euro, order flow in the first 14 weeks of 2015 in the North America region is substantially in line with order flow in the first 14 weeks of 2014, partly due to overstocking by most of our main customers in the North America region at the end of 2014 and to adverse weather conditions in the Northeast, which had a negative impact on consumer traffic and thus sales performance.

The order flow for the Middle East-Africa-India region is down 16.4% against the first 14 weeks of 2014 as a consequence of our customers’ inventory management policies. Typically, our regional dealers make large-scale orders on a periodic basis. As their inventories fall, they make follow-on orders to replenish stock. As has happened in the past, we expect order flow in the region to increase as soon as our dealers’ inventory levels need replenishment.

In terms of product labels, order flow of products sold under the Natuzzi name is even (+0.2%), whereas order flow of Private Label products are up by medium-single digit. The increase in private label order flow is due in part to the contribution of several new key accounts, such as DFS, Sofaworks and Furniture Village.

With respect to sales and revenues, which the Group recognizes once products are shipped, we have seen, double digit growth in turnover in the first 14 weeks of 2015 compared to the analogous period in 2014, largely as a result of production delays at the Chinese and Italian plants in the first part of 2014, causing a fall in production output. Please refer to last year 20F filed with SEC on April 2014 under “ITEM 5. Operating and Financial Review and Prospects, Trend Information” for a more detailed explanation.

As for raw materials, the inflationary pressure we experienced during the course of 2014 has started to decrease during the first three months of 2015. The Group should get some positive effects from this trend reversal in the following months.

Off-Balance Sheet Arrangements

As of December 31, 2014, neither Natuzzi S.p.A. nor any of its subsidiaries was a party to any off-balance sheet arrangements.

Related Party Transactions

Please see “Item 7. Major Shareholders and Related Party Transactions” of this Annual Report.

New Accounting Standards under Italian and U.S. GAAP

Process of Transition to International Accounting Standards — Following the entry into force of European Regulation No. 1606 of July 2002, EU companies whose securities are traded on regulated markets in the EU have been required, since 2005, to adopt International Financial Reporting Standards (“IFRS”), formerly known as IAS, in the preparation of their consolidated financial statements. Given that the Company’s securities are only traded on the NYSE, the Company is not subject to this requirement and continues to report its financial results in accordance with Italian GAAP and to provide the required reconciliation of certain items to U.S. GAAP in the Company’s Annual Reports on Form 20-F.

Italian GAAP — During 2014, the Italian Accounting Profession completed the review and update of the Italian accounting principles, started in 2010. The new set of accounting principles is effective for financial statements closed

as of December 31, 2014. The impact resulting from the adoption of the new standards, where applicable, have been disclosed in the notes to the consolidated financial statements. There are no additional recently issued accounting standards under Italian GAAP that have not been adopted by the Group.

U.S. GAAP — Recently issued but not yet adopted U.S. accounting pronouncements relevant for the Company are outlined below:

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” or ASU 2014-08. Under the new guidance, the Company would report a disposal, or planned disposal, of a component or group of components, as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. A strategic shift could include a disposal of a major geographical area, a major line of business, a major equity-method investment, or other major parts of the Company. A component may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group. In addition to expanding the existing disclosures for discontinued operations, the update requires new disclosures relating to (i) individually significant disposals that do not qualify for discontinued operations presentation, (ii) continuing involvement with a discontinued operation following the date of disposal and (iii) retained equity-method investments in a discontinued operation. ASU No. 2014-08 will be effective for us beginning January 1, 2015. This standard will not impact our results of operations or financial position until such time as we decide to undertake such a disposal, which is not currently anticipated.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from contracts with customers (Topic 606),” or ASU 2014-09. The update, which supersedes substantially all existing revenue recognition guidance, provides a single comprehensive model for recognizing revenues on the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Under the standard it is possible that more judgments and estimates would be required than under existing standards, including identifying the separate performance obligations in a contract, estimating any variable consideration elements, and allocating the transaction price to each separate performance obligation. The update also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update is effective for the Company for annual periods beginning January 1, 2017 and is to be applied either (i) retrospectively to each prior reporting period presented, with the option to elect certain defined practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the update recognized at the date of adoption in retained earnings (with additional disclosure as to the impact on individual financial statement lines affected). The Company is currently evaluating the impact if this update on the consolidated financial statements.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

The board of directors of Natuzzi S.p.A. currently consists of eight members, all of whom were elected at the Company’s annual general shareholders’ meeting held on April 28, 2014 and whose terms will expire on the date on which the shareholders’ meeting will approve the financial statements for fiscal year 2016. The directors and senior executive officers of the Company as of April 29, 2015, were as follows:


Name	Age	Position with the Company
Pasquale Natuzzi *	75	Chairman of the Board of Directors, Chief Executive Officer and ad interim Chief Operations Officer
Antonia Isabella Perrone *	45	Director
Giuseppe Antonio D’Angelo *	49	Outside Director
Dimitri Duffeleer*	45	Outside Director
Cristina Finocchi Mahne*	49	Outside Director
Ernesto Greco*	64	Outside Director
Vincenzo Perrone*	56	Outside Director
Stefania Saviolo*	50	Outside Director
Vittorio Notarpietro	52	Chief Financial Officer
Marco Saltalamacchia	53	Chief Commercial Officer
Antonio Cavallera	35	Chief HR, IT, Organization and Corporate Communications Officer
Ildebrando Aldrovandi	59	Corporate Quality & After Sales Director
Daniele Casone	33	Strategic Planning Manager
Claudia Lamarca	34	Internal Control Systems Manager

*	The above mentioned members of the board of directors were elected at the Company’s annual general shareholders’ meeting held on April 28, 2014.

Pasquale Natuzzi, currently Chairman of the Board of Directors, Chief Executive Officer and ad interim Chief Operations Officer. He founded the Company in 1959. Mr. Natuzzi held the title of sole director of the Company from its incorporation in 1972 until 1991, when he became the Chairman of the Board of Directors. Mr. Natuzzi has creative skills and is directly involved with brand development and product styling. He takes care of strategic partnerships with existing and new accounts.

Antonia Isabella Perrone is a Director and is involved in the main areas of Natuzzi Group management, from the definition of strategies to retail distribution, marketing and brand development, and foreign transactions. In 1998, she was appointed sole director of a company in the agricultural-food sector, wholly owned by the Natuzzi Family (as defined above). She became part of the Natuzzi Group in 1994, dealing with marketing and communication for the Italian market under the scope of retail development management until 1997. She has been married to Pasquale Natuzzi since 1997.

Giuseppe Antonio D’Angelo is an Outside Director of the Company and is currently Executive Vice President of Anglo-America & CIS regions with Ferrero International SA. Before joining Ferrero in 2009, he acquired significant international experience in general management of multinational companies such as General Mills (from 1997 to 2009), S.C. Johnson & Son (from 1991 to 1997) and Procter & Gamble (from 1989 to 1991). Mr. D’Angelo earned his Bachelor of Arts degree in Economics from LUISS University of Rome in 1988. He received certification from Harvard Business School in the Advanced Management Program in 2004.

Dimitri Duffeleer is an Outside Director of the Company and since June 2003 has been a Managing Director & Co-Founder of Quaeroq CVBA, an investment firm that focuses on small and mid-sized companies and that is a holder of 5.0% of the Company’s outstanding share capital. He founded the research company At Infinitum in 1998 and prior to that worked in engineering. He is currently a director and a member of the audit committee at RealDolmen NV, a director, president of the audit committee and member of the remuneration committee for Connect NV, a member of the supervisory board and the strategic committee at Generix Group and a director and a member of the audit and remuneration committee at Fountain SA.

Cristina Finocchi Mahne is an Outside Director of the Company and is currently Professor of Advanced Business Administration at the Faculty of Economics, La Sapienza University of Rome, and of Corporate Governance at Luiss Business School. She is a member of the board of directors and of the remuneration & nomination, related parties and control & risk committees of Trevi Group, a listed multinational foundation engineering company (since 2013) and a member of the board and of the risk and related parties committees of Banco di Desio e della Brianza Group, a listed banking group (since 2013). She previously served from 2010 to 2013 on the board of directors of Pms Group, a listed strategic communication and corporate governance advisory firm. She is Co-Chair of the Italian Chapter of WCD

(WomenCorporateDirectors), an international think tank, reserved to executive and independent board members, focused on best practices in corporate governance. She began her career in corporate finance at Euromobiliare, a merchant bank owned by HSBC and then gained additional experience in finance at Tamburi&Associati, JP Morgan, Hill & Knowlton and Fineco Group. She is the author of articles published in leading Italian economic newspapers and international publications. Prof. Finocchi Mahne earned her Degree in Economics and Business from La Sapienza University of Rome and her MBA from LUISS Business School.

Ernesto Greco is an Outside Director of the Company and since October 2007 has been the Chief Financial Officer and General Manager for Administration, Control and Information Systems of the Ferragamo Group. He started his professional career working in large chemical groups, including Montedison and Eni, as well as in high tech companies such as Hewlett Packard and Wang Laboratories in controllership and finance related positions. From 1989 to 2006 he served as Chief Financial Officer at the Bulgari Group and, from 2006 to 2007, he served as Chief Executive Officer of the Natuzzi Group.

Vincenzo Perrone is an Outside Director of the Company and is currently Professor of Organizational Theory and Behavior at Bocconi University—Milan, Italy, where he also previously served as Director of the Organizational and Human Resource Management Department of the Bocconi School of Management (1996—2002), Chairman of the Institute of Organization and Information Systems (2001—2007) and Vice-Rector for Research (2008—2012). He was a visiting professor at Carlson School of Management at the University of Minnesota from 1992 to 1994. He currently serves on the board of energy company Egea S.p.A. (since June 2009) and as a strategic advisor to the CEO of Fiera Milano S.p.A., a trade fair and exhibition organizer (since 2013). He has prior experience as a member of the board of directors of ClarisVita S.p.A. (2003-2005), ACTA S.p.A. (2004), IP Cleaning S.p.A. (2004—2008) and Società Autostrada Pedemontana Lombarda S.p.A. (2009—2011) and served on the advisory boards of Arthur Andersen MBA S.r.l. (1999—2000) and SAP Italia S.p.A. (2000—2001), as a member of the Technical and Scientific Oversight Board for procurement studies overseen by the Ministry of Economy and Finance – Treasury Department, on board committees responsible for awarding public tenders organized by Consip S.p.A. (2000—2003), on the Technical Committee for Research and Innovation of Confindustria (2004—2008) and on the Technical Commission for Public Finance at the Ministry of Economy and Finance (2007—2008). He has served as the Director of the Bocconi School of Management’s Economia & Management journal and has served as a reviewer for the Academy of Management Journal, Academy of Management Review, Organization Science (editorial board member) and Journal of International Business Studies. He has published several books and articles both in Italian and international journals.

Stefania Saviolo is an Outside Director of the Company. She is currently Professor of strategic management at Bocconi University and SDA Bocconi School of Management where since 2013 she has been the Director of the Luxury & Fashion Knowledge Center and founding director in 2001 for the Master in Fashion, Experience & Design Management. She was a visiting scholar at the Stern School of Business, New York University and also served as a visiting professor at Fudan University in Shanghai, China. She is a member of the board of directors and of the remuneration and control and risk committees of TXT e-solutions, a listed international software products and solutions vendor (since 2014). She has gained expertise in brand management, product marketing and internationalization strategies as a management consultant for international fashion and luxury companies. She is the author and co-author of several books and articles on management, particularly in the luxury, fashion and design industries.

Antonio Cavallera is the Chief HR, IT, Organization and Corporate Communications Officer. From September 2011 to November 2015, he served as Chief Strategic Planning Officer of the Company with principle responsibility for defining and monitoring the goals of the Transformation Plan project. He joined the Company in December 2005 and covered roles of increasing responsibility in the Human Resources & Organization Department. From November 2010 to August 2011 he was Corporate & Commercial Human Resources Manager and from June 2009 to November 2010 as Commercial Human Resources Manager. He has also served as Training & Change Management Manager from July 2008 to June 2009 and HR Retail Specialist from September 2006 to June 2009.

Vittorio Notarpietro is the Chief Financial Officer of the Company and the so-called “Italy Project Leader” (in which role he coordinates the initiatives aimed at promoting the re-industrialization of the upholstered furniture district in Puglia and Basilicata regions). He re-joined the Group in September 2009. From 1991 to 1998, he was the Finance Director and Investor Relations Manager for the Group. From 1999 to 2006, he was Vice President for Finance for IT Holding Group. From 2006 to 2009, he was the CEO of Malo S.p.A., a leading Italian company in the luxury sector.

Marco Saltalamacchia is the Chief Commercial Officer, a position he has served in since January 2014. He joined the Group after having worked in the automotive business: from 2006 to 2009 he was Senior Vice President for the Europe Region in BMW and from 2002 to 2006 he was Chairman and CEO of BMW Italia. Previously, he served in different roles in Sales and Marketing at Fiat and Renault. From 2009 to 2013, he was engaged in the creation and development of the G&MS Business & Investment Consulting Company, focused on the automotive industry.

Ildebrando Aldrovandi is the Corporate Quality & After Sales Director of the Group. He joined the Company on June, 2014. He has significant experience in the ‘corporate quality’ field, having worked in such well-known and competitive international companies as Zoppas, Tetra Pak, Lamborghini, Fagor Brandt, Avio, ARGO (ex Landini) and Alenia Aermacchi. In his experience, Mr. Aldrovandi has managed the Intellectual Property and Quality through the review and development of quality systems, both in Italian and foreign offices, particularly by introducing technical and organizational tools and facilitating the integration among Technical, Logistics, Administrative and Commercial Functions. In particular, he developed tools related to Service Excellence, Customer Satisfaction and Design Validation all according to the Lean-Kaizen philosophy. He also has a wealth of experience in Improvement tools (T.O.C, Lean Six Sigma, WCM, Kaizen) and has deployed low-cost solutions with quick profitability returns and integrated successfully IT-Operative Processes on SAP/Oracle Environments.

Claudia Lamarca is the Internal Control System Manager of the Group, having joined the Group in March of 2008 initially as Auditor. She joined the Group after gaining substantial experience in Fiat Group where she worked as auditor and SOX specialist for three years.

Daniele Casone is the Corporate Strategic Planning Manager of the Group. He has responsibility for coordinating and monitoring project implementation related to the Group Transformation Plan with a specific focus on costs and investments controlling. He joined the Company in December 2011 as Project Manager, and he performed various roles with different responsibilities within the Strategic Planning Department, while working closely with the CEO & Management team. Mr. Casone joined the Group after gaining substantial experience in two large consultancy companies as Project Manager where he was involved in many projects for Italian and international companies (Europe & US) in different industries: beverage, fashion and luxury, manufacturing, pharmaceuticals and energy. He gained considerable experience in the process of planning, control and reporting, in the design of the Industrial Plan and in defining a control model and KPI’s for our top management.

Compensation of Directors and Officers

As a matter of Italian law and under our by-laws, the compensation of executive directors, including the CEO, is determined by the board of directors, after consultation with the board of statutory auditors, within a maximum amount established by the Company’s shareholders, while the Company’s shareholders determine the base compensation for all board members, including non-executive directors. Compensation of the Company’s executive officers (for performing their role as such) is determined by the Chief Executive Officer. A list of significant differences between the Group’s corporate governance practices and those followed by U.S. companies listed on the New York Stock Exchange (“NYSE”) may be found at www.natuzzi.com. See “Item 16G. Corporate Governance on the Company—Strategy” for a description of these significant differences. None of our directors or senior executive officers is party to a contract with the Company that would entitle such persons to benefits upon the termination of service as a director or employment, as the case may be.

Aggregate compensation paid by the Group to the directors and officers was approximately €2.1 million in 2014: this figure includes only a portion of the gross annual salary for the Chief Operating Officer, Chief HR Officer and Chief Marketing Officer, whose contracts expired in July 2014, October 2014 and November 2014, respectively.

The compensation paid in 2014 to the members of the Board of Directors is set forth below individually:


Name	Base Compensation
Pasquale Natuzzi	€	80,000
Antonia Isabella Perrone	€	26,667
Giuseppe Antonio D’Angelo	€	26,667
Cristina Finocchi Mahne	€	17,458
Stefania Saviolo	€	16,667
Vincenzo Perrone	€	17,333
Ernesto Greco	€	16,667
Dimitri Duffeleer	€	16,667

Mr. Giuseppe Marino, who was a member of the Board, resigned from his role as director for professional reasons. Following the 2015 Annual Ordinary Shareholders’ Meeting of the Company held on April 29, 2015, Mr. Marino was not replaced.

During 2014, and due to the persistent negative performance of the Group, the Company decided to continue the suspension of any incentive plans for executive managers and clerks within Company headquarters, with the exception of sales staff and sales managers. Incentive plans for those employees within industrial plants (blue- and white-collar workers) have not changed.

For 2015, an incentive system has been reserved only for the Group’s commercial workforce (involving 62 employees), and is based on the achievement of an order flow-based target.

Statutory Auditors

The following table sets forth the names of the three members of the board of statutory auditors of the Company and the two alternate statutory auditors and their respective positions for the periods covered by this Annual Report. The current board of statutory auditors was elected for a three-year term on April 29, 2013, at the annual general shareholders’ meeting.


Name		Position
Carlo Gatto		Chairman
Cataldo Sferra		Member
Giuseppe Pio Macario		Member
Francesco Venturelli		Alternate
Costante Leone		Alternate

During 2014, the statutory auditors of the Group received approximately €0.1 million in compensation in the aggregate for their services to the Company and its Italian subsidiaries.

According to Rule 10A-3 of the Securities Exchange Act of 1934, unless an exemption applies, companies whose securities are listed on U.S. national securities exchanges must establish an audit committee meeting specific requirements. In particular, all members of this committee must be independent and the committee must adopt a written charter. The committee’s prescribed responsibilities include (i) the appointment, compensation, retention and oversight of the external auditors; (ii) establishing procedures for the handling of “whistle blower” complaints; (iii) discussion of financial reporting and internal control issues and critical accounting policies (including through executive sessions with the external auditors); (iv) the approval of audit and non-audit services performed by the external auditors; and (v) the adoption of an annual performance evaluation. A company must also have an internal audit function, which may be out-sourced, as long as it is not out-sourced to the external auditor.

The Company relies on an exemption from these audit committee requirements provided by Exchange Act Rule 10A-3(c)(3) for foreign private issuers with a board of statutory auditors established in accordance with local law or listing requirements and subject to independence requirements under local law or listing requirements. See “Item 16D. Exemption from Listing Standards for Audit Committees” for more information.

External Auditors

On April 29, 2013, at the annual general shareholders’ meeting, Reconta Ernst & Young S.p.A., with offices in Bari, Italy, was appointed as the Company’s external auditor for the three-year period ending with the approval of 2015 financial statements.

Employees

The following tables set forth a breakdown of the Group’s employees by qualification and location for the periods indicated:


Qualification	As of December 31,						Change 2014/2013			Change 2013/2012
Qualification	2014		2013		2012		Change 2014/2013			Change 2013/2012
Top managers		65		66		66		(1	)		0
Middle managers		175		166		170		9			(4	)
Clerks		990		1,210		1,211		(217	)		(1	)
Laborers		4,788		4,935		5,295		(147	)		(360	)

Total		6,018		6,377		6,742		(356	)		(365	)


Location	As of December 31,						Change 2014/2013			Change 2013/2012
Location	2014		2013		2012		Change 2014/2013			Change 2013/2012
Italy		2,655		3,134		3,177		(479	)		(43	)
Outside Italy		3,363		3,243		3,565		123			(322	)

Total		6,018		6,377		6,742		(356	)		(365	)

We believe in the importance of Corporate Social Responsibility and have generally enjoyed good relations with our employees. A significant number of our Italian and Chinese employees are members of trade unions, while our workers in Romania and Brazil are not members of trade unions.

Notwithstanding these generally good relations, in 2013 and during the first few weeks of 2014, we have experienced certain difficulties with our Italian laborers in connection with our reorganization efforts, as further discussed below. While our reorganization plans were under discussion, we experienced four days of strikes in June 2013 at our plant in Laterza (which produces upholstery), which had a negative impact on our other Italian operations due to lack of materials. When the reorganization plan and future layoffs were announced on July 1, 2013, we experienced another two days of general strikes in all of our Italian operations beginning the following day, and from July through September our laborers engaged in a slowdown campaign, resulting in lower levels of productivity. In February 2014, we closed our Italian plants for two days while we announced the names of those employees that would be subject to termination at the conclusion of the CIGS program. Our laborers protested these announced layoffs by blocking any goods from entering or leaving our Italian plants for another three days, effectively stopping production during that time period.

Italian law provides that, upon termination of employment for whatever reason, employees located in Italy are entitled to receive certain severance payments based on the length of employment. As of December 31, 2014, the Company had €20.9 million reserved for such termination indemnities, with such reserves being equal to the amounts, calculated on a percentage basis, required by Italian law.

On October 10, 2013, the Company entered into a the 2013 Italian Reorganization Agreement with local institutions, Italian trade unions, the Ministries of Economic Development and of Labor and Social Policy and the regions of Puglia and Basilicata governing the reorganization plan for the Group’s Italian operations. The 2013 Italian

Reorganization Agreement enshrined the main goals included in the Italian reorganization plan announced in July 2013, and represented the starting point for a shared roadmap towards the recovery of the Group’s competitiveness in Italy, based on a significant reduction in production costs and increases in productivity, investments and changes to the Company’s workforce. See “Item 10—Material Contracts.”

The 2013 Italian Reorganization Agreement initially entailed the closure of two of the Company’s manufacturing plants in Italy (although ultimately only one plant was closed). It also called for increasing the efficiency of the production cycle, reviewing the Company’s procurement and delivery processes to streamline logistics, continuing to automate leather-cutting operations, expanding moving production lines and implementing other rationalization initiatives. In terms of the Company’s workforce, the 2013 Italian Reorganization Agreement envisaged that 1,506 redundant employees would be subject to future layoffs.

Due to the complexity of the measures envisioned by the plan and in order to better manage workforce reductions, the Company and the trade unions obtained a one-year extension of the Company’s participation in the CIGS, which expired in October 2014. Under the CIGS program, government funds cover the substantial majority of the salaries of redundant workers.

During the period covered by the CIGS program, that expired in October 2014, Natuzzi, the trade unions and other parties to the agreement have agreed on several initiatives to help manage the redundant workers and to promote the re-industrialisation of the upholstered furniture district in Puglia and Basilicata, including initiatives that would, under certain conditions, move some production back to Italy from the Group’s Romanian plant, with employment and production to be undertaken by third parties. None of these initiatives reached the expected goal. In addition, the Company anticipated making incentive payments to induce the voluntary resignation of up to 600 employees at the conclusion of the period covered by the CIGS program. In 2014, of these 600 employees, a total of 429 employees accepted these resignation incentives and agreed to leave the Company, effective October 2014.

On March 3, 2015 the Company, the relevant trade union organizations and local institutions signed the 2015 Italian Reorganization Agreement that follows and develops the 2013 Italian Reorganization Agreement, which had paved the way for the restructuring of the Group’s Italian operations according to the guidelines included in the Group’s Transformation Plan.

The Italian Reorganization Agreements are a fundamental tool for the industrial re-launch of Natuzzi’s Italian plants (both from a qualitative and productive standpoint), representing the final step in the production efficiency and work-related cost reduction processes that have been tested over the past few months in the Group’s test laboratory. As a matter of fact, the Company will be able to better allocate workers according to efficiency criteria: workers on rotation will not be staffed at our plants (as opposed to the first part of 2014, when the staffing of workers on rotation at our plants led to a decrease in the level of productivity). These processes have highlighted an encouraging improvement in the main productivity indices.

The Group’s new industrial structure in Italy, based on Lean-enterprise product and industrial process innovations, provides for plant specialization according to product type and for the completion of the entire sofa production cycle within each single plant.

The entire line of Natuzzi Italia products will be assembled within two Italian plants, Matera-Jesce and Laterza. In particular, the Matera-Jesce plant will also be responsible for the manufacturing of the Re-vive armchairs, becoming the center of excellence and innovation for the Group’s production. The Santeramo-Jesce manufacturing plant will be dedicated to the production of the Divani & Divani by Natuzzi product line.

The new business structure will allow the Group to reduce the number of redundant employees subject to future lay-offs, decreasing from 1,506 (previously envisaged in the 2013 Italian Reorganization Agreement) to 516. As a result, the number of employees in Italy will be equal to 1,818 (as opposed to the current number of 2,334 employees excluding managers). The 2015 Reorganization Agreement provides that the Solidarity Agreement will be applicable to these 1,818 employees (both blue and white collars) for a 24-month period, starting from May 2, 2015. These 1,818 employees will work on a reduced-shift basis (for about five hours on average per day, as opposed to the current eight hour shift per day), consistent with the expected order flow that the Company foresees for its Italian productions.

The remaining 516 employees will be covered by the Italian temporary lay-off program named “Cassa Integrazione Guadagni” (under this program, government funds cover the substantial majority of the salaries of redundant workers). The 2015 Italian Reorganization Agreement provides for a possible and gradual reabsorption of up to 200 employees in the context of the territorial development initiatives contemplated in the 2013 Italian Reorganization Agreement (which have, in part, already been initiated). As to the remaining 316 employees, the Company anticipates making incentive payments to induce their voluntary resignation. Voluntary resignation formalities are to be agreed upon with the relevant trade union organizations in the following months.

Notwithstanding the global economic downturn and its own difficult financial situation, the Company has decided to focus on the improvement of its human capital to increase productivity and competitiveness.

In light of this, several initiatives have been undertaken by the Human Resources & Organization department in order for the Group to recover its competitiveness, improve its customer service and enhance product quality. The Group’s Human Resources Department and our board of directors have several initiatives under review that we anticipate may be adopted during 2015 to encourage employee performance.

In addition, the implementation phase of the SAP Human Capital Management system was completed throughout the Group in early April 2014. This system is expected to improve the efficiency and effectiveness of our human resources management by allowing for central management of the Group’s resources, the timely monitoring of performance and costs, a better and updated flow of communication and improved integration of the Group’s processes. This system contains and tracks personnel data, training plans, career paths, fields of expertise currently required (and expected to be required in the future), hiring plans, and other useful information. This human resources management system also allows for tracking of organizational data, performance, travel, reporting and budgeting.

In 2014, 52 training courses were designed and delivered, involving 580 persons (employees, workers, managers and executives), for a total amount of €175,000.00.

