2004 Annual Report of Benetton Assignment

Benetton Group Annual Report 2004 Benetton Group Annual Report 2004 Benetton Group S. p. A. Villa Minelli Ponzano Veneto [Treviso] – Italy Share Capital: Euro 236,026,454. 30 fully paid Tax ID/Treviso Company register: 00193320264 The Benetton Group 5 Directors and other of? cers 7 Letter to Shareholders from the Chairman and Founder of the Benetton Group, Luciano Benetton 8 Financial highlights 11 Directors’ report Markets, trademarks and licenses 12 Production organization 14 Human resources Information Technology 15 Accounting, tax and corporate organization Investor Relations INDEX 6 Communications 17 Corporate Governance 2 25 Supplementary information Benetton shares and shareholdings 27 Performance of Benetton shares 29 Relationships between the parent company, its subsidiaries and other related parties Management of ? nancial risks 30 Privacy and the protection of personal data 31 Directors Principal organizational and corporate changes 32 Signi? cant events since year-end Outlook for 2005 33 Group consolidated results Consolidated statement of income 35 Performance by activity 37 Financial situation – highlights 2 Impact of introducing IAS/IFRS Development of the relative regulatory framework IAS/IFRS conversion process for the Benetton Group 47 Consolidated ? nancial statements 48 Consolidated balance sheet reclassi? ed according to ? nancial criteria 50 Consolidated statement of income with revenues and cost of sales reclassi? ed 52 Consolidated balance sheet – Assets 54 Consolidated balance sheet – Liabilities, Shareholders’ equity and Memorandum accounts 56 Consolidated statement of income 58 Statement of changes in Shareholders’ equity 59 Statement of changes in minority interests 60 Consolidated statement of cash ? w 62 Companies and groups included in the consolidation as of December 31, 2004 INDEX 3 65 Notes to the consolidated ? nancial statements Activities of the Group Form and content of the consolidated ? nancial statements 66 67 70 73 82 90 91 Principles of consolidation Accounting principles and valuation criteria Supplementary information Comments on principal asset items Comments on principal liability and equity items Memorandum accounts Comments on principal items in the statement of income 100 Auditors’ report 101 Glossary 107 2005 ? nancial calendar Main consolidated companies as of December 31, 2004

Benetton Group SpA Ponzano Veneto [Tv] 100%0% Benind SpA Ponzano Veneto [Tv] 100% Olimpias SpA Ponzano Veneto [Tv] 100% SIGI Srl Ponzano Veneto [Tv] 100% Fabrica SpA Ponzano Veneto [Tv] 100% Benetton International SA Luxembourg 100% Benetton Retail Italia Srl Ponzano Veneto [Tv] 50% Filatura di Vittorio Veneto SpA Vittorio Veneto [Tv] 100% Buenos Aires 2000 Srl Ponzano Veneto [Tv] 100% Colors Magazine Srl Ponzano Veneto [Tv] 3% Benetton Real Estate Austria GmbH, Wien 100% Benetton 2 Retail Comercio de Produtos Texteis SA, Maia [Portugal] 100% Benetton Realty Spain SL Barcelona 100% Benetton Real Estate International SA, Luxembourg 100% Benetton Retail Ungheria Kft Nagykallo 100% Benetton Retail Spain SL Barcelona 100% Benetton Real Estate Spain SL Barcelona 97% Benetton Real Estate Austria GmbH, Wien 100% Benetton Realty Portugal Imobiliaria SA, Maia [Portugal] 100% Benetton Deutschland GmbH Munchen 100% Benetton Holding International NV SA, Amsterdam 100% Benetton USA Corp.

Wilmington 100% Benetton Argentina SA Buenos Aires 100% Benetton Ungheria Kft Nagykallo 100% Benetton Manufacturing Holding NV, Amsterdam 100% Benetton Australia Pty Ltd Sydney 100% Benetton Austria GmbH Salzburg 100% Benetton France Sarl Paris 100% Benetton Real Estate Belgique SA, Bruxelles 100% Benetton Realty France SA Paris 100% DCM Benetton India Ltd New Delhi 100% Benetton Asia Paci? c Ltd Hong Kong 100% United Colors of Benetton Do Brasil Ltda, Curitiba 100% Benetton Realty Russia OOO Moscow 100% Benetton Retail [1988] Ltd London 100% Benetton Retail Deutschland GmbH, Munchen 100% Denware Ltd London 51% New Ben GmbH Frankfurt am Main 100% Bentec SpA Ponzano Veneto [Tv] 100% Benair SpA Ponzano Veneto [Tv] 100% Bencom Srl Ponzano Veneto [Tv] 100% Benetton International Property NV SA, Amsterdam 00% 100% United Colors Communication SA Benetton Trading USA Inc Lawrenceville Lugano 100% Benetton Croatia doo Osijek 100% Benetton Slovakia sro Dolny Kubin 100% Benetton Textil – Confeccao de Texteis SA, Maia [Portugal] 100% Benetton Manufacturing Tunisia Sarl, Sahline 100% Benetton Retailing Japan Co Ltd Tokyo 100% Lairb Property Ltd Dublin 100% Benetton Japan Co Ltd Tokyo 100% Benetton Finance SA Luxembourg 100% Benetton Tunisia Sarl Sahline 50% Benetton Korea Inc Seoul 100% Benetton Societa di Servizi SA Lugano 100% Benetton Trading Sarl Sahline Directors and other of? cers Board of Directors Luciano Benetton [1] Carlo Benetton Silvano Cassano [2] Giuliana Benetton Gilberto Benetton Alessandro Benetton Reginald Bartholomew Luigi Arturo Bianchi Sergio De Simoi Gianni Mion Ulrich Weiss Pierluigi Bortolussi Chairman Deputy Chairman Managing Director Directors Secretary to the Board

Board of Statutory Auditors Angelo Caso Filippo Duodo Dino Sesani Antonio Cortellazzo Marco Leotta Chairman Auditors 5 Alternate Auditors Independent Auditors PricewaterhouseCoopers S. p. A. Powers granted [1] Company representation and power to carry out any action that is consistent with the Company’s purposes, except for those expressly reserved by law to the Board of Directors and to the Shareholders’ Meeting, with limitation on some categories of action. [2] Power to carry out any action relating to the ordinary administration of the Company as well as certain acts of extraordinary administration subject to limits on values. D I R E C TO R S A N D OT H E R O F F I C E R S

Letter to Shareholders from the Chairman and Founder of the Benetton Group, Luciano Benetton Dear Shareholders, 2004 closes with the distribution of dividends totaling 50% of net income [which was higher than forecasted], demonstrating the policy of the Benetton Group to create value for the shareholders and the market. During the year, we con? rmed our talent for exporting, making 50% of total sales abroad. Having always adopted the practice of thinking and planning with a long-term entrepreneurial mentality, we intend to stay ahead of the competition, concentrating on emerging markets like China and India, where we are already among the principal western players in the clothing sector. In the Chinese market, we distribute our products; and India, where we produce and distribute, is our bridgehead to entry into other Asian countries.

