20-F 1 dm6225.htm FORM 20-F

As filed with the Securities and Exchange Commission on July 14, 2006


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended:  December 31, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Transition Period from            to

OR

o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Date of event requiring this shell company report

001-14908
(Commission file number)

Ducati Motor Holding S.p.A.
(Exact name of registrant as specified in its charter)

Ducati Motor Holding S.p.A.
(Translation of registrant’s name into English)

Italy
(Jurisdiction of incorporation or organization)

Via A. Cavalieri Ducati 3, 40132 Bologna, Italy
(Address of principal executive offices)

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

Title of each class

 

Name of each exchange
on which registered


 


American Depositary Shares, each representing ten Ordinary Shares

 

New York Stock Exchange

Ordinary Shares*

 

New York Stock Exchange



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

None
(Title of Class)

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

None
(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

159,360,037 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   o

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 Act of 1934.

Yes   o

No   x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

          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   o

          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      o

 

Accelerated filer      x

 

Non-accelerated filer      o

          Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17   o

Item 18   x

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   o

No   x

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



TABLE OF CONTENTS

 

 

 

PART I

 

2

 

 

 

Item 1.  Identity of Directors, Senior Management and Advisors

 

2

 

 

 

Item 2.  Offer Statistics and Expected Timetable

 

2

 

 

 

Item 3.  Key Information

 

2

Selected Consolidated Financial Data

 

3

Exchange Rates

 

5

Risk Factors

 

6

Forward-Looking Statements

 

14

 

 

 

Item 4.  Information on the Company

 

14

History and Development of the Company

 

14

Business Overview

 

16

Organizational Structure

 

19

Products and Distribution

 

20

Description of Property

 

34

Capital Expenditures

 

35

 

 

 

Item 4A.  Unresolved Staff Comments

 

35

 

 

 

Item 5.  Operating and Financial Review and Prospects

 

35

Introduction

 

35

Critical Accounting  Estimates

 

38

Trend Information

 

42

Results of Operations

 

42

2005 Compared to 2004

 

43

Liquidity and Capital Resources

 

46

Research and Development

 

54

 

 

 

Item 6.  Directors, Senior Management and Employees

 

54

Directors

 

54

Board Committees

 

57

Senior Management

 

57

Statutory Auditors

 

58

Compensation of Directors and Senior Management

 

59

Employees

 

60

 

 

 

Item 7.  Major Shareholders and Related Party Transactions

 

61

Major Shareholders

 

61

Related Party Transactions

 

64

 

 

 

Item 8.  Financial Information

 

66

Consolidated Financial Statements

 

66

Other Financial Information

 

66

Dividend Policy

 

67

Significant Changes

 

67

i



Item 9.  The Offer and Listing

 

68

Trading Markets and Share Prices

 

68

 

 

 

Item 10.  Additional Information

 

68

Share Option Plans

 

68

Buy Back Plan

 

70

Employee Stock Ownership Plan

 

71

By-Laws

 

71

Significant Differences with Corporate Governance Practices under NYSE Rules

 

86

Material Contracts

 

91

Exchange Controls

 

91

Documents on Display

 

96

 

 

 

Item 11.  Quantitative and Qualitative Disclosures About Market Risk

 

96

 

 

 

Item 12.  Description of Securities Other than Equity Securities

 

98

 

 

 

PART II

 

99

 

 

 

Item 13.  Defaults, Dividend Arrearages and Delinquencies

 

99

 

 

 

Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds

 

99

 

 

 

Item 15.  Disclosure Controls and Procedures

 

99

 

 

 

Item 16.  [Reserved]

 

99

 

 

 

Item 16A.  Audit Committee Financial Expert

 

99

 

 

 

Item 16B.  Code of Ethics

 

99

 

 

 

Item 16C.  Principal Accountant Fees and Services

 

100

 

 

 

Item 16D.  Exemptions from the Listing Standards for Audit Committees

 

100

 

 

 

Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchaser

 

101

 

 

 

Item 17.  Financial Statements

 

101

 

 

 

Item 18.  Financial Statements

 

101

 

 

 

Item 19.  Exhibits

 

102

 

 

 

SIGNATURES

 

103

ii



PRESENTATION OF FINANCIAL AND OTHER INFORMATION

          Unless otherwise indicated, our audited financial statements and other financial information contained in this annual report on Form 20-F for the fiscal year ended December 31, 2005 (the “annual report”) have been prepared in conformity with International Financial Reporting Standards as adopted by the European Union (“IFRS”), which differ in certain significant respects from United States generally accepted accounting principles (“U.S. GAAP”).  For a discussion of the significant differences between IFRS and U.S. GAAP, see Notes 38, 39, 40 to our audited financial statements included in Item 18.

          We adopted IFRS for the first time in our annual audited financial statements for the year ended December 31, 2005, which included comparative financial statements for the year ended December 31, 2004. IFRS 1, First-time Adoption of International Financial Reporting Standards, requires that an entity develop accounting policies based on the standards and related interpretations effective at the reporting date of its first annual IFRS financial statements (i.e., for Ducati, December 31, 2004). IFRS 1 also requires that those policies be applied as of the date of transition to IFRS (i.e., for Ducati, January 1, 2004) and throughout all periods presented in the first IFRS financial statements.  See Note 37 to our audited financial statements included in Item 18.

          In this annual report, references to “we,” “us,” “our,” “Ducati,” “Group” and the “Company” are to Ducati Motor Holding S.p.A. and its subsidiaries and, unless the context otherwise requires, to their predecessors.  References to “DMH” are to Ducati Motor Holding S.p.A. only.  References to “Lit.,” “lira,” “lire” and “Italian lire” are to Italian lire, references to “US$,” “$,” “dollars” and “U.S. dollars” are to United States dollars and references to “€” or “euro” are to the euro, the single currency established for certain members of the European Union (the “EU”), including Italy, upon the commencement of the third stage of the European Monetary Union (“EMU”) on January 1, 1999.  References to “CONSOB” are references to the Commissione Nazionale per le Società e la Borsa (the Italian National Commission for Companies and the Stock Exchange).

          Beginning with fiscal year ended December 31, 2001, we have published our audited financial statements in euro.  For fiscal years ending before 2001, we published our audited financial statements in Italian lire.  From January 1, 1999 to February 28, 2002 (the last day in which the lira was legal tender in Italy), we carried out non-cash transactions in euro as well as lire.  For ease of comparison, we have presented in this annual report any amounts formerly stated in Italian lire in euro and/or in dollars, as applicable, as follows: converting the lire amounts into euro at the fixed conversion rate of Lit. 1,936.27 per euro established in connection with the commencement of the third stage of the EMU; and converting the euro amount into U.S. dollars at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) for euro on December 30, 2005, of US$1.1842 per euro.

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

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

1



          Market data used throughout this annual report was obtained from our internal dealer data, surveys commissioned by us or industry publications.  Registration data is based on our analysis of the following published sources:

ACEM (Association des Constructeurs Européens de Motocycles) and GIRAL (General Research International Associates Ltd.), an independent Swiss motorcycle consultancy, for the Western European markets;

 

 

ANCMA (Associazione Nazionale Ciclo Motociclo Accessori), for Italy;

 

 

MIC (Motorcycle Industry Council), for the United States;

 

 

Nirinsha Shinbun, for Japan; and

 

 

the Australian Bureau of Statistics, for Australia.

          Although we believe that these sources are reliable, we have not independently verified the information they have provided to us.  We have also not sought the consent of any of these entities to refer to their data in this annual report.

          “Ducati” is our registered trademark.  This annual report also includes the trademarks of other companies.

PART I

Item 1.  Identity of Directors, Senior Management and Advisors

          Not applicable.

Item 2.  Offer Statistics and Expected Timetable

          Not applicable.

Item 3.  Key Information

Selected Consolidated Financial Data

          The following table sets forth selected historical consolidated financial data derived from our audited financial statements included in Item 18 of this annual report, which have been prepared on the basis of IFRS.  Our consolidated financial statements as of and for the two years ended December 31, 2005, would not have had a material effect if presented under International Financial Reporting Standards as issued by the International Accounting Standards Board.

          In addition, the following table sets forth certain selected financial data prepared in conformity with U.S. GAAP.  For information concerning differences between IFRS and U.S. GAAP as applied to our audited financial statements, see Notes 38, 39 and 40 to the audited financial statements included in Item 18.

          The selected consolidated financial data set forth below (except for other financial data) should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and with our audited financial statements.

2



Selected Consolidated Financial Data in Conformity with IFRS

 

 

Year Ended December 31,

 

 

 


 

 

 

2004

 

2005

 

2005

 

 

 


 


 


 

 

 

(euro in thousands, except per share and ADS
data which are in euros)

 

(dollars in thousands,
except per share and
ADS data which are
in dollars) (1)

 

 

 






 



 

CONSOLIDATED STATEMENT OF INCOME DATA

 

 

 

 

 

 

 

 

 

 

Revenues

 

363,359

 

320,847

 

$

379,947

 

Cost of sales

 

 

(276,708

)

 

(262,392

)

 

(310,725

)

 

 



 



 



 

Gross profit

 

 

86,651

 

 

58,455

 

 

69,222

 

Other income

 

 

30,810

 

 

34,184

 

 

40,481

 

Distribution costs

 

 

(87,490

)

 

(89,443

)

 

(105,918

)

General and administrative expenses

 

 

(19,564

)

 

(21,855

)

 

(25,881

)

Other expenses

 

 

(1,226

)

 

(1,978

)

 

(2,342

)

Restructuring reserve

 

 

—  

 

 

(13,000

)

 

(15,395

)

Operating profit (loss)

 

 

9,181

 

 

(33,637

)

 

(39,833

)

Interest expense, net

 

 

(8,516

)

 

(6,124

)

 

(7,252

)

Foreign exchange gain/(loss), net

 

 

4,690

 

 

(1,191

)

 

(1,410

)

Profit/(loss) before income taxes

 

 

5,355

 

 

(40,952

)

 

(48,495

)

Income taxes

 

 

(8,824

)

 

(511

)

 

(605

)

Net profit/(loss) before minority interest

 

 

(3,469

)

 

(41,463

)

 

(49,100

)

Net profit/(loss) attributable to minority interest

 

 

—  

 

 

(1

)

 

(1

)

Net profit/(loss) attributable to the Group

 

 

(3,469

)

 

(41,464

)

 

(49,101

)

Net profit/(loss) per share (5)

 

 

(0.022

)

 

(0.266

)

 

(0.308

)

Net profit/(loss) per ADS(5)

 

 

(0.22

)

 

(2.66

)

 

(3.08

)

CASH FLOW AND OTHER FINANCIAL DATA

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(25,493

)

 

(31,029

)

 

(36,745

)

Cash flows from operating activities

 

 

23,442

 

 

41,981

 

 

49,714

 

Cash flows from (used in) investing activities

 

 

(25,354

)

 

(31,012

)

 

(36,724

)

Cash flows from financing activities

 

 

17,266

 

 

(7,279

)

 

(8,620

)



See notes below.

 

3



 

 

As of December 31,

 

 

 


 

 

 

2004

 

2005

 

2005

 

 

 


 


 


 

 

 

(euro in thousands, except per share and ADS
data which are in euros)

 

(dollars in thousands,
except per share and
ADS data which are
in dollars) (1)

 

 

 


 


 

CONSOLIDATED BALANCE SHEET DATA

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

49,327

 

53,017

 

$

62,783

 

Property, plant and equipment, net

 

 

70,288

 

 

66,556

 

 

78,816

 

Total assets

 

 

502,723

 

 

463,185

 

 

548,504

 

Total indebtedness(2)

 

 

214,862

 

 

189,972

 

 

224,965

 

Total shareholders’ equity

 

 

157,778

 

 

118,742

 

 

140,614

 

Selected Consolidated Financial Data in Conformity with U.S. GAAP (in thousands)(3)

 

 

Year Ended December 31,

 

 

 


 

 

 

2001

 

2002

 

2003

 

2004

 

2005

 

2005

 

 

 


 


 


 


 


 


 

 

 

(euro in thousands, except per share and ADS data which are in euros)

 

(dollars in thousands,
except per share and
ADS data which are
in dollars) (1)

 

 

 


 


 

CONSOLIDATED STATEMENT OF OPERATIONS DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) (4)

 

33,691

 

16,148

 

6,321

 

5,589

 

(34,724

)

$

(41,120

)

Profit (loss) before income taxes, minority interest and cumulative effect of change in accounting principles

 

 

20,308

 

 

9,973

 

 

852

 

 

2,924

 

 

(42,197

)

 

(49,970

)

Net profit/(loss)

 

 

14,178

 

 

6,966

 

 

(610

)

 

(2,071

)

 

(74,805

)

 

(88.584

)

Net profit/(loss) per share (basic)(5)

 

 

0.077

 

 

0.044

 

 

(0.004

)

 

(0.013

)

 

(0.482

)

 

(0.570

)

Net profit/(loss) per ADSs (basic)

 

 

0.77

 

 

0.44

 

 

(0.040

)

 

(0.13

)

 

(4.82

)

 

(5.70

)

Net profit/(loss) per share (diluted)

 

 

0.076

 

 

0.043

 

 

(0.004

)

 

(0.013

)

 

(0.482

)

 

(0.570

)

Net profit/(loss) per ADSs (diluted)

 

 

0.76

 

 

0.43

 

 

(0.040

)

 

(0.13

)

 

(4.82

)

 

(5.70

)

OTHER FINANCIAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

204

 

101

 

67

 

—  

 

—  

 

$

—  

 

Depreciation and amortization

 

 

17,625

 

 

16,975

 

 

16,628

 

 

15,652

 

 

17,391

 

 

20,594

 



See notes below.