Notwithstanding the difficult economic scenario in which the Group has been operating for the last few years, yet in 2014 the Company continued its training plan, as did in the prior three years, aimed at:

• improving the ability to realize a real and sustainable change over time, making the traditional organizational approach more consistent with the new concept of lean-oriented industrial production. 600 people (including workers and supervisors of Italian plants) participated in such training courses;

• Increasing the capacity to properly use financial information, both in planning and goal setting, and in assessing performance to improve the ability to assess the expected impact from management decisions on financial results of the relevant department and in the Company in general. Approximately 40 employees and managers in the Headquarters participated in such training program;

• improving the management of the Products/Services Portfolio, as a basis to optimize profits and the Company’s competitive position, through a greater ability in the utilization of methods and tools to identify the most promising market segments and to indicate how and where to intervene to increase the ‘efficiency and overall effectiveness of the offer on the markets. 40 employees and managers in the Headquarters participated in such training program;

• developing the ability to better understand the complex world of retail by anticipating trends, needs, and expectations of the consumer and developing management policies for competitive differentiation. 40 employees and managers in the Headquarters participated in such training program;

• improving the ability to apply the methodological and operational tools of project management, needed to plan and control activities, time, cost, people and risk factors related to corporate projects, and to manage effectively and efficiently complex processes of innovation and change. 15 employees and managers in the corporate department participated in such training program;

The type of training provided (broken down by type) is set forth below (percentage according to the number of trainings carried out):


TRAINING TYPE	%
Commercial		20	%
Company profile		1	%
Information technology		5	%
Linguistic		10	%
Managerial		25	%
Corporate regulations		4	%
Job-specific activities		35	%

TOTAL		100	%

As for trainings that arise from legal obligations, the Company focused on developing and completing the project for the safety of workers in the workplace in accordance with the provisions of the Agreement between the Italian government and Regions dated December 21, 2011, regulating the art.37 of Legislative Decree No. 81 April 9, 2008, as amended. These trainings were launched at the end of 2012 initially with groups of employees within the Headquarters and, subsequently, workers within production plants. These initiatives were added to other training activities of a commercial, IT, and language nature, as well as specialized training cycles required by law such as those in the field of health & safety.

Share Ownership

As a result, Mr. Natuzzi controls Natuzzi S.p.A., including its management and the selection of the members of its board of directors. Since December 16, 2003, Mr. Natuzzi has held his entire beneficial ownership of Natuzzi S.p.A. shares through INVEST 2003 S.r.l., an Italian holding company wholly-owned by Mr. Natuzzi and having its registered office at Via Gobetti 8, Taranto, Italy.

On November 6, 2014, INVEST 2003 s.r.l. completed the purchase of 250,000 ADSs, each representing one Ordinary Share, at a price of U.S.$2.00 per ADS. The purchase was privately negotiated with a single individual and was effected through an escrow arrangement with BNY Mellon, National Association.

On July 30, 2014, INVEST 2003 s.r.l. completed the purchase of 500,000 ADSs, each representing one Ordinary Share, at a price of U.S.$2.75 per ADS. The purchase was privately negotiated with a single individual and was effected through an escrow arrangement with BNY Mellon, National Association. For more information, refer to Schedule 13D (Amendment No. 2), filed with the SEC on September 14, 2014, that amends and supplements the Schedule 13D, filed with the SEC on April 24, 2008 (as amended by Amendment No. 1 filed on April 8, 2013 (“Amendment No. 1”).

These two purchases, carried out for investment purposes, brought the number of Ordinary Shares beneficially owned by each of Mr. Natuzzi and INVEST 2003 to 30,967,521 (representing 56.5% of the Ordinary Shares outstanding).

Between September 27, 2011 through April 30, 2013, INVEST 2003 S.r.l. completed the purchase of a total of 859,628 Natuzzi S.p.A. ADSs (representing approximately 1.6% of the Company’s total shares outstanding), at an average price of U.S.$ 2.37 per ADS. These purchases were made in accordance with a purchase plan undertaken pursuant to Rule 10b-18 (“Purchases of Certain Equity Securities by the Issuer and Others”) promulgated under the Securities Exchange Act of 1934 (the “Rule 10b-18 Plan”).

On April 18, 2008, INVEST 2003 S.r.l. purchased 3,293,183 ADSs, each representing one Ordinary Share, at the price of U.S.$ 3.61 per ADS. For more information, refer to Schedule 13D, filed with the SEC on April 24, 2008, and related Amendment No. 1 to Schedule 13D, filed with the SEC on April 8, 2013. For further discussion, see Note 22 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

Each of the Company’s other directors and officers owns less than 1% of the Company’s Ordinary Shares and ADSs. None of the Company’s directors or officers has stock options.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

Mr. Pasquale Natuzzi, who founded the Company and is currently its Chief Executive Officer and Chairman of the Board of Directors, as of April 24, 2015, beneficially owns 30,967,521, representing 56.5% of the Ordinary Shares outstanding (61.6% of the Ordinary Shares outstanding if the 5.1% of the Ordinary Shares owned by the Natuzzi Family are aggregated). Since December 16, 2003, Mr. Natuzzi has held his entire beneficial ownership of Natuzzi S.p.A. shares through INVEST 2003 S.r.l., an Italian holding company wholly-owned by Mr. Natuzzi and having its registered office at Via Gobetti 8, Taranto, Italy.

The following table sets forth information, as reflected in the records of the Company as of April 24, 2015, with respect to each person who beneficially owns 5% or more of the Company’s Ordinary Shares or ADSs:


	Number of Shares Owned		Percent Owned
Pasquale Natuzzi ⁽¹⁾		30,967,521		56.5	%
Credit Suisse ⁽²⁾		3,200,033		5.8	%
Donald Smith & Co., Inc.⁽³⁾		3,039,834		5.5	%
Quaeroq CVBA⁽⁴⁾		2,760,400		5.0	%

⁽¹⁾

Includes ADSs purchased on April 18, 2008, purchases made from September 27, 2011 through April 30, 2013 under the Rule 10b-18 Plan and two privately negotiated purchases executed on July 30, 2014 and November 6, 2014. If Mr. Natuzzi’s Ordinary Shares are aggregated with those held by members of the Natuzzi Family, the amount owned would be 33,767,521 and the percentage ownership of Ordinary Shares would be 61.6%.

⁽²⁾	According to Schedule 13G (Amendment No. 2) filed with the SEC by Credit Suisse on February 11, 2015.

⁽³⁾	According to the Schedule 13G filed with the SEC by Donald Smith & Co., Inc. on February 2, 2015.

⁽⁴⁾	According to the Schedule 13G filed with the SEC by Quaeroq CVBA on November 18, 2008.

As indicated in “Item 6. — Share Ownership,” Mr. Natuzzi controls Natuzzi S.p.A., including its management and the selection of the members of its board of directors. Since December 16, 2003, Mr. Natuzzi has held his entire beneficial ownership of Natuzzi S.p.A. shares through INVEST 2003 S.r.l., an Italian holding company wholly-owned by Mr. Natuzzi and having its registered office at Via Gobetti 8, Taranto, Italy.

In addition, the Natuzzi Family has a right of first refusal to purchase all the rights, warrants or other instruments which The Bank of New York Mellon, as depositary under the Deposit Agreement, determines may not lawfully or feasibly be made available to owners of ADSs in connection with each rights offering, if any, made to holders of Ordinary Shares. None of the shares held by the above shareholders has any special voting rights.

As of April 24, 2015, 54,853,045 Ordinary Shares were outstanding. As of the same date, there were 21,807,268 ADSs (equivalent to 21,807,268 Ordinary Shares) outstanding. The ADSs represented 39.8% of the total number of Natuzzi Ordinary Shares issued and outstanding.

Since certain Ordinary Shares and ADSs are held by brokers or other nominees, the number of direct record holders in the United States may not be fully indicative of the number of direct beneficial owners in the United States or of where the direct beneficial owners of such shares are resident.

Related Party Transactions

Transactions with related parties amounted to €6.8 million in 2014 sales and €6.4 million as at December 31, 2013 in trade receivables and were conducted at arm’s length.

During 2014, in consideration of the implementation of the efficiency actions set forth in the Business Plan, the Company outsourced the security and doorkeeping services, selling them to a former related party for an amount of 1.3 million. The price has been determined on the basis of the annual costs incurred by the Company for the same activities. The operation generated a profit of 1.5 million. Meantime, an eight-year renewable contract was signed with the same related party for the supply of security and doorkeeping services. The Company ascertained the economic convenience of the contract through a third-party appraisal.

Other than the foregoing transactions, neither the Company nor any of its subsidiaries was a party to a transaction with a related party that was material to the Company or the related party, or any transaction that was unusual in its nature or conditions, involving goods, services, or tangible or intangible assets, nor is any such transaction presently proposed. During the same period, neither the Company nor any of its subsidiaries made any loans to or for the benefit of any related party. For purposes of the foregoing, “related party” has the meaning ascribed to it in Item 7.B of Form 20-F.

ITEM 8. FINANCIAL INFORMATION

Consolidated Financial Statements

Please refer to “Item 18. Financial Statements” of this Annual Report.

Export Sales

Export sales from Italy totaled approximately €98.9 million in 2014, down 5% from 2013. That figure represents 25.0% of the Group’s 2014 net leather and fabric-upholstered furniture sales.

Legal and Governmental Proceedings

The Group is involved in tax and legal proceedings, including several minor claims and legal actions, arising in the ordinary course of business with suppliers and employees. The provision recorded against these claims is €7.0 million as of December 31, 2014 (€7.3 million as of December 31, 2013).

No accruals were made in 2014 since no new contingent liabilities have emerged in this respect.

Apart from the proceedings described above, neither the Company nor any of its subsidiaries is a party to any legal or governmental proceeding that is pending or, to the Company’s knowledge, threatened or contemplated against the Company or any such subsidiary that, if determined adversely to the Company or any such subsidiary, would have a materially adverse effect, either individually or in the aggregate, on the business, financial condition or results of the Group’s operations.

Dividends

Considering that the Group reported a negative net result in 2014 and considering the capital requirements necessary to implement the restructuring of the operations and its planned retail and marketing activities, the Group decided not to distribute dividends in respect of the year ended on December 31, 2014. The Group has also not paid dividends in any of the prior three fiscal years.

The payment of future dividends will depend upon the Company’s earnings and financial condition, capital requirements, governmental regulations and policies and other factors. Accordingly, there can be no assurance that dividends in future years will be paid at a rate similar to dividends paid in past years or at all.

Dividends paid to owners of ADSs or Ordinary Shares who are United States residents qualifying under the Income Tax Convention will generally be subject to Italian withholding tax at a maximum rate of 15%, provided that certain certifications are given timely. Such withholding tax will be treated as a foreign income tax which U.S. owners may elect to deduct in computing their taxable income, or, subject to the limitations on foreign tax credits generally, credit against their United States federal income tax liability. See “Item 10. Additional Information—Taxation—Taxation of Dividends.”

ITEM 9. THE OFFER AND LISTING

Trading Markets and Share Prices

Natuzzi’s Ordinary Shares are listed on the NYSE in the form of ADSs under the symbol “NTZ.” Neither the Company’s Ordinary Shares nor its ADSs are listed on a securities exchange outside the United States. The Bank of New York Mellon is the Company’s Depositary for purposes of issuing the American Depositary Receipts evidencing ADSs.

Trading in the ADSs on the NYSE commenced on May 13, 1993. The following table sets forth, for the periods indicated, the high and low market prices on an intraday basis per ADS as reported by the NYSE.


	New York Stock Exchange
	Price per ADS (in US dollars)
	High	Low
2010	5.95	2.64
2011	4.83	2.00
2012	3.82	1.77
2013	2.60	1.70
2014	3.22	1.33

	High	Low
2013
First quarter	2.40	1.87
Second quarter	2.35	1.92
Third quarter	2.40	1.70
Fourth quarter	2.60	1.70

	High	Low
2014
First quarter	3.19	2.35
Second quarter	3.22	2.40
Third quarter	2.60	2.55
Fourth quarter	2.06	2.00

	High	Low
2015
First quarter	1.85	1.76

	High	Low
Monthly data
October 2014	2.06	1.66
November 2014	1.97	1.78
December 2014	1.88	1.33
January 2015	1.80	1.35
February 2015	1.85	1.53
March 2015	1.75	1.52
April 2015 (through April 24)	1.83	1.59

ITEM 10. ADDITIONAL INFORMATION

By-laws

The following is a summary of certain information concerning the Company’s shares and By-laws (statuto) and of Italian law applicable to Italian stock corporations whose shares are not listed on a regulated market in the European Union, as in effect at the date of this Annual Report. In particular, Italian issuers of shares that are not listed on a regulated market of the European Community are governed by the rules of the Italian civil code (the “Civil Code”). The summary contains all the information that the Company considers to be material regarding the shares, but does not purport to be complete and is qualified in its entirety by reference to the By-laws or Italian law, as the case may be.

General — The issued share capital of the Company consists of 54,853,045 Ordinary Shares, with a par value of €1.00 per share. All the issued shares are fully paid, non-assessable and in registered form.

The Company is registered with the Companies’ Registry of Bari at No. 261878, with its registered office in Santeramo in Colle (Bari), Italy.

As set forth in Article 3 of the By-laws, the Company’s corporate purpose is the production, marketing and sale of sofas, armchairs, furniture in general and raw materials used for their production. The Company is generally authorized to take any actions necessary or useful to achieve its corporate purpose.

Authorization of Shares — At the extraordinary meeting of the Company’s shareholders on July 23, 2004, shareholders authorized the Company’s board of directors to carry out a free capital increase of up to €500,000, and a capital increase against payment of up to €3.0 million to be issued, in connection with the grant of stock options to employees of the Company and of other Group companies. On January 24, 2006 the Company’s board of directors, in accordance with the Regulations of the “Natuzzi Stock Incentive Plan 2004-2009” (which was approved by the board of directors in a meeting held on July 23, 2004), decided to issue without consideration 56,910 new Ordinary Shares in favor of the beneficiary employees. Consequently, the number of Ordinary Shares increased on the same date from 54,681,628 to 54,738,538. On January 23, 2007, the Company’s board of directors, in accordance with the Regulations of the “Natuzzi Stock Incentive Plan 2004-2009,” decided to issue without consideration 85,689 new Ordinary Shares in favor of beneficiary employees. Consequently, the number of Ordinary Shares increased on the same date from 54,738,538 to 54,824,227. On January 24, 2008 the Company’s board of directors, in accordance with the Regulations of the “Natuzzi Stock Incentive Plan 2004-2009,” decided to issue without consideration 28,818 new Ordinary Shares in favor of the beneficiary employees. Consequently, the number of Ordinary Shares increased on the same date from 54,824,227 to 54,853,045, the current number.

Form and Transfer of Shares — The Company’s Ordinary Shares are in certificated form and are freely transferable by endorsement of the share certificate by or on behalf of the registered holder, with such endorsement either authenticated by a notary in Italy or elsewhere or by a broker-dealer or a bank in Italy. The transferee must request that the Company enter his name in the register of shareholders in order to exercise his rights as a shareholder of the Company.

Dividend Rights — Payment by the Company of any annual dividend is proposed by the board of directors and is subject to the approval of the shareholders at the annual shareholders’ meeting. Before dividends may be paid out of the Company’s unconsolidated net income in any year, an amount at least equal to 5% of such net income must be allocated to the Company’s legal reserve until such reserve is at least equal to one-fifth of the par value of the Company’s issued share capital. If the Company’s capital is reduced as a result of accumulated losses, dividends may not be paid until the capital is reconstituted or reduced by the amount of such losses. The Company may pay dividends out of available retained earnings from prior years, provided that, after such payment, the Company will have a legal reserve at least equal to the legally required minimum. No interim dividends may be approved or paid.

Dividends will be paid in the manner and on the date specified in the shareholders’ resolution approving their payment (usually within 30 days of the annual general meeting). Dividends that are not collected within five years of the date on which they become payable are forfeited to the benefit of the Company. Holders of ADSs will be entitled to receive payments in respect of dividends on the underlying shares through The Bank of New York Mellon, as ADR depositary, in accordance with the deposit agreement relating to the ADRs.

Voting Rights — Registered holders of the Company’s Ordinary Shares are entitled to one vote per Ordinary Share.

As a registered shareholder, the Depositary (or its nominee) will be entitled to vote the Ordinary Shares underlying the ADSs. The Deposit Agreement requires the Depositary (or its nominee) to accept voting instructions from holders of ADSs and to execute such instructions to the extent permitted by law. Neither Italian law nor the Company’s By-laws limit the right of non-resident or foreign owners to hold or vote shares of the Company.

Board of directors — Under Italian law and pursuant to the Company’s By-laws, the Company may be run by a sole director or by a board of directors, consisting of seven to eleven individuals. The Company is currently run by a board of directors composed of eight individuals (see “Item 6. Directors, Senior Management and Employees”). The board of directors is elected by the Assembly of Shareholders at a shareholders’ meeting, for the period established at the time of election but in no case for longer than three fiscal years. A director, who may, but is not required to be a shareholder of the Company, may be reappointed for successive terms. The board of directors has the full power of ordinary and extraordinary management of the Company and in particular may perform all acts it deems advisable for the achievement of the Company’s corporate purposes, except for the actions reserved by applicable law or the By-laws to a vote of the shareholders at an ordinary or extraordinary shareholders’ meeting. See also “Item 10. Additional Information—Meetings of Shareholders.”

The board of directors must appoint a chairman (presidente) and may appoint a vice-chairman. The chairman of the board of directors is the legal representative of the Company. The board of directors may delegate certain powers to one or more managing directors (amministratori delegati), determine the nature and scope of the delegated powers of each director and revoke such delegation at any time. The managing directors must report to the board of directors and board of statutory auditors at least every 180 days on the Company’s business and the main transactions carried out by the Company or by its subsidiaries.

The board of directors may not delegate certain responsibilities, including the preparation and approval of the draft financial statements, the approval of merger and de-merger plans to be presented to shareholders’ meetings, increases in the amount of the Company’s share capital or the issuance of convertible debentures (if any such power has been delegated to the board of directors by vote of the extraordinary shareholders’ meeting) and the fulfillment of the formalities required when the Company’s capital has to be reduced as a result of accumulated losses that reduce the Company’s stated capital by more than one-third. See also “Item 10. Additional Information—Meetings of Shareholders”.

The board of directors may also appoint a general manager (direttore generale), who reports directly to the board of directors and confer powers for single acts or categories of acts to employees of the Company or persons unaffiliated with the Company.

Meetings of the board of directors are called no less than five days in advance by letter sent via fax, telegram or e-mail by the chairman on his own initiative. Meetings may be held in person, or by video-conference or tele-conference, in the location indicated in the notice convening the meeting, or in any other destination, each time that the chairman may consider necessary. The quorum for meetings of the board of directors is a majority of the directors in office. Resolutions are adopted by the vote of a majority of the directors present at the meeting. In case of a tie, the chairman has the deciding vote.

Directors having any interest in a proposed transaction must disclose their interest to the board and to the statutory auditors, even if such interest is not in conflict with the interest of the Company in the same transaction. The interested director is not required to abstain from voting on the resolution approving the transaction, but the resolution must state explicitly the reasons for, and the benefit to the Company of, the approved transaction. In the event that these provisions are not complied with, or that the transaction would not have been approved without the vote of the interested director, the resolution may be challenged by a director or by the board of statutory auditors if the approved transaction may be prejudicial to the Company. A managing director must solicit prior board approval of any proposed transaction in which he has any interest and that is within the scope of his powers. The interested director may be held liable for damages to the Company resulting from a resolution adopted in breach of the above rules. Finally, directors may be held liable for damages to the Company if they illicitly profit from insider information or corporate opportunities.

The board of directors may transfer the Company’s registered office within Italy, set up and eliminate secondary offices and approve mergers by absorption into the Company of any subsidiary in which the Company holds at least 90% of the issued share capital. The board of directors may also approve the issuance of shares or convertible debentures and reductions of the Company’s share capital in case of withdrawal of a shareholder if so authorized by the Company’s by-laws.

Under Italian law and pursuant to the Company’s By-laws, directors may be removed from office at any time by the vote of shareholders at an ordinary shareholders’ meeting. However, if removed in circumstances where there was no just cause, such directors may have a claim for damages against the Company. Directors may resign at any time by written notice to the board of directors and to the chairman of the board of statutory auditors. The board of directors must appoint substitute directors to fill vacancies arising from removals or resignations, subject to the approval of the board of statutory auditors, to serve until the next ordinary shareholders’ meeting. If at any time more than half of the members of the board of directors appointed by the Assembly of Shareholders resign, such resignation is ineffective until the majority of the new board of directors has been appointed. In such a case, 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 the new directors.

The compensation of executive directors, including the CEO, is determined by the board of directors, after consultation with the board of statutory auditors, within a maximum amount established by the Company’s shareholders, while the Company’s shareholders determine the base compensation for all board members, including non-executive directors. Directors are entitled to reimbursement for expenses reasonably incurred in connection with their functions.

Statutory Auditors — In addition to electing the board of directors, the Assembly of Shareholders, at ordinary shareholders’ meetings of the Company, elects a board of statutory auditors (collegio sindacale), appoint its chairman and set the compensation of its members. The statutory auditors are elected for a term of three fiscal years, may be re-elected for successive terms and may be removed only for cause and with the approval of a competent court. Expiration of their office will have no effect until a new board is appointed. Membership of the board of statutory auditors is subject to certain good standing, independence and professional requirements, and shareholders must be informed as to the offices the proposed candidates hold in other companies prior to or at the time of their election. In particular, at least one standing and one alternate member must be a certified auditor.

The Company’s By-laws provide that the board of statutory auditors shall consist of three statutory auditors and two alternate statutory auditors (who are automatically substituted for a statutory auditor who resigns or is otherwise unable to serve).

The Company’s board of statutory auditors is required, among other things, to verify that the Company (i) complies with applicable laws and its By-laws, (ii) respects principles of good governance, and (iii) maintains adequate organizational structure and administrative and accounting systems. The Company’s board of statutory auditors is required to meet at least once every ninety days. The board of statutory auditors reports to the annual shareholders’ meeting on the results of its activity and the results of the Company’s operations. In addition, the statutory auditors of the Company must be present at meetings of the Company’s board of directors and shareholders’ meetings.

The statutory auditors may decide to call a meeting of the shareholders or the board of directors, ask the directors information about the management of the Company, carry out inspections and verifications at the Company and exchange information with the Company’s external auditors. Additionally, the statutory auditors have the power to initiate a liability action against one or more directors after adopting a resolution with an affirmative vote by two thirds of the auditors in office. Any shareholder may submit a complaint to the board of statutory auditors regarding facts that such shareholder believes should be subject to scrutiny by the board of statutory auditors, which must take any complaint into account in its report to the shareholders’ meeting. If shareholders collectively representing 5% of the Company’s share capital submit such a complaint, the board of statutory auditors must promptly undertake an investigation and present its findings and any recommendations to a shareholders’ meeting (which must be convened immediately if the complaint appears to have a reasonable basis and there is an urgent need to take action). The board of statutory auditors may report to a competent court serious breaches of directors’ duties.

External Auditor — The audit of the Company’s accounts is entrusted, as per current legislation, to an independent audit firm whose appointment falls under the competency of the Shareholders’ Meeting, upon the board of statutory auditors’ opinion. In addition to the obligations set forth in national auditing regulations, Natuzzi’s listing on the NYSE requires that the audit firm issues a report on the annual report on Form 20-F, in compliance with the auditing principles generally accepted in the United States. Moreover, the audit firm is required to issue an opinion on the efficacy of the internal control system applied to financial reporting. No changes were identified in the Company’s internal control over financial reporting that occurred during the 2014 fiscal year that have materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.

The external auditor or the firm of external auditors is appointed for a three-year term, may be re-elected for successive terms, and its compensation is determined by a vote at an ordinary shareholders’ meeting, having heard the board of statutory auditors, and may be removed only for just cause by a vote of the shareholders’ meeting.

On April 29, 2013, the Company’s shareholders appointed Reconta Ernst & Young S.p.A., with registered offices at Via Po, 32, Rome, Italy, as its external auditor for a three-year term until the approval of the financial statements for 2015. For the entire duration of their office the external auditors or the firm of external auditors must meet certain requirements provided for by law.

Meetings of Shareholders — Shareholders are entitled to attend and vote at ordinary and extraordinary shareholder’s meetings. Votes may be cast personally or by proxy. Shareholder meetings may be called by the Company’s board of directors (or the board of statutory auditors) and must be called if requested by holders of at least 10% of the issued shares. If a shareholders’ meeting is not called despite the request by shareholders and such refusal is unjustified, a competent court may call the meeting. Shareholders are not entitled to request that a meeting of shareholders be convened to vote on matters which, as a matter of law, shall be resolved on the basis of a proposal, plan or report by the Company’s board of directors.

The Company may hold general meetings of shareholders at its registered office in Santeramo in Colle, or elsewhere within Italy or at locations outside Italy, following publication of notice of the meeting in any of the following Italian newspapers: “Il Sole 24 Ore,” “Corriere della Sera” or “La Repubblica” at least 15 days before the date fixed for the meeting.

The Assembly of Shareholders must be convened at least once a year. The Company’s annual stand-alone financial statements are prepared by the board of directors and submitted for approval to the ordinary shareholders’ meeting, which must be convened within 120 days after the end of the fiscal year to which such financial statements relate. This term may be extended by up to 180 days after the end of the fiscal year, as long as the Company continues to be bound by law to draw up consolidated financial statements or if particular circumstances concerning its structure or its purposes so require. At ordinary shareholders’ meetings, shareholders also appoint the external auditors, approve the distribution of dividends, appoint the board of directors and statutory auditors, determine their remuneration and vote on any matter the resolution or authorization of which is entrusted to them by law.

Extraordinary shareholders’ meetings may be called to vote on proposed amendments to the By-laws, issuance of convertible debentures, mergers and de-mergers, capital increases and reductions, when such resolutions may not be taken by the board of directors. Liquidation of the Company must be resolved by an extraordinary shareholders’ meeting.

The notice of a shareholders’ meeting may specify two or more meeting dates for an ordinary or extraordinary shareholders’ meeting; such meeting dates are generally referred to as “calls.”

The quorum for an ordinary meeting of shareholders is 50% of the Ordinary Shares, and resolutions are carried by the majority of Ordinary Shares present or represented. At an adjourned ordinary meeting, no quorum is required, and the resolutions are carried by the majority of Ordinary Shares present or represented. Certain matters, such as amendments to the By-laws, the issuance of shares, the issuance of convertible debentures and mergers and de-mergers may only be effected at an extraordinary meeting, at which special voting rules apply. Resolutions at an extraordinary meeting of the Company are carried, on first call, by a majority of the Ordinary Shares. An adjourned extraordinary meeting is validly held with a quorum of one-third of the issued shares and its resolutions are carried by a majority of at least two-thirds of the holders of shares present or represented at such meeting. In addition, certain matters (such as a change in purpose or corporate form of the company, demergers, mergers, the transfer of its registered office outside Italy, its liquidation prior to the term set forth in its By-laws, the extension of the term, the revocation of liquidation and the issuance of preferred shares) are approved by the holders of more than two-thirds of the shares present and represented at such meeting that must also represent more than one-third of the issued shares.