L E T T E R TO S H A R E H O L D E R S In fact, we are convinced that being entrepreneurs means believing in the future and in our abilities, taking advantage of dif? cult times in the market to become more competitive. And to invest more in the distribution network as well as in pricing policies that are more attractive to the customer. In 2005, in particular, we intend to increase our commitment, earmarking resources of more than 200 million euro for development: with investments directed at restyling stores and new openings, as well as at the product, in order to achieve an even more excellent quality-price ratio, and at style and service to the network.

These are important commitments that we take on with conviction and optimism because we believe in our network distribution model – a widespread presence in the world, in large capitals as well as in smaller towns – in cooperation with partners who, in turn, believe and invest in our common development plan. And these are responsible choices, directed towards future growth, which can be achieved only by those with substantial economic strength and constantly reducing ? nancial position. 7 Luciano Benetton Chairman of the Benetton Group Financial highlights Key operating data [millions of euro] Revenues Cost of sales Gross operating income Contribution margin EBITDA Income from operations Net income/[loss] for the year Key ? nancial data [millions of euro] Working capital Assets due to be sold Net capital employed Net ? nancial position Shareholders’ equity Self-? nancing Investments in tangible and intangible ? ed assets Purchase of equity investments Financial ratios [in %] Return on equity [ROE] Return on investments [ROI] EBITDA Return on sales [ROS] Net income [loss]/Revenues Share and market data Earnings/[Loss] per share [euro] [1] Shareholders’ equity per share [euro] [1] Dividend per share [euro] [1] Pay out ratio [%] Dividend yield Share price: December 31 [euro] Screen-based market: high [euro] Screen-based market: low [euro] Price/earnings ratio [P/E] Share price/Shareholders’ equity per share Market capitalization [millions of euro] Average no. of shares outstanding [2] Number of shares outstanding [1] [2] 2004 1,686 929 757 653 317 217 123 2004 688 8 1,668 431 1,230 312 152 22 2004 10. 0 13. 0 18. 8 12. 9 7. 3 2004 0. 68 6. 77 0. 34 50 3. 9 9. 74 10. 18 8. 33 14. 3 1. 4 1,768 181,558,811 181,558,811 % 100. 0 55. 1 44. 9 38. 7 18. 8 12. 9 7. 3 2003 1,859 1,049 810 696 335 232 108 2003 729 8 1,655 468 1,174 327 151 19 2003 9. 2 14. 0 18. 0 12. 5 5. 8 % 100. 0 56. 4 43. 6 37. 4 18. 0 12. 5 5. 8 2002 1,992 1,124 868 744 376 243 [10] 2002 798 114 1,768 613 1,141 349 169 1 2002 [0. 9] 13. 7 18. 12. 2 [0. 5] % 100. 0 56. 4 43. 6 37. 3 18. 8 12. 2 [0. 5] 2001 2,098 1,189 909 776 398 286 148 2001 811 1,896 640 1,241 374 311 2001 11. 9 15. 1 19. 0 13. 6 7. 1 % 100. 0 56. 7 43. 3 37. 0 19. 0 13. 6 7. 1 2000 % 2,018 100. 0 1,138 56. 4 880 43. 6 740 36. 7 400 19. 8 309 15. 3 243 12. 1 2000 772 1,723 536 1,175 311 305 7 2000 20. 7 17. 9 19. 8 15. 3 12. 1 2003 0. 59 6. 47 0. 38 64 3. 8 9. 11 11. 30 5. 90 15. 4 1. 4 1,654 181,558,811 181,558,811 2002 [0. 05] 6. 29 0. 35 n. a. 4. 8 8. 50 15. 90 8. 50 n. a. 1. 4 1,543 181,341,018 181,558,811 2001 0. 82 6. 86 0. 41 50 3. 6 12. 72 22. 44 9. 75 15. 5 1. 9 2,309 180,720,969 181,558,811 2000 1. 35 6. 0 0. 46 37 4. 8 22. 01 24. 20 18. 71 16. 5 3. 4 3,996 180,505,910 181,558,811 Restated after a reverse split of the shares approved by Shareholders’ Meeting on May 8, 2001. Net of treasury shares held during the year. 2004 revenues by activity [in %] Sportswear and equipment 4. 4% Manufacturing and other 6. 4% Casual 89. 2% Ricavi 2004 per area geografica (in %) 2004 revenues by geographical area [in %] Ricavi netti Rest of the world 0. 3% Asia 10. 3% The Americas 4. 3% Europe 85. 1% FINANCIAL HIGHLIGHTS Net revenues [millions of euro] 1,686 1,859 1,992 2,098 2,018 2004 2003 2002 2001 2000 9 Ricavi netti Total capital expenditures and self-? ancing [millions of euro] 174 312 170 327 170 349 311 374 312 311 Total capital expenditures Self-financing 2000 2001 2002 2003 2004 The Benetton Group, in 2004, can be brie? y summarized as follows: consolidated revenues of 1,686 million euro, impacted by the sale of the sports equipment business [completed during the ? rst half of 2003] and by continuing unfavorable trends in the principal foreign currency exchange rates; increasing net income, in line with forecasts, and a satisfying cash ? ow, with a signi? cant gain in ef? ciency on the costs front; balance sheet strength, con? rmed as being of the ? rst order. With consumers being very cautious in their spending and a de? tionary trend generated by both economic uncertainty and the ending of the multi? ber agreement with China, the market is presenting complex challenges. The economic environment, in the principal European markets in particular, continues to be cautious. But the Group can count on signi? cant strengths to compete in this highly competitive situation. I would particularly like to mention, on the one hand, a network of expert and experienced partners who work for and invest in the brand; and on the other, a management team that combines the traditional innovative Benetton culture with new and ambitious management and planning capabilities. D I R E C TO R S ‘ R E P O RT

In conclusion, we believe that we have strong foundations for the competitive relaunch of our business model in the medium term, which will enable the Group to compete in all international markets in future years. Silvano Cassano Managing Director 11 Directors’ report Markets, trademarks and licenses The areas with highest growth in 2004 were Eastern European countries and Russia, followed by Spain and Switzerland where our presence was further consolidated. In a market of primary importance like Germany, our position was strengthened by a joint venture agreement and purchase of stores to be managed directly. The retail network has reached 200 stores in the principal international capitals of fashion; this is strategic for the protection of commercial positions which are already important or tactical for future development.

In 2004, there were new openings in Paris, in the prestigious Boulevard Haussmann, as well as in Berlin, Stuttgart, “Our market response must travel at the same speed as our ideas. ” Fabrizio De Nardis, Chief Commercial Of? cer Stockholm, Fukuoka in Japan and St. Moritz in Switzerland. Regarding emerging countries, plans for commercial agreements are being studied in Middle-Eastern markets and an organization has been set up in India, controlled from Hong Kong, which is directly managing production and sales in the local market. D I R E C TO R S ‘ R E P O RT The stores network has been involved in a program to change internal architecture, developed following speci? and consistent concepts with a more precise and distinctive positioning of the various brands. During 2004, the new Twins concepts were launched for UCB, designed to express the various styles in the collections more effectively, and for Undercolors. In 2005, Pentagram, the new Sisley concept will make its debut. Also in 2004, a progressive sales policy action was introduced which, con? rming the central role and value of the partner-entrepreneur system, aims to achieve greater competitiveness based on more pronounced ? exibility in terms of pricing and margins, which should guarantee bene? ts both to the sales network, providing investment to keep it fresh and ef? cient, and to the ? al customer. In terms of product mix, a program was started to enhance the accessory collections of the various brands, with the twofold objective of completing the proposed “looks” and of providing interesting independent purchasing opportunities. A single team is involved in this, combining design, marketing and sourcing skills. On the license front, during 2004, development continued, in cooperation with highly experienced and competent companies and producers, in sectors [from furnishing to publishing, from fabrics to decor, from perfume to stationery] in which Benetton taste, design and “way of life” make an innovative and unique contribution.