 

4



 

As of December 31,

 

 


 

 

 

2001

 

2002

 

2003

 

2004

 

2005

 

2005

 

 


 


 


 


 


 


 

 

(euro in thousands, except per share and ADS data)

 

 

(dollars in
thousands, except
per share and
ADS data) (1)

 

 


 


 

CONSOLIDATED BALANCE SHEET DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

357,824

 

398,495

 

411,888

 

408,031

 

336,769

 

$

398,802

 

Total shareholders’ equity

 

 

77,717

 

 

83,483

 

 

81,154

 

 

74,422

 

 

4,027

 

 

4,768

 



(1)

Euro amounts are translated into U.S. dollars using the Noon Buying Rate for euro on December 30, 2005, of US$1.1842 per euro.

(2)

Total indebtedness comprises long-term debt (including current portion) and short-term bank borrowings.

(3)

Financial data prepared in conformity with U.S. GAAP are presented as supplemental information for investors; our audited financial statements included in this annual report are prepared in conformity with IFRS.  For information concerning certain differences between IFRS and U.S. GAAP as applied to our audited financial statements, see Notes 38, 39, and 40 to the audited financial statements.

(4)

Operating income, profit/(loss) before income taxes, and minority interest and net profit/(loss) are stated after deducting a non-cash expense for stock-based compensation of €0.2 million, €0.1 million, €0.1 million, and nil for each of the years 2001 through 2005, respectively.

(5)

We have not paid any dividends for the periods presented.

Exchange Rates

          Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of euro prices of DMH’s shares listed on the Mercato Telematico Azionario (“Telematico”), the automated screen-based trading system managed by Borsa Italiana S.p.A. (the “Italian Stock Exchange”) and, as a result, are likely to affect the market price of the ADSs in the United States.  Exchange rate fluctuations will also affect the U.S. dollar amounts received by holders of ADSs on the conversion into U.S. dollars by the ADS depositary of any cash dividends declared and paid in euro on the shares represented by the ADSs.

          The following table sets forth the Noon Buying Rate for euro expressed in U.S. dollars per euro rounded to the nearest one hundredth of a U.S. cent for the periods indicated. 

Year:

 

Average (1)

 

At Period End

 


 



 



 

2001

 

 

0.8909

 

 

0.8901

 

2002

 

 

0.9495

 

 

1.0485

 

2003

 

 

1.1411

 

 

1.2597

 

2004

 

 

1.2478

 

 

1.3538

 

2005

 

 

1.24001

 

 

1.1842

 


Month ending:

 

High

 

Low

 


 


 


 

December 31, 2005

 

 

1.2041

 

 

1.1699

 

January 31, 2006

 

 

1.2287

 

 

1.1980

 

February 28, 2006

 

 

1.2100

 

 

1.1860

 

March 31, 2006

 

 

1.2197

 

 

1.1886

 

April 30, 2006

 

 

1.2824

 

 

1.2091

 

May 31, 2006

 

 

1.2888

 

 

1.2607

 


 


 

(1)  Average of the Noon Buying Rate for euro on the last business day of each month in the period.

          The effective Noon Buying Rate for euro on June 26, 2006, was US$1.2554 per €1.00.

5



Risk Factors

          Investing in our shares or ADSs involves certain risks.  You should carefully consider each of the following risks and all of the information included in this annual report.

We have a recent history of losses

          We experienced net losses of €41.5 million in 2005 and €3.5 million in 2004. We attribute these losses in part to general economic conditions, which resulted in decreased motorcycle registrations in the markets in which we operate, to increased raw material costs and to the weakening of the dollar against the euro.  These macroeconomic factors hurt our financial condition, already weakened by a delay in the rotation of our product portfolio and by deterioration in our product mix, which had an increased percentage of sales of lower-margin motorcycles.  See “Item 5.  Operating and Financial Review and Prospects–Liquidity and Capital Resources.”  There can be no assurance that the macroeconomic factors described above will improve, that raw material costs will not remain at today’s historical high levels or even further increase, or that we will be able to effect a timely rotation of our product portfolio or improve our product mix.

          Our financial results in 2005 were also affected by a €13 million restructuring reserve, the write-down of discontinued research and development projects and inventories for a total of €14.3 million and the payment of penalties in connection with our cancellation of supply orders for a total of €0.9 million, all contemplated in our business plan for 2006-2008. 

          We prepared our financial statements for the year ended December 31, 2005 assuming that we will continue as a going concern, based on our belief that our business plan for 2006-2008 will result in satisfactory economic results for us in the future.  There can be no assurance that these assumptions and beliefs based on the successful implementation of our business plan are correct or that our future financial results will be satisfactory.  For more information on the 2006-2008 business plan, see “Item 4.  Information on the Company—Business Overview—Business Strategy—2006-2008 Business Plan.”  For more information on our capital increase, see “Item 8.  Financial Information—Significant Changes.”

Our future profitability and financial condition depend on the successful implementation of the 2006-2008 Business Plan and the validation of the assumptions and expectations on which it is based

          Our future operating and financial performance and business prospects will depend in large part on the successful implementation of our business plan for 2006-2008. Following the purchase of 30% less one share of our share capital by World Motors S.A. (“WM”), World Motors Red S.c.A. (“WM II”) and World Motors White S.c.A. (“WM III”) in March 2006, our board of directors, appointed at an ordinary shareholders’ meeting on April 10, 2006, approved the 2006-2008 business plan on April 13, 2006.  The business plan focuses on improving profit margins and generating cash flows by increasing sales of motorcycle models in the high-end our of product price range and decreasing overhead costs.  The plan also called for a capital increase, which was successfully completed in June 2006. 

           We have formulated the 2006-2008 business plan on the basis of assumptions about several factors that are beyond our control, including: (i) the evolution of the motorcycle market; (ii) inflation rates; (iii) the euro/US dollar exchange rate; (iv) financial expenses; (v) tax rates; and (vi) labor union relations.  If one or more of the assumptions turns out to be incorrect, in whole or in part, our actual results may differ, possibly significantly, from the targets in the business plan and there could be a material adverse effect on our financial conditions, results of operations and business prospects. For more information about our business plan, see “Item 4.  Information on the Company—Business Overview—Business Strategy—2006-2008 Business Plan.”

6



We have incurred significant indebtedness and depend on external financing to help fund our working capital needs

          In May 2005, DMH and Ducati Corse S.r.l. (“Ducati Corse”) entered into a syndicated loan facility for up to €100 million (the “Syndicated Loan Facility”), which includes a five-year term loan for up to €63.6 million and a renewable, 364-day revolving credit line for up to €36.4 million.  In connection with the Syndicated Loan Facility, DMH and Ducati Corse have granted the lending banks security interests in a significant portion of their assets.  Under the terms of this facility, we are required to comply with certain financial covenants and are subject to covenants that restrict our ability, among other things, to pay dividends, make certain asset sales and incur additional indebtedness.  In addition, events of default under the facility, including failure to pay any interest or principal when due, failure to comply with certain financial covenants, failure to pay other indebtedness when due, the occurrence of a change of control and the occurrence of certain bankruptcy or other insolvency events, entitles the lenders to declare any outstanding loans immediately due and payable, terminate the facility and foreclose on the collateral.  See “Item 5. Operating and Financial Review and Prospects—Other Financial Transactions—Syndicated Loan Facility.”  In the first half of 2006 DMH entered into three additional loan facilities:  with UniCredit Banca d’Impresa S.p.A. for up to €35 million; with Banca Intesa S.p.A. for up to €10 million; and with Banca Popolare di Verona and Novara S.c.r.l. for up to €10 million.  The terms of these facilities are substantially the same as the Syndicated Loan Facility, including the requirement to comply with certain financial covenants, and entitle the lenders to declare any outstanding loans immediately due and payable and terminate the facility upon any event of default.  See “Item 5. Operating and Financial Review and Prospects—Other Financial Transactions.”  As of June 23, 2006, €98 million was outstanding under the Syndicated Loan Facility.  There were no outstanding amounts under our other loan facilities at that time.

          Based on our expected results for 2005, we anticipated that we were not going to be in compliance with certain financial covenants in our loan facilities and we obtained a waiver of those financial covenants from the syndicate of lending banks.  The lending banks also agreed to amend those financial covenants in order to adapt them to the 2006-2008 Business Plan and to take into account the fact that we will prepare our consolidated financial statements in accordance with IFRS starting with the financial statements for the year ended December 31, 2005.  We cannot assure you that our operating cash flow and capital resources will allow us to meet our repayment obligations in the future and cannot assure you that future requests to waive any non-compliance or to amend any of our loan facilities will be granted by the lending banks or that we will be able to continue to draw on our current sources of liquidity. 

          We expect to finance our future working capital requirements using both cash generated by our operations and the available credit lines described above.  In addition, we successfully completed an  €80,000,000 capital increase in June 2006.  See “Item 4.  Information on the Company—History and Development of the Company.” Absent sufficient operating cash flow and capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations, or to reduce or delay planned expansion and capital expenditures, restructure or refinance our indebtedness or seek additional equity capital.  We cannot assure you that any of these transactions could be effected on satisfactory terms, if at all, or that having to engage in any such transaction would not have a material adverse effect on our business, prospects, results of operations or financial condition.

The world motorcycle market is highly competitive

          The world motorcycle market is highly competitive.  Our principal competitors are four Japanese manufacturers (Honda, Suzuki, Yamaha and Kawasaki), two European manufacturers (Triumph and BMW) and, to a more limited extent, Harley-Davidson of the United States.  Additional competitors, including MV Agusta and Aprilia of Italy, also produce motorcycles that compete with ours.  Motorcycles produced by Harley-Davidson’s Buell subsidiary also compete with our Sport Naked motorcycles.

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Most of our competitors have substantially greater financial resources, are more diversified and have significantly higher sales volumes (allowing for greater economies of scale) and market share than us.  Certain of our competitors may also have shorter product development cycles and may be able to bring new products to market more quickly than we can.  Like other manufacturers in the motorcycle industry, our competitiveness is also influenced by our performance on international professional racing circuits.  Racing success may also be affected by events outside of our control, such as injuries or accidents involving our riders.  The retention and renewal of sponsorship agreements, the most significant source of income for Ducati Corse, are dependent on our racing success, so we cannot assure you that an unsuccessful racing performance will not affect our financial results.  We cannot assure you that Ducati motorcycles will have continued success in the World Superbike Championship or the MotoGP.  We are also subject to potential price pressure from our competitors, including price pressure that may result from appreciation of the euro relative to other currencies, in particular the U.S. dollar, the U.K. pound sterling and the Japanese yen.  Based on available registration data, motorcycle registrations for Ducati motorcycles in 2005 decreased 3.54% compared to 2004.  Our market share, based on available registration data, decreased during 2005 in some of our principal markets, including Italy (down 15%), Germany (down 15%) and the United Kingdom (down 16%).  In general, we cannot assure you that, in the future, we will be able to maintain our present competitive position.  See “Item 4. Information on the Company —Products and Distribution—Market Share and Competition.”

Our future performance depends on our ability to innovate and on market acceptance of new and existing products

          Our ability to develop new products and improve existing ones through research will have a significant effect on our future performance.  Failure to develop and offer products that compare favorably to those of our competitors, in terms of price, quality, styling, reliability, safety, functionality or otherwise, may result in lower market share, lower sales volumes and margins, and may have a material adverse effect on our operational and financial results.  In particular, whether we optimize engine performance and develop new motorcycle models may determine how well we perform against competitors.  Moreover, the lack of market acceptance of new motorcycle models, potential delays in bringing new products to market or any inability to achieve efficiency targets without suffering quality losses could adversely affect our overall profitability.  See “Item 4.  Information on the Company —Products and Distribution—Product Research and Development.”

Demand for motorcycles is cyclical

          The motorcycle industry is subject to significant changes in demand due to changing social and economic conditions affecting discretionary consumer income, such as employment levels, business conditions, taxation rates, fuel costs, interest rates and other factors.  In our target market (the Sport sub-segment of the market for road motorcycles with engine displacements of 500cc or greater (the “>500cc Road Market”)), we have experienced periods of material decreases in demand, which have had a material effect on our results of operations for such periods. Most recently, demand for our motorcycles (as measured by unit sales) decreased in 2005 in a number of our principal geographic markets.  See “Item 5.  Operating and Financial Review and Prospects—2005 Compared to 2004.”  The factors underlying such changes in demand are beyond our control, and demand for our products may again decline in the future, which could have a further negative impact on our business, prospects, results of operations or financial condition.