According to the By-laws, in order to attend any shareholders’ meeting, shareholders, at least five days prior to the date fixed for the meeting, must deposit their share certificates at the offices of the Company or with such banks as may be specified in the notice of meeting, in exchange for an admission ticket. Owners of ADRs may make special arrangements with the Depositary for the beneficial owners of such ADRs to attend shareholders’ meetings, but not to vote at or formally address such meetings. The procedures for making such arrangements will be specified in the notice of such meeting to be mailed by the Depositary to the owners of ADRs.

Shareholders may appoint proxies by delivering in writing an appropriate power of attorney to the Company. Directors, auditors and employees of the Company or of any of its subsidiaries may not be proxies and any one proxy cannot represent more than 20 shareholders.

Preemptive Rights — Pursuant to Italian law, holders of Ordinary Shares or of debentures convertible into shares, if any exist, are entitled to subscribe for the issuance of shares, debentures convertible into shares and rights to subscribe for shares, in proportion to their holdings, unless such issues are for non-cash consideration or preemptive rights are waived or limited and such waiver or limitation is required in the interest of the Company. There can be no assurance that the holders of ADSs may be able to exercise fully any preemptive rights pertaining to Ordinary Shares.

Preference Shares. Other Securities — The Company’s By-laws allow the Company to issue preference shares with limited voting rights, to issue other classes of equity securities with different economic and voting rights, to issue so-called participation certificates with limited voting rights, as well as so-called tracking stock. The power to issue such financial instruments is attributed to the extraordinary meeting of shareholders.

The Company, by resolution of the board of directors, may issue debt securities non-convertible into shares, while it may issue debt securities convertible into shares through a resolution of an extraordinary shareholders’ meeting.

Segregation of Assets and Proceeds — The Company, by means of an extraordinary shareholders’ meeting resolution, may approve the segregation of certain assets into one or more separate pools. Such pools of assets may have an aggregate value not exceeding 10% of the shareholders’ equity of the company. Each pool of assets must be used exclusively for the carrying out of a specific business and may not be attached by the general creditors of the Company. Similarly, creditors with respect to such specific business may only attach those assets of the Company that are included in the corresponding pool. Tort creditors, on the other hand, may always attach any assets of the Company. The Company may issue securities carrying economic and administrative rights relating to a pool. In addition, financing agreements relating to the funding of a specific business may provide that the proceeds of such business be used exclusively to repay the financing. Such proceeds may be attached only by the financing party and such financing party would have no recourse against other assets of the Company.

Liquidation Rights — Pursuant to Italian law and subject to the satisfaction of the claims of all other creditors, shareholders are entitled to a distribution in liquidation that is equal to the nominal value of their shares (to the extent available out of the net assets of the Company). Holders of preferred shares, if any such shares are issued in the future by the Company, may be entitled to a priority right to any such distribution from liquidation up to their par value. Thereafter, all shareholders would rank equally in their claims to the distribution or surplus assets, if any. Ordinary Shares rank pari passu among themselves in liquidation.

Purchase of Shares by the Company — The Company is permitted to purchase shares, subject to certain conditions and limitations provided for by Italian law. Shares may only be purchased out of profits available for dividends or out of distributable reserves, in each case as appearing on the latest shareholder-approved stand-alone financial statements. Further, the Company may only repurchase fully paid-in shares. Such purchases must be authorized by the Assembly of Shareholders at an ordinary shareholders’ meeting. The aggregate purchase price of such shares may not exceed the earnings reserve specifically approved by shareholders. Shares held in violation of the above conditions and limitations must be sold within one year of the date of purchase. Similar limitations apply with respect to purchases of the Company’s shares by its subsidiaries.

A corresponding reserve equal to the purchase price of such shares must be created in the balance sheet, and such reserve is not available for distribution, unless such shares are sold or cancelled. Shares purchased and held by the Company may be resold only pursuant to a resolution adopted at an ordinary shareholders’ meeting. The voting rights attaching to the shares held by the Company or its subsidiaries cannot be exercised, but the shares are counted for quorum purposes in shareholders’ meetings. Dividends attaching to such shares will accrue to the benefit of other shareholders; pre-emptive rights attaching to such shares will accrue to the benefit of other shareholders, unless the shareholders’ meeting authorizes the Company to exercise, in whole or in part, the pre-emptive rights thereof.

In May 2009, the ordinary shareholders’ meeting of the Company approved a share buyback program as proposed by the board of directors. As of the date hereof, the share buyback program has not been implemented and, in accordance with its terms, the Company is no longer able to purchase its shares as part of the aforementioned share buyback program.

The Company does not own any of its ordinary shares.

Notification of the Acquisition of Shares — In accordance with Italian antitrust laws, the Italian Antitrust Authority is required to prohibit the acquisition of control in a company which would thereby create or strengthen a dominant position in the domestic market or a significant part thereof and which would result in the elimination or substantial reduction, on a lasting basis, of competition, provided that certain turnover thresholds are exceeded. However, if the turnover of the acquiring party and the company to be acquired exceed certain other monetary thresholds, the antitrust review of the acquisition falls within the exclusive jurisdiction of the European Commission.

Minority Shareholders’ Rights. Withdrawal Rights — Shareholders’ resolutions which are not adopted in conformity with applicable law or the Company’s By-laws may be challenged (with certain limitations and exceptions) within ninety days by absent, dissenting or abstaining shareholders representing individually or in the aggregate at least 5% of Company’s share capital (as well as by the board of directors or the board of statutory auditors). Shareholders not reaching this threshold or shareholders not entitled to vote at Company’s meetings may only claim damages deriving from the resolution.

Dissenting or absent shareholders may require the Company to buy back their shares as a result of shareholders’ resolutions approving, among others things, material modifications of the Company’s corporate purpose or of the voting rights of its shares, the transformation of the Company from a stock corporation into a different legal entity, or the transfer of the Company’s registered office outside Italy. The buy-back would occur at a price established by the board of directors, upon consultation with the board of statutory auditors and the Company’s external auditor, having regard to the net assets value of the Company, its prospective earnings and the market value of its shares, if any. The Company’s By-laws may set forth different criteria to determine the consideration to be paid to dissenting shareholders in such buy-backs.

Each shareholder may bring to the attention of the board of statutory auditors facts or actions which are deemed wrongful. If such shareholders represent more than 5% of the share capital of the Company, the board of statutory auditors must investigate without delay and report its findings and recommendations to the shareholders’ meeting.

Shareholders representing more than 10% of the Company’s share capital have the right to report to a competent court serious breaches of the duties of the directors, which may be prejudicial to the Company or to its subsidiaries. In addition, shareholders representing at least 20% of the Company’s share capital may commence derivative suits before a competent court against its directors, statutory auditors and general managers.

The Company may waive or settle the suit unless shareholders holding at least 20% of the shares vote against such waiver or settlement. The Company will reimburse the legal costs of such action in the event that the claim of such shareholders is successful and the court does not award such costs against the relevant directors, statutory auditors or general managers.

Any dispute arising out of or in connection with the By-Laws that may arise between the Company and its shareholders, directors, or liquidators shall fall under the exclusive jurisdiction of the Tribunal of Bari (Italy).

Liability for Mismanagement of Subsidiaries — Under Italian law, companies and other legal entities that, acting in their own interest or the interest of third parties, mismanage a company subject to their direction and coordination powers are liable to such company’s shareholders and creditors for ensuing damages suffered by such shareholders. This liability is excluded if (i) the ensuing damage is fully eliminated, including through subsequent transactions, or (ii) the damage is effectively offset by the global benefits deriving in general to the company from the continuing exercise of such direction and coordination powers. Direction and coordination powers are presumed to exist, among other things, with respect to consolidated subsidiaries.

The Company is subject to the direction and coordination of INVEST 2003 S.r.l.

Material Contracts

In the two years immediately preceding the filing of this Annual Report on Form 20-F, neither the Company nor any member of the Group has been a party to a material contract, other than contracts entered into in the ordinary course of business and the contracts described immediately below.

Italian Reorganization Agreements — On March 3, 2015 the Company, the relevant trade union organizations and local institutions signed the 2015 Italian Reorganization Agreement that follows and develops the 2013 Italian Reorganization Agreement entered into on October 10, 2013 (incorporated by reference to the Form 20-F filed by Natuzzi S.p.A. with the Securities and Exchange Commission on April 30, 2014, file number 001-11854). The 2013 Italian Reorganization Agreement had paved the way for the restructuring of the Group’s Italian operations according to the guidelines included in the Group’s Transformation Plan.

The 2015 Italian Reorganization Agreement is a fundamental tool for the industrial re-launch of Natuzzi’s Italian plants (both from a qualitative and productive standpoint), representing the final step in the production efficiency and work-related cost reduction processes that have been tested over the past few months in the Group’s test laboratory. As a matter of fact, the Company will be able to better allocate workers according to efficiency criteria: workers on rotation will not be staffed at our plants (as opposed to the first part of 2014, when the staffing of workers on rotation at our plants led to a decrease in the level of productivity). These processes have highlighted an encouraging improvement in the main productivity indices.

The Group’s new industrial structure in Italy, based on lean-enterprise product and industrial process innovations, provides for plant specialization according to product type and for the completion of the entire sofa production cycle within each single plant.

The new business structure will allow the Group to reduce the number of redundant employees subject to future lay-offs, decreasing from 1,506 (previously envisaged in the 2013 Italian Reorganization Agreement) to 516. As a result, the number of employees in Italy will be equal to 1,818 (as opposed to the current number of 2,334 employees). The 2015 Italian Reorganization Agreement provides that the Solidarity Agreement will be applicable to these 1,818 employees (both blue and white collars) for a 24-month period, starting from May 2, 2015. These 1,818 employees will work on a reduced-shift basis (for about 5 hours on average per day, as opposed to the current 8 hour shift per day), consistently with the expected order flow that the Company foresees for its Italian productions.

To support the Group’s made-in-Italy production, the Group has planned investments in the aggregate amount of €25 million, to be allocated to marketing, R&D and industrial enhancement.

Exchange Controls

There are currently no exchange controls, as such, in Italy restricting rights deriving from the ownership of shares. Residents and non-residents of Italy may hold foreign currency and foreign securities of any kind, within and outside Italy. Non-residents may invest in Italian securities without restriction and may transfer to and from Italy cash, instruments of credit and securities, in both foreign currency and Euro, representing interest, dividends, other asset distributions and the proceeds of any dispositions.

Certain procedural requirements, however, are imposed by law. Regulations on the use of cash and bearer securities are contained in the legislative decree No.231 of November 21, 2007, as amended from time to time, which implemented in Italy the European directives on anti-money laundering No. 2005/60 and 2006/70. Such legislation requires that transfers of cash or bearer bank or postal passbooks or bearer instruments in Euro or in foreign currency, effected for whatsoever reason between different parties, shall be carried out by means of credit institutions and any other authorized intermediaries when the total amount of the value to be transferred is equal to or more than €1,000. Credit institutions and other intermediaries effecting such transactions on behalf of residents or non-residents of Italy are required to maintain records of such transactions for ten years, which may be inspected at any time by Italian tax and judicial authorities. Non-compliance with the reporting and record-keeping requirements may result in administrative fines or, in the case of false reporting and in certain cases of incomplete reporting, criminal penalties. The Bank of Italy is required to maintain reports for ten years and may use them, directly or through other government offices, to police money laundering, tax evasion and any other unlawful activity.

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. Such obligation lies also on the aforesaid resident taxpayers who, even if do not own directly investments and financial assets held abroad, qualify as “beneficial owner” of the same. No such tax disclosure is required in respect of securities deposited for management with qualified Italian financial intermediaries and in respect of contracts entered into through their intervention, provided that the items of income derived from such foreign financial assets are collected through the intervention of the same intermediaries. 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 disclosed in their financial statements.

There can be no assurance that the current regulatory environment in or outside Italy will persist or that particular policies presently in effect will be maintained, although Italy is required to maintain certain regulations and policies by virtue of its membership of the EU and other international organizations and its adherence to various bilateral and multilateral international agreements.

Taxation

The following is a summary of certain U.S. federal and Italian tax matters. The summary contains a description of the principal U.S. federal and Italian tax consequences of the purchase, ownership and disposition of Ordinary Shares or ADSs by a holder who is a citizen or resident of the United States or a U.S. corporation or who otherwise will be subject to U.S. federal income tax on a net income basis in respect of the Ordinary Shares or ADSs. The summary is not a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase or hold Ordinary Shares or ADSs. In particular, the summary deals only with beneficial owners who will hold Ordinary Shares or ADSs as capital assets and does not address the tax treatment of a beneficial owner who owns 10% or more of the voting shares of the Company or who may be subject to special tax rules, such as banks, tax-exempt entities, insurance companies, partners or partnerships therein, or dealers in securities or currencies, or persons that will hold Ordinary Shares or ADSs as a position in a “straddle” for tax purposes or as part of a “constructive sale” or a “conversion” transaction or other integrated investment comprised of Ordinary Shares or ADSs and one or more other investments. The summary does not discuss the treatment of Ordinary Shares or ADSs that are held in connection with a permanent establishment through which a non-resident beneficial owner carries on business or performs personal services in Italy.

The summary is based upon tax laws and practice of the United States and Italy in effect on the date of this Annual Report, which are subject to change.

Investors and prospective investors in Ordinary Shares or ADSs should consult their own advisors as to the U.S., Italian or other tax consequences of the purchase, beneficial ownership and disposition of Ordinary Shares or ADSs, including, in particular, the effect of any state or local tax laws.

For purposes of the summary, beneficial owners of Ordinary Shares or ADSs who are considered residents of the United States for purposes of the current income tax convention between the United States and Italy (the “Income Tax Convention”), and are not subject to an anti-treaty shopping provision that applies in limited circumstances, are referred to as “U.S. owners”. Beneficial owners who are citizens or residents of the United States, corporations organized under U.S. law, and U.S. partnerships, estates or trusts (to the extent their income is subject to U.S. tax either directly or in the hands of partners or beneficiaries) generally will be considered to be residents of the United States under the Income Tax Convention. Special rules apply to U.S. owners who are also residents of Italy, according to the Income Tax Convention.

For the purpose of the Income Tax Convention and the United States Internal Revenue Code of 1986, as amended, beneficial owners of ADRs evidencing ADSs will be treated as the beneficial owners of the Ordinary Shares represented by those ADSs.

Taxation of Dividends

i) Italian Tax Considerations — As a general rule, Italian laws provide for the withholding of income tax on dividends paid by Italian companies to shareholders who are not residents of Italy for tax purposes, currently levied at a 26% rate on dividends paid as of July 1, 2014. Italian laws provide a mechanism under which non-resident shareholders can claim a refund of, as of July 1, 2014, up to 11/26 of Italian withholding taxes on dividend income by establishing to the Italian tax authorities that the dividend income was subject to income tax in another jurisdiction in an amount at least equal to the total refund claimed. U.S. owners should consult their own tax advisers concerning the possible availability of this refund, which traditionally has been payable only after extensive delays. Alternatively, reduced rates (normally 15%) may apply to non-resident shareholders who are entitled to, and comply with procedures for claiming, benefits under an income tax convention.

Under the Income Tax Convention, dividends derived and beneficially owned by U.S. owners are subject to an Italian withholding tax at a reduced rate of 15%.

However, the amount initially made available to the Depositary for payment to U.S. owners will reflect withholding at the 26% rate. U.S. owners who comply with the certification procedures described below may then claim an additional payment of 11% of the dividend (representing the difference between the 26% rate applicable as of July 1, 2014, and the 15% rate, and referred to herein as a “treaty refund”). This certification procedure will require U.S. owners (i) to obtain from the U.S. Internal Revenue Service (“IRS”) a form of certification required by the Italian tax authorities (IRS Form 6166), unless a previously filed certification is effective on the dividend payment date (such certificates, filed together with the statement indicated under (ii) below, should be effective until the end of the fiscal year for which the statement was originally filed), (ii) to produce a statement in accordance with the Italian tax authorities decree of July 10, 2013, whereby the U.S. owner represents to be a U.S. owner individual or corporation with no permanent establishment in Italy, and (iii) to set forth other required information. IRS Form 6166 may be obtained by filing a request for certification on IRS Form 8802. (Additional information, including IRS Form 8802, can be obtained from the IRS website at www.irs.gov. Information appearing on the IRS website is not incorporated by reference into this document.) The time for processing requests for certification by the IRS normally is 30 to 45 days. Accordingly, in order to be eligible for the procedure described below, U.S. owners should begin the process of obtaining certificates as soon as possible after receiving instructions from the Depositary on how to claim a treaty refund.

The Depositary’s instructions will specify certain deadlines for delivering to the Depositary the documentation required to obtain a treaty refund, including the certification that the U.S. owners must obtain from the IRS. In the case of ADSs held by U.S. owners through a broker or other financial intermediary, the required documentation should be delivered to such financial intermediary for transmission to the Depositary. In all other cases, the U.S. owners should deliver the required documentation directly to the Depositary. The Company and the Depositary have agreed that if the required documentation is received by the Depositary on or within 30 days after the dividend payment date and, in the reasonable judgment of the Company, such documentation satisfies the requirements for a refund by the Company of Italian withholding tax under the Convention and applicable law, the Company will within 45 days thereafter pay the treaty refund to the Depositary for the benefit of the U.S. owners entitled thereto.

If the Depositary does not receive a U.S. owner’s required documentation within 30 days after the dividend payment date, such U.S. owner may for a short grace period (specified in the Depositary’s instructions) continue to claim a treaty refund by delivering the required documentation (either through the U.S. owner’s financial intermediary or directly, as the case may be) to the Depositary. However, after this grace period, the treaty refund must be claimed directly from the Italian tax authorities rather than through the Depositary. Expenses and extensive delays have been encountered by U.S. owners seeking refunds from the Italian tax authorities.

Distributions of profits in kind will be subject to withholding tax. In that case, prior to receiving the distribution, the holder will be required to provide the Company with the funds to pay the relevant withholding tax.

ii) United States Tax Considerations — The gross amount of any dividends (that is, the amount before reduction for Italian withholding tax) paid to a U.S. owner generally will be subject to U.S. federal income taxation as foreign-source dividend income and will not be eligible for the dividends-received deduction allowed to domestic corporations. Dividends paid in Euro will be included in the income of such U.S. owners in a dollar amount calculated by reference to the exchange rate in effect on the day the dividends are received by the Depositary or its agent. If the Euro are converted into dollars on the day the Depositary or its agent receives them, U.S. owners generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. owners who receive a treaty refund may be required to recognize foreign currency gain or loss to the extent the amount of the treaty refund (in dollars) received by the U.S. owner differs from the U.S. dollar equivalent of the Euro amount of the treaty refund on the date the dividends were received by the Depositary or its agent. Italian withholding tax at the 15% rate will be treated as a foreign income tax which U.S. owners may elect to deduct in computing their taxable income or, subject to the limitations on foreign tax credits generally, credit against their U.S. federal income tax liability. The rules governing the foreign tax credit are complex and U.S. owners are urged to consult their own tax advisers in this regard. Dividends will generally constitute foreign-source “passive category” income for U.S. tax purposes.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual with respect to the Ordinary Shares or ADSs will be subject to taxation at reduced rates if the dividends are “qualified dividends”. Dividends paid on the Ordinary Shares or ADSs will be treated as qualified dividends if (i) the Company is eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS has approved for the purposes of the qualified dividend rules and (ii) the Company was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The Income Tax Convention has been approved for the purposes of the qualified dividend rules, and the Company believes it is eligible for the benefits of the Income Tax Convention. Based on the Company’s audited financial statements and relevant market and shareholder data, the Company believes that it was not treated as a PFIC for U.S. federal income tax purposes with respect to its 2013 or 2014 taxable year. In addition, based on the Company’s audited financial statements and its current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, the Company does not anticipate becoming a PFIC for its 2015 taxable year.

The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or common stock and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to treat dividends as qualified for tax reporting purposes. Because such procedures have not yet been issued, it is not clear whether the Company will be able to comply with the procedures. Holders of Ordinary Shares and ADSs should consult their own tax advisers regarding the availability of the reduced dividend tax rate in the light of the considerations discussed above and their own particular circumstances.

Foreign tax credits may not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities or in respect of arrangements in which a U.S. owner’s expected economic profit is insubstantial. U.S. owners should consult their own advisers concerning the implications of these rules in light of their particular circumstances.

A beneficial owner of Ordinary Shares or ADSs who is, with respect to the United States, a foreign corporation or a nonresident alien individual, generally will not be subject to U.S. federal income tax on dividends received on Ordinary Shares or ADSs, unless such income is effectively connected with the conduct by the beneficial owner of a trade or business in the United States.

Taxation of Capital Gains

i) Italian Tax Considerations — Under Italian law, capital gains tax (“CGT”) is generally levied on capital gains realized by non-residents from the disposal of shares in companies resident in Italy for tax purposes even if those shares are held outside of Italy. However, capital gains realized by non-resident holders on the sale of non-qualified shareholdings (as defined below) in companies listed on a stock exchange and resident in Italy for tax purposes (as is the Company’s case) are not subject to CGT. In order to benefit from this exemption, such non-Italian-resident holders may need to file a certificate evidencing their residence outside of Italy for tax purposes.

A “qualified shareholding” consists of securities that entitle the holder to exercise more than 2% of the voting rights of a company with shares listed on a stock exchange in the ordinary meeting of the shareholders or represent more than 5% of the share capital of a company with shares listed on a stock exchange. A “non-qualified shareholding” is any shareholding that does not exceed either of these thresholds. The relevant percentage is calculated taking into account the shareholdings sold during the prior 12-month period.

Capital gains realized upon disposal of a “qualified” shareholding are partially included in the shareholders’ taxable income, for an amount equal to 49.72% with respect to capital gains realized as of January 1, 2009. If a taxpayer realizes taxable capital gains in excess of 49.72% of capital losses of a similar nature incurred in the same tax year, such excess amount is included in his total taxable income. If 49.72% of such taxpayer’s capital losses exceeds its taxable capital gains, then the excess amount can be carried forward and deducted from the taxable amount of similar capital gains realized by such person in the following tax years, up to the fourth, provided that it is reported in the tax report in the year of disposal.

The above is subject to any provisions of an income tax treaty entered into by the Republic of Italy, if the income tax treaty provisions are more favorable. The majority of double tax treaties entered into by Italy, including the Income Tax Convention, in accordance with the OECD Model tax convention, provide that capital gains realized from the disposition of Italian securities are subject to CGT only in the country of residence of the seller.

The Income Tax Convention between Italy and the U.S. provides that a U.S. owner is not subject to the Italian CGT on the disposal of shares, provided that the shares are not held through part of a permanent establishment of the U.S. owner in Italy.

ii) United States Tax Considerations — Gain or loss realized by a U.S. owner on the sale or other disposition of Ordinary Shares or ADSs will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the U.S. owner’s basis in the Ordinary Shares or the ADSs and the amount realized on the disposition (or its dollar equivalent, determined at the spot rate on the date of disposition, if the amount realized is denominated in a foreign currency). Any such gain or loss generally would be treated as arising from sources within the United States. Such gain or loss will generally be long-term capital gain or loss if the U.S. owner holds the Ordinary Shares or ADSs for more than one year. The net amount of long-term capital gain recognized by a U.S. owner that is an individual holder generally is subject to taxation at a reduced rate. The ability to offset capital losses against ordinary income is subject to limitations. Deposits and withdrawals of Ordinary Shares by U.S. owners in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

A beneficial owner of Ordinary Shares or ADSs who is, with respect to the United States, a foreign corporation or a nonresident alien individual will not be subject to U.S. federal income tax on gain realized on the sale of Ordinary Shares or ADSs, unless (i) such gain is effectively connected with the conduct by the beneficial owner of a trade or business in the United States or (ii), in the case of gain realized by an individual beneficial owner, the beneficial owner is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.

Taxation of Distributions from Capital Reserves

Italian Tax Considerations — Special rules apply to the distribution of certain capital reserves. Under certain circumstances, such a distribution may be considered as taxable income in the hands of the recipient depending on the

existence of current profits or outstanding reserves at the time of distribution and the actual nature of the reserves distributed. The application of such rules may also have an impact on the tax basis in the Ordinary Shares or ADSs held and/or the characterization of any taxable income received and the tax regime applicable to it. Non-resident shareholders may be subject to withholding tax and CGT as a result of such rules. You should consult your tax adviser in connection with any distribution of capital reserves.

Other Italian Taxes

Estate and Inheritance Tax — A transfer of Ordinary Shares or ADSs by reason of death or gift is subject to an inheritance and gift tax levied on the value of the inheritance or gift, as follows:

• Transfers to a spouse or direct descendants or ancestors up to €1,000,000 to each beneficiary are exempt from inheritance and gift tax. Transfers in excess of such threshold will be taxed at a 4% rate on the value of the Ordinary Shares or ADSs exceeding such threshold;

• Transfers between relatives within the fourth degree other than siblings, and direct or indirect relatives-in-law within the third degree are taxed at a rate of 6% on the value of the Ordinary Shares or ADSs (where transfers between siblings up to a maximum value of €100,000 for each beneficiary are exempt from inheritance and gift tax); and

• Transfers by reason of gift or death of Ordinary Shares or ADSs to persons other than those described above will be taxed at a rate of 8% on the value of the Ordinary Shares or ADSs.

If the beneficiary of any such transfer is a disabled individual, whose handicap is recognized pursuant to Law No. 104 of February 5, 1992, the tax is applied only on the value of the assets received in excess of €1,500,000 at the rates illustrated above, depending on the type of relationship existing between the deceased or donor and the beneficiary.

The tax regime described above will not prevent the application, if more favorable to the taxpayer, of any different provisions of a bilateral tax treaty, including the convention between Italy and the United States against double taxation with respect to taxes on estates and inheritances, pursuant to which non-Italian resident shareholders are generally entitled to a tax credit for any estate and inheritance taxes possibly applied in Italy.

Italian Financial Transaction Tax — In December 2012, Italy introduced a financial transaction tax (the “IFTT”), which, beginning March 1, 2013, is applicable, among other transactions, to all trades entailing the transfer of title of (i) shares or equity-like financial instruments issued by companies resident in Italy, such as the Ordinary Shares; and (ii) securities representing the shares and financial instruments under (i) above (including depositary receipts such as the ADSs), regardless of the residence of the issuer. The IFTT may also apply to the transfer of Ordinary Shares and ADSs by a U.S. resident.