In particular, agreements were signed in the jewelry and contraceptive sectors and the widening of the product ranges offered continued, from toys to children’s books, with Benny the sheep, the Benetton brand mascot, as the star. Production organization Capital expenditure was directed above all towards the managerial independence of production centers in Croatia, Hungary and Tunisia, which operate complete cycles [from 12 "The production organization has its head in Italy and its operations arm without borders. ” Biagio Chiarolanza, Chief Operating Of? cer raw material to ? nished product] and on quality control systems which fully meet the strictest Benetton Group standards.

In an ever more competitive scenario, the production organization, which maintains its strategic heart [d[design, planning, coordination and programming]n Italy, is arranged into a dual production line: in Italy, based mainly on a logic of speed of response to the market, and abroad, where ef? ciency is combined with the necessary cost control. The process of decentralization of production activities within Europe continued during the year. Special attention was given to the “sourced products” area, with total outsourcing of production, reserved for particular products and speci? c markets like China. This area of activity, among other things, has triggered competitive bene? s within the Benetton organization, in terms of cost reduction and shortening of production times. In 2004, the Hong Kong sourcing platform was completed, which, with 40 specialists, ensures faster action and better customer service in the markets of China, Far Eastern countries, Japan and the United States. In addition, the new “multi-hub” model was designed and implemented for management of the international logistics platform. This model is supported by a centralized I. T. system, accessible to the various logistics centers, which is able to coordinate and optimize, from the 2004 net sales by brand [i[in %]nited Colors of Benetton 72. 0% Other 6. 4% Playlife 2. 0% Killer Loop 0. 7% Sisley 18. 9% Net sales by brand [i[in %]iller Loop 0. % United Colors of Benetton 72. 0 % Sisley 18. 9% Playlife 2. 0% Other 6. 4% 2004 2003 United Colors of Benetton 67. 5% Sisley 19. 0% Playlife 1. 4% Other 6. 2% Rollerblade 3. 3% Nordica 0. 3% Ricavi x settore di attivita 13 Prince and Ektelon 1. 5% Killer Loop 0. 8% Revenues by activity [i[in %]asual 89. 2% Sportswear and equipment 4. 4% Manufacturing and other 6. 4% 2004 2003 Casual 84. 9% Sportswear and equipment 8. 6% Manufacturing and other 6. 5% D I R E C TO R S ‘ R E P O RT headquarters, dispatches of products according to required delivery date and geographic location of the customer, combining timeliness of information and better control of the business.

The new Product Technical function was brought into operation, which, acting as a link between product, operations and commercial functions, focuses efforts and resources on the common objectives of innovation and programming, also working with research centers, universities and laboratories. Human resources During the year, Human Resources function concentrated on the development of an organization which is able to merge the innovative capacity of new resources with the company culture that encompasses the experience and strong managerial tradition of Benetton. D I R E C TO R S ‘ R E P O RT “The human capital at the center of the company, a mix of innovative abilities and historical knowledge. ” Andrea Negrin, Human Resources Of? cer 14

One of the many projects under development to be implemented was Project Vivaio, aimed at identifying company resources of high-potential young people, to be integrated, in line with the company’s multicultural and international vision, with talents coming from all over the world, people with innovative abilities to be ? tted into the three key areas of sales and marketing, product and operations. Another important project implemented in the year was the Product Technology Center, a center of excellence which cooperates with the most prestigious international institutes and universities [f[from the Massachusetts Institute of Technology to The Milan Politecnico]dedicated to the development of new and innovative materials, fabrics and products to be introduced into the production lines. Information technology The most signi? ant initiative in the year was part of Project Phoenix, of which the main objective is to support the core business through total systems integration. A new production planning project was initiated which provides for a complete review of the process and for “Investments in Information Technologies are the new frontier of competition. ” Adolfo Pastorelli, Chief Information Technology application and technological updating of the systems used. This project forms part of a complete review of the production and logistics structure in order to achieve a shorter time to market than at present, and with optimized and coordinated customer deliveries.

The work related in particular to the merchandized products support system [f[from planning to production by the chosen supplier, from Benetton quality control to delivery to the customer]ith high savings in terms of costs and time. IT support was also implemented for the new logistics/distribution structure in Hong Kong for products sourced in the Far East: a “multi-hub” model which will contribute to increase our international presence due to greater timeliness of information ? ows, combined with better control of all activities. Concerning the foreign production centers, the new production control system has enabled us to monitor stages of production in the various production units in real time and to make projections for the dispatch of orders.

Accounting, tax and corporate organization The impact of the introduction of International Accounting Standards/International Financial Reporting Standards [I[IAS/IFRS]s currently being analyzed, with the resultant organizational repercussions, also in terms of training and information systems. A project has also been started to adjust for the requisites of the Sarbanes Oxley Act, the 2002 American law that requires companies listed on the NYSE to provide and document a detailed control and documentation system for company processes and data reported in the financial statements. This project will ensure Benetton Group compliance within the time limits set by the law.

Finally, during 2004, the Company has been working on consolidation of the corporate structure created by the business reorganization which took place in December 2003. Investor relations During 2004, Investor Relations stayed in constant touch with the market: in the year, various meetings were organized with members of the national and international ? nancial community and major brokers continuously publicized research on Benetton shares. The department’s activities also included telephone conferences at the time of publication of the results, organization of days dedicated to ? nancial analysts, which involved top management and some operational managers, as well as participation in sector conferences. 004 also saw the celebration of 15 years listing on the NYSE. On that occasion, June 8, the Benetton Group took part in the ceremony at the end of the New York Stock Exchange working day, ringing the traditional closing bell. 15 “Financial soundness and strong operational leverage are the certainties which can be relied on for future growth. ” Pier Francesco Facchini, Chief Financial Of? cer During 2004, the Benetton Group Investor Relations website was enhanced with new sections: IAS/IFRS, Glossary, “Share your thoughts”, FAQ [F[Frequently Asked Questions]The structure of the Corporate Governance and Analyst coverage sections were revised to enhance the contents and make navigation easier.