Our business is seasonal and we are required to predict levels of demand in advance and provide current motorcycle models to the market on a timely basis

          Our operations, like those of other competitors in the motorcycle industry, are characterized by seasonal fluctuations in demand and a stable production level (although we shut down production each year during the month of August and the last two weeks of December).  Annual retail demand for motorcycles is highest during April, May and June, resulting in peak factory sales during March, April and May and a build-up of inventory from September to February.

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As a result, we must plan overall annual production levels based on predicted levels of demand for our products, which we derive in part from our own market assessments and long-term, non-binding purchase commitments from our distributors.  We must also provide current models to the market during the critical annual spring season as demand typically shifts in the second half of the year to models introduced for the following year.  Mismanagement of our production levels or delayed delivery of current models can result in excess inventories and resulting promotional expenses (i.e., rebates, discounts, complimentary accessories and other incentives) that we incur to reduce the same.  In addition, a number of factors could cause dealers to delay or cancel orders already placed with us, including general economic conditions, competitive factors and changes in governmental regulation such as import/export rules and tariff rates.  We cannot assure you that we will accurately predict annual and long-term demand in the future or in any event provide our current motorcycles to the market on a timely basis.  Any failure to do so may have a material adverse effect on our business, prospects, results of operations or financial condition. 

We are dependent on our suppliers, and increases in component prices may negatively affect our operations

          We purchase virtually all of our motorcycle parts and components from third-party suppliers.  With the exception of a limited number of long-term component supply contracts for periods ranging from one to three years, we enter only into short-term, rolling contracts with suppliers.  In addition, we typically contract with our suppliers on a non-exclusive basis, which allows us to replace our suppliers at any time.  Generally, individual motorcycle components are available from a variety of sources, and our policy is to identify at least two sources of supply for each component.  However, we rely upon single-source suppliers for certain components, including “platform” components (such as those relating to the brake and injection systems).  See “Item 4. Information on the Company —Products and Distribution—Production.”  Our assembly operations may be interrupted or otherwise adversely affected by delays in the supply of parts and components from third-party suppliers.  They may also be interrupted if parts or components become unavailable on commercially reasonable terms in the future.  Even if parts and components are available from alternative sources, we may face increased costs and production delays in connection with the replacement of an existing supplier with one or more alternative suppliers.  These factors could have a material adverse effect on our business, prospects, results of operations or financial condition. 

          Like other competitors in the motorcycle industry, our operations are affected by the prices of motorcycle components.  The prices of motorcycle components have been subject to fluctuations in the past and may be subject to fluctuations in the future.  These fluctuations may result from fluctuations in the prices of raw materials (including commodities such as steel, aluminum, energy and oil-related products) from which these components are manufactured.  During 2004 and 2005, the price of steel increased between 20% and 60% (depending on the type of steel), resulting in an average increase in per-motorcycle production cost of approximately two percent.  In the first quarter of 2006, the price of aluminum rose by 30% compared to 2005, resulting in an average increase in per-motorcycle production cost of approximately one percent.  Any material increase in the prices of motorcycle components may have a material adverse effect on our business, prospects, results of operations or financial condition.

We have made significant investments and capital expenditures as to which we may not receive a return

          In 2004 and 2005, our capital expenditures on property, plant and equipment were €10.4 million and €10.6 million, respectively, and our investments in intangible assets were €15.1 million and €20.5 million, respectively.  Our capital expenditures in 2004 and 2005 mainly related to development expenses in connection with our new Sportclassic motorcycle model line and the development of the commercial version of the Desmosedici, the motorcycle used in the MotoGP World Championship.  If any of these or similar initiatives is unsuccessful, our related past and anticipated future capital expenditures and research and development expenditures may not result in any return or material benefit to us, which could have a material adverse effect on our business, prospects, results of operations or financial condition.

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Our racing activities are subject to strict regulations

          Participation in the Moto GP and Superbike world racing championships is subject to strict regulation.  Any change in the regulations and/or the interpretation of the regulations could adversely affect the management of Ducati Corse, resulting in increased costs of managing the team and reduced income, and we could be obliged to modify our strategic choices regarding participation in these competitions.  As a result, regulations in the racing sector could have a material adverse effect on our financial conditions, results of operations and business prospects and those of Ducati Corse.

We may be subject to significant product liability claims

          Like our competitors, we are exposed to possible claims for personal injury from the use of our motorcycles, particularly in the United States, where product liability claims grounded on personal injuries are more common than in other countries.  Although no claims of this kind have been made against us that are not covered by our existing product liability insurance coverage, such claims may arise in the future.  A partially or completely uninsured claim, if successful and of significant magnitude, could have a material adverse effect on our business, prospects, results of operations or financial condition.  See “Item 4. Information on the Company —Products and Distribution—Insurance and Product Liability.”

Our motorcycles may contain defects

          Like competing motorcycles, our products may have unanticipated defects.  Product defects have given rise to recalls of our motorcycles in the past and may do so again in the future.  Any unanticipated defects in our motorcycles or recalls could be costly to us and may have a material adverse effect on the Ducati brand and our business, prospects, results of operations and financial condition.

We rely on a single manufacturing facility

          Ducati motorcycles are manufactured at our sole production facility located in Borgo Panigale outside Bologna, Italy.  All manufacturing and assembly, as well as warehousing of certain components, is performed at this site.  A significant interruption of production at this facility would have a material adverse effect on our business, prospects, results of operations and financial condition.

Strikes and other labor disturbances may negatively impact our operations

          We operate in a heavily unionized industry and are subject to the risk of strikes and other work stoppages.  Our employees in Italy are subject to national and company-specific bargaining agreements.  The national collective bargaining agreement applicable to us and our employees was renewed in May 2003 and will expire on June 30, 2007.  Our company-specific collective bargaining agreement was signed on December 19, 2003 and expires on December 31, 2007.

          Our operations have not suffered material disruption as a result of strikes or work stoppages in the recent past.  However, we have been, and in the future may be, subject to strikes and work stoppages in connection with the negotiation of company-specific or national labor contracts.  Any strikes, work stoppages or other industrial actions may interrupt the production of motorcycles and could have a material adverse effect on our business, prospects, results of operations and financial condition.

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Our motorcycle design and technology are not protected by intellectual property rights

          The design and technology of our motorcycles, including the Desmodromic valve control system, are not protected by any material patent, trademark or other intellectual property rights, other than the registered trademarks associated with the Ducati brand itself.  In particular, the technical features that distinguish Ducati motorcycles are not protected by material patents or other intellectual property rights.  The component parts of our motorcycles are manufactured according to well-known techniques and include components that are not unique to our products.  As a result, the design and technology of our motorcycles are vulnerable to being copied or imitated by competitors, and certain of our competitors have copied our technology and design features in the past.  Our competitors may have or develop equivalent or superior manufacturing and design skills, and may develop an enhancement that will be patentable or otherwise protected from duplication by others.  These events could have a material adverse effect on our business, prospects, results of operations and financial condition.

We are dependent on qualified personnel

          Like our competitors, our commercial success depends in part upon our ability to continue to attract and retain highly qualified design, technical and commercial management and other personnel.    In 2003, 2004 and 2005, none of our managers earned performance bonuses because of our failure to meet certain financial targets. See “Item 6. Directors, Senior Management and Employees—Compensation of Directors and Senior Management.”  As a result, we may have increased difficulty in retaining such personnel, especially if the labor market in general improves, and cannot assure you that the members of our management team will continue working for us in the long term.  Competition in general for qualified personnel in the motorcycle industry is intense and we could be materially adversely affected by the loss of key employees.  We cannot assure you that we will be able to attract, recruit and retain sufficient qualified personnel to remain competitive.

The international nature of our operations exposes us to risks

          Like our competitors, we distribute motorcycles and other products in many countries and face risks related to our international operations, including: changes in governmental regulations; tariffs or taxes and other trade barriers; trends in prices, salaries interest rates and exchange rates; political, social and economic instability; and inflation.

          Any of these factors could materially adversely affect our business, prospects, results of operations and financial condition.

We are subject to foreign currency exchange rate fluctuations, particularly with respect to the U.S. dollar, and to interest rate fluctuations

          We are exposed to foreign exchange rate risks.  Our sales and operating profits are affected by fluctuations in currency exchange rates between the euro and certain foreign currencies, principally the U.S. dollar, the U.K. pound sterling and the Japanese yen, because of both the impact on product prices and operating expenses, as well as the effect of such fluctuations on the translation into euros of the foreign currency-denominated results of operation of our foreign subsidiaries operating outside the euro zone.  In 2005, we had revenues denominated in U.S. dollars, Japanese yen and U.K. pounds sterling that together exceeded 33.3% of our total revenues for the year (with sales in U.S. dollars accounting for approximately 18.8% of our total revenues), while our costs are principally denominated in euros.

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          We are also subject to potential price pressure from our competitors that may result from appreciation of the euro relative to these other currencies.  In 2003 and 2004, the euro’s appreciation against other currencies (including the U.S. dollar, where the appreciation was approximately 19.4% on average, and 20.4% at year end in 2003, and 9.9% on average, and 7.8% at year end in 2004), contributed to the decline in our sales and operating results.  More recently, during the first two quarters of 2006, the euro has once again shown a general upward trend in value against the U.S. dollar.  We engage in foreign exchange transactions to hedge portions of our transactional exposure to fluctuations in exchange rates between the euro and various foreign currencies, including the U.S. dollar, the U.K. pound sterling and the Japanese yen.  Our hedging policy until the end of 2003 consisted in covering, during the last quarter of each year, the sales of the coming year.  Beginning in January 2004, we shifted to 18-month rolling coverage.  However, at the end of 2004, we revised our currency exchange rate hedging policy; our new currency exchange rate hedging policy consists of six-month rolling coverage that is consistent with the amount of our orders and receivables in currencies that we normally have in place.  We cannot assure you that the foregoing will adequately protect us from the effects of future exchange rate fluctuations.  See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

          Similarly, changes in interest rates may affect our results by increasing or decreasing our borrowing costs.  Our current interest rate hedging policy consists in covering exclusively long-term contracts, having duration greater than 18 months.  However, we cannot assure you that changes in the interest rates relating to short-term contracts will not have an adverse effect on our operating results.

We are subject to strict environmental, safety and other governmental regulations

          Motorcycles sold in the United States, the European Union countries and other countries are subject to environmental emissions regulations and safety standards.  For example, applicable regulations in the United States include the emissions and noise standards of the U.S. Environmental Protection Agency and, in the State of California, the more stringent emissions standards of the State of California Air Resources Board.  Ducati motorcycles sold in the United States are also subject to the National Traffic and Motor Vehicle Safety Act and the rules promulgated thereunder by the National Highway Traffic Safety Administration.  In addition, all of our motorcycle models are required to comply with applicable homologation regulations in the countries in which they are distributed.  As these laws and regulations become increasingly stringent, future compliance requirements may result in increased costs or the withdrawal of our motorcycles from certain markets.  As a result, future environmental, safety and other regulations may have a material adverse effect on our business, prospects, results of operations and financial condition.

          We are also subject to a number of domestic Italian governmental regulations relating to the use and storage of materials, discharge and disposal of wastes from the factory and safety standards of facilities and processes.  We have not been subject to material environmental or safety claims in the past and believe that our activities conform in all material respects to presently applicable environmental and safety regulations.  However, the failure to comply with present or future regulations could result in damages or fines, suspension of production or cessation of certain activities.  New regulations could require us to incur significant expenses that could have an adverse effect on our results of operations.  Any failure to control the use of, or adequately restrict the discharge of, hazardous substances or to comply with safety requirements and legislation could subject us to significant liabilities.  See “Item 4. Information on the Company—Products and Distribution—Governmental and Environmental Regulation.”

Our ability to pay dividends is subject to limitations

          DMH has not paid any cash dividends on its shares since its formation in 1996.

          Italian law imposes certain restrictions on the distribution of dividends by Italian companies.  In particular, Italian law prohibits distributing dividends other than from net income or distributable reserves set forth in a company’s statutory accounts approved by a meeting of shareholders and after the establishment of certain compulsory reserves.  In addition, if losses from previous fiscal years have reduced a company’s capital, dividends may not be paid until the capital is reconstituted or its stated amount is reduced by the amount of such losses.

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Further, our Syndicated Loan Facility, New Loan, Banca Intesa Loan and BPVN Loan (as defined below) restrict our ability to pay dividends if a dividend distribution would cause DMH to be in violation of its financial covenants under the loan.  The application of these restrictions limits our ability to make distributions to holders of the shares and ADSs.  Even if we meet the statutory requirements and would be able to pay dividends in compliance with our loans we cannot assure you that we will decide to pay dividends.