The IFTT will apply at a rate of 0.2% for over-the-counter transactions, reduced to 0.1% for trades executed on a regulated market or multilateral trading facility. The New York Stock Exchange should qualify as a regulated market for such purposes.

The rules governing the IFTT are fairly complex and still subject to further clarification to be issued by the Italian tax authorities. As to its basic features, it should be noted that the IFTT (i) is levied on a tax base equal to (x) the market value (calculated by taking the net balance of daily trades on the relevant securities) or, in the absence of any such market value, (y) the consideration paid for each trade; and (ii) is borne by the purchaser but is collected by the financial intermediaries (including non-resident financial intermediaries) intervening in the relevant trades.

However, a number of exemptions apply, including with respect to trades of securities issued by companies having an average market capitalization lower than €500 million in the month of November of the year preceding the year in which the trade takes place. Companies, the securities of which are listed on a foreign regulated market, and which could benefit from this exemption, such as the Company, need a confirmation from the Italian Ministry of Economy and Finance: such companies must communicate their market capitalization for each tax year to the Ministry, which will then prepare a list of the companies in relation to which the exemption applies.

EU Financial Transaction Tax — On February 14, 2013, the European Commission proposed the implementation of the EU FTT (see “Item 3. Key Information—Risk Factors”) that may also apply to the transfer of Ordinary Shares and ADSs by a U.S. resident. However, the related EU directive has not yet been enacted. Moreover, the implementation of the proposed EU FTT may also affect the IFTT, as described above.

United States Information Reporting and Backup Withholding Requirements — In general, information reporting requirements will apply to payments by a paying agent within the United States to a non-corporate (or other non-exempt) U.S. owner of dividends in respect of the Company Shares or ADSs, or the proceeds received on the sale or other disposition of the Company Shares or ADSs. Backup withholding may apply to such amounts if the U.S. owner fails to provide an accurate taxpayer identification number to the paying agent on a properly completed IRS Form W-9 or otherwise comply with the applicable requirements of the backup withholding rules. Amounts withheld as backup withholding will be creditable against the U.S. owner’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS.

Documents on Display

The Company is subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), applicable to foreign private issuers. In accordance therewith, the Company is required to file reports, including annual reports on Form 20-F, and other information with the U.S. Securities and Exchange Commission. These materials, including this Annual Report, are available for inspection and copying at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the public reference room. As a foreign private issuer, we have been required to make filings with the SEC by electronic means since November 4, 2002. Any filings we make electronically will be available to the public over the Internet at the SEC’s website at http://www.sec.gov. The Form 20-F and reports and other information filed by the Company with the Commission will also be available for inspection by ADS holders at the Corporate Trust Office of The Bank of New York Mellon at 101 Barclay Street, New York, New York 10286.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion of the Group’s risk management activities includes “forward-looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward looking statements. See “Forward Looking Information.” A significant portion of the Group’s net sales and its costs, are denominated in currencies other than the euro, in particular the U.S. dollar.

The Group is exposed to market risks principally from fluctuations in the exchange rates between the Euro and other currencies, including in particular the U.S. dollar, and to a significantly lesser extent, from variations in interest rates.

Exchange Rate Risks — The Group’s foreign exchange rate risks in 2014 arose principally in connection with Canadian dollars, Chinese yuan, British pounds, Romanian Leu, U.S. dollars, Japanese yen, Australian dollars, Brazilian Reais, Swedish kroner, Danish kroner, Russian Rubles, Indian Rupee, Norwegian kroner and Swiss francs, as well as in connection with Euros for the Company’s subsidiary located in Eastern Europe.

As of December 31, 2014 and 2013, the Group had outstanding trade receivables denominated in foreign currencies totaling €61.0 million and €42.4 million, respectively, of which 62.6% and 56.2%, respectively, were denominated in U.S. dollars. On those same dates, the Group had €25.3 million and €19.4 million, respectively, of trade payables denominated in foreign currencies, principally U.S. dollars. See Notes 6 and 16 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

As of December 31, 2014, the Company was a party to a number of currency forward contracts (known in Italy as domestic currency swaps), all of which are designed to hedge future sales denominated in U.S. dollars and other currencies. As of the same date, no option contract was outstanding (as was the case as of December 31, 2013). The Group does not use such foreign exchange contracts for speculative trading purposes.

As of December 31, 2014, the notional amount in Euro terms of all of the outstanding currency forward contracts totaled €44.7 million. As of December 31, 2013, the notional amounts of all of the outstanding currency forward contracts totaled €41.4 million.

At the end of 2014, such currency forward contracts had notional amounts of Canadian dollars 16.0 million, €10.0 million, British pounds 7.5 million, U.S.$ 11.4 million, Australian dollars 3.1 million, Japanese yen 290.0 million and Swedish kroner 3.6 million. All of these forward contracts had various maturities extending through June 2015. See Note 29 to the Consolidated Financial Statements included in Item 18 of this Annual Report. The table below summarizes (in thousands of Euro equivalent) the contractual amounts of currency forward contracts (no options were outstanding) intended to hedge future cash flows from accounts receivable and sales orders as of December 31, 2014 and 2013:


Euro equivalent of contractual amounts of currency forward contracts as of:	December 31,
	2014		2013
Canadian dollars	€	11,519	€	10,153
Euro^*		9,896		12,037
British pounds		9,512		5,984
U.S. dollars		9,178		8,817
Australian dollars		2,103		2,157
Japanese yen		2,099		1,362
Swedish kroner		387		341
Norwegian kroner		0		575
Swiss francs		0		0

Total	€	44,694	€	41,426

*	Used by the Group’s Romanian subsidiary to hedge its net collections denominated in Euro.

As of December 31, 2014, these forward contracts had a net unrealized loss of €0.3 million, compared to a net unrealized gain of €0.5 million as of December 31, 2013. The Group recorded this amount in “other income (expense), net” in its Consolidated Financial Statements. See Note 29 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

The following table presents information regarding the contract amount in thousands of Euro equivalent and the estimated fair value of all of the Group’s foreign exchange contracts: contracts with unrealized gains are presented as “assets” and contracts with unrealized losses are presented as “liabilities.”


	December 31, 2014					December 31, 2013
	Contract Amount		Unrealized gains (losses)			Contract Amount		Unrealized gains (losses)
Assets		11,212		312			24,636		592
Liabilities		33,482		(583	)		16,790		(193	)

Total	€	44,694	€	(271	)	€	41,426	€	399

The Group’s foreign currency forward contracts as of December 31, 2013 had maturities of a maximum of six months. The potential loss in fair value of all of the Group’s forward contracts outstanding as of December 31, 2014 that would have resulted from a hypothetical, instantaneous and unfavorable 10% change in currency exchange rates would have been approximately €5.0 million. This sensitivity analysis assumes an instantaneous and unfavorable 10% fluctuation in exchange rates affecting the foreign currencies of all of the Group’s hedging contracts outstanding as of the end of 2014.

For the accounting of transactions entered into in an effort to reduce the Group’s exchange rate risks, see Notes 3 and 29 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

At December 31, 2014, the Group had approximately €19 million in cash and cash equivalents held in Chinese yuan (€52 million as at December 31, 2013). Exchange rate fluctuations in respect of this amount could have significant positive or negative effects on our results of operations in future periods.

Interest Rate Risks — To a significantly lesser extent, the Group is also exposed to interest rate risk. As of December 31, 2014, the Group had €30.1 million (equivalent to 7.9% of the Group’s total assets as of the same date) in debt outstanding (bank overdrafts and long-term debt, including the current portion of such debt), which is for the most part subject to floating interest rates. See Notes 15 and 20 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

In the normal course of business, the Group also faces risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk and legal risk.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

ITEM 12A. DEBT SECURITIES

Not applicable.

ITEM 12B. WARRANTS AND RIGHTS

Not applicable.

ITEM 12C. OTHER SECURITIES

Not applicable.

ITEM 12D. AMERICAN DEPOSITARY SHARES

Fees paid by ADR holders — The Bank of New York Mellon, as the Depositary of our ADSs, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.


Persons depositing or withdrawing shares must pay:		For:

$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)		• Depositing or substituting the underlying shares • Selling or exercising rights • Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates

A fee for the distribution of proceeds of sales of securities or rights in an amount equal to the lesser of: (i) the fee for the issuance of ADSs referred to above which would have been charged as a result of the deposit by owners of securities (for purposes hereof treating all such securities as if they were shares) or shares received in exercise of rights distributed to them, respectively, but which securities or rights are instead sold by the Depositary and the net proceeds distributed and (ii) the amount of such proceeds		• Distribution of securities distributed to holders of deposited securities which are distributed by the Depositary to ADS registered holders

Registration or transfer fees		• Transfer and registration of shares on our share register to or from the name of the Depositary or its agent when holders deposit or withdraw shares

Expenses of the Depositary		• Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) • Converting foreign currency to U.S. dollars

Taxes and other governmental charges the Depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes		• As necessary

Any charges incurred by the Depositary or its agents for servicing the deposited securities		• As necessary

Fees payable by the Depositary to the Company

i) Fees incurred in past annual period — From January 1, 2014 to December 31, 2014, the Depositary waived a total of $2,194.86 in administrative fees for routine corporate actions including services relating to Natuzzi’s annual general meeting of shareholders

ii) Fees to be paid in the future — The Company does not have any agreements in place with the Depositary for the payment or reimbursement of fees or other direct or indirect payments by the Depositary to the Company in connection with its ADS program.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures — The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2014. 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 on the Company’s evaluation of its disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2014 to provide reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s applicable rules and forms, and that it is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Management’s Annual Report on Internal Control Over Financial Reporting — The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Even when determined to be effective, they can provide only reasonable assurance regarding the reliability of financial reporting and the preparation and presentation of financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

To assess the effectiveness of the Company’s internal control over financial reporting, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, used the criteria described in “2013 Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

The Company’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2014. Based on such assessment, the Company’s management has concluded that as of December 31, 2014, the Company’s internal control over financial reporting was effective and that there were no material weaknesses in the Company’s internal control over financial reporting.

The effectiveness of internal control over financial reporting as of December 31, 2014 has been audited by Reconta Ernst & Young S.p.A., an independent registered public accounting firm, as stated in their report on the Company’s internal control over financial reporting, which follows below.

(c) Attestation Report of the Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Natuzzi S.p.A.

We have audited Natuzzi S.p.A. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Natuzzi S.p.A. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Natuzzi S.p.A. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Natuzzi S.p.A. and subsidiaries as of December 31, 2014 and 2013 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014 and our report dated April 30, 2015 expressed an unqualified opinion thereon.

/s/ Reconta Ernst & Young S.p.A.

Bari, Italy

April 30, 2015

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

The Company has determined that, because of the existence and nature of its board of statutory auditors, it qualifies for an exemption provided by Exchange Act Rule 10A-3(c)(3) from many of the Rule 10A-3 audit committee requirements. The board of statutory auditors has determined that each of its members is an “audit committee financial expert” as defined in Item 16A of Form 20-F. For the names of the members of the board of statutory auditors, see “Item 6. Directors, Senior Management and Employees—Statutory Auditors” and Item 16G. Corporate Governance—Audit Committee and Internal Audit Function.”

Each of the audit committee financial experts is independent under the NYSE Independence Standards that would apply to audit committee members in the absence of our reliance on the exemption in Rule 10A-3(c)(3).

ITEM 16B. CODE OF ETHICS

The Company has adopted a code of ethics, as defined in Item 16B of Form 20-F under the Exchange Act. This code of ethics applies, among others, to the Company’s Chief Executive Officer and Chief Financial Officer. The Company’s code of ethics is downloadable from its website at http://www.natuzzi.com/en-EN/page/code-of-ethics-18.html. If the Company amends the provisions of its code of ethics that apply to the Company’s Chief Executive Officer and Chief Financial Officer, or if the Company grants any waiver of such provisions, it will disclose such amendment or waiver on its website at the same address.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Reconta Ernst & Young S.p.A. (“Ernst & Young”, hereafter) has served as Natuzzi S.p.A.’s principal independent public auditor for fiscal year 2014, 2013 and 2012 for which it audited the consolidated financial statements included in this Annual Report.

The following table sets forth the aggregate fees billed and billable to the Company by Ernst & Young in Italy and abroad during the fiscal years ended December 31, 2014 and 2013, for audit fees, audit–related fees, tax fees and all other fees for audit.


	2014		2013
	(Expressed in thousands of euros)
Audit fees		600		600
Audit-related fees		—		—
Tax fees		—		3
Other fees		—		—

Total fees		600		603

Audit fees in the above table are the aggregate fees billed and billable in connection with the audit of the Company’s annual financial statements.

Tax fees consist of fees billed and billable in connection with the professional services rendered for tax compliance.

The Company’s board of statutory auditors expressly pre-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. All services rendered by our independent auditors for audit and non-audit services were pre-approved by our board of statutory auditors in accordance with this policy.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

The Company is relying on the exemption from listing standards for audit committees provided by Exchange Act Rule 10A-3(c)(3). The basis for this reliance is that the Company’s board of statutory auditors meets the following requirements set forth in Exchange Act Rule 10A-3(c)(3):

1)	the board of statutory auditors is established and selected pursuant to Italian law expressly permitting such a board;

2)	the board of statutory auditors is required under Italian law to be separate from the Company’s board of directors;

3)	the board of statutory auditors is not elected by management of the Company and no executive officer of the Company is a member of the board of statutory auditors;

4)	Italian law provides for standards for the independence of the board of statutory auditors from the Company and its management;

the board of statutory auditors, in accordance with applicable Italian law and the Company’s governing documents, is responsible, to the extent permitted by Italian law, for the appointment, retention and oversight of the work (including, to the extent permitted by law, the resolution of disagreements between management and the auditor regarding financial reporting) of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company, and

6)	to the extent permitted by Italian law, the audit committee requirements of paragraphs (b)(3), (b)(4) and (b)(5) of Rule 10A-3 apply to the board of statutory auditors.

The Company’s reliance on Rule 10A-3(c)(3) does not, in its opinion, materially adversely affect the ability of its board of statutory auditors to act independently and to satisfy the other requirements of Rule 10A-3.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

From January 1, 2014 to December 31, 2014, no purchases were made by or on behalf of the Company or any other affiliated purchaser of the Company’s Ordinary Shares or ADSs.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

ITEM 16G. CORPORATE GOVERNANCE

Under NYSE rules, we are permitted, as a listed foreign private issuer, to adhere to the corporate governance rules of our home country in lieu of certain NYSE corporate governance rules.

Corporate governance rules for Italian stock corporations (società per azioni) like the Company, whose shares are not listed on a regulated market in the European Union, are set forth in the Civil Code. As described in more detail below, the Italian corporate governance rules set forth in the Civil Code differ in a number of ways from those applicable to U.S. domestic companies under NYSE listing standards, as set forth in the NYSE Listed Company Manual.

As a general rule, our company’s main corporate bodies are governed by the Civil Code and are assigned specific powers and duties that are legally binding and cannot be derogated from. The Company follows 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. 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 the Company. As required by Italian law, an external auditing firm (società di revisione) is in charge of auditing the Company’s financial statements. The members of the Company’s board of directors and board of statutory auditors, as well as the external auditor, are directly and separately appointed by shareholder resolution at the general shareholders’ meetings. This system differs from 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.

Below is a summary of the significant differences between Italian corporate governance rules and practices, as the Company has implemented them, and those applicable to U.S. issuers under NYSE listing standards, as set forth in the NYSE Listed Company 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, their 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 — The presence of a prescribed number of independent directors on the Company’s board is neither mandated by any Italian law applicable to the Company nor required by the Company’s By-laws.

However, Italian law sets forth certain independence requirements applicable to the Company’s statutory auditors. Statutory auditors’ independence is assessed on the basis of the following rules: a person who (i) is a director, or the spouse or a close relative of a director, of the Company or any of its affiliates, or (ii) has an employment or a regular consulting or similar relationship with the Company or any of its affiliates, or (iii) has an economic relationship with the Company or any of its affiliates which might compromise his/her independence, cannot be appointed to the Company’s board of statutory auditors. The law sets forth certain principles aimed at ensuring that any member of the board of statutory auditors who is a chartered public accountant (iscritto nel registro dei revisori contabili) be substantively independent from the company subject to audit and not be in any way involved in the company’s decision-making process. The Civil Code mandates that at least one standing and one alternative member of the board of statutory auditors be a chartered public accountant. Each of the current members of the board of statutory auditors is a chartered public accountant.

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 — Under the laws of Italy, neither non-executive directors nor independent directors are required to meet in executive sessions. The members of the Company’s board of statutory auditors are required to meet at least 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 auditors and (v) the adoption of an annual performance evaluation. A company must also have an internal audit function, which may be outsourced, except to the independent auditor.

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 Rule 10A-3, to the extent permitted by local law) (the “Statutory Auditor Requirements”) are exempt from the audit committee requirements established by the rule. The Company is relying on this exemption on the basis of its separate board of statutory auditors, which is permitted by the Civil Code and which satisfies the Statutory Auditor Requirements. Nevertheless our board of statutory auditors, consisting of independent and highly professional experts, complies with the requirements indicated at points (i), (iii) and (iv) of the preceding paragraph. The Company also has an internal audit function, which has not been outsourced.

Compensation Committee

NYSE Domestic Company Standards — Under NYSE standards, the compensation of the CEO 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 — The Company has not established a compensation committee. As a matter of Italian law and under our by-laws, the compensation of executive directors, including the CEO, is determined by the board of directors, after consultation with the board of statutory auditors, within a maximum amount established by the Company’s shareholders, while the Company’s shareholders determine the base compensation for all Board members, including non-executive directors. Compensation of the Company’s executive officers is determined by the Chief Executive Officer. The Company does not produce a compensation report. However, the Company discloses aggregate compensation of all of its directors and officers as well as individual compensation of each director in Item 6 of its Annual Report.

Nominating Committee

NYSE Domestic Company Standards — Under NYSE standards, a domestic company must have a nominating committee (or equivalent) comprised solely of independent directors, which is responsible for nominating directors.

Our Practice — As allowed by Italian laws, the Company has not established a nominating committee (or equivalent) responsible for nominating its directors. Directors may be nominated by any of the Company’s shareholders or the Company’s board of directors. Mr. Natuzzi, by virtue of owning a majority of the outstanding shares of the Company, controls the Company, including its management and the selection of its board of directors.

Corporate Governance and 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 — In January 2011, the Company’s board of directors approved the adoption of a compliance program to prevent certain criminal offenses, according to the Italian Decree 231/2001. The Company has adopted a code of ethics that applies to all employees of the Company, including the Company’s Chief Executive Officer, Chief Financial Officer, and principal accounting officer. The Company believes that its code of ethics and the conduct and procedures adopted by the Company address the relevant issues contemplated by the NYSE standards applicable to U.S. companies noted above.

Certifications as to Violations of NYSE Standards

NYSE Domestic Company Standards — Under NYSE listing standards, the CEO of a U.S. company listed on the NYSE must certify annually to the NYSE that he or she is not aware of any violation by the company of the NYSE corporate governance standards. The company must disclose this certification, as well as the fact that the CEO/CFO certification required under Section 302 of the Sarbanes-Oxley Act of 2002 has been made in the company’s annual report to shareholders (or, if no annual report to shareholders is prepared, its annual report). Each listed company on the NYSE, both domestic and foreign issuers, must submit an annual written affirmation to the NYSE regarding compliance with applicable NYSE corporate governance standards. In addition, each listed company on the NYSE, both domestic and foreign issuers, must submit interim affirmations to the NYSE upon the occurrence of specified events. A domestic issuer must file such an interim affirmation whenever the independent status of a director changes, a director joins or leaves the board, a change occurs to the composition of the audit, nominating/corporate governance, or compensation committee, or there is a change in the company’s classification as a “controlled company.”

The CEO of both domestic and foreign issuers listed on the NYSE must promptly 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 rules, the Company’s CEO is not required to certify annually to the NYSE whether he is aware of any violation by the Company of the NYSE corporate governance standards. However, the Company is required to submit an annual affirmation of compliance with applicable NYSE corporate governance standards to the NYSE within 30 days of the filing of its annual report on Form 20-F with the SEC. The Company is also required to submit to the NYSE an interim written affirmation any time it is no longer eligible to rely on, or chooses to no longer rely on, a previously applicable exemption provided by Rule 10A-3, or if a member of its audit committee ceases to be deemed independent or an audit committee member had been added. Under NYSE rules, the Company’s CEO must notify the NYSE in writing if any executive officer becomes aware of any material non-compliance by the Company 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 the Company’s shareholders must authorize (i) the issuance of shares in connection with capital increases, and (ii) the buy-back of its own shares, the adoption of equity compensation plans does not per se require prior approval of the shareholders.

ITEM 16H. MINE SAFETY DISCLOSURE.

Not applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS

Our financial statements have been prepared in accordance with Item 18 hereof.

ITEM 18. FINANCIAL STATEMENTS

Our audited consolidated financial statements are included in this Annual Report beginning at page F-1.


Index to Consolidated Financial Statements	Page
Reports of Independent Registered Public Accounting Firm		F-1

Consolidated Balance Sheets as of December 31, 2014 and 2013		F-2

Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012		F-3

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012		F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012		F-5

Notes to the Consolidated Financial Statements		F-6

ITEM 19. EXHIBITS


1.1		English translation of the by-laws (Statuto) of the Company, as amended and restated as of January 24, 2008 (incorporated by reference to the Form 20-F filed by Natuzzi S.p.A. with the Securities Exchange Commission on June 30, 2008, file number 001-11854).

2.1		Deposit Agreement dated as of May 15, 1993, as amended and restated as of December 31, 2001, among the Company, The Bank of New York, as Depositary, and owners and beneficial owners of ADRs (incorporated by reference to the Form 20-F filed by Natuzzi S.p.A. with the Securities and Exchange Commission on July 1, 2002, file number 001-11854).

4.1		Agreement among the Ministry of Economic Development, Ministry of Labour and Social Policy, INVITALIA, the Region of Puglia, the Region of Basilicata, Natuzzi S.p.A., Confindustria and the Italian trade union and other entities named therein, dated as of October 10, 2013 (incorporated by reference to the Form 20-F filed by Natuzzi S.p.A. with the Securities and Exchange Commission on April 30, 2014, file number 001-11854).

4.2		Addendum among the Ministry of Economic Development, Confindustria of Bari, Natuzzi S.p.A. and the trade unions named therein dated as of March 3, 2015, to the agreement dated as of October 10, 2013.

4.3		Two separate agreements, each among the Ministry of Labor, the Ministry of Economic Development, the Puglia Region, the Basilicata Region, Natuzzi S.p.A., Confindustria Bari and the Italian trade unions and other entities named therein, each dated as of March 3, 2015.

8.1		List of Significant Subsidiaries.

12.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

12.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

13.1		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Natuzzi S.p.A.

We have audited the accompanying consolidated balance sheets of Natuzzi S.p.A. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Natuzzi S.p.A. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with established accounting principles in the Republic of Italy.

Established accounting principles in the Republic of Italy vary in certain significant respects from generally accepted accounting principles in the United States of America. Information related to the nature and effect of such differences is presented in note 31 to the consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Natuzzi S.p.A. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 30, 2015 expressed an unqualified opinion thereon.

/s/ Reconta Ernst & Young S.p.A.