The website characteristics of completeness, clarity and ease of navigation, in April, earned the Group the prize for the best European IR website in 2004 and, in September, it was awarded the prize for the best IR website in the consumer goods sector by the Web Marketing Association. In September 2004, an identi? cation of the composition of shareholders was completed, which showed the subdivision of shares on the market by geographical area; in particular, shares held by European investors were equivalent to 67% of the total ? oating shares [3[33%]while American investors represented 31%. D I R E C TO R S ‘ R E P O RT 16 D I R E C TO R S ‘ R E P O RT

Communications In 2004, Fabrica, the Benetton communication research center had its tenth birthday. What immediately became a workshop where communication for the future could be planned and, at the same time, tested in the ? eld, is now an international, multicultural center which participates in the free circulation of opinions and in the debate on ideas. The anniversary, celebrated by a book published by Electa, also provided an opportunity to highlight the role of Fabrica, as a frontier outpost of the Benetton Group business culture. Fabrica ran the United Colors of Benetton 2004 fall-winter communication campaign, which showed pictures of orphaned primates con? scated from illegal traders. The campaign continues Benetton’s re? ction on diversity, seen as the “richness” of our world, extending it from the variety of human races to living beings that occupy ? rst place in zoological classi? cation. It was presented in London in October, at the Natural History Museum, which will host the entire exhibition of pictures from May to July 2005. The English publisher Boots has published the book James and other Apes with an introduction by Jane Goodall, one of the leading experts on the science of animal behavior and habitat and the defense of nature, who backed the Benetton project. Also in fall season, the product campaign, photographed by David Sims for Fabrica, was launched; this reaf? med the values of the United Colors of Benetton brand, in particular color, youth and contemporary style. Corporate Governance Corporate Governance. Again, in 2004, the Benetton Group paid particular attention to corporate governance, continuing with the adaptation of organization structures relating to control, decision-making and management to best national and international practice, complying with the standards required by the Code of Conduct for Listed Companies. The corporate governance system, as outlined below, is based on the principles of proper management and information, achieved by means of a continuous process of veri? cation of their ef? ciency and effectiveness.

The Company has adopted a traditional system of corporate governance by virtue of which the management body of the Company is the Board of Directors, the monitoring body relating to compliance with such matters as the law, the articles of association and the principles of correct administration is the Board of Statutory Auditors, while the independent auditors carry out the accounting audit. Ownership of the Company. As described in greater detail in the “Ownership of the Company” section of the Directors’ report relative to the 2004 ? nancial statements and based on the latest available report, the Shareholder Edizione Holding S. p. A. controls the Company with a shareholding of 67. 144%. Board of Directors. Directors. Executive Committee, Related Party Transactions.

Board of Directors. During 2004, the Board of Directors held eight meetings during which they reviewed and approved guidelines for the Group’s operations, proposals for changes to the organization and general policies regarding the management of human resources, proposals for the reorganization of the corporate structure, the trend of business, extraordinary operations, and the quarterly and half-year results. During these meetings, the Executive Directors also provided adequate information to the Board of Directors and to the Board of Statutory Auditors concerning any signi? cant, atypical or unusual transactions or transactions with Related Parties.

The Board of Directors also paid particular attention to the periodic reports prepared by the Internal Audit Committee regarding its activities and, amongst other things, evaluation of the adequacy of the internal audit system. For Board meetings, Directors are provided, suf? ciently in advance, with all the documentation and information needed to enable the Board to make decisions with adequate background knowledge of the matters in question. The current system of powers granted by the Board of Directors on May 12, 2004, as illustrated below, and the information procedures adopted by the Company ensure that all transactions of major economic and ? nancial importance are submitted for Board approval. The code of conduct relating to “transactions with Related Parties” and “signi? ant transactions”, adopted by the Company on March 30, 2004, also requires that the Executive Directors, although having the relative powers, submit for prior approval of the Board of Directors, any transactions with signi? cant balance sheet, pro? t or ? nancial impacts for the Company and the Group. For signi? cant transactions which exceed a value of 1. 5 million euro, each Director or Statutory Auditor has the right to ask for an evaluation by one or more independent experts. 17 D I R E C TO R S ‘ R E P O RT 18 Directors. The Board of Directors, which remains in of? ce until the Shareholders’ meeting to approve the ? nancial statements to December 31, 2004, is made up of eleven Directors.

On September 9, 2004, the Company, at the time of adopting some changes to the articles of association resulting from coming into effect of the recent reform of company law, took the opportunity to increase the maximum number of members of the Board of Directors from eleven to ? fteen. The Chairman, Luciano Benetton, has power to represent the Company and to carry out all acts that are pertinent to the Company’s activities, with limits on certain categories of acts and in particular the following operations: _ purchase and sale of shareholdings, company stocks and bonds for amounts over 25 million euro; _ purchase and sale of companies and businesses, purchase and sale of real property for amounts over 25 million euro; _ granting of loans to persons or entities other than subsidiary companies for amounts over 5 million euro.

The Managing Director, Silvano Cassano, has power to carry out acts relating to ordinary administration, as well as certain acts of extraordinary administration, subject to limits on values for the following operations in particular: _ purchase and sale of shareholdings and company stocks for amounts over 5 million euro; _ purchase and sale of securities and bonds for amounts over 10 million euro; _ purchase and sale of companies and businesses, purchase and sale of real property for amounts over 10 million euro; _ granting of loans to persons or entities other than subsidiary companies for amounts over 5 million euro. None of the other Directors have executive powers.

There are seven Non-Executive Directors [C[Carlo Benetton, Gilberto Benetton, Giuliana Benetton, Reginald Bartholomew, Luigi Arturo Bianchi, Sergio De Simoi and Ulrich Weiss]nd, of these, three [R[Reginald Bartholomew, Luigi Arturo Bianchi and Ulrich Weiss]re “independent” from the owners and from corporate management, as prescribed by the Code of Conduct for Listed Companies, while all are assiduous participants in the Board’s activities. The Board of Directors, also based on information supplied by the Directors themselves, annually checks the existence of the requirements of independence of each of its members in accordance with the Code of Conduct for Listed Companies. D I R E C TO R S ‘ R E P O RT

The following table lists the of? ces which Directors hold in other companies not belonging to the Group: Director Luciano Benetton Carlo Benetton Of? ce Director Deputy Chairman Director Chairman Deputy Chairman Director Company 21,Investimenti S. p. A. , Edizione Holding S. p. A. Edizione Holding S. p. A. Tecnica S. p. A. Autogrill S. p. A. , Edizione Holding S. p. A. , Ragione S. A. p. A. di G. Benetton & C. Telecom Italia S. p. A. , Olimpia S. p. A. Banca Antoniana Popolare Veneta S. p. A. , Mediobanca S. p. A. , Autogrill Group Inc. , Lloyd Adriatico S. p. A. , Autostrade S. p. A. , Pirelli & C. S. p. A. , Schemaventotto S. p. A. Edizione Holding S. p. A.