You may face difficulties in protecting your rights as holders of ADSs

          DMH is incorporated under the laws of the Republic of Italy.  As a result, certain rights and obligations of holders of our ADSs are governed by Italian law and DMH’s Statuto (By-Laws).  These rights and obligations are different from those that apply to U.S. corporations.  For example, under Italian law, an investor that has acquired more than 30.0% of the shares of a company (or that already holds more than 30.0%, and acquires more than an additional 3.0% of such shares during a 12-month period) whose shares are listed on the Telematico is required to launch a tender offer for all of the shares of such company.  Further, under Italian law, holders of ADSs have no right to vote the shares underlying their ADSs, although under the deposit agreement governing our ADSs, ADS holders have the right to give instructions to The Bank of New York, the ADS depositary, as to how they wish such shares to be voted.  For these reasons, our ADS holders may find it more difficult to protect their interests against actions of our management, board of directors or other shareholders than they would as shareholders of a corporation incorporated in the United States.

The price of our shares and ADSs may be volatile

          No predictions can be made as to the effect, if any, that sales of our shares or the availability of our shares for sale will have on the market price of our shares or ADSs prevailing from time to time.  Future sales of our shares by shareholders, the issue and sale of new shares by us, or the perception that such sales could occur may adversely affect prevailing market prices for our shares and ADSs.  You may not be able to resell your shares or ADSs at or above the price at which you purchased them due to a number of factors, including: a possible lack of liquidity in the market for our shares or ADSs; differences between our actual financial or operating results and those expected by investors and analysts; changes in analysts’ recommendations or projections; pricing and competition in the motorcycle industry; new statutes or regulations or changes in interpretations of existing statutes and regulations affecting our business; and changes in general market conditions.

Control by certain shareholders

          According to information provided to CONSOB and other information available to us, as of June 23, 2006, WM, WM II and WM III owned in the aggregate 29.82% of our outstanding shares and four other shareholders each held more than 1.0%  (see “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders”); the remainder of our shares are widely held.  As a result, WMI, WMII and WMIII have the power to determine (or hold a veto right in respect of) matters requiring shareholder approval, including the appointment of all but one member of our board of directors.  For information about the shareholder agreement among WM, WM II and WM III, see “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—Shareholder Agreement.”  The concentration of our beneficial ownership may also have the effect of delaying, deterring or preventing a change in our control, may discourage bids for our shares or ADSs at a premium over the market price of the shares and ADSs or may adversely affect the market price of our shares and ADSs.

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Forward-Looking Statements

          We make forward-looking statements in this annual report.  Examples of such forward-looking statements include, but are not limited to:  (i) projections or expectations of revenues, income (or loss), earnings (or loss) per share, dividends, capital structure or other financial terms or ratios; (ii) our statements of plans, objectives or goals, including those related to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements.  Words such as “believes,” “anticipates,” “expects,” “intends” and “plans” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

          By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved.  We caution readers that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements.  These factors include: the effects of our leverage on our operating results; the effects of external economic factors on the motorcycle industry; the effects of competition in the geographic and business areas in which we conduct operations; the many interrelated factors that affect consumer confidence and demand for motorcycles; production difficulties, which may arise from capacity and supply constraints, excess inventory levels, labor shortages or slowdowns; the effects of, and changes in, regulation and government policy; other changes in our operating environment; and our success in managing the risks associated with these and other factors.

          We caution that the foregoing list of important factors is not exhaustive.  When relying on forward-looking statements to make decisions with respect to Ducati, investors and others should carefully consider the foregoing factors and other uncertainties and events.  Such forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update or revise any of them, whether as result of new information, future events or otherwise.

Item 4.  Information on the Company

History and Development of the Company

          We are one of the world’s leading manufacturers of high-performance sport motorcycles.  Founded in 1926, we are widely recognized among motorcycle enthusiasts for producing racing-inspired motorcycles characterized by unique engine features, innovative design, advanced engineering and overall technical excellence.  With an extensive racing pedigree dating to the 1950s, our motorcycles have dominated the World Superbike Championship, where we have won 13 manufacturers’ titles since 1990 and more single race victories than all other manufacturers combined.  In 2003, after an absence of over 30 years, we resumed participation in the MotoGP Championship, placing second in the manufacturers’ ranking of the Championship in 2004; in 2005, we finished third in the manufacturers’ ranking.  We believe that our globally recognized brand, unique product characteristics and proven racing success provide us with a loyal and enthusiastic customer base and enable us to position our motorcycles as premium price products primarily within the “Sport” sub-segment of the large-displacement motorcycle market.

          DMH, which operates under the trademark “Ducati,” was incorporated in Italy on May 29, 1996, as a società per azioni, or a company whose capital is represented by shares.  Our registered and administrative office is located at Via A. Cavalieri Ducati 3, 40132 Bologna, Italy.  Our telephone number at this office is +39-051-641-3111.  Our agent in the United States is Ducati North America, Inc. (“Ducati North America”).  Ducati North America’s address is 10443 Bandley Drive, Cupertino, CA 95014-1912, and its telephone number is (408) 253-0499.

          Our predecessor was founded on July 4, 1926, when Antonio Cavalieri Ducati and his three sons established one of the first companies in Italy to manufacture radios and electrical components.  In 1935, Ducati moved his company to a modern, purpose-built factory at Borgo Panigale, outside Bologna, where we manufacture motorcycles today.  In 1947, our predecessor began production and distribution of motorcycles, which rapidly developed a reputation for high-performance, technical excellence and racing success.  During the 1950s, Ducati manufactured a series of increasingly powerful motorcycles, including a number of models developed by the famous Ducati engineer, Fabio Taglioni.  Taglioni adapted for use on motorcycles the Desmodromic valve control system, a signature (although unpatented) Ducati technical feature that can be found on every motorcycle we produce today.

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          As a result of their superior performance characteristics, Ducati motorcycles rapidly achieved success in international racing competitions.  A 125cc Grand Prix was runner-up in the 1958 World Championship and the 250cc Mach 1 motorcycle, introduced in 1964, was among the fastest 250cc roadsters available at the time.  In 1972, a Ducati 750 GT prototype won a dramatic victory in the Imola 200 race, establishing the reputation of a new Ducati engine for high-performance and racing success.  This engine, called the L-twin, was comprised of two cylinders mounted at a 90-degree angle to form a unique L-shaped design, a configuration that, combined with a Formula One-inspired tubular trestle frame, proved successful in racing and in road use.  Following the Imola victory, Ducati commenced production of a series of larger displacement motorcycles using the L-twin engine.  These motorcycles formed the foundation of the modern Ducati motorcycle lines and enjoyed a high degree of success on world racing circuits, culminating in Mike Hailwood’s historic 1978 victory on a Ducati 900 Super Sport in the Isle of Man race.  Despite its technical excellence and racing success, Ducati’s fortunes declined sharply in the early 1980’s, primarily as a result of the decision by the major shareholder at the time, a state-owned industrial concern, to shift Ducati’s focus to products other than motorcycles, principally small diesel engines.

          In 1985, Cagiva S.p.A., an Italian manufacturing conglomerate (together with its subsidiaries, “Cagiva”) acquired the Ducati brand and related business.  Cagiva reinvigorated the Ducati brand by refocusing on Ducati’s tradition of building high-performance racing motorcycles.  Under Cagiva’s ownership, Ducati motorcycles reinforced their reputation for excellence on and off the racetrack.  In March 1987, Marco Lucchinelli triumphed on a Ducati Ottovalvole 851 prototype in the Daytona “Battle of the Twins” competition.  In 1990, Raymond Roche rode a Ducati 888 to victory in the World Superbike Championship, the first time a Ducati two-cylinder engine motorcycle successfully challenged a four-cylinder engine produced by our Japanese competitors.  Beginning in 1995, however, liquidity problems at Cagiva unrelated to the Ducati motorcycle business resulted in significant production delays and reduced sales.

          In 1996, DMH was formed by a group of investment funds known as Texas Pacific Group (“TPG”) and Deutsche Morgan Grenfell (“DMG”) to acquire the Ducati brand name, trademark and related intellectual property rights from Cagiva.  Cagiva contributed the other assets and liabilities associated with the Ducati business to DMH in exchange for shares issued to Cagiva representing 49.0% of DMH’s total issued and outstanding shares.  Following these transactions, TPG and DMG indirectly owned, in the aggregate, 51.0% of the shares of DMH.  On July 30, 1998, TPG and DMG through their affiliates, together with a third investor, acquired the remaining 49.0% of the shares of DMH owned by Cagiva.

          Beginning in late 1996, we successfully implemented a focused turnaround program, which included:  restarting the supply process; substantially increasing our investment in working capital to increase production and relaunch our research and development efforts; installing a new management team; rebuilding our sales, marketing and public relations departments and revamping our corporate image; initiating plans to streamline our assembly process; establishing a quality control process; taking control of distribution in key markets; and successfully introducing new models and new versions of our motorcycles.

          In March 1999, DMH completed an initial public offering of 90,200,000 shares, of which 17,000,000 shares were issued by DMH and 73,200,000 shares were sold by the selling shareholders in the initial public offering.  As a result of the initial public offering, TPG reduced its holdings in DMH from 72.0% to 34.8%.  In connection with the initial public offering, our shares were listed on Telematico and our ADSs were listed on the New York Stock Exchange.

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          In April 2001, our shares began trading on the Segmento Titoli con Alti Requisiti (the Segment for Equity with High Standards, or “STAR”) of Telematico.  This segment was created by Borsa Italiana S.p.A. for small- and medium-sized companies that operate in traditional sectors of the economy and meet stricter requirements relating to transparency, liquidity and corporate governance than those usually required for listing on the Telematico so that such companies can achieve greater market visibility.  As part of the STAR admission requirements, we appointed Mediobanca to act as specialist for our shares.  The specialist is required to take a number of actions intended to support the market for our shares and to facilitate the communication of information about us to investors.

          On February 28, 2006, TPG Motorcycle Acquisition L.P. (“TPG Acquisition”), a limited partnership that is part of TPG, agreed to sell to Investindustrial Holdings S.A. (“Invind Holdings”) (or companies designated by it) a stake representing 30% less one share of our share capital at a price per share of 0.85 euro.  After the designation by Invind Holdings on March 27, 2006, the shares were purchased by WM (24,821,919 shares, equivalent to 15.58% of our share capital), WM II (11,144,047 shares, equivalent to 6.99% of our share capital) and WM III (11,842,044 shares, equivalent to 7.43% of our share capital).  For more information about Invind Holdings and WM, WM II and WM III, see “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders.”  On April 4, 2006, TPG Acquisition sold its remaining stake in Ducati (approximately 3% of our share capital) in open market transactions.

          Following the purchase by WM, WM II and WM III and in light of negative market developments and unsatisfactory results, our management formulated a three-year business plan, which was approved by our board of directors on April 13, 2006.  The primary objective of this plan is to improve our margins and generate cash flow by increasing sales of motorcycles in the high end of our product range and reducing our overhead and operating costs.  For a description of the 2006-2008 business plan, see “ –Business Overview –Business Strategy –2006-2008 Business Plan.”

          As contemplated in our 2006-2008 business plan and approved by the board of directors at its meetings on April 13 and May 4, 2006, we successfully completed an  €80,000,000 capital increase in June 2006.  This capital increase was achieved through an offering of 160,343,960 subscription rights (representing the right to subscribe for 160,343,960 shares) to shareholders of DMH.  From May 8 to May 26, 2006, DMH shareholders exercised a total of 158,579,839 subscription rights and subscribed for the related 158,579,839 shares.  The 1,764,121 subscription rights that remained unexercised at the end of this period were sold on the Borsa Italiana between June 5 and June 9, 2006, and the related 1,764,121 shares were subsequently subscribed.

          Following the completion of the capital increase, as of June 23, 2006, 320,687,920 of our ordinary shares were outstanding.

Business Overview

          We produce motorcycles in six model lines, which vary in their technical and design features and intended customers:  Superbike, Super Sport, Sport Naked, Sport Touring, Multistrada and Sport Classic.  We sell our motorcycles and related products in 61 countries worldwide, with a primary focus on the Western European and North American markets, which together accounted for approximately 84.0% of our revenues in each of the last two years.  In 2005, no single country accounted for more than 15.0% of our revenues from motorcycles and related products, with the exception of Italy, which accounted for 27.8%.  The United States and Canada accounted for 18.8% of our revenues from motorcycles and related products.  We have a global distribution network directly controlling our Italian sales and operating wholly owned distribution subsidiaries in North America, France, Germany, the Benelux countries (also responsible for Sweden and Norway), Japan and the United Kingdom.  Our manufacturing operations, based in Bologna, Italy, consist primarily of engine and motorcycle assembly and are not vertically integrated, resulting in a relatively low fixed cost structure.