Bari, Italy

April 30, 2015

F - 1

Natuzzi S.p.A. and Subsidiaries

Consolidated Balance Sheets

as of December 31, 2014 and 2013

(Expressed in thousands of euros)


				Dec. 31, 2014		Dec. 31, 2013
	Notes
ASSETS
Current assets:
Cash and cash equivalents		4			32,848		61,033
Marketable securities		5			4		4
Trade receivables, net		6			95,987		78,853
Other receivables		7			18,112		48,484
Inventories		8			90,213		78,991
Unrealized foreign exchange gain		30			312		592
Prepaid expenses and accrued income		9			1,312		1,938
Deferred income taxes		18			494		288

Total current assets					239,282		270,183

Non current assets:
Property plant and equipment		10			130,782		143,579
Intangible asset, net		11			4,408		5,558
Goodwill		12			—		—
Investment in affiliates		13			—		1,429
Trade receivables, net		6			3,393		—
Other non current assets		14			2,228		1,159

Total non current assets					140,811		151,725

TOTAL ASSETS					380,093		421,908

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Bank Overdrafts		15			20,708		25,020
Current portion of long-term debt		20			3,141		3,342
Accounts payable-trade		16			75,233		67,393
Accounts payable-other		17			29,712		25,839
Unrealized foreign exchange losses		30			583		193
Income taxes		18			1,072		7,126
Deferred income taxes		18			1,000		1,000
Salaries, wages and related liabilities		19			18,299		8,325

Total current liabilities					149,748		138,238

Non current liabilities:
Employees’ leaving entitlement		3o	)		20,890		24,837
Long-term debt		20			6,162		4,171
Deferred income taxes		18			—		—
Deferred income for capital grants		3n			8,063		8,624
Other liabilities		21			21,215		34,436

Total non current liabilities					56,330		72,068

Commitments and contingent liabilities		23			—		—
Shareholders’ equity:		22
Share capital					54,853		54,853
Reserves					40,902		42,780
Additional paid-in capital					8,442		8,442
Retained earnings					66,817		102,835

Total equity attributable to Natuzzi S.p.A. and Subsidiaries					171,014		208,910
Non-controlling interest					3,001		2,692

Total shreholders’ equity					174,015		211,602

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY					380,093		421,908

See accompanying notes to the consolidated financial statements

F - 2

Natuzzi S.p.A. and Subsidiaries

Consolidated Statements of Operations

Years ended December 31, 2014, 2013 and 2012

(Expressed in thousands of euros except per share data)


			2014			2013			2012
Net sales	24			461,400			449,109			468,844
Cost of sales	25			(333,173	)		(317,299	)		(313,847	)

Gross profit				128,227			131,810			154,997
Selling expenses	26			(128,882	)		(126,634	)		(132,417	)
General and administrative expenses	27			(36,303	)		(37,505	)		(39,862	)

Operating income/(loss)				(36,958	)		(32,329	)		(17,282	)
Other income/(expense), net	28			(10,573	)		(31,900	)		(4,577	)

Earning/(loss) before taxes and non-controlling interest				(47,531	)		(64,229	)		(21,859	)
Income taxes	18			(1,809	)		(4,136	)		(4,171	)

Net income/(loss)				(49,340	)		(68,365	)		(26,030	)
Less: (Net income)/loss attributable to non-controlling interest				(17	)		(211	)		(74	)

Net income/(loss) attributable to Natuzzi S.p.A. and Subsidiaries				(49,357	)		(68,576	)		(26,104	)

Basic loss per share	3z	)		(0.90	)		(1.25	)		(0.48	)
Diluted loss per share	3z	)		(0.90	)		(1.25	)		(0.48	)
Average Ordinary Shares Outstanding				54,853,045			54,853,045			54,853,045
Average Ordinary Shares Outstanding assuming dilution				54,853,045			54,853,045			54,853,045

See accompanying notes to the consolidated financial statements

F - 3

Natuzzi S.p.A. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

Years ended December 31, 2014, 2013 and 2012

(Expressed in thousands of euros except number of ordinary shares)


	Share Capital amount		Reserves			Additional paid in capital		Retained earnings			Equity attributable to Natuzzi S.p.A.			Non- controlling interest			Total Share holders’ equity
Balances at December 31, 2011		54,853		42,780			8,282		204,562			310,477			3,035			313,512

Italsofa Shanghai dividend distribution															(186	)		(186	)
IMPE acquisition minority interest							160					160			(360	)		(200	)
Exchange difference on translation of financial statement									(3,396	)		(3,396	)		(39	)		(3,435	)
Net Income /(loss) of the year									(26,104	)		(26,104	)		74			(26,030	)

Balances at December 31, 2012		54,853		42,780			8,442		175,062			281,137			2,524			283,661

Exchange difference on translation of financial statement									(3,651	)		(3,651	)		(43	)		(3,694	)
Net Income /(loss) of the year									(68,576	)		(68,576	)		211			(68,365	)

Balances at December 31, 2013		54,853		42,780			8,442		102,835			208,910			2,692			211,602

Exchange difference on translation of financial statement									11,461			11,461			292			11,753
2013 partial loss offset				(1,878	)				1,878
Net Income /(loss) of the year									(49,357	)		(49,357	)		17			(49,340	)

Balances at December 31, 2014		54,853		40,902			8,442		66,817			171,014			3,001			174,015

See accompanying notes to the consolidated financial statements

F - 4

Natuzzi S.p.A. and Subsidiaries

Consolidated Statements of Cash Flows

Years ended December 31, 2014, 2013 and 2012

(Expressed in thousands of euros)


	2014			2013			2012
Cash flows from operating activities:
Net earnings (loss)		(49,340	)		(68,365	)		(26,030	)
Adj to reconcile net income (loss) to net cash provided by op. activities
Depreciation and amortization		14,240			16,561			17,033
Write off of Fixed Assets		—			359			339
Impairment of long lived Assets and non current investments		2,590			8,550			864
One-time termination benefit (provision)		—			19,959			—
Deferred income taxes		(161	)		141			(5,957	)
(Gain)/Loss on disposal of assets		(1.503	)		61			1,306
Unrealized foreign exchange (gain) and losses		671			508			(1,500	)
Deferred income for capital grants		(561	)		(585	)		(606	)
Change in assets and liabilities:
Receivables, net		(20,526	)		14,216			(130	)
Inventories		(11,221	)		3,278			11,268
Prepaid expenses and accrued income		626			93			566
Accounts payable		7,841			4,065			(215	)
Income taxes		(6,054	)		(2,073	)		7,864
Salaries, wages and related liabilities		9,973			358			(73	)
Other liabilities net		33,688			2,892			(11,352	)
One-time termination benefit (utilization for settlements)		(13,495	)		(1,364	)		(568	)
Employees’ leaving entitlement		(3,947	)		(880	)		(1,028	)
Total adjustments		12,161			66,139			17,811

Net cash provided by (used in) operating activities		(37,179	)		(2,226	)		(8,219	)

Cash flows from investing activities:
Property, plant and equipment:
Additions		(6,587	)		(7,116	)		(7,513	)
Disposals		6,809			212			1,737
Government grants received		5,239			—			—
Other assets		79			(1,091	)		(310	)
Dividends payment		—			(202	)		—
Minority interest acquisition		292			(43	)		(386	)

Net cash used in investing activities		5,832			(8,240	)		(6,472	)

Cash flows from financing activities:
Long-term debt:
Proceeds		5,000			—			—
Repayments		(3,346	)		(3,274	)		(3,753	)
Short-term borrowings		(4,177	)		(1,932	)		2,811

Net cash provided by (used in) financing activities		(2,523	)		(5,206	)		(942	)

Effect of translation adjustments on cash		5,685			(1,008	)		(694	)
Increase (decrease) in cash and cash equivalents		(28,185	)		(16,680	)		(16,327	)
Cash and cash equivalents, beginning of the year		61,033			77,713			94,040
Cash and cash equivalents, end of the year		32,848			61,033			77,713
Supplemental disclosure of cash flow information:
Cash paid during the year for interest		1,359			929			662
Cash paid during the year for income taxes		6,470			7,213			2,516

See accompanying notes to the consolidated financial statements

F - 5

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

1. Description of business and Group composition

The consolidated financial statements include the accounts of Natuzzi S.p.A. (‘Natuzzi’ or the ‘Company’) and of its subsidiaries (together with the Company, the ‘Group’). The Group’s primary activity is the design, manufacture and marketing of contemporary and traditional leather and fabric upholstered furniture. The subsidiaries included in the consolidation at December 31, 2014, together with the related percentages of ownership, are as follows:


Name	Percentage of ownership		Registered office	Activity
Italsofa Nordeste S/A		100.00	Salvador de Bahia, Brazil		(1	)
Italsofa Shanghai Ltd		96.50	Shanghai, China		(1	)
Natuzzi China Ltd		100.00	Shanghai, China		(1	)
Italsofa Romania		100.00	Baia Mare, Romania		(1	)
Natco S.p.A.		99.99	Santeramo in Colle, Italy		(2	)
I.M.P.E. S.p.A.		100.00	Bari, Italy		(3	)
Nacon S.p.A.		100.00	Santeramo in Colle, Italy		(4	)
Lagene S.r.l.		100.00	Santeramo in Colle, Italy		(4	)
Natuzzi Americas Inc.		100.00	High Point, NC, USA		(4	)
Natuzzi Iberica S.A.		100.00	Madrid, Spain		(4	)
Natuzzi Switzerland AG		100.00	Dietikon, Switzerland		(4	)
Natuzzi Benelux S.A.		100.00	Hereentals, Belgium		(4	)
Natuzzi Germany Gmbh		100.00	Köln, Germany		(4	)
Natuzzi Japan KK		100.00	Tokyo, Japan		(4	)
Natuzzi Services Limited		100.00	London, UK		(4	)
Natuzzi Trading Shanghai Ltd		100.00	Shanghai, China		(4	)
Natuzzi Oceania PTI Ltd		100.00	Sydney, Australia		(4	)
Natuzzi Russia OOO		100.00	Moscow, Russia		(4	)
Natuzzi India Furniture PVT Ltd		100.00	New Delhi, India		(4	)
Italholding S.r.l.		100.00	Bari, Italy		(5	)
Natuzzi Netherlands Holding		100.00	Amsterdam, Holland		(5	)
Natuzzi Trade Service S.r.l.		100.00	Santeramo in Colle, Italy		(6	)
SALENA SRL		49.00	Milan, Italy		(7	)

(1)	Manufacture and distribution

(2)	Intragroup leather dyeing and finishing

(3)	Production and distribution of polyurethane foam

(4)	Services and distribution

(5)	Investment holding

(6)	Transportation services

(7)

Dormant

During 2014, Natuzzi Nordic was liquidated.

F - 6

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

2. Basis of preparation

The financial statements utilized for the consolidation are the financial statements of each Group company at December 31, 2014, 2013 and 2012. The 2014, 2013 and 2012 financial statements have been adopted by the respective Boards of Directors of the relevant companies.

The financial statements of subsidiaries are adjusted, where necessary, to conform to Natuzzi’s accounting principles and policies, which are consistent with Italian legal requirements governing financial statements considered in conjunction with established accounting principles promulgated by the Italian Accounting Profession (OIC).

Established accounting principles in the Republic of Italy vary in certain significant respects from generally accepted accounting principles in the United States of America. Information relating to the nature and effect of such differences is presented in note 31 to the consolidated financial statements.

3. Summary of significant accounting policies

During 2014, the Italian Accounting Profession completed the review and update of the Italian accounting principles, started in 2010. The project was mainly aimed to consider the developments following changes in legislation, international and national accounting practice and accounting interpretations.

The new set of accounting principles is effective for financial statements closed as of December 31, 2014. The impacts deriving from the adoption of the new standards, where applicable, have been disclosed in the notes.

The significant accounting policies followed in the preparation of the consolidated financial statements are also based on the considerations indicated in paragraph “Liquidity and Capital Resources” included in Item 5 of this Annual Report and are outlined below.

a) Principles of consolidation

The consolidated financial statements include all affiliates and companies that Natuzzi directly or indirectly controls, either through majority ownership or otherwise. Control is presumed to exist where more than one-half of a subsidiary’s voting power is controlled by the Company or the Company is able to govern the financial and operating policies of a subsidiary or control the removal or appointment of a majority of a subsidiary’s board of directors. Where an entity either began or ceased to be controlled during the year, the results of operations are included only from the date control commenced or up to date control ceased.

The assets and liabilities of subsidiaries are consolidated on a line-by-line basis and the carrying value of intercompany investments held is eliminated against the related shareholder’s equity accounts. The non-controlling interests of consolidated subsidiaries are separately reported in the consolidated balance sheets and consolidated statements of operations. All intercompany balances and transactions are eliminated in consolidation.

b) Foreign currency transactions

Foreign currency transactions are recorded at the exchange rates applicable at the transaction dates. Assets and liabilities denominated in foreign currency are remeasured at year-end exchange rates. Foreign exchange gains and losses resulting from the remeasurement of these assets and liabilities are included in other income (expense), net, in the consolidated statements of operations.

F - 7

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

c) Forward and collars exchange contracts

The Group enters into forward exchange contracts (known in Italian financial markets as domestic currency swaps) and, for a limited number of contracts, into so called “zero cost collars” exchange rate derivative instruments to manage its exposure to foreign currency risks. The Group does not enter into these contracts on a speculative basis, nor is hedge effectiveness constantly monitored. As a consequence of this, forward and collar exchange contracts are not used to hedge any on or off-balance sheet items. Therefore, at December 31, 2014, 2013 and 2012 all unrealized gains or losses on such contracts are recorded in other income (expense), net, in the consolidated statements of operations.

d) Financial statements of foreign operations

The financial statements of foreign subsidiaries expressed in foreign currency are translated directly into euro as follows: i) year-end exchange rate for assets, liabilities, and shareholders’ equity and ii) average exchange rates during the year for revenues and expenses. The resulting exchange differences on translation are recorded as a direct adjustment to shareholders’ equity.

e) Cash and cash equivalents

The Company classifies as cash and cash equivalents cash on hand, amounts on deposit and on account in banks.

f) Marketable debt securities

Marketable debt securities are valued at the lower of cost or market value determined on an individual security basis. A valuation allowance is established and recorded as a charge to other income (expense), net, for unrealized losses on securities. Unrealized gains are not recorded until realized. Recoveries in the value of securities are recorded as part of other income (expense), net, but only to the extent of previously recognized unrealized losses.

Gains and losses realized on the sale of marketable debt securities are computed based on a weighted-average cost of the specific securities being sold. Realized gains and losses are charged to other income (expense), net.

g) Accounts receivable and payable

Receivables are stated at nominal value net of an allowance for doubtful accounts. Payables are stated at face value. The Group records revenues net of returns and discounts. The Group estimates sales returns and discounts and creates an allowance for them in the year of the related sales. The Group makes estimates in connection with such allowances based on its experience and historical trends in its large volumes of homogeneous transactions. However, actual costs for returns and discounts may differ significantly from these estimates if factors such as economic conditions, customer preferences or changes in product quality differ from the ones used by the Group in making these estimates.

The Group makes estimates and judgments in relation to the collectability of its accounts receivable and maintains an allowance for doubtful accounts based on losses it may experience as a result of failure by its customers to pay amounts owed. The Group estimates these losses using consistent methods that take into consideration, in particular, insurance coverage in place, the creditworthiness of its customers and general economic conditions. Changes to assumptions relating to these estimates could affect actual results. Actual results may differ significantly from the Group’s estimates if factors such as general economic conditions and the creditworthiness of its customers are different from the Group’s assumptions.

F - 8

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

h) Inventories

Raw materials are stated at the lower of cost (determined under the specific cost method for leather hides and under the weighted-average method for other raw materials) and replacement cost.

Goods in process and finished goods are valued at the lower of production cost and net realizable value. Production cost includes direct production costs and production overhead costs. The production overhead costs are allocated to inventory based on the manufacturing facility’s normal capacity.

The provision for slow moving and obsolete raw materials and finished goods is based on the estimated realizable value net of the costs of disposal.

i) Property, plant and equipment

Property, plant and equipment is stated at historical cost, except for certain buildings which were revalued in 1983, 1991 and 2000 according to Italian revaluation laws. Maintenance and repairs are expensed; significant improvements are capitalized and depreciated over the useful life of the related assets. The cost or valuation of fixed assets is depreciated on the straight-line method over the estimated useful lives of the assets (refer to note 10). The related depreciation expense is allocated to cost of goods sold, selling expenses and general and administrative expenses based on the usage of the assets. Depreciation is calculated also for assets not in use.

j) Intangible assets and Goodwill

Set-up costs, advertising costs and goodwill are recorded with the consent of the board of statutory auditors, and are stated at cost, net of the amortization expense calculated on the straight-line method over a period of five years. Other intangible assets primarily include software and trademarks, and are stated at cost, net of the amortization expense calculated on the straight-line method over their estimated useful life.

The carrying amounts of these assets are reviewed to determine if they are in excess of their recoverable amount, based on discounted cash flows, at the consolidated balance sheet date. If the carrying amount exceeds the recoverable amount, the asset is written down to the recoverable amount.

k) Investment in affiliates

The affiliate enterprise is Salena S.r.l. in which the Company owns 49% and has a significant influence. This affiliate has interests in real estate. We account for ownership interest under the acquisition cost method, net of any estimated impairment loss, since we have significant influence but we do not control.

l) Impairment of long-lived assets and long-lived assets to be disposed of

The Company reviews long-lived assets, including intangible assets with estimable useful lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset with its recoverable value, which is the higher of a) future undiscounted and discounted cash flows expected to be generated by the asset or b) estimated fair value less costs to sell. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the recoverable value of the assets. Assets not in use/to be disposed of are reported at the lower of their carrying amount and their fair value less costs to sell. Estimated fair value is generally determined through various valuation techniques including quoted market values and third-party independent appraisals, as considered necessary.

F - 9

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

m) Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for losses available for carryforward in the various tax jurisdictions. Deferred tax assets are reduced by a valuation allowance to an amount that is more likely than not to be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

n) Government grants

Capital grants compensate the Group for the partial cost of an asset and are part of the Italian government’s investment incentive program, under which the Group receives amounts generally equal to a percentage of the aggregate investment made by the Group in the construction of new manufacturing facilities, or in the improvement of existing facilities, in designated areas of the country.

Capital grants from government agencies are recorded when there is reasonable assurance that the grants will be received and that the Group will comply with the conditions applying to them.

Until December 31, 2000 capital grants were recorded, net of tax, within reserves in shareholders’ equity. As from January 1, 2001 all new capital grants are recorded in the consolidated balance sheet initially as deferred income and subsequently recognized in the consolidated statement of operations as revenue on a systematic basis over the useful life of the related asset.

In addition when capital grants are received after the year in which the related assets are acquired, the depreciation of the capital grants is recognized as income as follows: (a) the depreciation of the grants related to the amortization of the assets recorded in statements of operations in the years prior to the date in which the grants are received, is recorded in other income (expense), net; (b) the depreciation of the grants related to the amortization of the assets recorded in statements of operations of the year, is recorded in net sales.

At December 31, 2014 and 2013 the deferred income for capital grants shown in the consolidated balance sheet amounts to 8,063 and 8,624, respectively.

The amortization of these grants recorded in net sales of the consolidated statement of operations for the years ended December 31, 2014, 2013 and 2012, amounts to 442, 461 and 470, respectively.

Cost reimbursement grants relating to research, training and other personnel costs are credited to income when there is a reasonable assurance of receipt from government agencies.

o) Employees’ leaving entitlement

Leaving entitlements represent amounts accrued for each Italian employee that are due and payable upon termination of employment, assuming immediate separation, determined in accordance with applicable Italian labour laws. The Group accrues the full amount of employees’ vested benefit obligation as determined by such laws for leaving entitlements. At December 31, 2014 and 2013 employees’ leaving entitlement shown in the consolidated balance sheets amounts to 20,890 and 24,837, respectively.

F - 10

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Under such Italian labor laws, upon termination of an employment relationship, the former employee has the right to receive termination benefits for each year of service equal to the employee’s gross annual salary, divided by 13.5. The entitlement is increased each year by an amount corresponding to 75% of the rise in the cost of living index plus 1.5 points.

The expenses recorded for the leaving entitlement for the years ended on December 31, 2014, 2013 and 2012 were 5,690, 6,162 and 6,393, respectively.

p) Revenue recognition

The Company recognizes revenue on sales at the time products are shipped from the manufacturing facilities, and when the following criteria are met: persuasive evidence of an arrangement exists; the price to the buyer is fixed and determinable and collectability of the sales price is reasonably assured.

Revenues are recorded net of returns and discounts. Sales returns and discounts are estimated and provided for in the year of sales. Such allowances are made based on historical trends. The Company has the ability to make a reasonable estimate of such allowances due to large volumes of homogeneous transactions and historical experience.

q) Cost of sales, selling expenses, general and administrative expenses

Cost of sales consist of the following expenses: the change in opening and closing inventories, purchases of raw materials, labor costs, third party manufacturing costs, depreciation and amortization expense of property, plant and equipment used in the production of finished goods, energy and water expenses (for instance light and power expenses), expenses for maintenance and repairs of production facilities, distribution network costs (including inbound freight charges, warehousing costs, internal transfer costs and other logistic costs involved in the production cycle), rentals and security costs for production facilities, small-tools replacement costs, insurance costs, and other minor expenses.

Selling expenses consist of the following expenses: shipping and handling costs incurred for transporting finished products to customers, advertising costs, labor costs for sales personnel, rental expense for stores, commissions to sales representatives and related costs, depreciation and amortization expense of property, plant and equipment and intangible assets that, based on their usage, are allocated to selling expense, sales catalogue and related expenses, warranty costs, exhibition and trade-fair costs, advisory fees for sales and marketing of finished products, expenses for maintenance and repair of stores and other trade buildings, bad debt expense, insurance costs for trade receivables and other related costs, and other miscellaneous expenses.

General and administrative expenses consist of the following expenses: costs for administrative personnel, advisory fees for accounting and information-technology services, traveling expenses for management and other personnel, depreciation and amortization expenses related to property, plant and equipment and intangible assets that, based on their usage, are allocated to general and administrative expense, postage and telephone costs, stationery and other office-supplies costs, expenses for maintenance and repair of administrative facilities, statutory auditors and external auditors fees, and other miscellaneous expenses. As noted above, the costs of the Group’s distributions network, which include inbound freight charges, warehousing costs, internal transfer costs and other logistic costs involved in the production cycle, are classified under the “cost of sales” line item.

F - 11

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

r) Shipping and handling costs

Shipping and handling costs sustained to transport products to customers are expensed in the periods incurred and are included in selling expenses. Shipping and handling expenses recorded for the years ended December 31, 2014, 2013 and 2012 were 42,326, 40,461 and 42,577, respectively.

s) Advertising costs

Advertising costs (other than those capitalized as intangibles) are expensed in the periods incurred and are included in selling expenses. Advertising expenses recorded for the years ended December 31, 2014, 2013 and 2012 were 17,943, 16,152 and 19,527, respectively.

t) Commission expense

Commissions payable to sales representatives and the related expenses are recorded at the time shipments are made by the Group to customers and are included in selling expenses. Commissions are not paid until payment for the related sale’s invoice is remitted to the Group by the customer.

u) Warranties

Warranties are estimated and provided for in the year of sales. Such allowances are made based on historical trends. The Company has the ability to make a reasonable estimate of such allowances due to large volumes of homogeneous transactions and historical trends.

v) Research and development costs

Research and development costs are expensed in the period incurred. At December 31, 2014 and 2013 research and development expenses were 5,794 and 7,940 respectively.

w) Contingencies

Liabilities for loss contingencies are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

x) Use of estimates

The preparation of financial statements in conformity with established accounting policies requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

y) Leases

The Company has evaluated is existing lease contracts and concluded that all of its contracts are operating in nature. As such, lease expenses are recognized when incurred over the term of the lease.

z) Earnings (losses) per share

Basic earnings (losses) per share is calculated by dividing net earnings (losses) attributable to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings (losses) per share include the effects of the possible issuance of ordinary shares under share grants and option plans in the determination of the weighted average number of ordinary shares outstanding during the period.

F - 12

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

The following table provides the amounts used in the calculation of losses per share:


	2014			2013			2012
Net loss attributable to ordinary shareholders		(49,357	)		(68,576	)		(26,104	)

Weighted-average number of ordinary shares outstanding during the year		54,853,045			54,853,045			54,853,045
Increase resulting from assumed conversion of share grants and options		—			—			—

Weighted-average number of ordinary shares and potential shares outstanding during the year		54,853,045			54,853,045			54,853,045

4. Cash and cash equivalents

Cash and cash equivalents are analyzed as follows:


	2014		2013
Cash on hand		96		180
Bank accounts		32,752		60,853

		32,848		61,033

The following table shows the Group’s cash and cash equivalents broken-down by country/region


	2014		2013
China		18,898		52,429
Europe		13,328		7,961
North America		388		378
South America		198		105
Other		36		160

		32,848		61,033

In China, during 2014 the Company pledged a deposit of 110 million RMB (14.6 million euro) in order to obtain a bank overdraft. Following repayment of the overdraft in January 2015, the pledge has been released.

5. Marketable debt securities

Details regarding marketable debt securities are as follows:


	2014		2013
Foreign corporate bonds		4		4

		4		4

The contractual maturity of the Group’s marketable debt securities at December 31, 2014 is on short term.

F - 13

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

6. Trade receivables, net

Trade receivables are analyzed as follows:


	2014			2013
North American customers		42,633			32,100
Other foreign customers		40,749			33,045
Domestic customers		25,019			24,951

Total trade receivables		108,401			90,096
(Allowance for doubtful accounts)		(9,021	)		(11,243	)

Total trade receivables, net		99,380			78,853


Total trade receivables, net current		95,987			78,853
Total trade receivables, net non-current		3,393			—

Total trade receivables, net		99,380			78,853

Trade receivables are due primarily from major retailers who sell directly to their customers. Trade receivables due from related parties amounted to 5,501 as at December 31, 2014 (5,471 in 2013). Sales to related parties amounted to 6,837 in 2014 (6,359 in 2013). Transactions with related parties were conducted at arm’s length. During 2014, payments by instalments were agreed upon, with related parties, expiring in 2020. Following the agreements reached, the non-current portion of receivables, amounting to 3,393, was reclassified to non-current assets.

As of December 31, 2014, 2013 and 2012 and for each of the years in the three-year period ended December 31, 2014, the Company had customers who exceeded 5% of trade receivables and/or net sales as follows:


Trade receivables	N° of customers		% of trade receivables
2014		2		21	%
2013		2		15	%
2012		2		17	%


Net sales	N° of customers		% of net sales
2014		2		9	%
2013		2		14	%
2012		2		15	%

In 2014, 2013 and 2012 one customer accounted for approximately 5%, 8% and 8% of the total net sales of the Group, respectively. This customer operates many furniture stores throughout the United States.

The Company insures with a third party its collection risk in respect of a significant portion of accounts receivable outstanding balances, and estimates an allowance for doubtful accounts based on the insurance in place, the credit worthiness of its customers, as well as general economic conditions.

The following table provides the movements in the allowance for doubtful accounts:


Allowance for doubtful accounts	2014			2013			2012
Balance, beginning of year		11,243			9,848			10,647
Charges-bad debt expense		536			3,546			471
(Reductions-write off of uncollectible accounts)		(2,758	)		(2,151	)		(1,270	)

Balance, end of year		9,021			11,243			9,848

F - 14

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Trade receivables denominated in foreign currencies at December 31, 2014 and 2013 totaled 61,042 and 42,357, respectively. These receivables consist of the following:


Trade receivables in foreign currencies	2014		2013
U.S. dollars		38,209		23,821
Canadian dollars		9,246		9,461
British pounds		8,018		2,366
Australian dollars		2,299		1,847
Other currencies		3,270		4,862

Total		61,042		42,357

7. Other receivables

Other receivables are analyzed as follows:


	2014		2013
Receivable from National Institute for Social Security		2,483		16,473
Government capital grants		—		5,239
VAT		2,057		4,484
Receivable from tax authorities		2,844		2,901
Advances to suppliers		5,699		8,579
Other		5,029		10,808

		18,112		48,484

The “Receivable from National Institute for Social Security” represents the amounts anticipated by the Company on behalf of such governmental institute related to salaries for those employees subject to temporary work force reduction. The decrease with respect to 2013 is due to the partial offsetting of the receivable against the payment of taxes and social contributions during 2014.

The receivable for “Government capital grants” represented remaining amounts due from government agencies related to capital expenditures that have been incurred, and was collected in 2014.

The “VAT” receivable includes value added taxes and interest thereon reimbursable to various companies of the Group. While currently due at the balance sheet date, the collection of the VAT receivable may extend over a maximum period of up to two years.

The “Receivable from tax authorities” represents principally advance taxes paid in excess of the amounts due and interest thereon.

The “Advances to suppliers” represents principally advance payment for services and general expenses.

The “Other” caption primarily includes deposits and certain receivables related to green incentive for photovoltaic investment. The decrease with respect to 2013 is related to the portion (4.6 million, collected in March 2014) of the compensation with the Shanghai Municipality deriving from the second supplementary agreement that was signed in July 2013 between the Company and the Shanghai Municipality, pursuant to which the Company obtained the reimbursement of taxes due on 2011 relocation compensation.

F - 15

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

8. Inventories

Inventories are analyzed as follows:


	2014		2013
Leather and other raw materials		55,344		47,206
Goods in process		9,059		8,931
Finished products		25,810		22,854

		90,213		78,991

As of December 31, 2014 inventories increase by 11,222 with respect to December 31, 2013. The increase is mainly related to leather and other raw materials which the Company had to stock, to face increased orders in the last part of the year.

As of December 31, 2014 and 2013 the provision for slow moving and obsolete raw materials and finished products included in inventories amounts to 6,799 and 6,572, respectively.

9. Prepaid expenses and accrued income

Prepaid expenses and accrued income are analyzed as follows:


	2014		2013
Accrued income		6		4
Prepayments		1,306		1,934

		1,312		1,938

Prepayments mainly include the rent advance payment on factory buildings.