D I R E C TO R S ‘ R E P O RT Gilberto Benetton Giuliana Benetton Alessandro Benetton Director Chairman and Managing Director Chairman Deputy Chairman Sole Director Director 21,Investimenti S. p. A. , 21,Investimenti Partners S. p. A. 21,Partners S. G. R. S. p. A. Nordest Merchant S. p. A. Saibot S. r. l. Edizione Holding S. p. A. , Autogrill S. p. A. , Sirti S. p. A. , Permasteelisa S. p. A. , 21,Centrale Partners S. A. [m[member of the Supervisory Board]irelli & C. Real Estate S. p. A. Anima S. G. R. S. p. A. , Assicurazioni Generali S. p. A. Tim S. p. A. Edizione Holding S. p. A. , Schemaventotto S. p. A. 21,Investimenti S. p. A. , Autogrill S. p. A. Autogrill Group Inc. , Autostrade S. p. A. , Cartiere Burgo S. p. A. , Banca Antoniana Popolare Veneta S. p. A. , Olimpia S. p. A. , Telecom Italia Media S. p. A. , Telecom Italia S. p. A. , Fondazione Cassa di Risparmio di Venezia, Luxottica Group S. p. A. Olimpia S. p. A. Autostrade S. p. A. , Schemaventotto S. p. A. , 21,Investimenti Partners S. p. A. , 21,Investimenti S. p. A. Ducati Motors S. p. A. , HeidelbergCement AG [H[Heidelberg]Continental AG [H[Hannover]Bego Medical AG [B[Bremen]9 Reginald Bartholomew Luigi Arturo Bianchi Gianni Mion Director Director Deputy Chairman Managing Director Director Sergio De Simoi Auditor Director Ulrich Weiss

Director Executive Committee. An Executive Committee was set up in September 2003, consisting, in addition to the Chairman Luciano Benetton, of the Managing Director Silvano Cassano and Directors Alessandro Benetton and Gianni Mion. Executive Committee meetings are also attended by the Board of Statutory Auditors and the Chairman of the Internal Audit Committee, neither of which have the right to vote. One of the Executive Committee’s tasks is to de? ne, upon proposal by the Managing Director, Company and Group strategic, industrial and ? nancial plans, the annual budget and interim adjustments for subsequent submittal to the Board of Directors.

The Executive Committee also reviews and approves investment and divestiture plans of particular importance, the granting of loans and the giving of guarantees, and analyzes the more important problems relating to the Company’s performance, which in turn enables the Board of Directors to comply more effectively with its legal obligations. The Executive Committee met seven times during 2004. Related Party Transactions. On March 31, 2004, the Board of Directors formally adopted the Rules of Conduct that Benetton Group S. p. A. will have to comply with in matters regarding Related Party Transactions and signi? cant transactions. These Rules reiterate the central role of the Board of Directors in the Company’s system of corporate governance and aims to ensure that the transactions being regulated are carried out according to criteria of substantial and procedural fairness.

Related Party Transactions, also non-intercompany transactions, which are atypical, unusual or concluded with non-standard conditions, even though not normally subject to Board approval, must, nevertheless, be submitted for prior Board approval. Prior Board of Directors’ approval is also required for transactions that could have a signi? cant economic or ? nancial impact on the Company or the Group and which in terms of value, counterparty quality, object, methods or timing could jeopardize the Company’s assets. For both of these types of transactions, the Board of Directors has to decide on the basis, among other things, of detailed information acquired with suitable advance notice.

The above-mentioned Rules of Conduct do not expressly provide for directors with an interest in an operation to leave the board meeting. Therefore it is left to the Board to decide whether it is suitable or not to leave when this could prejudice the maintenance of a quorum in the meeting. The Rules of Conduct in relation to signi? cant transactions and transactions with Related Parties have been adopted by subsidiary companies in 2005. Board of Statutory Auditors. The Board of Statutory Auditors is made up of: _ Angelo Caso . Chairman; _ Filippo Duodo . Auditor; _ Dino Sesani . Auditor; _ Antonio Cortellazzo . Alternate Auditor; _ Marco Leotta . Alternate Auditor.

All members of the Board of Statutory Auditors were appointed on May 14, 2002. Their mandate expires on the date of the Shareholders’ Meeting to approve the 2004 ? nancial statements. The Statutory Auditors are appointed, in accordance with the criteria laid down in art. 148 of the Finance Consolidation Act, which is implemented in art. 19 of the articles of association, on the basis of voting lists submitted to the Company’s registered of? ce prior to the Shareholders’ Meeting, accompanied by an adequate description of each candidate’s personal and professional characteristics. 20 D I R E C TO R S ‘ R E P O RT There is no Auditor representing the minority Shareholders, as they did not present alternative voting lists.

The Board of Statutory Auditors met seven times during 2004. Management and coordination in accordance with articles 2497 and subsequent of the Italian Civil Code. In January 2004, all of the Italian subsidiaries, directly or indirectly wholly owned by Benetton Group S. p. A. , made the announcements required by art. 2497-bis of the Italian Civil Code, recognizing the management and coordination function performed by the Parent Company Benetton Group S. p. A. Compensation Committee and Committee for Proposed Appointments of Directors. In implementation of the Code of Conduct for Listed Companies and with the duties mentioned therein, the Board of Directors recon? med, as members of the Compensation Committee for 2004, Directors Reginald Bartholomew, Ulrich Weiss and Gianni Mion, Chairman. The Committee, therefore, consists mainly of non-executive directors; in view of the composition of the shareholders, a non-independent director is included among the members of the committee. The Compensation Committee, by express provision of the relative rules governing its activities, formulates its proposals for submission to the Board of Directors, in the absence of persons directly interested, who leave the meeting during discussions and resolutions concerning them. During 2004, the Compensation Committee met three times. For ? cal year 2004, compensation for executive Directors and/or Directors with special tasks was apportioned by the Board of Directors on the basis of the proposal formulated by the Compensation Committee, in the amounts indicated in the notes to the consolidated ? nancial statements of the Benetton Group, following the determination of the aggregate compensation by the Shareholders’ Meeting, in accordance with the Articles of Association. During the reference year, the Compensation Committee also proposed, having used a company with experience in the preparation of variable compensation schemes, adoption of a Stock Option Plan aimed at motivation and retention of the Company’s top managers.

After adoption of the Plan by the Board of Directors on July 15, 2004, the Compensation Committee provided the Board with further indications of the number of options to be assigned and the identity of the persons to receive them. The said Stock Option Plan is linked to company results and achievement of preset objectives. Further information is shown in the paragraph “stock option” in the Directors’ Report accompanying the statutory and consolidated ? nancial statements of Benetton Group S. p. A. Given the current composition of the Company’s Shareholders, the Board of Directors does not consider it necessary yet to set up a Committee for proposed appointments of Directors. Directors are nominated on the basis of a single voting list which is deposited at the Company’s head of? e prior to the Shareholders’ Meeting, accompanied by an adequate description of the candidates’ personal and professional characteristics. Internal Audit Committee. Internal audit. The Internal Audit Committee is made up of three Non-Executive Directors, two of whom are independent. On May 12, 2004, the appointments of Directors Ulrich Weiss, Luigi Arturo Bianchi and Sergio De Simoi were con? rmed. The Internal Audit Committee has the following tasks: _ make proposals for the establishment of an internal audit department responsible for the internal audit and to determine the duties of this department; _ review periodic reports, reporting relationships and the executive plan of persons 22 D I R E C TO R S ‘ R E P O RT esponsible for internal audit, also promoting actions for the improvement of the internal audit system; _ report to the Board of Directors, at least every 6 months, in connection with its approval of year-end ? nancial statements and the half-year report, on activities carried out and on the adequacy of the internal audit; _ monitor compliance with, and periodic revision of, corporate governance rules; _ verify, together with the head of the ? nance function and the independent audit company, the adequacy of accounting principles used; _ assess, together with the heads of the ? nance and internal audit functions, proposals submitted by independent auditing ? ms for assignment of the independent audit, making a recommendation for assignment of the task that the Board of Directors has to submit to the Shareholders’ Meeting; _ evaluate the results presented in the independent auditor’s report. The Committee performed its functions during 2004, meeting ? ve times under the chairmanship of Ulrich Weiss and with the participation of the entire Board of Statutory Auditors, in conformity with the regulations adopted by the Company. The functionality and adequacy of the internal audit system were guaranteed by the Board of Directors, with the help of the speci? c corporate function coordinated by the Head of Internal Audit.