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Competitive Strengths

          We believe that the following competitive strengths should be the basis for our future strategies:

          Focused Market Niche Strategy.  Founded in the Ducati racing heritage, our product development effort is primarily focused on racing-derived motorcycles.  This focus gives us a strong competitive position in our targeted market niche of high-performance sport motorcycles.  We estimate that our worldwide market share in our target market has grown from 4.0% in 1996 to 4.4% in 2005.  We remain loyal to our original market for uncompromised, high-performance sport motorcycles, a position recognized by our customers, motorcycle enthusiasts, the press and the industry at large.

          Global Brand Strength.  Our well-defined market positioning and unique brand character, combined with the international success of our motorcycles in the World Superbike Championships, the MotoGP Championship and other international racing events, promote awareness of the Ducati brand around the world.  The Ducati brand is recognized globally for large-displacement, high-performance sport motorcycles and is associated with innovative design, advanced engineering and racing success.  We also reach Ducati enthusiasts all over the world through our website.

          Technical Excellence and Performance Superiority.  Ducati motorcycles excel on the racetrack because of their superior handling characteristics and usable power.  We believe that our motorcycles have a reputation for advanced engineering and overall technical excellence.  This reputation has developed as a result of decades of consistent design and technical innovation at Ducati, including such signature features as the “Desmodromic” valve control system, the “L-twin” engine and the tubular trestle frame. 

          Strong Manufacturing Fundamentals.  Our manufacturing operations are not vertically integrated and have a relatively low fixed cost structure.  We assemble our motorcycles and engines and manufacture only two strategically important components, crank cases and cylinder heads.  We also use a relatively large number of key common components, particularly high-cost engine components, and employ flexible production processes that we believe are well suited to our current and anticipated production volumes.

Business Strategy

          Our business plan for 2006-2008 and other strategic initiatives to increase our sales and profitability, are described below.

2006-2008 Business Plan. 

          The 2006-2008 business plan focuses on offering high-end motorcycle models and reducing our overhead and operating costs.  The plan also calls for improvements to our production plant and its technological research facilities, as well as to our computerized resource planning system (ERP).  The principal strategies outlined in the 2006-2008 business plan are discussed below.  For discussion of the financial aspects of the plan and the financial projections contained therein, see “Item 5.  Operating and Financial Review and Prospects—Trend Information.”

          During the three-year period covered by the business plan, we intend to renovate our product offering by: (i) launching five new models; (ii) continuously renovating existing models; and (iii) eliminating several models that have reached the end of their product lifecycle.  We also plan to attract new customers using the Monster 695 as an entry model to Ducati motorcycles.  In order to improve the financial capacity of dealers and encourage the launch of new models, the business plan calls for a reduction in the inventory held by our distribution network.  As a result of this reduction, we anticipate that sales of Ducati motorcycles will be below the number of motorcycles registered in 2006 and 2007.  In addition to this focus on our product offering, the 2006-2008 business plan calls for the reduction of operating costs through the implementation of new global sourcing policies.  These policies are aimed at reducing product costs and improving quality through the careful selection of suppliers.  The plan also provides for corporate restructuring in order to reduce personnel costs. 

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          We formulated our 2006-2008 business plan, and the forward-looking data it contains, on the basis of certain assumptions about external factors that are beyond the control of our management, as well as assumptions about the feasibility of certain strategic operating measures that management has some ability to control.  For a description of the risks relating to the implementation of the 2006-2008 business plan and the uncertainties surrounding the assumptions on which this plan is based, as well as the forward-looking data contained in the 2006-2008 business plan, see “Item 3.  Key Information—Risk Factors.”

Other Strategies

In addition to the 2006-2008 business plan, Ducati plans to undertake other strategic initiatives to increase its financial outcome and economic position.  These measures are described below.

Maintaining our market position.  We intend to maintain our strong niche position in the “Sport” segment of the >500cc Market, which is due to our great tradition of technical excellence, innovative design, advanced engineering solutions and racing success.

Strengthen our distribution network.  Our distribution strategy is aimed at improving our wholesale and retail distribution networks while increasing our contact with retail customers and better understanding their needs.  In carrying out our strategy, we:  (i) have taken direct control of distribution in strategic markets by establishing wholly owned sales and marketing subsidiaries; (ii) have appointed new distributors in markets in which we have previously been inactive and evaluate each year whether to further expand our distribution network to new markets; (iii) have implemented regular efficiency controls of our distributors and replace on an on-going basis those under-performing distributors; and (iv) have introduced “Ducati stores” in selected markets throughout the world (160 Ducati stores were open at December 31, 2005, as compared with 151 Ducati stores open at December 31, 2004).  We believe that a more efficient and competitive distribution network will be a key factor driving future increases in our market share.

Strengthen Our Global Brand.  We intend to continue to pursue a coordinated marketing effort to reinforce the traditional strengths of the Ducati brand and to increase the visibility of the Ducati name.  We have adopted internationally uniform corporate logos, graphics and lettering, and marketing and promotional materials and have launched a number of international advertising campaigns, set up the “Ducati Museum” at its headquarters in Bologna, established an official Internet site and organized the World Ducati Week in Bologna in 2004 with more than 45,000 Ducati enthusiasts attending.  We also intend to continue to seek to extend media coverage of the Ducati brand beyond the traditional motorcycle sector press.  We believe that our marketing strategy will further increase brand awareness and customer loyalty.

Expand Our Product Offering.  We intend to continue to develop and expand our offering of motorcycle-related products.  These products include technical riding gear (such as helmets, leather suits and gloves), apparel (such as T-shirts, sweatshirts and leather jackets), performance and custom accessories and a wide range of other merchandise.

Increase Our Production Efficiency.  We are continuing to rationalize our manufacturing processes to reduce complexity and increase production efficiency.  In particular, we have continued to refine our production process to increase the use of components common to multiple models and to reduce costs through purchasing leverage and component co-design with key suppliers.

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Growth of Our Internet Business.  We intend to increase revenue through the on-line sale of Ducati products.  We also intend to continue improving the function and content of our website, which is an important means of communication and marketing for us.

Organizational Structure

          DMH designs, manufactures and distributes Ducati-branded motorcycles, spare parts and apparel.  DMH has six direct, wholly owned subsidiaries engaged in the regional distribution of Ducati motorcycles and other products:  Ducati North America, Ducati France S.A.S. (“Ducati France”), Ducati Motor Deutschland GmbH (“Ducati Motor Deutschland”), Ducati North Europe B.V. (“Ducati North Europe”), Ducati Japan Ltd. (“Ducati Japan”) and Ducati U.K. Limited (Ducati U.K.”).  In addition, DMH owns Ducati Corse, the Ducati racing subsidiary, as well as Ducati Retail S.r.l. (“Ducati Retail”) and Ducati Consulting S.r.l. (“Ducati Consulting”), all as described in more detail below.

          The following chart illustrates our organizational structure as of the date of this annual report, including the country of incorporation of each subsidiary.

Message

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          We renamed our subsidiary Ducati Benelux B.V. as Ducati North Europe as of February 11, 2004.

          On April 14, 2004, we formed Ducati Retail, a subsidiary held 99.0% by DMH and 1% by Enrico D’Onofrio, Finance Director of DMH.  Ducati Retail makes retail sales of Ducati-branded clothing, accessories, spare parts and other items in areas not covered by the traditional distribution network and also provides mechanic services and sells spare parts.

          On May 6, 2004, we formed Ducati Consulting, a majority-owned subsidiary (85% held by DMH, with the remaining interests held by two then-DMH executives and a then-member of DMH’s board of directors) that provides consulting and logistics services to all of the Ducati Group companies, as well as to our suppliers and other manufacturers.

          In December 2004, Ducati.Com S.r.l., a subsidiary formed in July 2000 to focus on our internet initiatives, was merged into DMH with the aim of making organization and management more efficient (in particular, in respect of treasury management, legal and administrative functions).  As a result of this merger, Ducati Corse, which had been held 99% by DMH and 1% by Ducati.Com S.r.l., became a wholly owned subsidiary of DMH.

Products and Distribution

The World Motorcycle Market

          In 2005, total world motorcycle registrations were estimated at 1.2 million units, including all motorcycles and scooters with engine displacements greater than 500cc registered in the United States, Western Europe, Japan and Australia.  We view the world motorcycle market as divided into four main segments:  motor scooters, off-road motorcycles, road motorcycles with engine displacements of less than 500cc and road motorcycles with engine displacements of 500cc or greater.  Other subdivisions of the world motorcycle market exist and there is no universally recognized system for classifying this market. 

          We believe that the >500cc Road Market may be further segmented into “Cruiser,” “Touring,” “Dual,” “Naked” and “Sport” sub-segments.  The Cruiser sub-segment comprises heavy motorcycles with a classic American design typically featuring heavy use of chrome components and twin-cylinder “V” engines.  The Touring sub-segment comprises motorcycles designed for comfortable, long-distance travel, while the Dual sub-segment comprises motorcycles designed for on and off-road riding.  The Naked sub-segment comprises motorcycles totally or partially without body panels.  The Sport sub-segment principally comprises motorcycles built for, or, inspired by, racing.

          We currently compete primarily in the Sport sub-segments of the >500cc Road Market.

          The Sport sub-segment is divided into four main groupings:  Superbike, Sport Naked, Super Sport and Sport Touring.  Superbike motorcycles are racing-derived and equipped with the most powerful engines and the latest technical advances and are targeted at riders desiring a bike that is similar to those used on international professional racing circuits.  Sport Naked motorcycles are principally characterized by the absence of fairing so as to leave the engine exposed and reduce overall weight of the motorcycle.  Super Sport motorcycles feature classic design and are targeted at riders interested in balancing horsepower with greater rideability.  Sport Touring motorcycles combine the engine power of motorcycles in the Sport sub-segment, with the long-range driveability and features of Touring motorcycles, and are targeted at customers who are interested in comfortable, one- or two-rider bikes for traveling over relatively longer distances.

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Motorcycle Lines

          We manufacture and distribute six high-performance lines of motorcycles across the Naked, Sport and Dual sub-segments of the >500cc Road Market:  Superbike, Super Sport, Sport Naked, Sport Touring, Multistrada and Sportclassic.  Motorcycle sales accounted for 77% of our revenues in 2005, as compared to 79% in 2004 and 81% in 2003.  We manufacture multiple models within our six product lines, which are differentiated primarily by their engine capacity, fairing and color schemes.

          All of our motorcycles share several design features that are closely associated with the Ducati brand and serve to distinguish Ducati motorcycles from those of our competitors.  All Ducati motorcycles are equipped with the Desmodromic valve control system, a dual camshaft mechanism that we believe allows more precise control of engine valves than traditional spring-based systems, improving power output and overall engine efficiency.  The Desmodromic system, which is not patented, eliminates “valve float” that can occur at very high engine speeds, thereby improving engine “breathing” and increasing engine performance.  The Desmodromic system also delivers power more smoothly over a broader revolutions per minute (“rpm”) range than traditional engines, which endows Ducati’s two-cylinder engines with a key benefit of four-cylinder units — namely consistent, usable power.  Ducati motorcycle engines are also built to the unique L-twin design, comprising two cylinders mounted at a 90-degree angle, a configuration that we believe allows for lighter weight and improved aerodynamics over the four-cylinder configurations of our competitors.  As a result of the engine design and the Desmodromic system, all Ducati motorcycles produce a deep, resonant engine sound that is a noted Ducati characteristic.

          In addition, all Ducati motorcycles employ the tubular trestle frame traditionally associated with Ducati motorcycles.  We believe that the tubular trestle frame, which is inspired by Formula One automotive racing technology, increases the rigidity and strength of our motorcycles and allows for a more compact design architecture that facilitates greater speed and more precise handling.  We believe that these features, among others, contribute to the superior and distinctive performance of our motorcycles.  As part of our business strategy, all motorcycle models introduced in the future will likely maintain these signature technical characteristics.

          Although they share the common characteristics described above, our individual product lines are distinguished by the following features:

          Superbike.  The Superbike is closely derived from the Ducati motorcycles currently competing in the World Superbike Championship.  Since the introduction of the first Ducati Superbike, the 851, in 1987, we have continuously upgraded the technology and power of this motorcycle.  The 851 was based on custom-built championship racing bikes modified to meet government safety and noise standards.  With the success of the 851, we extended the Superbike range to include the 916 and the 748, introduced in 1993 and 1994.  The 916 won several worldwide awards, including four “motorcycle of the year” awards from Motor Cycle News (“MCN”) magazine.  For model year 1999, we launched the 996 to replace the 916.  The 996 features a 996cc liquid-cooled, four-valve twin engine.  For model year 2000, we introduced two new versions of the 748 Superbike, one with a more powerful engine and another in a special racing version.  For model year 2001, we introduced the 996R Testastretta (meaning “compact head”), which features a 998cc engine.  For sale in model year 2002, we launched the 998R Testastretta, a radically redesigned Superbike that offers a more powerful engine and is more aerodynamic that its predecessors.  The 998R Testastretta was nominated “Sports Motorcycle of the Year” by German magazine Motorrad, Europe’s leading motorcycle publication.  For model year 2003, we launched the new 999, a radically redesigned Superbike with an improved Testastretta series engine, which is lighter and more aerodynamic than its predecessors.  For model year 2004, we launched the 749R, with a Testastretta series engine and chassis specifically developed to ensure top competitiveness on the racetrack.  The 749R completes the Superbike range and marks Ducati’s return to the World Supersport Championship.  All Superbike motorcycles can reach speeds in excess of 250-270 kilometers (155-170 miles) per hour and have a compact design and slim silhouette designed to provide superior handling at such speeds. 