10. Property, plant and equipment and accumulated depreciation

Fixed assets are listed below together with accumulated depreciation.


2014	Cost or valuation		Accumulated depreciation			Net book value		Annual rate of depreciation
Land and industrial buildings		166,914		(70,181	)		96,733		0 – 10	%
Machinery and equipment		122,694		(100,137	)		22,557		10 – 25	%
Airplane		—		—			—		3	%
Office furniture and equipment		14,726		(13,392	)		1,334		10 – 20	%
Retail gallery and store furnishings		31,935		(30,756	)		1,179		25 – 35	%
Transportation equipment		4,244		(3,825	)		419		20 – 25	%
Leasehold improvements		18,167		(10,140	)		8,027		10 – 20	%
Construction in progress		533		—			533		—

Total		359,213		(228,431	)		130,782

F - 16

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)



2013	Cost or valuation		Accumulated depreciation			Net Book value		Annual rate of depreciation
Land and industrial buildings		166,056		(65,797	)		100,259		0 – 10	%
Machinery and equipment		123,781		(100,414	)		23,367		10 – 25	%
Airplane		24,075		(17,331	)		6,744		3	%
Office furniture and equipment		23,155		(21,402	)		1,753		10 – 20	%
Retail gallery and store furnishings		32,068		(30,336	)		1,732		25 – 35	%
Transportation equipment		4,266		(3,873	)		393		20 – 25	%
Leasehold improvements		17,648		(9,853	)		7,795		10 – 20	%
Construction in progress		1,536		—			1,536		—

Total		392,585		(249,006	)		143,579

The following table shows the Long lived assets down by country:


	2014		2013
Italy		75,458		88,737
Romania		17,477		18,450
United States of America		14,247		12,805
China		11,767		11,195
Brazil		11,152		11,326
Spain		210		—
UK		160		1,019
Other countries		311		47

Total		130,782		143,579

The increase in long lived assets pertaining to United States is connected to new shop openings occurred in 2014.

In 2014 the Company performed an impairment review of its fixed assets.

For assets in use, the Company determined the fair value using the Undiscounted and Discounted Cash Flow, at the lowest level for which identifiable cash flows are independent of other cash flows, and compared it with the carrying value of its fixed assets. Cash flow projections were derived from the Business Plan 2014-2016, adopted by the Board of Directors on February 28, 2014, as updated by management to reflect the roll-forward of the Plan in the next years.

For assets not in use/to be disposed of, the fair value was estimated through third-party independent external appraisals, and, for some specific assets (Pojuca plant) through the most recent market value determined on the basis of a preliminary sale agreement stipulated in the first months of 2015.

As a result of the impairment tests performed, the Company recorded an impairment loss totaling 1,160 was recorded (414 as “lands and industrial buildings”, 746 as “retail gallery and store furnishing”).

In 2013 the Company performed an impairment review of its fixed assets and an impairment loss totaling 8,550 was recorded (450 as “land and industrial buildings”, 448 as “machinery and equipment”, 1,659 as “retail gallery and store furnishing” and 5,993 as “airplane”).

For assets in use, the Company determined the fair value using the Undiscounted and Discounted Cash Flow, at the lowest level for which identifiable cash flows are independent of other cash flows, and compared it with the carrying value of its fixed assets. Cash flow projections were derived from the Business Plan 2014-2016, as adopted by the Board of Directors on February 28, 2014.

F - 17

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

For assets not in use/to be disposed of, the fair value was estimated through third-party independent external appraisals, and, for some specific assets (aircraft) through the most recent market value determined on the basis of a preliminary sale agreement stipulated in the first months of 2014.

Following the main impairments performed by country.

In Brazil the Company in order to improve its worldwide manufacturing efficiency, in 2008 decided to close and try to sell one of the two Brazilian manufacturing plants located in Pojuca—State of Bahia. This decision was formally confirmed in 2010 with a Board of Director’s resolution. The plant was classified as property, plant and equipment since the sale was deemed unlikely to happen in the short term. Impairment tests were performed from 2008 on, based on third-party independent appraisals, which resulted in the recording of an impairment loss of 2,911 in 2008 and an additional impairment loss of 1,036 in 2011. As of December 31, 2011 the carrying value of the plant, net of the 2008 and 2011 impairment loss, was 5,891.

During 2012 the company revaluated its earlier decision to sell the plant, given its growth plans in Brazil. As of December 31, 2012, the Company performed the annual impairment analysis with a new third-party independent appraisal and determined that its carrying value was less than the fair value less cost to sell. As consequence, no additional impairment loss was recorded in the 2012 consolidated statement of operations. As of December 31, 2012 the carrying value, net of the 2008 and 2011 impairment loss, was still 5,891.

As of December 31, 2013, new external appraisals were requested for the review of the fair market value of Pojuca plant (not in use) and Simoes Filho plant (currently in use). The appraisals determined that the carrying values of these plants (net of the impairment losses already recorded for the Pojuca plant) were less than the fair value less cost to sell for each of the plant considered. As a consequence, no additional impairment loss has been recorded in 2013 consolidated statement of operations. As of December 31, 2013 the carrying value of the plant not in use (Pojuca), net of the 2008 and 2011 impairment loss, was 4,936.

As of December 31, 2014, a new impairment test has been performed for the Pojuca plant (not in use) and Simoes Filho plant (currently in use). The impairment test has been based on new third-party external appraisals that determined the carrying values of these plants do not exceed the fair value less cost to sell for each of the plant considered. Also, during 2014, negotiations started with a third party for the sale of the Pojuca plant. In particular, in July 2014 a rental agreement with a sale promise clause was signed, followed by a preliminary sale/purchase agreement signed in the first months of 2015, in which the agreed sale price is higher than the carrying value of the plant as of December 31, 2014. To date, the first instalment of the sale price has already been collected. For the reported considerations, no additional impairment loss has been recorded in 2014. As of December 31, 2014 the carrying value of the plant not in use (Pojuca), net of the 2008 and 2011 impairment loss, remains therefore 4,936.

In Italy, the Company in 2008 decided to close and market for sale some industrial buildings mainly utilized as warehouses and located in the cities of Altamura and Matera nearby the Group’s headquarters in Santeramo in Colle. As a result of this decision the Company performed an impairment analysis and recorded an impairment loss of 1,792. As of December 31, 2012 the carrying value, net of the 2008 impairment loss, of the three remaining industrial buildings not in use was 3,842.

F - 18

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

As of December 31, 2013, as a consequence of the reorganization process of the Group that resulted in the agreement entered into with government Ministries, regions and trade unions on October 10, 2013, two other plants (Ginosa and Matera—La Martella) were idled and considered not to be used in the near term (2014). As a consequence, at year-end, after recording the depreciation charge for the year, the Company performed an impairment analysis estimating the fair value of all industrial buildings not in use on the basis of observable market transactions involving sales of comparable buildings and third party independent appraisals. Based on these third-party independent appraisals, the Company recorded an impairment loss of 404.

As of December 31, 2014, new third-party external appraisals have been requested for the review of the fair market value of plants not in use. The appraisals have resulted for some plants in a carrying value higher than the fair value, for an amount of 357, which the Company has recorded as impairment loss.

Also, in 2013 the Company performed an impairment test was performed on plants being used and assets pertaining to the Italian retail business unit. The recoverable amount was determined as value in use, using the Discounted Cash Flow method, derived from the Business Plan 2014-2016, as adopted by the Board of Directors on February 28, 2014. The impairment test resulted in the recording of an impairment loss of 698 for long-lived assets connected to the retail business unit. Also, as of December 31, 2013, an impairment loss of 5,993 was recorded for a specific asset (Airplane), as a result of a preliminary sale agreement signed by the Company in March 2014, in order to align the carrying value of the Airplane to the market value. The airplane has been formally sold in August 2014, recording an additional loss of 99.

During 2014, a new impairment test has been performed on plants being used and assets pertaining to the Italian retail business unit, in consideration of the history of losses over the past few years. The recoverable amount has been determined as value in use, using the Discounted Cash Flow method, derived from the updated Business Plan 2015-2020. No impairment loss has been recorded as a result of the test performed.

In China, an impairment test has been performed in 2014 on the Chinese plant, in consideration of the loss for the year. In particular, the delays in the implementation of the new manufacturing process (“moving line”) caused a decline in revenues and an increase in production costs, for the higher need of external labor in order to face the market demand. The recoverable amount has been determined as value in use, using the Discounted Cash Flow method, derived from the updated Business Plan 2015-2020. No impairment loss has been recorded as a result of the test performed

In Spain, in 2012 the Company performed an impairment review of the retail long-lived assets and an impairment loss of 864 was recorded. The Company determined the fair value of the assets using the Discounted Cash Flow, at the lowest level for which identifiable cash flows are independent of other cash flows, and compared it with the carrying value of its fixed assets. An impairment loss arose due, in particular, to the decline in cash flow projections related to the uncertain prospects for full economic recovery in Spain, since private consumption was negatively impacted by a general weakness in the job market, high levels of public indebtedness, and a decreasing level of savings among families.

As of December 31, 2013, an additional impairment test has been performed for the retail long-lived assets (equipment and retail gallery and store furnishing) as a consequence of the reported losses of stores and galleries over the past few years. The recoverable amount was determined as value in use, using the Discounted Cash Flow method, derived from the Business Plan 2014-2016, as adopted by the Board of Directors on February 28, 2014. The impairment test resulted in the recording of an impairment loss of 482.

F - 19

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

In UK, in 2014 the Company has performed an impairment for the retail long-lived assets (equipment and retail gallery and store furnishing) as a consequence of the reported losses of stores and galleries over the past few years. The recoverable amount has been determined as value in use, using the Discounted Cash Flow method, derived from the updated Business Plan 2015-2020. The impairment test resulted in the recording of an impairment loss of 649.

In 2013, assets write-off were recorded for some stores that were closed during 2013. The total asset write-off was 246.

In Other European countries (mainly Germany), during 2013 an impairment test has been performed for the retail long-lived assets due to the negative track record of economic results, and impairment loss of 782 has been recorded. Also in this case, the recoverable amount has been determined as value in use, using the Discounted Cash Flow method, derived from the Business Plan 2014-2016, as adopted by the Board of Directors on February 28, 2014.

In the other countries (Romania, United States of America), no impairment indicators arose in the current year, thanks to the positive track record of operating results.

11. Intangible assets

Intangible assets consist of the following, together with accumulated amortization:


2014	Gross carrying amount		Accumulated amortization			Net book value
Software		26,444		(23,928	)		2,516
Trademarks, patents and other		14,889		(12,997	)		1,892

Total		41,333		(36,925	)		4,408


2013	Gross carrying amount		Accumulated amortization			Net book Value
Software		25,503		(22,115	)		3,388
Trademarks, patents and other		14,490		(12,320	)		2,170

Total		39,993		(34,435	)		5,558

During 2013, the Company included in “Trademarks, patents and other” the advertisement costs related to the launch of its new armchair, Re-vive, for an amount of 1,225. At December 31, 2014 these advertisement costs amount to 918, net of the depreciation charge for the year.

Impairment tests have been performed on these costs both in 2013 and in 2014. The recoverable amount has been determined as value in use, using the Discounted Cash Flow method, derived, for 2013, from the Business Plan 2014-2016, as adopted by the Board of Directors on February 28, 2014, and, for 2014, from the updated Business Plan 2015-2020. No impairment loss has been recorded.

Amortization expense recorded for these assets was 2,515, 3,212 and 2,683 for the years ended December 31, 2014, 2013 and 2012, respectively. Estimated amortization expense for the next five years is 2,508 in 2015, 1,396 in 2016, 317 in 2017, 82 in 2018, 58 in 2019 and 47 in 2020.

F - 20

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

12. Goodwill

At December 31, 2014 and 2013 the net book value of goodwill may be analyzed as follows:


	2014			2013
Gross amount		9,136			9,136
Less accumulated amortization		(9,136	)		(9,136	)

Total, net		—			—

The changes in the carrying amount of goodwill for the year ended December 31, 2014, 2013 and 2012 are as follows:


	2014		2013			2012
Balance, beginning of year		—		81			261
Increase for new acquisition		—		—			—
(Reductions for amortization)		—		(81	)		(180	)

Balance, end of year		—		—			81

During 2013, the depreciation process of Goodwill, related to a small operating unit named “Italian retail owned stores”, was completed and, as a consequence, its net book value is nil and aligned with the US GAAP where the original carrying value was already written-off. See Note 31.

13. Investment in affiliates

At December 31, 2013 investments in affiliates included the 49% interest in Salena S.r.l., which carrying value was 1,429.

At December 31, 2014, the investment has been totally impaired, in consideration of some legal disputes among shareholders.

14. Other non-current assets

Other non-current assets consist of the following:


	2014		2013
Security deposits		900		1,159
Receivable from extraordinary disposal		1,328		—

Total		2,228		1,159

In consideration the efficiency actions set forth in the Group Transformation Plan, which implementation started in 2014, the Company outsourced the security and doorkeeping services, selling them to a former related party.

At December 31, 2014, other non-current assets include therefore the receivable of 1,328 deriving from this operation, which collection will start from 2016.

F - 21

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

15. Bank overdrafts

Bank overdrafts consist of the following:


	2014		2013
Bank overdrafts		20,708		25,020

Bank overdrafts are payable on demand and only relate to Italian entities. The weighted average interest rates on the above overdrafts at December 31, 2014 and 2013 are as follows:


	2014			2013
Bank overdrafts		4.50	%		3.89	%

Letters of credit available to the Group amounted to 46,899 and 47,026 at December 31, 2014 and 2013, respectively. The unused portion of these facilities, for which no commitment fees are due, amounted to 253 and 1,028 at December 31, 2014 and 2013, respectively.

16. Accounts payable-trade

Accounts payable-trade totaling 75,233 and 67,393 at December 31, 2014 and 2013, respectively, represent principally amounts payable for purchases of goods and services in Italy and abroad, and include 25,286 and 19,392 at December 31, 2014 and 2013, respectively, denominated in foreign currencies.

17. Accounts payable-other

Accounts payable-other are analyzed as follows:


	2014		2013
Provision for warranties		6,575		6,335
Advances from customers		7,458		4,776
Cooperative advertising and quantity discount		5,525		3,956
Withholding taxes on payroll and on others		2,122		2,329
Other accounts payable		8,032		8,443

Total		29,712		25,839

“Other accounts payable” represents principally VAT payable.

The following table provides the movements in the “Provision for warranties”:


	2014			2013			2012
Balance, beginning of year		6,335			5,804			7,180
Charges to profit and loss		2,051			2,492			1,000
Reductions for utilization		(1,811	)		(1,961	)		(2,376	)

Balance, end of year		6,575			6,335			5,804

18. Taxes on income

Italian companies are subject to two enacted income taxes at the following rates:


	2014			2013			2012
IRES (state tax)		27.50	%		27.50	%		27.50	%
IRAP (regional tax)		4.82	%		4.82	%		4.82	%

F - 22

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

IRES is a state tax and is calculated on the taxable income determined on the income before taxes modified to reflect all temporary and permanent differences regulated by the tax law. The enacted IRES tax rate for 2014, 2013 and 2012 is 27.50% of taxable income.

IRAP is a regional tax and each Italian region has the power to increase the current rate of 3.90% by a maximum of 0.92%. In general, the taxable base of IRAP is a form of gross profit determined as the difference between gross revenues (excluding interest and dividend income) and direct production costs (excluding labour costs, interest expense and other financial costs). The enacted IRAP tax rate due in Puglia region for 2014, 2013 and 2012 is 4.82% (3.90% plus 0.92%). Total income taxes for the years ended December 31, 2014, 2013 and 2012 are allocated as follows:


	2014			2013			2012
Current:
- Domestic		(1,175	)		(1,212	)		(1,856	)
- Foreign		(796	)		(2,835	)		(8,309	)

Total (a)		(1,971	)		(4,047	)		(10,165	)

Deferred:
- Domestic		—			—			(1,000	)
- Foreign		162			(89	)		6,994

Total (b)		162			(89	)		5,994

Total (a+b)		(1,809	)		(4,136	)		(4,171	)

Certain foreign subsidiaries enjoy significant tax benefits, such as corporate income tax exemptions or reductions of the corporate income tax rates effectively applicable. The tax reconciliation table reported below shows the effect of such “tax exempt income” on the Group’s 2014, 2013 and 2012 income tax charge.

Consolidated “Net income/(loss) before income taxes and non-controlling interest” of the consolidated statement of operations for the year ended December 31, 2014, 2013 and 2012, is analyzed as follows:


	2014			2013			2012
Domestic		(28,062	)		(60,085	)		(11,144	)
(a) Foreign		(19,469	)		(4,144	)		(10,715	)

(b) Total		(47,531	)		(64,229	)		(21,859	)

F - 23

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

The effective income taxes differ from the expected income tax expense (computed by applying the IRES state tax, which is 27.5% for 2014, 2013 and 2012, to income before income taxes and non-controlling interest) as follows:


	2014			2013			2012
Expected tax benefit at statutory tax rates		13,070			17,663			6,011
Effects of:
-Tax exempt income		3,570			1,450			1,109
-Aggregate effect of different tax rates in foreign jurisdictions		(587	)		1,311			965
- Italian regional tax		(1,150	)		(1,212	)		(1,854	)
- Expiration and write off tax loss carry-forwards		—			(3,101	)		—
- Non-deductible expenses		(3,113	)		(3,250	)		(993	)
- Provisions for contingent liabilities		—			—			—
- Depreciation and impairment of goodwill		—			(5	)		(5	)
- Effect of net change in valuation allowance established against deferred tax assets		(13,600	)		(16,992	)		(8,679	)
- Tax effect of unremitted earnings		—			—			(725	)

Actual tax charge		(1,809	)		(4,136	)		(4,171	)

The effective income tax rates for the years ended December 31, 2014, 2013 and 2012 were 3.81%, 6.44% and 19.08%, respectively.

The related Income tax debt recorded for the years ended December 31, 2014 and 2013 is 1,072 and 7,126, respectively.

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 are presented below:


	2014			2013
Deferred tax assets:
Tax loss carry-forwards		96,026			75,839
Provision for warranties		1,993			1,976
Allowance for doubtful accounts		2,277			3,890
Unrealized net losses on foreign exchange		2,514			1,152
Impairment of long-lived assets		2,639			4,554
One-time termination benefits		3,094			6,805
Inventory obsolescence		1,685			1,648
Goodwill and intangible assets		1,358			1,503
Intercompany profit on inventory		1,210			1,176
Provision for contingent liabilities		2,092			1,893
Provision for sales representatives		354			339

Total gross deferred tax assets		115,242			100,775
Less valuation allowance		(112,372	)		(98,772	)
Net deferred tax assets (a)		2,870			2,003

Deferred tax liabilities:
Unrealized net gains on foreign exchange		(2,239	)		(1,008	)
Unremitted earnings of subsidiaries		(137	)		(137	)
With tax on unremitted earnings of subsidiaries		(1,000	)		(1,000	)
Government Grants		—			(570	)
Other temporary differences		—			—

Total deferred tax liabilities (b)		(3,376	)		(2,715	)

Net deferred tax assets (a + b)		(506	)		(712	)

F - 24

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

A valuation allowance has been established for most of the deductible tax temporary differences and tax loss carry-forwards.

Net deferred tax assets not provided for are mainly related to provisions for contingent liabilities and unrealized net losses on foreign exchange recorded by Natuzzi China Ltd and Italsofa Romania, for which a valuation allowance has not been recorded in consideration of the positive economic result of the subsidiaries.

The valuation allowance for deferred tax assets as of December 31, 2014 and 2013 was 112,372 and 98,772, respectively. The net change in the total valuation allowance for the years ended December 31, 2014 and 2013 was an increase of 13,600 and 16,992, respectively. In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and the tax loss carry-forwards are utilized. The increase of the 2014 deferred tax assets is related to some temporary differences of foreign subsidiaries.

Starting from 2012, in Italy, a new tax rule has been adopted for tax losses carry forwards. From 2012 all net losses carried forward no longer expire, with the only limitation being that such loss carryforwards can be utilized to off-set a maximum of 80% of the taxable income in each following year. The new tax rule is applicable also to net losses recorded in previous periods.

Given the cumulative loss position of the Company and of most of the Italian and foreign subsidiaries as of December 31, 2014 and 2013, and despite the new tax rule described above, management has considered the scheduled reversal of deferred tax liabilities and tax planning strategies, in making their assessment. The management after a reasonable analysis as of December 31, 2014 and 2013 has not identified any relevant tax planning strategies prudent and feasible available to reduce the valuation allowance. Therefore, at December 31, 2014 and 2013 the realization of the deferred tax assets is primarily based on the scheduled reversal of deferred tax liabilities, except in certain historically profitable jurisdictions.

Based upon this analysis, management believes it is not more likely than not that Natuzzi Group will realize the benefits of these deductible differences and net operating losses carry-forwards, net of the existing valuation allowance at December 31, 2014 and 2013.

F - 25

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Net deferred income tax assets are included in the consolidated balance sheets as follows:


2014	Current			Non current			Total
Gross deferred tax assets		5,881			109,361			115,242
(c) Less Valuation allowance		(3,011	)		(109,361	)		(112,372	)

(d) Deferred tax assets		2,870			—			2,870
Deferred tax liabilities compensated		(2,376	)		—			(2,376	)

Net deferred tax assets		494			—			494

Deferred tax liabilities		(1,000	)		—			(1,000	)

Net deferred tax assets (liabilities)								(506	)

2013	Current			Non current			Total
Gross deferred tax assets		4,249			96,526			100,775
Less Valuation allowance		(2,246	)		(96,526	)		(98,772	)

Deferred tax assets		2,003			—			2,003
Deferred tax liabilities compensated		(1,715	)		—			(1,715	)

Net deferred tax assets		288			—			288

Deferred tax liabilities		(1,000	)		—			(1,000	)

Net deferred tax assets (liabilities)								(712	)

As of December 31, 2014, taxes that are due on the distribution of the portion of shareholders’ equity equal to unremitted earnings of some of the subsidiaries is 137 and the 10% of the withholding tax has also posted considering that these unremitted earnings will be distributed as dividends. The Group has provided for such taxes as the likelihood of distribution is probable. As of December 31, 2014 the tax losses carried-forward of the Group total 337,648 and expire as follows:


2015			2,280
2016			1,971
2017			1,498
2018			1,423
2019			13,162
Thereafter			54,773
No expiration			262,541

Total			337,648

19. Salaries, wages and related liabilities

Salaries, wages and related liabilities are analyzed as follows:


	2014		2013
Salaries and wages		7,034		1,344
Social security contributions		7,104		3,462
Vacation accrual		4,161		3,519

Total		18,299		8,325

The increase in salaries and wages is mainly deriving from the payment deferment of December salaries, settled in January 2015.

F - 26

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

The increase in social security contributions is mainly attributable to the liabilities of November and December 2014, for which the Company has asked and obtained a payment by instalment.

Salaries and wages include by 1,720 incentive payments relate to the unsettled portion of incentives granted to employees further to the agreements signed with social parties in October 2013 (see note 28). In particular, for some employees, payments by instalments have been agreed upon, ending in April 2015.

20. Long-term debt

Long-term debt at December 31, 2014 and 2013 consists of the following:


	2014			2013
6-months Euribor (360) plus a 3.9% spread long-term debt with final payment due August 2019		5,000			—
2.25% long-term debt payable in annual equal installments with final payment due May 30, 2015		301			597
3-months Euribor (360) plus a 1.0% spread long-term debt with final payment due August 2015		1,946			4,356
0.74% long-term debt payable in annual installments with final payment due April 2018		2,056			2,560

Total long-term debt		9,303			7,513
Less: (current installments)		(3,141	)		(3,342	)

Long-term debt, excluding current installments		6,162			4,171

In 2014 the Company obtained a new Long term debt of a nominal amount of 5,000 with installments payable on a monthly basis and with final payments due August 2019. This long term floating-rate debt provides variable installments depending on the 6-months Euribor (360) plus a 3.9% spread. The loan is guaranteed by a mortgage on some Italian plants for an amount of 10,000. During 2013 and 2014 the Company punctually reimbursed all the installment of the aforementioned long term loans.

Loan maturities after 2014 are summarized below:


2016			1,700
2017			1,756
2018			1,813
2019			893
Thereafter			—

Total			6,162

At December 31, 2014 and 2013 there are no covenants on the above long-term debt. In addition, at December 31, 2014 and 2013 there is no long-term debt denominated in foreign currencies.

Interest expense related to long-term debt for the years ended December 31, 2014, 2013 and 2012 was 152, 111 and 209 respectively. Interest expense is paid with the related installment (quarterly, semi-annual or annual).

F - 27

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

21. Other liabilities

Other liabilities consist of:


	2014		2013
Provision for tax and legal proceedings		7,001		7,315
One-time termination benefits		11,235		24,730
Termination indemnities for sales agents		1,139		1,095
Other provisions		1,840		1,296

		21,215		34,436

The Group is involved in a number of certain and probable claims (including tax claims) and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters, after the provision accrued, will not have a material adverse effect on the Group’s consolidated financial position or results of operations. The changes in the balance of “Provision for tax and legal proceedings” for the year ended December 31, 2013, 2012 and 2011 are as follows:


Provision for tax and legal proceedings	2014			2013			2012
Balance, beginning of year		7,315			8,293			12,237
-Increase for new provision		—			1,433			740
-(Reductions)		(314	)		(2,411	)		(4,684	)

Balance, end of year		7,001			7,315			8,293

The “One-time termination benefits” include the amounts to be paid on the separation date of certain workers and have been determined by the Company based on the current applicable Italian law and regulations for involuntarily termination of employees. In particular, in September 2011 the Company and the Trade Unions submitted a request to the Italian Ministry of Labor to access for 24 months (starting from October 16, 2011) to the unemployment benefits (Italian law July, 23 1991 n. 223 e D.M. August 20, 2002 n. 31444) granted by a special Social Security procedure called “CIGS—Cassa Integrazione Guadagni Straordinaria”. The average number of positions involved in the CIGS program within the Group’s Italian facilities for the 2011-2013 period was 1,273, employed in the Italian headquarters and production sites. In October 2011 the Italian Ministry of Labor accepted the above request, and admitted the Company to a 24 month layoff period, in order to support the reorganization process of the Company that assumed 1,060 redundant employees at the end of the lay-off period (October 15, 2013). Based on the above signed agreement, the Company, at December 31, 2011 increased the One-time termination benefits reserve to 6,703 with an addition accrual of 5,446 (for the 1,060 employees to be dismissed) recorded as a non-operating expense, under the line “other income/(expense) net” of the consolidated statement of operations for the year ended December 31, 2011. During 2012, the Company paid one-time termination benefits of 568 to the workers terminated pursuant to individual agreements reached during the year. As of December 31, 2012, the provision therefore decreased to 6,135.