Organization and information systems were found to be able to assure, also as regards subsidiaries, monitoring of the administrative and accounting system and of the central and decentralized organizational structure. Work continued on mapping of processes and risks concerning the activities of all Group companies, as well as operational and budget control of individual businesses and review of internal auditing procedures. These activities, taking into account the listing of Benetton shares also on the United States stock exchange, were carried out observing likewise the regulatory provisions contained in the so-called “Sarbanes-Oxley Act”. Non-Executive Directors, the Board of Statutory Auditors, and the independent auditing ? rm all received adequate information in this respect.

During 2004, the Internal Supervisory and Monitoring Body, as required by article 6, paragraph 1 letter b] of Legislative Decree 231/2001, consisting of Ulrich Weiss, Chairman, Luigi Arturo Bianchi and Roberto Taiariol, performed its checks on operation and observance of the Organizational and Operational Model adopted by the Company. This Model, you are reminded, consists of: _ a code of ethics and of conduct; _ operating procedures and reporting systems; _ an internal supervisory and monitoring body; _ a disciplinary system. The Organizational and Operational Model was also adopted by the main Group companies during 2004. Handling of con? dential information. All con? dential information is managed by the Managing Director, upon consultation with the Chairman. Together, the Managing Director and the Chairman also ensure that adequate checks are carried out with regard to the classi? cation of con? dential information in accordance with current legislation.

The Board of Directors approves all press releases relating to approval of the annual ? nancial statements, the half-year report, and the quarterly report, as well as extraordinary operations that are subject to the approval of the Board of Directors. All communications to and relations with the press, institutional investors and individual 23 D I R E C TO R S ‘ R E P O RT Shareholders are conducted by the Media and Communications Department and the Investor Relations Department, respectively. Implementing the “Regulation for Markets Organized and Managed by Borsa Italiana S. p. A. ” [R[Regolamento dei Mercati Organizzati e Gestiti da Borsa Italiana S. p. A. ]since ? cal year 2002, the Board of Directors has of? cially adopted the “Code of Conduct for Internal Dealing”. This is designed to regulate obligations of noti? cation and disclosure concerning transactions undertaken in ? nancial instruments issued by Benetton Group S. p. A. by those persons de? ned by the Code as “Important Persons”. The noti? cation obligations imposed by the Code on “Important Persons” provide for tighter timing and involve wider categories of subjects and securities than does the Regulation of Borsa Italiana S. p. A. Since Benetton Group S. p. A. shares are also listed on the Frankfurt stock exchange, the Code of Conduct also implements the obligations of noti? ation and disclosure provided by the Wertpapierhandelsgesetz – WpHG law [S[Securities Trading Act]Section 15a, introduced by the 4th Finanzmarktforderungsgesetz [F[Fourth Financial Markets Promotion Act]Relations with Institutional Investors and with other Shareholders. The Investor Relations Department ensures correct management of relations with ? nancial analysts, institutional investors and individual Italian and foreign Shareholders. Among other things, this department co-ordinates activities with members of the Financial Community. This function complies with the criteria of fairness, clarity and equal access to information contained in the “Market Information Guide” drafted by Borsa Italiana S. p. A. , making available in the Investor Relations section of the Company’s website http://www. benettongroup. om/ investors/ ample documentation and information concerning the Company, with particular reference to price-sensitive information. The following documents, among others, are available on the site: the Articles of Association, the Code of Conduct for Internal Dealing, the Organizational and Operational Model, the Rules of Conduct in Related Party Transactions, press releases and periodical ? nancial information. This document is available on website http://www. benettongroup. com/investors/ in the Corporate Governance section. 24 D I R E C TO R S ‘ R E P O RT Supplementary information Benetton shares and shareholdings Treasury shares. During the period, Benetton Group S. p. A. either bought nor sold any treasury shares or shares or stock in parent companies, either directly or indirectly or through subsidiaries, trustees or other intermediaries. Shares held by Directors and Statutory Auditors. Directors Luciano, Gilberto, Giuliana and Carlo Benetton directly and indirectly hold equal interests in the entire share capital of Edizione Holding S. p. A. , the parent company of Benetton Group S. p. A. and owner of 67. 144% of the share capital. Except as indicated, Directors Luciano, Gilberto, Giuliana and Carlo Benetton [i[including their not legally separated spouses and children who are minors]ave not, during 2004, held other shares in Benetton Group S. p. A. r in subsidiary companies, either directly or through subsidiaries, trust companies, or third parties, except as indicated below, referring to Gilberto Benetton. As indicated in the statements received, during 2004 no other equity investments in the Company have been held by its other Directors and Statutory Auditors, except those indicated in the table below: Number of shares held as of 12. 31. 2003 45,000 4,000 3,500 Number Number of shares of shares purchased sold Number of shares held as Type of of 12. 31. 2004 ownership 45,000 Owned 4,000 Owned 3,500 Owned Name and surname Gilberto Benetton Alessandro Benetton Ulrich Weiss Company Benetton Group S. p. A. Benetton Group S. p. A. Benetton Group S. p. A. 25 Stock option plan. The resolution of the extraordinary Shareholders’ Meeting uthorized the Board of Directors, in accordance with article 2443 of the Italian Civil Code, to decide, also more than once and for a maximum period of ? ve years from the date of the shareholders’ meeting resolution, to increase the share capital, for cash, one or more times, with the consequent issue of ordinary shares, with normal ownership, to be offered for subscription by employees of Benetton Group S. p. A. and subsidiary companies at prices equivalent to the nominal value of 1. 30 euro each, as well as a share premium determined at the time they are assigned, on the basis of the arithmetic average of share prices recorded in the last month in Borsa Valori di Milano [M[Milan Stock Exchange]excluding option rights in accordance with article 2441, ? al paragraph of the Italian Civil Code, for a maximum total of 6. 5 million euro, through the issue of a maximum of 5,000,000 ordinary shares with a nominal value of 1. 30 euro each. The Board of Directors on the same date resolved to increase, for cash, the share capital by 236,026,454. 30 euro to 240,230,104. 40 euro to service the share incentive Plan, issuing 3,233,577 options which confer the right to subscribe to the same number of Company shares, at a price of 8. 984 euro. If the resolved increase is not fully subscribed within the period from time to time ? xed for the purpose, the capital will be increased by an amount equivalent to subscriptions received at the expiry of this period.

These stock options represent an instrument to motivate and retain, in the medium-long term, employees and directors, selected from among the top executives of the Company and its subsidiary companies, who hold of? ces which are considered the most important strategically. D I R E C TO R S ‘ R E P O RT The assignment cycle envisaged consists of a period when exercise of the options is restricted of four years from the date of assignment [t[the so-called vesting period]nd a further period of ? ve years for exercise of the options; however, under certain conditions, there will be the possibility of exercising up to a maximum of 50 % of options assigned two years after the date of assignment.