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For model year 2005, the Superbike family received a facelift which included a new front fairing, new side fairing and front shield and a new mudguard. With regards to technical changes, the 999 model received an upgraded engine, previously only mounted on the 999S, while the 999S received an upgrade in its suspension system.  We sold 6,094 Superbike motorcycles in 2005, representing 17.6% of total units sold and 27.8% of total revenues from motorcycles, compared to 10,213 Superbike motorcycles in 2004, representing 27.9% of total units sold and 40.6% of total revenues from motorcycles. The decrease in revenues of Superbike motorcycles is attributable primarily to the decrease in sales in the low end of the range of this product line, in particular the 749 model, and to the absence of the 998 Final Edition model, which was sold only in 2004.

          Super Sport.  Our Super Sport motorcycles are characterized by their light weight, superior handling and tight cornering ability, as well as by their classic design and engineering features.  Ducati Super Sport motorcycles are fitted with our traditional two-valve twin engine, nicknamed the “Pompone” (which means “strong pump”) by Ducati enthusiasts, and are aimed at riders that prefer improved handling and smooth power delivery to maximum horsepower.  Ducati launched its first Super Sport motorcycle in 1973.  Over two decades, the Super Sport line has undergone a series of design and technical updates while retaining its essential characteristics.  In April 1998, we launched a new model in the Super Sport line, the 900SSie, for sale the following year.  In January 2000, we sold 2000 units of the limited edition MH900 evoluzione exclusively over the internet (all of which were delivered by the spring of 2003).  In addition, we launched a 750cc version of the 900SS for model year 1999 and, for 2001 and 2002, respectively, we launched new, matte black versions called the 750 and 900 Sport.  For model year 2003, we introduced a 620cc version and upgraded the 750cc and 900cc engines of our Super Sport motorcycles to 800cc and 1000cc dual spark engines, which have two spark plugs per cylinder, offering extra reliability, increased power and lower emissions.  However, for model years 2004 and 2005, following a decline in demand and sales volumes for this line, we eliminated all models in this line other than the 1000cc.  We sold 1,030 Super Sport motorcycles in 2005, representing 3.0% of total units sold and 2.5% of revenues from motorcycles, compared to 1,426 Super Sport motorcycles in 2004, representing 3.9% of total units sold and 3.0% of total revenues from motorcycles. The decrease in revenues of Super Sport motorcycles is attributable primarily to the mature stage in the product lifecycle of the models in this product line.

          Sport Naked (or “Monster”).  The motorcycles in the Sport Naked – or Monster – line are designed for the urban rider seeking superior bike performance.  The principal design characteristic of the Monster is its total absence of any fairing so as to leave the engine exposed and reduce the overall weight of the motorcycle.  The Sport Naked line was launched in 1993 and was an immediate success.  The Monster 620 i.e., featuring unusual lightness and an engine with electronic injection, was introduced in 2001 to renovate the Monster 600.  In 2003, we further updated the engines in the Monster bikes by introducing the 800cc and 1000cc to replace the previous 750cc and 900cc.  The Monster line was subsequently expanded to include new models designed to meet special market needs: the Monster Dark and the Monster S4 model with a 916cc engine.  The Monster S4R was also subsequently introduced with the 996 Desmoquattro water-cooled engine taken from the competition 996, which is the most powerful engine ever made, and a frame modified to radically differentiate the it from the Monster S4.  At the end of 2004, the S2R was launched with the 800cc engine originating directly from the Monster S4R.  The S2R 1000 model, the sporty and powerful model in the SR series, was presented in September 2005 and followed by the S4Rs Testastretta and Monster 695 in early 2006.  The S4Rs Testastretta boasts a more powerful engine resulting directly from our experience in the Superbike World Championship, and the Monster 695 is an evolution of the basic 620 version.  We sold 16,585 Sport Naked motorcycles in 2005, representing 48% of total units sold and 38.7% of total revenues from motorcycles, compared to 18,027 Sport Naked motorcycles sold in 2004, representing 49.3% of total units sold and 37.8% of total revenues from motorcycles.  The decrease in revenues of Sport Naked motorcycles is attributable primarily to the drop in sales of the M620 and S4R models, which was partly set off by the success of the new S2R model, which recorded sales of more than 9,700 units in 2005.

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          Sport Touring.  Our Sport Touring line serves a group of consumers who desire the speed, handling and styling of a Ducati, but prefer a more comfortable ergonomic configuration for longer rides.  In addition, the ST2 has a more comfortable second seat to accommodate a passenger and is equipped with two side bags.  We introduced the Sport Touring line in April 1997 with the ST2, which won the 1997 MCN magazine “Sport Tourer of the Year” award.  For model year 1999, we launched the ST4, a more powerful and technically advanced four-valve per cylinder version of the ST2.  For model year 2001, we introduced the ST4S with a 996cc engine, and for model year 2002, we introduced a version with an Anti-lock Brake System (ABS).  For model year 2004, we launched the ST3, which features a new three-valve engine.  For model year 2005, we made only minor adjustments to the Sport Touring family, such as a new, easier-to-use wet clutch and an additional available color, black.  We sold 1,397 Sport Touring motorcycles in 2005, representing 4% of total units sold and 4.5% of total revenues from motorcycles, compared to 2,996 Sport Touring motorcycles in 2004, representing 8.2% of total units sold and 8.1% of total revenues from motorcycles. The decrease in revenues of Sport Touring motorcycles is attributable primarily to reduced sales of the ST3, whose launch in 2004 had generated high demand among dealerships and retail customers.

          Multistrada.  In September 2001, we first showed a prototype of our fifth family of motorcycles called the Multistrada.  The first model, the Multistrada 1000 Dual Spark, went into production in April 2003.  The motorcycle is a multipurpose sportsbike offering Superbike performance in a more comfortable design with a more upright position and a new dual spark, air-cooled 1000cc engine.  Following the success of the initial Multistrada model, 2005 saw the introduction of a smaller version equipped with a two-valve 620cc engine, as well as an improved 1000 version with an upgraded suspension system and higher quality components. In addition, smaller technical changes were made in an effort to further improve overall comfort and versatility.  We sold 6,156 Multistrada in 2005, representing 17.8% of total units sold and 15.8% of total revenues from motorcycles, compared to 3,898 Multistrada in 2004, representing 10.7% of total units sold and 10.5% of total revenues from motorcycles.  The increase in sales of the Multistrada motorcycles in 2005 as compared to 2004 was primarily attributable to the introduction of the new MTS 620 and MTS 1000S models.

          Sport Classic.  We presented the prototypes of the Sport Classic, our sixth line of motorcycles, to the press and public in October 2003.  This motorcycle line, which is reminiscent of classic Ducati motorcycles but features today’s technology, was conceived and developed based on online research of the interests of Ducati’s fans.  The first Sport Classic is the Paul Smart 1000 Limited Edition, which went into production in September 2005.  This motorcycle, featuring front and rear Ohlins suspension and painted in the silver and green color scheme similar to the original Ducati 750 Super Sport, is inspired by the bike that Paul Smart rode to victory in the Imola 200 race in 1974.  It shares the same technology as our other motorcycles, distinguishing itself by its 1970’s look.  The Paul Smart 1000 was followed by the 1000 Sport and the 1000 GT, which went into production in October 2005 and in April 2006, respectively.

          The gross profit (in thousands of euro) and the gross profit margin (in percent) for the years 2004 and 2005 for each of our motorcycle lines is listed below.  The gross profit margin is a percentage calculated by dividing gross profit by related revenues:

 

 

Year Ended December 31,

 

 

 


 

 

 

2004
Gross Profit

 

2005
Gross Profit

 

 

 


 


 

 

 

€/000

 

%

 

€/000

 

%

 

Superbike

 

 

25,465

 

 

22.0

 

 

12,691

 

 

18.5

 

Super Sport

 

 

881

 

 

10.2

 

 

77

 

 

1.3

 

Sport Naked

 

 

10,988

 

 

10.2

 

 

-359

 

 

-0.4

 

Sport Touring

 

 

3,215

 

 

14.0

 

 

965

 

 

8.6

 

Multistrada

 

 

4,275

 

 

14.3

 

 

-114

 

 

-0.3

 

Sport Classic

 

 

—  

 

 

—  

 

 

5,144

 

 

19.5

 

Total Motorcycle Product Lines /Average

 

 

44,824

 

 

15.8

 

 

18,404

 

 

7.4

 

Total Gross Profit/Average

 

 

86,651

 

 

23.8

 

 

58,455

 

 

18.2

 

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          The current suggested retail prices in Italy for our motorcycles range from €6,995 for the Monster Dark 620cc motorcycle to €30,000 for the Superbike 999R.  Each Ducati motorcycle sold is covered by a two-year warranty.

          In addition to these six motorcycle lines, we manufacture custom racing motorcycles for our official teams, as well as for private race teams, professional riders and racing enthusiasts who compete without direct factory support.  We sold 12 custom racing motorcycles in 2005, 14 in 2004 and 18 in 2003.  We continue to believe that selling racing motorcycles serves to reinforce Ducati’s reputation as a leader in high-performance motorcycle technology.  The design and manufacturing of racing motorcycles allow our experienced research and development team to test new technical innovations and design features.

Motorcycle-Related Products, Services and Licensing

          In addition to our high performance motorcycles, we offer spare parts, Ducati Performance accessories, technical riding gear and enthusiast apparel and merchandising.  We also organize a number of events to encourage fans to join the World of Ducati, such as riding schools, classic rallies around Italy, online competitions, and Ducati tour and rental programs.

          Spare Parts.  We produce spare parts to service Ducati motorcycles in circulation.  We have outsourced the physical movement and storage of our spare parts in Europe to Saima Avandero S.p.A., an Italian logistics company.  We manage our spare parts catalogue and order processing electronically.

          “Ducati Performance” Accessories.  A popular trend among many Ducati owners is to replace motorcycle components with custom-made accessories to increase the individuality of their motorcycles.  We currently design and distribute a wide range of Ducati parts and accessories (some of which are approved only for racing use) under the “Ducati Performance” trade name, including custom-painted gasoline tanks, specialized exhaust systems, fenders, fairings and carbon fiber parts and accessories.

          Technical Riding Gear and Enthusiast Apparel.  Ducati entered into collaboration and supply agreements with leading companies in the motorcycle apparel sector, including Dainese and Suomy, to develop a line of apparel with the Ducati trademark.  The line includes jackets, suits, gloves, boots, helmets and protective garments, in addition to other sport wear.  The Company also markets a line of products of motorcycling enthusiasts, including T-shirts, caps and other items.  These articles are all sold through the Ducati distribution network and in Ducati Stores.  The same products are also sold at stores at the Ducati museum, the Bologna airport and the Ducati Factory Outlet at Borgo Panigale through the Ducati Retail subsidiary company.  Furthermore, in line with our strategy to expand into new selected markets, in April 2005 we announced our entry into the Chinese market through a long-term partnership agreement with a Chinese company that has started to distribute Ducati articles of clothing through a newly opened store in Shanghai.

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          Licensing.  We license the Ducati trademark and other trademarks to leading companies selected to manufacture and sell products inspired by the world of Ducati motorcycles.  We have entered into a number of contracts with companies working in various sectors, including publishing, apparel and accessories, perfumery, models, stationery and school supplies, toys and videogames.  We have entered into an agreement with the licensee of the “Ermenegildo Zegna” trademark for the production and sale of a Zegna-Ducati fragrance; with the holder of the Costume National trademark for production of the “C’N’C’” line, which is designed for the urban rider; with Tumi Inc. to create a collection of luggage and accessories bearing the “Ducati” and “Ducati Corse” trademarks; with Rockstar Games NYC for the creation of videogames; with Ride Now Motorcycle Tour Operator to organize motorcycle trips and outings under the name “Ducati Tours”; with Oakley Sales Corp. for the production of Oakley eyewear bearing the Ducati trademark; with the holder of the CHICCO trademark, Sonic International Toys Ltd., Maisto (May Cheong Toy Products Ltd.), New-Ray Toys Development Ltd., Paul’s Model Art Gmbh, Peg Perego S.p.A. and Italeri S.p.A. to manufacture toys and models bearing the Ducati trademark; with Ediciones Altaya S.A. and Hachette Fascicoli S.r.l. to produce publications on Ducati motorcycles; with Accademia S.r.l. and Aquila Brand S.p.A. to manufacture stationery and school products with the Ducati trademark; and with Vir2 Studios LLC and Spike CO Ltd. for the production of videogames in which images of Ducati motorcycles are used and reproduced.  These licenses are intended to increase awareness of the Ducati brand and to provide an expanded source of revenue.