Before the end of the first lay-off period (October 15, 2013), an agreement was signed between the Company and the Trade Unions by which the Company obtained the extension by one year (October 15, 2014) of the special Social Security procedure called “CIGS—Cassa Integrazione Guadagni Straordinaria”, and the number of redundant workers was estimated at 1,506, with the possibility for maximum 600 workers to adhere to an incentive payments program ending in May 2014. Based on the agreement dated October 10, 2013, the Company, at December 31, 2013 increased the One-time termination benefits reserve to 24,730 with an additional accrual of 19,959 recorded as a non-operating expense, under the line “other income/(expense) net” of the consolidated statement of operations for the year ended December 31, 2013 (see note 28). The provision, calculated by the

F - 28

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Company together with its labor consultants, considered (i) the cost of future layoffs, to be paid for those workers not adhering to the incentive payments program (ii) the best estimation of incentive payments to be paid in 2014 (iii) the advance notice remuneration owed to redundant workers in case of termination.

During 2014, the Company obtained the postponement of the “CIGS—Cassa Integrazione Guadagni Straordinaria” by one additional year (expiring on October 16, 2015) for 1.550 workers.

Also, in 2014, negotiations started with social parties to obtain a solidarity agreement aimed to avoid layoffs by reducing the number of daily work hours for all employees and reduce labor and social contribution costs. The agreement was finally signed on March 3, 2015 and refers to a total number of 1,818 workers, net of the 429 workers that left the Company further to the acceptance of incentive payments. Remaining redundant employees amount to 516, to be managed through possible reabsorptions at the Ginosa site and at newcos being established, together with incentive payment programs to be defined. Based on the new estimation of the redundancy, no accrual was posted in 2014 to the one-time termination benefit provision since the Company estimated, together with its labor consultant, that the remaining provision is sufficient enough to cover the cost of future layoffs and/or incentive payments to be agreed upon.


One time termination benefit	2014			2013			2012
Balance, beginning of year		24,730			6,135			6,703
-Increase for new provision		—			19,959			—
-(Utilization for settlements)		(13,495	)		(1,364	)		(568	)

Balance, end of year		11,235			24,730			6,135

During 2014, 2013 and 2012, the Company granted one-time termination benefits of 13,495, 1,364 and 568 respectively, to the workers terminated pursuant to individual agreements reached during each year. For 2014, termination benefits paid amount to 11,775 on total recognized benefits of 13,495. For the remaining 1,720 recognized benefits, payments by instalments have been agreed upon, ending in April 2015.

22. Shareholders’ equity

The share capital is owned, as of December 31, as follows:


	2014			2013
Mr. Pasquale Natuzzi*		56.5	%		55.1	%
Mrs. Anna Maria Natuzzi		2.6	%		2.6	%
Mrs. Annunziata Natuzzi		2.5	%		2.5	%
Other investors		38.4	%		39.8	%

		100	%		100	%

*	through Invest 2003 S.r.l.

An analysis of the “Reserves” is as follows:


	2014		2013
Legal reserve		11,199		11,199
Monetary revaluation reserve		1,344		1,344
Government capital grants reserve		27,871		29,749
Majority shareholder capital contribution		488		488

Total		40,902		42,780

F - 29

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

The number of ordinary shares issued at December 31, 2014 and 2013 is 54,853,045. The par value of one ordinary share is euro 1.

Italian law requires that 5% of net income of the parent company and each of its consolidated Italian subsidiaries be retained as a legal reserve, until this reserve is equal to 20% of the issued share capital of each respective company. The legal reserve may be utilized to cover losses; any portion which exceeds 20% of the issued share capital is distributable as dividends. The legal reserve totaled 11,199 at December 31, 2014 and 2013, respectively.

During 2014, the government capital grants reserve decreased by 1,878 as a consequence of the partial offset of the loss for 2013 recorded by the parent company.

During 2008 the majority shareholder made a contribution of 488 recorded by the Company under shareholder’s equity in the line item “reserves”.

The translation adjustment included in retained earnings of shareholders’ equity related to translation of the Group’s foreign assets and liabilities at December 31, 2014 was a credit of 11,461 (debit of 3,651 at December 31, 2013).

Non-controlling interest—Non-controlling interest shown in the accompanying consolidated balance sheet at December 31, 2014 is 3,001 (2,692 at December 31, 2013). The variation includes the effect of the exchange difference on group’s foreign financial statements.

23. Commitments and contingent liabilities

Several companies of the Group lease manufacturing facilities and stores under non-cancellable lease agreements with expiry dates through 2023. Rental expense recorded for the years ended December 31, 2014, 2013 and 2012 was 15,933, 17,602 and 17,931, respectively. As of December 31, 2014, the minimum annual rental commitments are as follows:


2015			13,329
2016			12,818
2017			13,075
2018			13,021
2019			13,201
Thereafter			8,571

Total			74,015

Certain banks have provided guarantees at December 31, 2014 to secure payments to third parties amounting to 788 (898 at December 31, 2013). These guarantees are unsecured and have various maturities extending through December 31, 2016.

Following the “defensive” job-security agreement signed with social parties on March 3, 2015, redundant employees have been estimated to be 516, to be managed through possible reabsorption at the Ginosa site and incentive payment programs to be defined. At the end of the program, lasting 24 months, the Company will therefore provide the remaining redundant employees with notice of formal termination.

F - 30

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

24. Segmental and geographical information

The Group operates in a single industry segment, that is, the design, manufacture and marketing of contemporary and traditional leather and fabric upholstered furniture. It offers a wide range of upholstered furniture for sale, manufactured in production facilities located in Italy and abroad (Romania, Brazil and China).

Net sales of upholstered furniture analyzed by coverings are as follows:


Sales of upholstered furniture	2014		2013		2012
Upholstered furniture—Leather		374,418		382,237		389,778
Upholstered furniture—Fabric		34,702		20,621		19,627

Subtotal		409,120		402,858		409,405

Other sales		52,280		46,251		59,439

Total		461,400		449,109		468,844

Within leather and fabric upholstered furniture, the Company offers furniture in the following categories: stationary furniture (sofas, loveseats and armchairs), sectional furniture, motion furniture, sofa beds and occasional chairs, including recliners and massage chairs.

The following tables provide information upon the net sales of upholstered furniture and of long-lived assets by geographical location. Net sales are attributed to countries based on the location of customers.


Sales of upholstered furniture	2014		2013		2012
United States of America		114,007		102,525		108,137
Italy		35,997		31,022		34,121
England		37,524		30,667		32,261
Canada		37,868		40,189		45,024
France		16,126		20,085		19,195
Spain		12,525		12,292		13,587
Belgium		10,244		11,645		14,185
Germany		13,279		16,247		16,984
Brazil		10,747		8,548		6,571
Australia		9,694		10,469		12,758
China		21,626		18,330		9,491
Other countries (none greater than 2%)		89,483		100,839		97,091

Total		409,120		402,858		409,405

In addition, the Group also sells minor volumes of excess polyurethane foam, leather by-products and certain pieces of furniture (coffee tables, lamps and rugs) which, for 2014, 2013 and 2012 totaled 52,280, 46,251 and 59,439, respectively.

F - 31

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

25. Cost of sales

Cost of sales is analyzed as follows:


	2014			2013			2012
Opening inventories		78,991			82,269			93,537
Purchases		216,047			195,302			186,579
Labor		81,791			78,695			75,699
Third party manufacturers		16,325			11,129			11,212
Other manufacturing costs		30,232			28,895			29,089
Closing inventories		(90,213	)		(78,991	)		(82,269	)

Total		333,173			317,299			313,847

The line item “Other manufacturing costs” includes the depreciation expenses of property plant equipment used in the production of finished goods. This depreciation expense amounted to 9,677, 10,283 and 9,505 for the years ended December 31, 2014, 2013 and 2012, respectively.

26. Selling expenses

Selling expenses is analyzed as follows:


	2014		2013		2012
Salaries (commercial)		21,229		20,588		21,526
Fairs		2,965		3,699		3,339
Commissions		9,109		9,002		9,697
Freight		40,258		38,470		40,293
Promotion		1,583		1,129		1,690
Advertising		17,943		16,152		19,527
Depreciations (commercial)		1,908		2,761		4,057
Product repairs		6,024		3,922		4,594
Samples		1,151		1,039		900
Credit insurance cost		575		613		527
Bad debts		536		3,546		471
Other commercial insurance cost		623		539		548
Other Freight costs		8,010		7,155		7,323
Rent (commercial)		11,876		13,648		13,008
Consultancy (Commercial)		1,032		404		707
Utilities (commercial)		2,076		2,178		2,278
Other (commercial)		1,984		1,789		1,932

Total		128,882		126,634		132,417

F - 32

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

27. General and administrative expenses

General and administrative expenses is analyzed as follows:


	2014		2013		2012
Salaries		18,410		18,535		17,998
Consultancy		4,133		3,677		4,127
Electronic data processing		111		124		196
Mail & Phone		1,044		1,000		1,085
Other		1,729		1,996		2,109
Printing & Stationery		580		572		643
Depreciations		2,656		3,518		3,470
Travel expenses		3,238		3,945		5,148
Cars cost		1,119		1,171		1,214
Directors and auditors—fees		647		592		982
Non deductibles and indirect taxes		2,636		2,375		2,890

		36,303		37,505		39,862

28. Other income /(expense), net

Other income/(expense), net is analyzed as follows:


	2014			2013			2012
Interest income		952			1,348			1,561
(Interest expense and bank commissions)		(2,815	)		(1,895	)		(1,719	)

Interest income/(expense), net		(1,863	)		(547	)		(158	)
Gains (losses) on foreign exchange, net		(2,158	)		(3,305	)		(3,396	)
Unrealized exchange gain (losses) on derivative instruments, net		(271	)		519			908
Other, net		(6,281	)		(28,567	)		(1,931	)

Total		(10,573	)		(31,900	)		(4,577	)

“Gains (losses) on foreign exchange, net” are related to the following:


	2014			2013			2012
Net realized gains (losses) on derivative instruments		(282	)		2,150			(1,101	)
Net realized gains (losses) on accounts receivable and payable		(288	)		(2,574	)		2,309
Net unrealized gains (losses) on accounts receivable and payable		(1,588	)		(2,881	)		(4,604	)

Total		(2,158	)		(3,305	)		(3,396	)

F - 33

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

“Other, net” are related to the following:


	2014			2013			2012
Impairment losses of long-lived assets and non-current investments		(2,590	)		(8,550	)		(864	)
Provisions for contingent liabilities		—			(1,433	)		(740	)
One-time termination benefits		(844	)		(19,959	)		—
Profit from extraordinary disposal		1,564			—			—
Chinese relocation compensation		—			8,738			—
Expenses for the Chinese relocation		—			(857	)		—
Write-off of fixed assets		—			(359	)		(339	)
Other, net		(4,411	)		(6,147	)		12

Total		(6,281	)		(28,567	)		(1,931	)

Provisions for contingent liabilities—The Company has charged to other income (expense), net in 2013 and 2012 the amount of 1,433 and 740, respectively, for the estimated probable liabilities related to some claims (including tax claims) and legal actions in which it is involved. There were no such similar claims in 2014.

During 2013 the Group has made no additional accruals related to tax contingent liabilities. The amount of the accrual for contingent liabilities, totaling 1,433, is related to several minor claims and legal actions arising in the ordinary course of business mainly referred to the parent Company.

During 2012 the Group has charged to other income (expense), net the amount of 114 for the probable tax contingent liabilities related to income taxes and other taxes of the parent company and some foreign subsidiaries. The remaining amount of 626 of the provisions for contingent liabilities is related to several minor claims and legal actions arising in the ordinary course of business.

Impairment losses of long-lived assets and non-current investments—In 2014 the Company performed an impairment review of its production and retail long-lived assets, and an impairment loss of 1,160 was recorded (414 of “lands and industrial buildings”, 746 as “retail gallery and store furnishings”). Also, at December 31, 2014, the Company has totally impaired the investment in the affiliate Salena S.r.l., in consideration of some legal disputes among shareholders for an amount of 1,430.

In 2013 the Company performed an impairment review of its production and retail long-lived assets and an impairment loss totaling 8,550 was recorded (2,153 as retail assets, 404 as long-lived assets not in use in Italy, and 5,993 as the airplane).

In 2012 the Company performed an impairment review of its long-lived assets related to retail stores in Spain and an impairment loss of 864 was recorded.

One-time termination benefits – In September 2011, the Company and the Trade Unions submitted a request to the Italian Ministry of Labor to access for 24 months (starting from October 16, 2011) to the unemployment benefits (Italian law July, 23 1991 n. 223 e D.M. August 20, 2002 n. 31444) granted by special Social Security procedure called “CIGS—Cassa Integrazione Guadagni Straordinaria”. Based on the above signed agreement, the Company, at December 31, 2011 accrued 5,446 to the One-time termination benefits reserve (for the 1,060 employees to be dismissed) recorded as a non-operating expense, under the line “other income/(expense) net” of the consolidated statement of operations for the year ended December 31, 2011. No additional accruals were made for the year ended December 31, 2012.

F - 34

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Before the end of the first layoff period (October 15, 2013), a new agreement was signed between the Company, government ministries, regions and the trade unions, by which the Company obtained the extension by one year (October 15, 2014) of the special Social Security procedure called “CIGS—Cassa Integrazione Guadagni Straordinaria”, and the number of redundant workers has been estimated in 1,506, with the possibility for maximum 600 workers to adhere to an incentive payments program ending in May 2014. Based on the above signed agreement dated October 10, 2013, the Company, at December 31, 2013 increased the One-time termination benefits reserve to 24,730 with an addition accrual of 19,959 recorded as a non-operating expense, under the line “other income/(expense) net” of the consolidated statement of operations for the year ended December 31, 2013. The provision, calculated by the Company together with its labor consultants, considered (i) the cost of future layoffs, to be paid for those workers not adhering to the incentive payments program (ii) the best estimation of incentive payments to be paid in 2014 (iii) the advance notice remuneration owed to redundant workers in case of termination (see note 21).

During 2014, the Company obtained the postponement of the “CIGS—Cassa Integrazione Guadagni Straordinaria” by one additional year (expiring on October 16, 2015) for 1.550 workers.

Also, negotiations started with social parties to obtain a solidarity agreement aimed to avoid layoffs by reducing the number of daily work hours for all redundant employees and reduce labor and social contribution costs. The agreement was finally signed on March 3, 2015 and refers to a total number of 1,818 workers, net of the 429 workers that left the Company further to the acceptance of incentive payments. Remaining redundant employees amount to 516, to be managed through possible reabsorption at the Ginosa site and incentive payment programs to be defined. Based on the new estimation of the redundancy, no accrual was posted in 2014 to the one-time termination benefit provision since the Company estimated, together with its labor consultant, that the remaining provision is sufficient enough to cover the cost of future layoffs and/or incentive payments to be agreed upon.

The cost of 844 included in the line “other income/(expense), net” is related to the termination benefits recognized to laid-off employees of the subsidiaries Natco and Impe, for which no provision had been accounted for in previous years.

Profit from extraordinary disposal – In consideration of the implementation of the efficiency actions set forth in the Group Transformation Plan, during 2014 the Company sold the security and doorkeeping services to a former related party, for an amount of 1,328, recording a profit of 1,564.

Chinese relocation compensation— On January 26, 2011 Italsofa Shanghai Ltd (a Chinese subsidiary) signed an agreement with the Shanghai Municipality and Shanghai n.12 Metro Line Development Co. Ltd to abandon its industrial site and relocate to another industrial site. In April 2011, this agreement was executed and Italsofa Shanghai relocated its manufacturing process to a new industrial site. As a consequence of the signed agreement Italsofa Shanghai collected a relocation compensation amount of 46,691 (equal to RMB 420 million), which was recorded as non-operating income, under the line “other income/(expense) net” of the consolidated statement of operations for the year ended December 31, 2011. During 2013, a second supplementary agreement was signed between the Company and the Shanghai Municipality, by which the Company obtained the reimbursement of taxes due on the relocation compensation, totaling 8,738 (equal to RMB 71.4 million).

Expenses for the Chinese relocation— As a consequence of the above relocation, all fixed assets owned by Italsofa Shanghai that were not transferred to the new industrial site (the industrial building and some machines and equipment) were written-off in 2011 recording a loss of 18,388 (equivalent to RMB 165 million). In addition

F - 35

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

the Chinese subsidiary recorded other extraordinary expenses for employees compensation and fees of 3,243 (equivalent to RMB 28 million). The consolidated statement of operations for the year ended December 31, 2011 includes under the line “other income/(expense) net” the cumulative expenses for the Chinese relocation of 21,631. During 2013, additional consulting expenses were incurred, connected to the second supplementary agreement, totaling 857, which were recorded as non-operating expenses under the line “other income/(expense) net” of the consolidated statement of operations for the year ended December 31, 2013.

Write off of fixed assets—The write off of fixed assets includes the net book value of those fixed assets that refer mainly to damaged items and that were no longer in conformity with the production quality standards, together with assets pertaining to stores that were closed. As of December 31, 2013 and 2012 the write offs of fixed assets amount to 359 and 339, respectively.

Other, net – Other, net include as of December 31, 2014 extraordinary expenses incurred by Chinese subsidiaries of 2.1 million and the cumulated depreciation on assets temporary not in use (i.e. some of the Italian plants), for which depreciation had been suspended in previous years and which had to be recorded following the adoption of the new accounting principles, effective for financial statements closed at December 31, 2014. The amount of the accumulated depreciation is 694. As of December 31, 2013, the caption included 2,278 of partial write-off of some government grants receivables following a revision of the original grant decree, and 1,693 of extraordinary costs related to the restructuring of the Group. As of December 31, 2012, the caption included minor items.

29. Financial instruments and risk management

A significant portion of the Group’s net sales and its costs are denominated in currencies other than the euro, in particular the U.S. dollar. The remaining costs of the Group are denominated principally in euros. Consequently, a significant portion of the Group’s net revenues are exposed to fluctuations in the exchange rates between the euro and such other currencies. The Group uses forward exchange contracts (known in Italy as domestic currency swaps) and zero cost collars to reduce its exposure to the risks of short-term declines in the value of its foreign currency denominated revenues. The Group uses such derivative instruments to protect the value of its foreign currency denominated revenues, and not for speculative or trading purposes.

The Group is exposed to credit risk in the event that the counterparties to the domestic currency swaps and zero cost collars fail to perform according to the terms of the contracts. The contract amounts of the domestic currency swaps and zero cost collars described below do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the Group through its use of those financial instruments. The amounts exchanged are calculated on the basis of the contract amounts and the terms of the financial instruments, which relate primarily to exchange rates. The immediate credit risk of the Group’s domestic currency swaps is represented by the unrealized gains or losses on the contracts. Management of the Group enters into contracts with creditworthy counter-parties and believes the risk of material loss from such credit risk to be remote. The table below summarizes in euro equivalent the contractual amounts of forward exchange contracts and zero cost collars used to hedge principally future cash flows from accounts receivable and sales orders at December 31, 2014 and 2013:


	2014		2013
U.S. dollars		9,178		8,817
Euro		9,896		12,037
Canadian dollars		11,519		10,153
British pounds		9,512		5,984
Australian dollars		2,103		2,157
Norwegian kroner		—		575
Swedish kroner		387		341
Japanese yen		2,099		1,362

Total		44,694		41,426

F - 36

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

The following table presents information regarding the contract amount in euro equivalent amounts and the estimated fair value of all of the Group’s forward exchange and zero cost collar contracts. Contracts with net unrealized gains are presented as ‘assets’ and contracts with net unrealized losses are presented as ‘liabilities’.


	2014					2013
	Contract		Unrealized			Contract		Unrealized
	amount		gains (losses)			amount		gains (losses)
Assets		11,212		312			24,636		592
Liabilities		33,482		(583	)		16,790		(193	)

Total		44,694		(271	)		41,426		399

At December 31, 2014, 2013 and 2012, the exchange derivative instruments contracts had a net unrealized income (expense), of (271) and 519, respectively. These amounts are recorded in other income (expense), net in the consolidated statements of operations (see note 26).

Unrealized gains (losses) on forward exchange contracts are determined by using quoted prices in active markets for similar forward exchange contracts.

The fair value of zero cost collars is determined using pricing models developed based on the exchange rates in active markets.

Refer to note 3 (c) for the Group’s accounting policy on forward exchange contracts and zero cost collars.

30. Fair value of financial instruments

The following table summarizes the carrying value and the estimated fair value of the Group’s financial instruments:


	2014						2013
	Carrying			Fair			Carrying			Fair
	value			value			value			value
Assets:
-Marketable debts securities		4			4			4			4
- Derivative instruments		312			312			592			592
Liabilities:
-Long-term debt		9,303			8,852			7,513			6,759
- Derivative instruments		(583	)		(583	)		(193	)		(193	)

F - 37

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Cash and cash equivalents, trade and other receivables, payables and bank overdrafts approximate fair value because of the short maturity of these instruments.

Market value for quoted marketable debt securities is represented by the securities exchange prices at year-end. Fair value of the long-term debt is estimated based on cash flows discounted using current rates available to the Company for borrowings with similar maturities.

31. Application of generally accepted accounting principles in the United States of America

The established accounting policies followed in the preparation of the consolidated financial statements (Italian GAAP) vary in certain significant respects from those generally accepted in the United States of America (US GAAP).

The calculation of net loss and shareholders’ equity in conformity with US GAAP is as follows:

Reconciliation of net loss:


	2014			2013			2012
Net loss attributable to Natuzzi S.p.A. and subsidiaries in conformity with Italian GAAP		(49,357	)		(68,576	)		(26,104	)

Adjustments to reported income:
(a) Revaluation of property, plant and equipment		28			28			28
(b) Government grants		283			532			618
(c) Revenue recognition		192			281			—
(d) Goodwill and intangible assets		—			81			(1,056	)
(e) Translation of foreign financial statements		5,430			1,862			2,678
(f) One-time termination benefits		(2,885	)		7,987			(568	)
(h) Write-off advertisement and advisory costs		376			(1,833	)		—
(i) Long lived assets – Depreciation		—			(1,643	)		—
Tax effect of US GAAP adjustments		(82)			(753)			(5,123)

Net loss attributable to Natuzzi S.p.A. and subsidiaries in conformity with US GAAP		(46,015	)		(62,034	)		(29,527	)

Basic loss per share in conformity with US GAAP		(0.84	)		(1.13	)		(0.54	)
Diluted loss per share in conformity with US GAAP		(0.84	)		(1.13	)		(0.54	)

F - 38

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Reconciliation of equity attributable to Natuzzi S.p.A. and Subsidiaries:


	2014			2013
Equity attributable to Natuzzi S.p.A. and Subsidiaries in conformity with Italian GAAP		171,014			208,910

(a) Revaluation of property, plant and equipment		(368)			(396)
(b) Government grants		(8,727	)		(9,010	)
(c) Revenue recognition		(3,084	)		(3,276	)
(e) Translation of foreign financial statements		9,951			15,982
(f) One-time termination benefits		11,235			14,120
(g) Long-lived assets—impairment		388			388
(h) Write-off advertisement and advisory costs		(1,457	)		(1,833	)
(i) Long lived assets—Depreciation		(1,643	)		(1,643	)
Tax effect of US GAAP adjustments		(6,253	)		(6,171	)

Equity attributable to Natuzzi S.p.A. and Subsidiaries in conformity with US GAAP		171,056			217,071

The condensed consolidated balance sheets as at December 31, 2014 and 2013, and the condensed consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012, which include all the US GAAP differences commented below are as follows:

Condensed Consolidated Balance Sheets as at December 31, 2014 and 2013


	Dec. 31, 2014		Dec. 31, 2013
ASSETS
Current assets		233,612		264,700
Non current assets		147,682		164,221

TOTAL ASSETS		381,294		428,921

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities		149,357		136,963
Non current liabilities		57,880		72,195
Equity attributable to Natuzzi S.p.A. and Subsidiaries		171,056		217,071
Non-controlling interest		3,001		2,692

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		381,294		428,921

F - 39

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Condensed Consolidated Statements of Operations Years Ended December 31, 2014, 2013 and 2012


	2014			2013			2012
Net sales		456,374			445,183			459,271
Cost of sales		(339,157	)		(333,600	)		(318,148	)

Gross profit		117,217			111,583			141,123
Selling expenses		(123,452	)		(109,883	)		(122,963	)
General and administrative expenses		(36,303	)		(57,464	)		(37,623	)

Operating income/(loss)		(42,538	)		(55,764	)		(19,463	)
Other income /(expenses), net		(1,614	)		(1,353	)		(666	)

Net income/(loss) before income taxes		(44,152	)		(57,117	)		(20,129	)
Income taxes		(1,846	)		(4,706	)		(9,324	)

Net income /(loss)		(45,998	)		(61,823	)		(29,453	)
Less: (Net income)/loss attributable to non-controlling interest		(17	)		(211	)		(74	)

Net income /(loss) attributable to Natuzzi S.p.A. and subsidiaries		(46,015	)		(62,034	)		(29,527	)

The tables below set forth the reconciliation of net sales and operating income (loss) from Italian GAAP to US GAAP for the years ended December 31, 2013, 2012 and 2011:

Reconciliation of net sales from Italian GAAP to US GAAP


	2014			2013			2012
Net sales in conformity with Italian GAAP		461,400			449,109			468,844

(b) Government grants (reclassification)		(442	)		(461	)		(470	)
(c) Revenue recognition (adjustment)		(1,757	)		(1,300	)		(600	)
( j) Cost paid to resellers (reclassification)		(2,827	)		(2,165	)		(5,323	)
(m) Contingent liabilities reversal (reclassification)		—			—			(3,180	)

Net sales in conformity with US GAAP		456,374			445,183			459,271

F - 40

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Reconciliation of operating loss from Italian GAAP to US GAAP


	2014			2013			2012
Operating income/(loss) in conformity with Italian GAAP		(36,958	)		(32,329	)		(17,282	)

(a) Revaluation prop, plant and equ. (adjustment)		28			28			28
(b) Government grants (adjustment)		283			532			618
(c) Revenue recognition (adjustment)		192			281			—
(d) Goodwill and intangible assets amortization (adjustment)		—			81			(116	)
(d) Goodwill and Intangible assets impairment (adjustment)		—			—			(940	)
(f) One-time termination benefits (adjustment)		(2,885	)		7,987			(568	)
(f) One-time termination benefits (reclassification)		(844	)		(19,959	)		—
(g) Long-lived assets and non-current investments (reclassification)		(2,590	)		(8,550	)		(864	)
(h) Write-off advertisement and advisory costs		376			(1,833	)		—
(i) Long lived assets—Depreciation (adjustment)		—			(1,643	)		—
(i) Long lived assets—Depreciation (reclassification)		(140	)		—			—
(k) Write-off of fixed assets (reclassification)		—			(359	)		(339	)

Operating income/(loss) in conformity with US GAAP		(42,538	)		(55,764	)		(19,463	)

The differences which have a material effect on net loss and/or shareholders’ equity are disclosed as follows:

(a) Certain property, plant and equipment has been revalued in accordance with Italian laws. The revalued amounts are depreciated for Italian GAAP purposes. US GAAP does not allow for such revaluations, and depreciation is based on historical costs. The revaluation primarily relates to industrial buildings. The adjustment to net loss and shareholders’ equity represents the reversal of excess depreciation recorded under Italian GAAP on revalued assets.