The proportion of offers assigned that will become effectively exercisable, once the vesting period of four years has passed, will depend on the level of achievement, accumulated in the vesting period, of preset objectives which are used as indicators of EVA [E[Economic Value Added]erformance with reference to the 2004/2007 four year period. More details are contained in the “Stock Option Plan Rules” available under “Codes” in the Corporate Governance/Investor Relations section of the Company’s website. Ownership of the Company. Edizione Holding S. p. A. [w[with registered of? ce in Treviso, Italy]a holding company, wholly owned by the Benetton family, has the majority holding in the Company with 121,905,639 ordinary shares, equivalent to 67. 44%. Shareholders by class Edizione Holding S. p. A. Institutional investors and banks Other investors By size of holding [1[1]rom 1 to 4,999 shares From 5,000 to 9,999 shares Over 10,000 shares Holdings not classi? ed Total [1[1] I R E C TO R S ‘ R E P O RT % 67. 144 17. 220 15. 636 No. of shareholders 27,221 206 371 27,798 Number of shares 10,502,130 1,395,851 176,692,592 [7[7,031,762]81,558,811 26 As per last Spa? d survey as of January 13, 2005. Performance of Benetton shares. The performance of Benetton shares during 2004 was positive overall, with an increase of 6. 9% compared with December 31, 2003, against a Mibtel performance of 18. % and a Midex performance of 12. 6%. In the American market, Benetton ADRs [A[American Depositary Receipts]ent up by 17. 4% with increased trading during the year. [1[1]2[2]estated after a reverse split of the shares approved by Shareholders’ Meeting on May 8, 2001. Net of treasury shares held during the year. 27 Performance of ordinary share and Benetton ADR – Dec. 31, 2003 to Dec. 31, 2004 01. 02. 04 04. 01. 04 05. 03. 04 06. 01. 04 08. 02. 04 03. 01. 04 09. 01. 04 10. 01. 04 12. 01. 04 07. 01. 04 02. 02. 04 11. 01. 04 12. 31. 04 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Volume Share [e[euro]0. 5 10. 0 9. 5 9. 0 8. 5 8. 0 0. 01. 04 09. 01. 04 08. 02. 04 03. 01. 04 01. 02. 04 04. 01. 04 2,500,000 2,000,000 1,500,000 1,000,000 500,000 Volume ADR [U[US $]6. 01. 04 11. 01. 04 02. 02. 04 05. 03. 04 12. 01. 04 12. 31. 04 07. 01. 04 28. 0 26. 0 24. 0 22. 0 20. 0 D I R E C TO R S ‘ R E P O RT Share and market data Earnings/[L[Loss]er share [e[euro]1[1]hareholders’ equity per share [e[euro]1[1]ividend per share [e[euro]1[1]ay out ratio [%[%]ividend yield Share price: December 31 [e[euro]creen-based market: high [e[euro]creen-based market: low [e[euro]rice/earnings ratio [P[P/E]hare price/Shareholders’ equity per share Market capitalization [m[millions of euro]verage no. f shares outstanding [2[2]umber of shares outstanding 2004 2003 2002 2001 2000 0. 68 0. 59 [0[0. 05]. 82 1. 35 6. 77 6. 47 6. 29 6. 86 6. 50 0. 34 0. 38 0. 35 0. 41 0. 46 50 64 n. a. 50 37 3. 9 3. 8 4. 8 3. 6 4. 8 9. 74 9. 11 8. 50 12. 72 22. 01 10. 18 11. 30 15. 90 22. 44 24. 20 8. 33 5. 90 8. 50 9. 75 18. 71 14. 3 15. 4 n. a. 15. 5 16. 5 1. 4 1. 4 1. 4 1. 9 3. 4 1,768 1,654 1,543 2,309 3,996 181,558,811 181,558,811 181,341,018 180,720,969 180,505,910 181,558,811 181,558,811 181,558,811 181,558,811 181,558,811 Relationships between the parent company, its subsidiaries and other related parties. The Benetton Group has limited trade dealings with Edizione Holding S. p. A. the parent company], with subsidiary companies of the same and with other parties which, directly or indirectly, are linked by common interests with the majority Shareholder. Trading relations with such parties are conducted on an arm’s-length basis and using the utmost transparency. These transactions relate mostly to purchases of tax credits and services. In addition, Italian Group companies are participating in a national tax consolidation per article 117 and subsequent of the Tax Consolidation Act DPR 917/86 based on a proposal by the consolidating company Edizione Holding S. p. A. which exercised the option for this regime on December 31, 2004.

The duration of the option is three years starting from the 2004 ? scal year. The relationships arising from participation in the consolidation are governed by speci? c Rules approved and signed by all participating companies. The relevant totals appear below: [t[thousands of euro]ccounts receivable _ including for participation in the Edizione Holding S. p. A. tax consolidation Accounts payable _ including for participation in the Edizione Holding S. p. A. tax consolidation Purchases of raw materials Other costs and services Sales of products Revenue from services and other income 2004 32,864 32,283 19,285 18,664 2,982 13,229 17 937 2003 1,198 11,049 3,432 13,863 76 776 9 The Group has also undertaken some transactions with companies directly or indirectly controlled by, or in any case, under the in? uence of, managers serving within the Group. The Parent Company’s management believes that such transactions were completed at market rates. The total value of such transactions was not, in any case, signi? cant in relation to the Group’s total value of production. No Director, Manager, or Shareholder is a debtor of the Group. Management of ? nancial risks. The Group has always paid special attention to ? nancial risk management by constantly monitoring its exposures and managing them by means of derivative instruments.

Exposure to exchange risk is marginal and almost totally concentrated in the US dollar, Japanese yen, British pound and Swiss franc; at the end of 2004, such exposure was substantially neutralized by Outrights, Currency Swaps, Non Deliverable Forwards and Collars [�["zero cost”]or: Currency to sell Currency Euro 159 124 49,672 368 35 51 50 33 Currency to buy Currency Euro 116 87 33,300 247 2 2 1 1 [in [in millions]dollar Japanese yen British pound Swiss franc D I R E C TO R S ‘ R E P O RT During 2004, the Group did not use any derivative instruments that involved collecting or paying premiums. Under the Group’s guidelines, its exposure to exchange risk is split into: _ exposure to economic exchange risk: represented by the sum of monetary ? ows [rec[receipts and payments in the same currency are netted]all currencies other than the “functional currency”.

Risk exposure arises as soon as the price lists for collections are de? ned [eac[each year being divided into two main collections]ich takes place approximately 15 months prior to the time when cash will be received: the prices in foreign currency applied to the budget volumes for each item are converted at an exchange rate [kno[known as the "target rate”]calculate a budgeted result that the hedging policy has to ensure; _ exposure to exchange translation risk: on the net investment made by Benetton Group S. p. A. in foreign Group companies. Each variation in the exchange rate generates a new value for the net amount that the Parent Company has invested in Group companies located outside of the euro-zone.

The “translation differences” that arise in such cases represent gains or losses that have a cash impact when there is a distribution of dividends or if the foreign subsidiary is liquidated or sold off; these differences do not ? ow into the statement of income, but are a direct adjustment to Group Shareholders’ equity. In the same way as the exposure to exchange risk, exposure to interest risk is also monitored on an ongoing basis and managed by way of derivative instruments. At the end of the year, the risk exposure on the liabilities side [essen[essentially a ? oating-rate bond loan with maturity in 2005 for 300 million euro and a ? oating-rate syndicated loan with maturity in 2007 for 500 million euro]rtially hedged by interest rate swaps for a notional value of 240 million euro, taken out mostly in previous years of which 190 million will mature in 2005.