          Events and services.  A small part of our income is related to events that we organize to encourage fans to join the World of Ducati, such as riding schools, classic motorcycle rallies around Italy, online competitions and Ducati promotional tours.  See “—Marketing activities.”

          The gross profit (in thousands of euro) and the gross profit margin (in percent) for the years 2004 and 2005 for our motorcycle-related products, services and licensing is listed below.  The gross profit margin is a percentage calculated by dividing gross profit by related revenues.

 

 

Year Ended December 31,

 

 

 


 

 

 

2004
Gross Profit

 

2005
Gross Profit

 

 

 


 


 

 

 

 

€/000

 

 

%

 

 

€/000

 

 

%

 

Motorcycle-Related Products, Services and Licensing

 

 

41,827

 

 

53,1

 

 

40,051

 

 

54.4

 

Total Gross Profit/Average

 

 

86,651

 

 

23,8

 

 

58,455

 

 

18.2

 

Market Share and Competition

          We compete primarily in the Sport sub-segment of the >500cc Road Market.  Our principal competitors are four Japanese manufacturers (Honda, Suzuki, Yamaha and Kawasaki), two European manufacturers (BMW and Triumph) and, to a more limited extent, Harley-Davidson of the United States.  Harley-Davidson’s Buell subsidiary produces motorcycles that compete with our Sport Naked motorcycles.

          Our Japanese competitors are generalist manufacturers competing in all segments of the motorcycle market, from scooters to large-displacement off-road and on-road motorcycles.  BMW and Triumph manufacture motorcycles for various sub-segments of the >500cc Road Market.  Like Ducati, Harley-Davidson focuses on a niche market, in particular the Cruiser sub-segment of the >500cc Road Market, although it also has a limited offering of Sport Naked motorcycles through its Buell subsidiary.

          Worldwide registrations of Ducati motorcycles were 35,887 in 2004 and 34,631 in 2005.  The historical worldwide trend of Ducati registrations can mask significant regional variations.  From 2004 to 2005, Ducati registrations increased significantly in the United States (up 26%) and Spain (up 43%) and more modestly in those countries not served by commercial subsidiaries (up 4.5%) and France (up 1.5%), and decreased in Germany (down 15%), Japan (down 5.5%), the Benelux countries (down 17%), the United Kingdom (down 16%) and Italy (down 15%). For a discussion of the relationship between registrations and retail sales, see “Item 5. Operating and Financial Review and Prospects —Introduction.” 

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          Honda, Suzuki, Yamaha and Kawasaki all have substantially greater worldwide market shares than we do.  Based on available registration data, we estimate that these companies had approximately the following market shares of the Sport segment of the >500cc Road Market worldwide in 2005:

 

 

2005 worldwide %
of Sport sub-segment
of >500cc Road Market

 

 

 

Company

 

 


 


 

Suzuki

 

 

25.1

%

Honda

 

 

19.9

%

Yamaha

 

 

18.6

%

Kawasaki

 

 

14.0

%

          We estimate that Triumph and BMW have a market share of approximately 3.2% and 9.1%, respectively.

          Our market share varies among our motorcycle lines comprising the Sport sub-segment of the >500cc Road Market.  In 2005, we estimate that we had approximately a 2.8% global share of our historical core market for Superbike and Super Sport motorcycles, as compared to 3.7% in 2004, reflecting the fact that we did not launch any new Superbike nor Super Sport models in 2005, and approximately a 6.1% global share of the market for Naked motorcycles, compared to 6.4% in 2004, reflecting increased competition from new models launched by our Japanese competitors.  We estimate that we had approximately a 5.9% global share of the market for Sport Touring motorcycles in 2005, compared to 7.4% in 2004, decreased demand for the ST3 model following its launch in 2004.  We estimate that we had approximately a 3.9% global share of the market for dual motorcycles in 2005, compared to 2.8% in 2004, due to the success of the new models introduced in the Multistrada family.

          Our market share also varies significantly across geographical areas.  We estimate that we had the following market shares in 2005 in markets in which we have a commercial subsidiary: 8.5% in Italy, 3.4% in the United States, 4.5% in Japan, 2.8% in Germany, 4.0% in France, 3.3% in Great Britain, 5.1% in the Netherlands and 6.0% in Belgium.

          Unit sales showed varying trends in our principal geographic markets, with increases in the United States (up 33.4%), Japan (up 9.7%) and France (up 9.3%), substantially unchanged sales in Germany (up 0.3%) and decreases in the countries served by importers (down 4.5%), the United Kingdom (down 6.9%), the Benelux countries (down 16.3%) and Italy (down 27.4%).

          Market estimates in this annual report are based on our analysis of registration data obtained from published sources, as well as of our internal dealer data and surveys commissioned by us.  See “Presentation of Financial and Other Information,” at the beginning of this annual report.

          The following table gives a breakdown of the revenues from motorcycles and related products in our principal markets in the last two financial years:

 

 

Year Ended December 31,

 

 

 


 

 

 

2004

 

2005

 

 

 


 


 

 

 

(euro amounts in thousands)

 

Italy

 

 

120,070

 

 

33.1

%

 

89,075

 

 

27.8

%

United States

 

 

56,051

 

 

15.4

%

 

60,168

 

 

18.8

%

Germany

 

 

27,284

 

 

7.6

%

 

22,936

 

 

7.1

%

Japan

 

 

26,364

 

 

7.3

%

 

27,227

 

 

8.5

%

United Kingdom

 

 

23,370

 

 

6.4

%

 

19,498

 

 

6.1

%

France

 

 

29,507

 

 

8.1

%

 

30,788

 

 

9.6

%

Other foreign countries

 

 

80,713

 

 

22.1

%

 

71,155

 

 

22.1

%

Total

 

 

363,359

 

 

100

%

 

320.847

 

 

100

%

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Seasonality of Our Business

          Worldwide motorcycle sales and registrations are seasonal, peaking during March through May and April through June, respectively.  During 2005, we recorded 59.6% of our revenues during the first six months of the year.  Our motorcycle production levels are relatively stable throughout the year (excluding annual shutdown periods for the month of August and the last two weeks of December).  Consequently, we experience periods of inventory build up from September through February in anticipation of the spring selling season.  Depending on market conditions and our commercial strategy, the level of inventory we hold or sell to importers and dealers at any time may change, as a result of which unit sales may be less seasonal than registrations.

Product Research and Development

          The fundamentals of our product development include technical excellence, consistent use of Ducati’s “signature features,” styling and continual innovation.  We believe that we can continue successful product development by leveraging an experienced engineering team, which spans three generations of engineering talent dating back to the Taglioni era, with recently acquired state-of-the-art technology.

          Since 2003, our policy regarding research and development has been marked by continuity, consisting of studies and design activities aimed at acquiring knowledge and tangibly applying it to the creation and implementation of new products and to the technological improvement of existing products.

          As part of our research and development program, we have adopted the following strategies: reducing, through the use of innovative materials, the weight of our motorcycles in order to reduce fuel consumption and polluting emissions, while at the same time increasing safety standards; improving the aerodynamics of our motorcycles in order to reduce fuel consumption and polluting emissions, while preserving the characteristic style and design that distinguish the Ducati brand; improving engine performance, while at the same time achieving a reduction of the noise level of fuel feed and exhaust systems; and researching new technical solutions relating to motorcycle bodies and engines in order to improve performance.

          As part of our research and development program, we have entered into two research and development contracts with our subsidiary Ducati Corse.  These contracts deal specifically with the development of technical solutions for racing activities that can also be used for the production of Ducati motorcycles intended for retail sale.

          In 2005, our research and development expenditures (capitalized and expensed) were €26.5 million (as compared to €19.3 million in 2004).

          In connection with our research and development activities, we also received capital grants totaling approximately €3.7 million and subsidized loans for a total amount of approximately €9.6 million from the Italian Ministry for Productive Activities during 2004 and 2005.  These loans have a five-year term starting at the time of final approval of the technical and financial statements presented with regard to the period of validity authorized for each project.  These loans are found in a “pre-amortization” phase from the date of disbursement until the date of final approval of the technical and financial statements, generating interest payable for the Company but not the obligation repay the principal.

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Distribution

          Distribution is a key element of our business and is crucial to increase market share and profitability.  Historically, Ducati distributed its motorcycles in Italy directly, through a network of retail dealers (typically multi-brand dealers), in the United States through a wholly-owned subsidiary and abroad through a series of independent distributors, each responsible for establishing its own network of retail dealers.  Dealers outside Italy and the United States would contract with a distributor rather than with Ducati.  In 1997 we implemented a distribution strategy aimed at both improving our wholesale and retail distribution networks and increasing our contact with, and understanding of our retail customer.  To achieve these objectives, we acquired direct control of wholesale distribution in strategic markets by forming wholly owned subsidiaries in charge of sales and marketing, replaced certain wholesale distributors whose results were unsatisfactory and began commercial relationships with distributors in markets in which we were previously not present.  We also launched a restructuring of our dealer network in Italy and backed the opening of “Ducati Stores” in selected markets throughout the world. 

           Wholesale Distribution.  Our wholesale distribution model is based primarily on forming wholly owned distribution and sales subsidiaries, and we now have wholly owned subsidiaries for the United States and Canada, France, Germany, Belgium, Netherlands, Sweden, Norway, Japan, United Kingdom and Ireland.  The establishment of additional wholly owned subsidiaries has a number of important benefits, including (i) acquisition of profits that had previously been earned by the independent distributors; (ii) formation of a closer relationship with consumers, allowing us to better understand the needs of our consumers and the motorcycle market in general; (iii) increased control over the distribution process and more effective and coordinated marketing activities; and (iv) because motorcycles are stored at, and shipped directly from, our factory to retail dealers or distributors (except for the United States and Japan), enhanced ability to redistribute inventory among various markets and to meet demand peaks for the various models while reducing overall logistical costs.

          We sell our products through independent distributors in countries in which we do not have a wholly owned subsidiary.  We are normally bound to these distributors by exclusive distribution agreements, pursuant to which we grant the distributor exclusive rights to distribute Ducati products in the relevant territory.  The importer in turn undertakes (i) not to sell Ducati products outside the assigned territory; (ii) not to compete with Ducati by manufacturing or selling competing products, unless permitted by contract; (iii) to reach defined sales goals; and (iv) to provide Ducati with data concerning sales to dealers and retail customers, the official registration data in the relevant territory and information about trade policies and market data.  We continue to appoint new distributors in markets in which we have previously been inactive, and evaluate each year whether to further expand our distribution network to new markets.

          Retail Distribution.  We intend to organize our retail distribution network around a centralized direct control hub in all countries where we are currently present and to expand our retail distribution network range of action abroad.

          In Italy, we have restructured our retail distribution network, reducing the number of Ducati dealers, from 165 in 1996 to 64 in December 2005, while offering enhanced marketing and merchandising support.  The enhanced support for these activities is designed to encourage dealers to invest in and transform their dealerships into Ducati Stores, following the model discussed below.  This strategy is intended for our benefit and for the benefit of the dealers.  The dealers benefit from increased sales volume and improved profitability while we expect to benefit from a stronger and more uniform retail sales network for our motorcycles and other products.  This restructuring in Italy has also contributed to boosting sales and profits in Italy.  Based on this success in Italy, we have decided to adopt a similar model in foreign markets as well, commencing with in France, Germany and Japan.  For geographic reasons, we have adopted a different strategy in the United States aimed at strengthening our wholesale distribution network.  As of December 31, 2005, there are approximately 800 Ducati dealers in operation around the world.

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          Our relationships with Italian dealers are currently governed by standard contracts based on partial exclusivity and multi-brand arrangements.  Under these agreements, the dealer is awarded the right to distribute to a pre-determined number of parties within a given territory in exchange for its undertaking not to make or sell competing products and guarantee that certain sales volumes will be attained.  We are entitled to examine each dealer’s book and records regarding Ducati products in order to monitor the dealer’s efficiency and compliance with the terms of the distribution agreement.

          Finally, we have developed a special design concept for dealers wanting to open Ducati Stores in selected markets around the world.  The Ducati Stores are centered on the Ducati brand and offer a customized and characteristic retail space as well as a high level of service and technical support.  Ducati motorcycles are the primary focus in the Ducati Stores and are supported by displays of Ducati Performance spare parts and accessories and the Ducati line of apparel.  In some Ducati Stores a “History Wall” displays images of Ducati’s racing heritage and an “Engineering Wall” shows a large-scale engineering drawing of the 916 Superbike.  We provide Ducati Stores with a specialized design consultancy service but do not own any direct interest in the stores; Ducati Stores are operated pursuant to franchising agreements.  As of December 31, 2005, approximately 160 Ducati Stores are in operation around the world, 49 of which are in Italy.

Marketing Activities

          While Ducati is fundamentally a motorcycle manufacturer, we are also the custodian of a valuable global brand.