(b) Under Italian GAAP until December 31, 2000 government grants related to capital expenditures were recorded, net of tax, within reserves in shareholders’ equity. Subsequent to that date such grants have been recorded as deferred income and recognized in the consolidated statement of operations as revenue or other income, as appropriate under Italian GAAP (see note 3 n)), on a systematic basis over the useful life of the asset.

Under US GAAP, such grants, when received, are classified either as a reduction of the cost of the related fixed asset or as a deferred credit and amortized over the estimated remaining useful lives of the assets. The amortization is treated as a reduction of depreciation expense and classified in the consolidated statement of operations according to the nature of the asset to which the grant relates.

The adjustments to net loss represent mainly the annual amortization of the pre December 31, 2000 capital grants based on the estimated useful life of the related fixed assets. The adjustments to shareholders’ equity are to reverse the amounts of capital grants credited directly to equity for Italian GAAP purposes, net of the amounts of amortization of such grants for US GAAP purposes.

F - 41

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Amortization of deferred income related to grants recognized as revenues under Italian GAAP of 442, 461 and 470 for the years ended December 31, 2014, 2013 and 2012 respectively would be reclassified to depreciation expense and recorded in cost of goods sold under US GAAP, in the period such amounts are recognized.

(c) Under Italian GAAP, the Group recognizes sales revenue, and accrued costs associated with the sales revenue, at the time products are shipped from its manufacturing facilities located in Italy and abroad. Most of the products are shipped from factories directly to customers under terms that transfer the risks and ownership to the customer when the customer takes possession of the goods. These terms are “delivered duty paid”, “delivered duty unpaid”, “delivered ex quay” and “delivered at customer factory”. Delivery to the customer generally occurs within one to six weeks from the time of shipment.

US GAAP requires that revenue should not be recognized until it is realized or realizable, i.e. when related assets received or held are readily convertible to known amounts of cash or claims to cash. Also, revenue should not be recognized until earned, which occurs when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. For the Group, this requirement is generally met at the time delivery to the customer occurs. Accordingly, the Italian GAAP for revenue recognition differs from US GAAP.

The principal effects of this variance on the accompanying consolidated balance sheets as of December 31, 2014 and 2013 and related consolidated statements of operations for each of the years in the three-year period ended December 31, 2014 are indicated below:


	2014			2013
	Effects			Effects
	Increase			Increase
Effect of revenue recognition adjustment on	(Decrease)			(Decrease)
Trade receivables, net		(20,201	)		(18,400	)
Inventories		14,592			12,917

Total effect on current assets (a)		(5,609	)		(5,483	)

Accounts payable-trade		(2,525	)		(2,208	)
Income taxes		—			—

Total effect on current liabilities (b)		(2,525	)		(2,208	)

Total effect on shareholders’ equity (a-b)		(3,084	)		(3,276	)


Effect of revenue recognition adjustment on	2014			2013			2012
Net sales		(1,757	)		(1,300	)		(600	)
Gross profit		120			178			(222	)
Operating income/(loss)		192			281			—
Net Income/(loss)		192			281			—

(d) Under Italian GAAP, the Company amortizes the goodwill arising from business acquisitions on a straight-line basis over a period of five years. In addition, under Italian GAAP, the Company has allocated certain intangible assets, having definite lives and arising from a business acquisition and asset acquisition under the caption goodwill.

Under US GAAP, in accordance with Accounting Standards Certification (ASC) 350, Intangibles, Goodwill and Other, the Company does not amortize goodwill. Instead, the Company annually assesses goodwill impairment at the end of its fiscal year by applying a fair value test. In the first step of testing for goodwill impairment, the Company estimates the fair value of each reporting unit, which we have determined to be the geographic

F - 42

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

operating segments and compares the fair value with the carrying value of the net assets assigned to each reporting unit. If the fair value is less than its carrying value, then a second step would be performed to determine the fair value of the goodwill. In this second step, the fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if that reporting unit had just been acquired and the purchase price were being initially allocated. If the fair value of the goodwill is less than its carrying value for a reporting unit, an impairment charge would be recorded.

The changes in the carrying amount of goodwill, intangible assets and US deferred taxes arising from business and asset acquisitions are as follows:


	Goodwill						Intangibles					US Deferred Taxes
	US			Italian			US			Italian		Goodwill		Intangible
Balance at Jan 1, 2012		295			261			941			—		—		(295)

Impairment		(295	)		—			(645	)		—		—		202
Amortization		—			(180	)		(296	)		—		—		93

Balance at Dec.31, 2012		—			81			—			—		—		—

Impairment		—			—			—			—		—		—
Amortization		—			(81	)		—			—		—		—

Balance at Dec.31, 2013		—			—			—			—		—		—

Impairment		—			—			—			—		—		—
Amortization		—			—			—			—		—		—

Balance at Dec.31, 2014		—			—			—			—		—		—

In 2012 Natuzzi performed its annual impairment test of goodwill and an impairment loss of 295 was recorded. The Company determined the fair value of the reporting unit on a discounted cash flow basis. An impairment loss arose due, in particular, to the continued decline in cash flow projections related to the uncertain prospects for full economic recovery in Italy, since private consumption was negatively impacted by a general weakness in the job market, high levels of public indebtedness, and a decreasing level of savings among families. As a result of the impairment test, the implied fair value of goodwill was zero and therefore, the Company recorded an impairment charge of 645 for the residual amount of the intangibles with a cumulative impairment loss of 940. The key inputs that were used in performing the impairment tests related to the estimated long term growth rate of 0.5%, the weighted average cost of capital equal to 12.47%, and an estimated average growth rate in sales of 5% (2.5% in 2012) for the subsequent years.

Under US GAAP the impairment loss of 940 for 2012 has been classified as cost of sales and is included as part of operating loss.

In 2013, the original carrying value of the goodwill under Italian GAAP (81) and US GAAP (nil) have resulted aligned as a consequence of the amortization process, completed at year-end, where for both GAAP the carrying value of goodwill is nil.

(e) Under Italian GAAP as of December 31, 2014, 2013 and 2012, the financial statements of the foreign subsidiaries expressed in a foreign currency are translated directly into euro as follows: (i) year-end exchange rate for assets, liabilities, share capital and retained earnings and (ii) average exchange rates during the year for revenues and expenses. The resulting exchange differences on translation are recorded as a direct adjustment to shareholders’ equity (see note 3 d)).

F - 43

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Under US GAAP as of December 31, 2014, 2013 and 2012 Natuzzi’s foreign subsidiaries financial statements have been translated on the basis of the guidance included in ASC No. 830-20, Foreign Currency Transactions (Formerly FASB Statement No. 52). Under US GAAP, foreign subsidiaries are considered to be an integral part of Natuzzi due to various factors including significant intercompany transactions, financing, and cash flow indicators. Therefore, the functional currency for these foreign subsidiaries is the functional currency of the parent, namely the euro. As a result all monetary assets and liabilities are remeasured, at the end of each reporting period, using euro and the resulting gain or loss is recognized in the consolidated statements of operations. For all non monetary assets and liabilities, share capital and retained earnings historical exchange rates are used. The average exchange rates during the year are used to translate non-Euro denominated revenues and expenses, except for those non-Euro denominated revenues and expenses related to assets and liabilities which are translated at historical exchange rates. The resulting exchange differences on translation are recognized in the statements of operations.

At December 31, 2014, 2013 and 2012 the US GAAP difference arises due to the requirement to use the local currency as the functional currency under Italian GAAP as compared to US GAAP, which requires that the functional currency be determined based on certain indicators which may, or may not result in the local currency being determined to be the functional currency. Consequently, the Company recorded in the US GAAP reconciliation (a) income of 5,430 for 2014, 1,862 for 2013 and of 2,678 for 2012, respectively; and (b) an increase in shareholders’ equity of 9,951 and 15,982 for 2014 and 2013, respectively.

(f) In accordance with Italian GAAP, the Company records the expense related to one-time termination benefits in the period the Company has formally decided to adopt the termination plan (approval by the Board of Directors and agreements signed with the Trade Unions) and is able to reasonably estimate the related one-time termination benefits.

Under US GAAP, ASC No. 420, Exit or Disposal Obligations, paragraph 8 states that the liability for the one-time termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract is measured and recognized if a one-time arrangement exist at the date the plan of termination meets all the following criteria and has been communicated to the employees: (a) management, having the authority to approve the action, commits to a plan of termination; (b) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date; (c) the plan establishes the terms of the benefit arrangement, including the benefits that employees will receive upon termination (including but not limited to cash payments), in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated; (d) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Therefore, on the basis of the above discussion, the Italian GAAP recognition in the consolidated statement of operations of the one-time termination benefits related to the employees to be terminated involuntarily differs from US GAAP, due primarily for the need under US GAAP for the plan to be communicated in sufficient detail to the terminated employees.

F - 44

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

During 2012, the Company paid 568 of one-time termination benefits to the workers terminated pursuant to individual agreements, which had been previously provided for under Italian GAAP.

During 2013, following the new agreement signed with the Trade Unions in October 2013, under Italian GAAP the Company accrued 19,959 to the provision for one-time termination benefits, in consideration of a total redundancy of 1,506 workers. Also, during the year, the Company paid termination benefits of 1,364 to terminated employees and reached individual agreements with 372 workers, for incentives of 10,610 to be paid in 2014. As of December 31, 2013, the total provision for one-time termination benefits according to Italian GAAP was 24,730. According to US GAAP, the Company: (i) reversed 7,987 out of the consolidated statements of operations and 14,120 out of the equity, representing respectively the accrual and the total provision attributable to the remaining 1,134 workers for which no individual agreements were reached (ii) reclassified the accrual of the year of 19,959 made to the provision for one-time termination benefits that was classified under the line “other income /(expense), net” in the consolidated statement of operations prepared according to Italian GAAP to cost of sales, included therefore as part of operating loss.

During 2014, the Company recognized incentives to 429 terminated employees for an amount of 13,495. No additional accrual was posted according to Italian GAAP. Also, termination benefits for an amount of 844 were recognized to laid-off employees of the subsidiaries Natco and Impe, for which no provision had been accounted for in previous years. According to US GAAP the Company: (i) recorded the additional cost of 2,885 incurred for the payment of incentives not provided for according to US GAAP (the US GAAP provision at December 31, 2013 was in fact of 10,610) (ii) reversed out of the consolidated statement of operations the remaining provision recorded under Italian GAAP of 11,235, connected to the portion of workers for whom no notification/agreements were reached in 2014. The residual difference of equity under US GAAP of 11,235 is therefore attributable to the 516 workers that represent the remaining redundant workers and for which the criteria in ASC 420 have not yet been met.

In addition, according to US GAAP, the Company reclassified the cost of 844 incurred by the subsidiaries Natco and Impe for terminated employees during the year, that was classified under the line “other income / (expense), net” in the consolidated statement of operations for the year ended December 31, 2014, and for which no accrual had been posted in previous years.

(g) The Company in order to improve its worldwide manufacturing efficiency, in 2008 decided to close and try to sell one of its two Brazilian manufacturing plants located in Pojuca—State of Bahia, recording an impairment loss. Under US GAAP the impairment loss has been measured by the amount by which the carrying value exceeds its fair value less cost to sell of 388. The difference between Italian GAAP and US GAAP related to costs to sell was reported in the US GAAP reconciliation for the year ended December 31, 2008 and continues to be reflected as an adjustment in the equity reconciliation as of December 31, 2014 and 2013, and will be reversed at the time of the sale of the plant.

During 2014, 2013 and 2012 the Company performed an impairment review of its fixed assets and non-current investments and impairment losses of 2,590, 8,550 and 864 respectively were recorded. Under Italian GAAP the impairment losses were classified under the line “other income /(expense), net” in the consolidated statement of operations for the year ended December 31, 2014 and December 31, 2013. Under US GAAP these impairment losses would be classified as cost of sales and would be included as part of operating loss.

(h) In 2013, the Group has capitalized advertising costs incurred for the advertising campaign launched to promote the new Re-vive armchair totaling 1,224, and advisory costs related to the implementation of

F - 45

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

the new “moving line” production system in the Italian plants, totaling 609. Advertising costs, according to Italian GAAP, are capitalizable if they are connected to the necessary commercial phase of “launch” of a new and innovative product and they are functional and essential to the success of the related project. In accordance with Italian GAAP, advertising costs have been amortized over a five year period.

Under US GAAP (ASC 340-20), advertising costs are usually expensed as incurred, except for some “direct-response” advertising costs, which are to be reported as an asset and amortized over the future benefit period. For costs to qualify as direct-response advertising, a direct link between specific sales to customers and specific advertising expenditures has to be demonstrated, so that it is reasonable to conclude that the advertising will result in probable future benefits.

The advertising campaign launched by the Company to introduce the new Re-vive armchair has not been qualified as “direct-response” advertising, since the promotional activities performed did not have the aim to reach targeted consumers and the effect of this campaign in terms of direct responses from selected customers cannot therefore be measured and/or easily verifiable. Accordingly, under US GAAP, these costs have been expensed.

Advisory costs related to the implementation of the new “moving line” production system are classifiable, according to Italian GAAP, to research and development costs, which capitalization is permitted provided that: (i) the product or process is clearly defined and costs are separately identified and measured reliably (ii) the technical feasibility of the product and/or process can be demonstrated, and the Company owns or can obtain the financial resources needed to realize the product/process (iii) revenues that are forecasted to be realized from the intended product/process are sufficient at least to recover the incurred costs, after deducting production costs, selling expenses and any additional development costs.

According to US GAAP, these advisory costs can be considered as start-up costs. ASC 720-15 defines start-up costs as one-time activities related to any of the following: a) opening a new facility; b) introducing a new product or service; c) conducting business in a new territory; d) conducting business with an entirely new class of customers (for example, a manufacturer who does all of its business with retailers attempts to sell merchandise directly to the public) or beneficiary; e) initiating a new process in an existing facility; f) commencing some new operation. ASC 720-15 requires the costs of start-up activities to be expensed as incurred, therefore advisory costs related to the implementation of the new “moving line” production system have been expenses for US GAAP purposes.

As of December 31, 2013, therefore, under US GAAP, a total write-off of 1,833 was recorded with reference to the above advertisement and advisory costs, whereas in 2014 the depreciation amount of 376 recorded under ITA GAAP has been reversed for US GAAP purposes. According to US GAAP, the differences of 1,833 and 376 for years 2013 and 2014 respectively have been classified as cost of sales. No additional advertisement and advisory costs eligible for capitalization under Italian GAAP were capitalized in 2014 in the consolidated financial statements prepared according to Italian GAAP.

(i) During 2010, the Company formally decided to sell its Pojuca manufacturing plant, which had been closed in 2008 (see note 31 (g)), with a Board of Directors’ resolution. The plant was classified as property, plant and equipment since not all criteria to record it as held for sale had been met. According to Italian GAAP, from 2011 depreciation on this plant has been suspended, and the plant has been stated at the lower between the cost, net of cumulated depreciation, and the fair value, determined through third-party independent appraisals.

F - 46

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

According to US GAAP, considering that the sale was not foreseeable in near term, and there is no evidence that the sale process has been started, depreciation has not been interrupted. Therefore, under US GAAP, the depreciation has been maintained using the currency historical exchange rates of the assets, as required by ASC 830-20. Considering the impairment loss posted in 2011, and the different foreign currency translation process of the 2012 financial statements, the cumulated depreciation costs did not impact the net result and net equity in the previous years.

As of December 31, 2013, the recalculation of the depreciation process for the Brazilian plant not in use resulted in a depreciation impact of 1,643, net of the accumulated impairment losses, which impacted the net equity and net result, classified as part of operating loss in the consolidated statement of operations. As of December 31, 2013, the carrying value of the Pojuca plant, according to US GAAP, net of the 2008 and 2011 impairment loss, was 1.4 million.

During 2014, negotiations started with a third party for the sale of the Pojuca plant. In particular, in July 2014 a rental agreement with a sale promise clause was signed, followed by a preliminary sale/purchase agreement signed in the first months of 2015, in which the agreed sale price is higher than the carrying value of the plant as of December 31, 2014.

As of December 31, 2014, in consideration of the above preliminary sale/purchase agreement, and considering the sale was highly probable in the short term, depreciation has been stopped also according to US GAAP and no additional impairment has been recorded. As a consequence, the carrying value of the Pojuca plant, according to US GAAP, net of the 2008 and 2011 impairment loss, remains 1.4 million.

In addition, during 2014, following the adoption of the new Italian accounting principles, effective for financial statements closed at December 31, 2014, the Company had to calculate the accumulated depreciation on assets temporary not in use (i.e. some of the Italian plants), for which depreciation had been suspended in previous years under Italian GAAP only. The amount of the cumulated depreciation is 694, of which 140 related to the depreciation charge for 2014. According to US GAAP, the Company has reclassified the depreciation charge for 2014, that was classified under the line “other income / (expense), net” in the consolidated statement of operations for the year ended December 31, 2014 to cost of sales.

(j) Under Italian GAAP certain costs paid to resellers are reflected as part of selling expenses. Under US GAAP, in accordance with ASC No. 605-50 (Revenue Recognition – Customer Payments and Incentive) (Formerly EITF 01-09), these costs should be recorded as a reduction of net sales. Such expenses include advertising contributions paid to resellers which amounted at December 31, 2014, 2013 and 2012 to 2,827, 2,165 and 5,323, respectively.

(k) During 2013 and 2012 the Company under Italian GAAP has recognized the write-off of tangible assets of 359 and 339, respectively, as part of non-operating loss under the line “other income /(expense), net”. Under US GAAP such write-off charge has been classified as part of operating loss.

(l) Under Italian GAAP, the Company includes its warranty cost as a component of selling expenses in the consolidated statement of operations. Under US GAAP, warranty costs would be included as a component of cost of sales. For the years ended December 31, 2014, 2013 and 2012 warranty cost amounting to 6,023, 6,414, and 4,593, respectively, would be reclassified from selling expenses to cost of sales under US GAAP.

(m) During 2012, certain legal and tax claims pertaining to the Company’s Brazilian subsidiary, Italsofa Nordeste S.A., were reversed due to a favorable decision by the relevant court and due to the expiration of

F - 47

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

the relevant statute of limitations, respectively. Based on this favorable decision, the Company, with assistance from its advisors, has evaluated the likelihood of loss arising from these claims as “remote” and, therefore, the Company reversed the accrual made in previous years.

Under Italian GAAP the Company classified this reversal under the line “net sales” (other revenues) for 3,180. Under US GAAP this reversal would be reclassified from net sales to “general and administrative expenses” as part of the operating result. During 2014 and 2013 there was no item to be reversed.

(n) Under Italian GAAP the Company records a tax contingent liability (income tax exposure) when it is probable that the liability has been incurred and the amount of the loss can be reasonably estimated.

The Company adopted the provisions of ASC No. 740-10, Income Taxes Overall, on January 1, 2007. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a threshold of more-likely-than-not for recognition of tax benefits and liabilities on uncertain tax position taken or expected to be taken in a tax return. ASC 740 also provides related guidance on measurement, derecognition, classification, interest and penalties, and disclosure. As a result of the implementation of ASC 740 as of January 1, 2007, the Company did not recognize any increase or decrease in the liability for unrecognized tax benefits, in respect of the Italian GAAP.

There are no differences between the amounts recognized by the Company under ASC 740 and the amounts recognized under Italian GAAP.

The following table provides the movements in the liability for unrecognized tax benefits for the years ended December 31, 2014 and 2013:


	2014			2013
Balance, beginning of the year		453			541
Additions based on tax positions related to the current year		—			63
Additions for tax positions of prior years		—			—
Foreign exchange		3			(75	)
Reductions due to statute of limitations expiration		(48	)		(73	)
Settlements		—			(3	)

Balance, end of year		408			453

The Company recognized interest and penalties, accrued in relation to the uncertainties in income taxes disclosed above, in other income (expense), net. During the years ended December 31, 2014, 2013 and 2012, the Company recognized approximately 34, 51 and 2 in interest and penalties, respectively. The total provision for the payment of interest and penalties as at December 31, 2014 and 2013 amounted to approximately 488, and 508, respectively (net of foreign currency exchange rate losses of the period and release of liabilities due to the expiration of the tax audit terms).

Under Italian GAAP the Company includes the provisions for income tax contingent liabilities under the line other liabilities of the non current part of the balance sheet. For the years ended December 31, 2014 and 2013 the above provisions for income tax contingent liabilities amount to 896 and 961, respectively.

The Company operates in many foreign jurisdictions. With no material exceptions, the Company is no longer subject to examination by tax authorities for years prior to 2009.

According to Italian GAAP the Company has accrued a provision of 1,000 for the withholding tax due to undistributed earnings as the likelihood of distribution is more likely than not in the near term.

F - 48

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

Under US GAAP the provision for the withholding tax has been accrued for all the unremitted earnings of subsidiaries for which a withholding tax is applicable in case of a dividend distribution. As of December 31, 2014 and 2013 the provision amounted to 7,252 and 7,170.

(o) The consolidated statements of cash flows for the years ended December 31, 2013, 2012 and 2011 prepared by the Company under Italian GAAP is in conformity with US GAAP ASC No. 230, Statement of Cash Flow (Formerly FASB Statement No. 95).

Comprehensive Income — Comprehensive income/(loss) generally encompasses all changes in shareholders’ equity (except those arising from transactions with owners). The Company’s comprehensive income (loss) under U.S. GAAP does not differ from its U.S. GAAP net income (loss) indicated in Note 31.

Recently issued Accounting Pronouncements — Recently issued but not yet adopted U.S. Accounting pronouncements relevant for the Company are as follows:

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” or ASU 2014-08. Under the new guidance, the Company would report a disposal, or planned disposal, of a component or group of components, as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. A strategic shift could include a disposal of a major geographical area, a major line of business, a major equity-method investment, or other major parts of the Company. A component may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group. In addition to expanding the existing disclosures for discontinued operations, the update requires new disclosures relating to (i) individually significant disposals that do not qualify for discontinued operations presentation, (ii) continuing involvement with a discontinued operation following the date of disposal and (iii) retained equity-method investments in a discontinued operation. ASU No. 2014-08 will be effective for us beginning January 1, 2015. This standard will not impact our results of operations or financial position until such time as we decide to undertake such a disposal, which is not currently anticipated.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from contracts with customers (Topic 606),” or ASU 2014-09. The update, which supersedes substantially all existing revenue recognition guidance, provides a single comprehensive model for recognizing revenues on the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Under the standard it is possible that more judgments and estimates would be required than under existing standards, including identifying the separate performance obligations in a contract, estimating any variable consideration elements, and allocating the transaction price to each separate performance obligation. The update also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update is effective for the Company for annual periods beginning January 1, 2017 and is to be applied either (i) retrospectively to each prior reporting period presented, with the option to elect certain defined practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the update recognized at the date of adoption in retained earnings (with additional disclosure as to the impact on individual financial statement lines affected). The Company is currently evaluating the impact if this update on the consolidated financial statements.

F - 49

Natuzzi S.p.A. and Subsidiaries

Notes to consolidated financial statements

(Expressed in thousands of euros except as otherwise indicated)

32. Subsequent events

On March 3, 2015 a job-security agreement has been signed between the Company and the relevant trade union organizations and local institutions, which (i) determines in 1,818 units the workforce in the Italian plants, to which the contract will be applied. These 1,818 employees will work on a reduced-shift basis (for about five hours on average per day, as opposed to the current eight hour shift per day), which is consistent with the expected order flow that the Company foresees for its Italian productions; (ii) reduces employee redundancy to 516 units from 1,506 units. These 516 employees will be covered by the Italian temporary lay-off program named “Cassa Integrazione Guadagni.” The agreement also envisages a possible reduction of redundant employees from 516 to 316, considering a reabsorption of 100 units at the Ginosa site and about additional 100 units at newcos being established.

During the first half of 2015 the Company expects to finalize negotiations to confirm its credit lines, obtain additional long-term loans of Euro 5 million, and enter a receivables securitization agreement for a maximum amount of Euro 35 million.

On February 10, 2015, a sale agreement has been signed for the sale of the Brazilian plant not in use located in Pojuca, at a price of Euro 5 million, and the first installment of the sale price (Euro 1.5 million) has been collected on February 13, 2015.

F - 50

SIGNATURE

The registrant, Natuzzi S.p.A., 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.


NATUZZI S.p.A.

By		/s/ Pasquale Natuzzi
		Name: Pasquale Natuzzi
		Title: Chief Executive Officer

Date: April 30, 2015

Exhibit Index


1.1		English translation of the by-laws (Statuto) of the Company, as amended and restated as of January 24, 2008 (incorporated by reference to the Form 20-F filed by Natuzzi S.p.A. with the Securities and Exchange Commission on June 30, 2008, file number 001-11854).

2.1		Deposit Agreement dated as of May 15, 1993, as amended and restated as of December 31, 2001, among the Company, The Bank of New York, as Depositary, and owners and beneficial owners of ADRs (incorporated by reference to the Form 20-F filed by Natuzzi S.p.A. with the Securities and Exchange Commission on July 1, 2002, file number 001-11854).

4.1		Agreement among the Ministry of Economic Development, Ministry of Labour and Social Policy, INVITALIA, the Region of Puglia, the Region of Basilicata, Natuzzi S.p.A., Confindustria and the Italian trade union and other entities named therein, dated as of October 10, 2013 (incorporated by reference to the Form 20-F filed by Natuzzi S.p.A. with the Securities and Exchange Commission on April 30, 2014, file number 001-11854).

4.2		Addendum among the Ministry of Economic Development, Confindustria of Bari, Natuzzi S.p.A. and the trade unions named therein dated as of March 3, 2015, to the agreement dated as of October 10, 2013.

4.3		Two separate agreements, each among the Ministry of Labor, the Ministry of Economic Development, the Puglia Region, the Basilicata Region, Natuzzi S.p.A., Confindustria Bari and the Italian trade unions and other entities named therein, each dated as of March 3, 2015.

8.1		List of Significant Subsidiaries.

12.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

12.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

13.1		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.