The offsetting asset risk exposure is controlled by a policy, approved by the Parent Company Board of Directors in July 2003. The policy requires that investment instruments be bank deposits, monetary funds or short-term bonds and ? xed or variable rate bonds with durations under three years. These instruments have to have an issuer rating of not less than “A-” from S or Fitch or “A3” from Moody’s. Moreover, in order to avoid an excessive concentration of risk in a single issuer in the case of issuers with a rating of less than “AA” [or eq[or equivalent]maximum amount that can be invested must not exceed 10% of the Group’s total investment of liquid funds up to a maximum of 20 million euro.

Privacy and the protection of personal data. As early as 2000, the Company adopted the Security Planning Document [SPD] [SPD]aged by the legislation then in force. This concerned the processing by IT systems of information considered “sensitive” or “judicial”. Legislative Decree 196 of June 30, 2003, partially amending the previous regulations, provides for adoption of the new minimum security measures and compliance with reference to the same data by December 31, 2005 [date [date in the latest extension by Decree Law 314 of December 30, 2004, article 6-bis]Company updated its SPD as of 2004 and will again update it in compliance with the new rules by December 31, 2005.

All Group companies have brought themselves into line with the data security model adopted by the Parent Company. 30 D I R E C TO R S ‘ R E P O RT Directors. Parent Company Directors as of December 31, 2004 are as follows: Name and surname Luciano Benetton Carlo Benetton Silvano Cassano Giuliana Benetton Gilberto Benetton Alessandro Benetton Gianni Mion Sergio De Simoi Ulrich Weiss Reginald Bartholomew Luigi Arturo Bianchi Date of birth 05. 13. 1935 12. 26. 1943 12. 18. 1956 07. 08. 1937 06. 19. 1941 03. 02. 1964 09. 06. 1943 05. 23. 1945 06. 03. 1936 02. 17. 1936 06. 03. 1958 Appointed 1978 1978 2003 1978 1978 1998 1990 2003 1997 1999 2000 Of? e Chairman Deputy Chairman Managing Director Director Director Director Director Director Director Director Director Principal organizational and corporate changes. The branches of Bencom S. r. l. in Spain, France and Great Britain became operational in January 2004. Through these branches, Bencom S. r. l. directly manages a certain number of Benetton stores in the above-mentioned countries, previously controlled by Benetton Retail Spain S. L. , Benetton Retail France S. A. S. and Benetton Retail [1988][1988], respectively. During June, a branch was set up in Belgium, operational from August 1, to purchase and manage, also by rental to third parties, businesses operating Benetton stores. On February 17, 2004 Ben? n S. p. A. ought from third parties, for 15 million euro, 15% of the Olimpias S. p. A. share capital, of which it previously held 85%. This company produces, mainly for Group companies, textile products and, in particular, fabrics, knitted fabrics, yarns, woven and printed fabrics, as well as acting as a dye house and laundry. With effect from December 1, 2004, Olimpias S. p. A. was merged by incorporation into the parent company Ben? n S. p. A. , which changed its name at the same time to Olimpias S. p. A. The operation is part of and is based on the same rationale as a more general reorganization of the Group, largely completed during the 2003 ? nancial year. During May, Benetton International S. A. formerly Benetton Retail International S. A. ] sold to Benetton Holding International N. V. S. A. [forme[formerly Benetton International N. V. S. A. ]olding in Benetton Asia Paci? c Ltd. , a company operating in Hong Kong in retail activities and services for other Group companies. The German subsidiary New Ben GmbH purchased, for a price of 4 million euro, the entire shareholding in Mari Textilhandels GmbH, a German company owning around 30 stores engaged in the sale of Group-branded products in various German regions. This purchase was effective on July 1, 2004; from the same date, Mari Textilhandels GmbH was merged by incorporation into New Ben GmbH.

Continuing with the same process of simpli? cation of the corporate structure, with effect from September 1, 2004, I. M. I. S. r. l. was merged by incorporation into the parent company Bencom S. r. l. In September 2004, Benetton Group S. p. A. sold its holding of 10% of the share capital of Tecnica S. p. A. to third parties. 31 D I R E C TO R S ‘ R E P O RT Luciano Benetton, Gilberto Benetton, Carlo Benetton and Giuliana Benetton are brothers and sister; Alessandro Benetton is the son of Luciano Benetton. Directors’ fees due to members of the Board of Benetton Group S. p. A. totaled 4,927 thousand euro in 2004. During its July 15 meeting, Benetton Group S. p. A.

Board of Directors approved a stock option plan for Group top management. Details of this operation are shown in the paragraph “Stock option plan”. The corporate restructuring plan in Spain and Portugal was completed with the transfer of the shareholding in Benetton Real Estate Spain S. L. [forme[formerly Benetton Textil Spain S. L. ]Benetton Holding International N. V. S. A. to Benetton Realty Spain S. L. Benetton Realty Spain S. L. sold its shareholding in Benetton Realty Portugal Imobiliaria S. A. to Benetton Real Estate International S. A. ; Benetton Real Estate Spain S. L. sold its shareholding in Benetton Textil Confeccao de Texteis S. A. to Benetton Manufacturing Holding N. V.

The corporate restructuring plan continued in France with the transfer of the shareholding in Benetton France Commercial S. A. S. [forme[formerly Benetton Retail France S. A. S. ]netton International S. A. to Benetton France S. a r. l. [forme[formerly Benetton France Trading S. a r. l. ]tton France Commercial S. A. S. sold to third parties the entire shareholding in the French company L’Apollinaire S. n. c. , owner of a sales business. D I R E C TO R S ‘ R E P O RT In December, the purchase of the remaining 50% of the share capital of DCM Benetton India Ltd. from third parties by Benetton Holding International N. V. S. A. was ? nalized and the liquidations of Benetton Sportsystem Taiwan Ltd. nd Benetton [Far E[Far East]were completed. Signi? cant events since year-end. No signi? cant events occurred after year-end. 32 Outlook for 2005. The economic environment in the principal European markets, especially in Italy and Germany which represent 55% of Group revenues, continues to be disappointing. Consumers are spending very cautiously and are placing great emphasis on the quality-price ratio even more than in the past. De? ationary pressures in the market are generated both by economic uncertainty and by the ending of the multi? ber agreement for the Chinese market. In this situation, it is dif? cult to speculate on an economic recovery in the short-term.

The Group has established an important policy of incentives to the network of partners, in line with the business model, with the objective of placing them in a condition to increase their investment capacity, to open new stores and to renew the existing ones, as well as to increase their competitive capacity in terms of price to the ? nal customer. This policy of incentives to the network has been made possible by the strategic focus on ef? ciency actions, optimization of production and organization systems and strict containment of administrative costs. Expected revenues for 2005 are between 1,620 and 1,650 million euro, with EBIT around 9. 5-10% and net income around 6%.

In 2005, the level of investments will amount to around 130-150 million