          Brand Development.  We hold several important trademarks, including the world-famous “Ducati” trademark.  As early as 1996, we hired communication, public relations, advertising and marketing specialists and centralized coordination of marketing activities at our headquarters in Bologna.  In 2003, we created a dedicated marketing department within DMH to improve the organization and management of on-line, as well as traditional, marketing activities.  The department works to develop strategies to meet the needs of the growing number of Ducati fans around the world.  In 2004, we re-launched our “Ducati People” global advertising campaign (launched initially in 1998) with Ducati Club members cast in the spotlight.  The campaign is intended to communicate the authenticity and uniqueness of the Ducati brand.

          Since we attract media attention through our international racing activities and product innovations, our marketing strategy does not require large investments in advertising.  The primary source of advertising comes from Ducati motorcycles on racing circuits around the world and articles published in a broad range of motorcycle publications.  Thanks to the strength of the Ducati brand, media coverage of Ducati extends beyond the traditional motorcycle press.  Articles featuring Ducati have appeared in the financial sections of Financial Times, Forbes, The Wall Street Journal and Barron’s, and features dedicated to Ducati have also appeared in Vogue and on CNN, CNBC and Bloomberg Television.  Ducati enthusiasts, including Formula One drivers, models, international athletes and film. celebrities, have also contributed to our brand’s fame and dissemination.

          We intend to continue taking part in initiatives that support the Ducati brand in the world of art, design and fashion.  Ducati motorcycles were recently used for the advertising campaigns of a large number of fashion designers, including Versace, Dior and Donna Karan, and a Ducati motorcycle was used in shooting the films “Matrix Reloaded” and “Catwoman.”

29



          We have also sponsored the Motogiro d’Italia, a historical motorcycle rally that takes place along the picturesque roads of Central Italy, since its revival in 2001.  Participants ride motorcycles produced before 1957, the last year of the original Motogiro, as well as other recent motorcycle models, primarily Ducati.  The event has drawn enormous media interest and has attracted hundreds of enthusiasts and journalists from the world over.  Another marketing activity, which began in 2003, is the Centopassi, a competitive motorcycle tour in which participant Ducati owners and enthusiasts challenge Ducati test riders on the new Multistrada on the roads of the Italian Alps.  A final marketing activity is the World Ducati Week, which has become an important event for Ducati enthusiasts.  The third World Ducati Week, in May 2004, attracted more than 45,000 Ducati enthusiasts from 30 countries to the Misano Adriatico racetrack.

          On March 18, 2002, Ducati entered into an agreement with Linea S.p.A. to launch the Ducati Desmo Finance Program in support of its sales activities in Italy.  The agreement concerns (i) consumer financial services for purchasers of Ducati products; (ii) financial services for Ducati retail stores and dealers, and (iii) the issue and management of credit cards bearing the Ducati trademark.  The agreement has been renewed until August 31, 2006, awaiting the result of negotiations for a new joint venture for the supply of the same financial services, which should be jointly formed and owned by Ducati and Linea S.p.A.

          Racing.  The performance of Ducati motorcycles on international racing circuits helps sustain high demand for Ducati products.  Participation in racing increases visibility of Ducati motorcycles through media coverage of the races and serves as a practical demonstration of the high-performance characteristics of Ducati motorcycles.  Our racing activities also support our research and development activities, as many innovations developed for, and implemented in, racing motorcycles are later introduced in the production of Ducati motorcycles intended for the retail consumer.

          Ducati motorcycles compete with official teams in the MotoGP World Championship, the Superbike World Championship, the Supersport World Championship and the AMA Superbike Championship (U.S.-based).  We made our return to the MotoGP World Championship in 2003 after an absence of more than 30 years, and have been rewarded with a second place finish in the manufacturers’ ranking in the 2004 season and a third place finish in the manufacturers’ ranking in the 2005 season.  Loris Capirossi and Sete Gibernau are competing with the new GP6 in the 2006 season.  We compete in the Superbike World Championship with our official Ducati teams and by selling motorcycles to other private teams.  Since 1990 we have won more single race victories than all other manufacturers combined and a total of 13 manufacturers titles.

          The Superbike World Championship and the AMA Superbike Championship require participation using motorcycles derived from roadsters (also called “current production models”).  They are converted for racing through a series of modifications allowed by the relevant regulations, which require, however, that the design and basic technical features remain unaltered.  Regulations in force in the MotoGP World Championship for the 2006 season require that prototype motorcycles be used (use of basic components of current production motorcycles is prohibited).  These prototype motorcycles must be equipped with 4-stroke engines up to 990cc in size and with fuel tanks having a maximum capacity of 22 liters.  Starting with the 2007 season, the maximum piston displacement is expected to be lowered to 800cc, with the concomitant reduction of the maximum fuel tank capacity to 21 liters, in an effort to limit excessive improvement in performances.

          Ducati Corse, our subsidiary dedicated to racing activities founded in January 1999, manages the activities of the Ducati racing teams and designs and manufactures motorcycles and engines exclusively for racing use.  Ducati Corse also locates sponsors and engages in marketing and promotional activities designed to increase awareness of the Ducati brand.

          Sponsors of the Ducati racing team participating in the MotoGP World Championship include: Charles Stewart & Company Limited (displaying the Marlboro trademark); Telecom Italia S.p.A. (displaying the Alice trademark); Binda S.p.A. (displaying the Breil trademark); and Fiat Auto, S.p.A. (displaying the Alfa Romeo trademark).  Sponsors of the Ducati racing team participating in the Superbike World Championship include Binda S.p.A. (displaying the Breil trademark); Xerox Ltd.; and Fiat Auto, S.p.A. (displaying the Alfa Romeo trademark).  Ducati Corse has also entered into a sponsorship and technical partnership agreement with Shell International Petroleum Company Ltd. (“Shell”) pursuant to which Shell sponsors Ducati’s participation in the MotoGP World Championship and the Superbike World Championship and undertakes to supply fuel and lubricants developed and produced specifically for the world of racing.

30



          In December 2005 Ducati Corse entered into a contract with D’Antin Pramac S.r.l (“D’Antin”), pursuant to which Ducati Corse has agreed to supply D’Antin motorcycles, engines and spare parts, in addition to technical support, so that D’Antin can take part in the MotoGP World Championship with a satellite Ducati Corse team called “D’Antin Pramac.”  D’Antin has undertaken to participate in all of the MotoGP World Championship races during the 2006, 2007 and 2008 seasons with two riders and allows D’Antin to renew the contract for the 2009 season.

          Internet.  The Internet represents our most important tool of communication with Ducati enthusiasts and customers, as well as a vital element for innovating corporate processes and brand recognition. Re-launched in 2000, the website www.ducati.com today receives more than 9,200,000 visitors from all over the world (150,000 of which are registered users), who in 2005 viewed approximately 217 million pages.  With 15 gigabytes of data, texts and images, the website offers complete information about all of the models the Ducati Group makes, constant coverage of the race activities in the various national and international championships, news about all events and initiatives of interest for its fans and Ducati clubs around the world.  It also provides information about the network of dealers and Ducati branches in the world, and various features of interest for all riders and those who aspire to become such.  More than 1500 garments, accessories and merchandising items bearing the Ducati trademark are in the extensive on-line store catalogue.  Moreover, on-line sales of limited edition motorcycles, such as the MH900e, 996R and 998S Bayliss, have made the Ducati web site one of the greatest e-commerce successes anywhere in Italy and around the world.  Of the web site’s visitors, 40% are in the United States, 43% in Europe (mainly Italy), and the remaining 16% are in Japan and other Asian countries.  The enthusiasm and support of its community of fans enabled Ducati.com to win the prestigious WWW2004 award in 2004 as the best Italian Internet site in the Automotive and Engines category, according to Il Sole 24 Ore.  In order to achieve an even closer relationship with its fans around the world, in 2006 the Company also launched a “blog” (on-line diary) on its web site managed by Chairman of the Board and CEO Federico Minoli, where he communicates with the web site’s visitors and describes, in person, the news regarding Ducati’s activity around the world.

Production

          Our manufacturing operations are not vertically integrated and are characterized by a relatively low fixed cost structure.  Our production is primarily focused on engine and motorcycle assembly and the machining of two strategic components, engine blocks and cylinder heads.  Our strategic goal with regards to production is to continually improve the integration of our in-house production operations with the assembly work performed by a network of select suppliers in an effort to reduce complexity in the production process and improve efficiency.

          All Ducati motorcycles are manufactured at a single industrial facility located in Borgo Panigale, outside Bologna, Italy.  The facility consists of 124,487 square meters of land and contains plants, warehouses and offices (approximately 36,000 square meters of indoor space), test tracks and parking areas.  All manufacturing and assembly, as well as warehousing of certain components, are performed on site.

          We outsource the production of the majority of our parts and components to third-party suppliers.  As a result, the functions we perform at our facility in Borgo Panigale are basically those of assembly and quality control.  As part of the production process each engine and each finished motorcycle is subjected to rigorous quality controls, including static and dynamic tests during the various stages of production.

31



          We have implemented several initiatives to improve our production processes and reduce costs.  In January 1999, we introduced a new software system to monitor the flow of all production-related information, from the initial order to delivery of the finished product.  This system is an important and effective planning tool that allows the user to automatically generate production schedules based on sales forecasts, optimize warehouse stock volume levels, generate orders for purchasing materials and organize the flow of materials needed for production.

          We are able to maintain relatively high production efficiency, even with relatively low volumes of production, primarily due to the fact that the various models produced have a large number of common components, especially engine components.  In 1999, we embarked on a project to simplify production, aiming at improving quality and reducing production costs.  In 2000, we commenced another project called Desmo (Ducati Evolution and Supply Management Optimization), aimed at eliminating the inefficiencies in the production process.  In 2005, we produced 17 different models using only two engine blocks and three cylinder heads.  In order to simplify production and reduce costs, we have adopted a “platform” approach to production, the purpose of which is to avoid the assembly of numerous individual components.  Under the platform approach, a motorcycle is divided into a discrete number of key components (or “platforms”) that are in turn made up of a number of sub-components.  One key supplier is made responsible for provision of a platform and managing suppliers of the sub-components that go into the platform.  The platform assembly approach has reduced the number of our suppliers and increased the volume of components provided by each supplier, thereby improving our ability to negotiate competitive prices.  It has also provided an opportunity to develop jointly new components with key suppliers at the research and development stage.  We have already implemented platform production processes for 83 assembly groups (including forks, clutch covers and fuel pumps), thereby significantly reducing the number of parts required to be assembled directly.

          As part of our initiative to outsource non-strategic activities to third parties, we outsource our packaging, shipping and logistics functions to Saima Avandero S.p.A., which allows us to respond more quickly to requests from our dealers.  Saima Avandero S.p.A. also manages the packaging and distribution of spare parts at its dedicated center in Modena.

          The present maximum production capacity of our production facility is approximately 48,000 motorcycles a year, compared to a yearly average of approximately 35,000 motorcycles produced during the last three-year period.  We do not foresee having to bear costs for increasing our production capacity should demand come back into line with the higher volumes of the past.

Supplies and Suppliers

          We currently buy from third-party suppliers the majority of the single motorcycle parts and components that we use in our production process.  In 2005, approximately 91% of our total costs of goods sold were for parts and components purchased from third parties, while approximately 9% were for direct labor costs. 

          While we currently purchase our parts and components from a large number of suppliers, our top ten parts and components suppliers accounted for approximately 40% of our parts and components procurements spending in 2005.  Our largest suppliers include Brembo (brake systems), Magneti Marelli (injection systems), Mahle (pistons), Michelin and Pirelli (tires) and Showa and Ohlins (suspensions).

          Except for a limited number of mid-term supply contracts (generally for three years), we only enter into short-term, renewable contracts with our suppliers.  We typically contract with our suppliers on a non-exclusive basis, which allows us to replace suppliers at any time.  Our policy is to identify at least two sources for each component so as to be able to switch promptly to the alternative supplier if necessary. Although for certain key components we rely upon single-source suppliers, we believe these suppliers can also be replaced if necessary.

32



          Among the supply contracts that play a major role in Ducati’s production activity are the three-year contracts the Company has with Brembo and Magneti Marelli Power Training for the supply of the braking system platforms and injection system platforms of its motorcycles, respectively.

Intellectual Property

          The design, main technical features and the most important technology of Ducati motorcycles, including the Desmodromic valve control system, are not protected by any intellectual property rights.  Only a few non-aesthetic technical features of marginal importance of Ducati products are protected by patents.  With the exception of these limited technical characteristics, the Ducati motorcycle components are manufactured according to known technologies and include components not supplied to Ducati on an exclusive basis.  See “Item 3. Key Information—Risk Factors—Our motorcycle design and technology are not protected by intellectual property rights.”

          Our patents and rights to use intellectual property had a total net value equivalent to approximately €4.3 million as of December 31, 2005, and consist of software licenses that Ducati North America and Ducati have purchased from third parties.

          Our expenses for grants, licenses, trademarks and similar rights concern almost exclusively the “Ducati” trademark, purchased at the time of our acquisition from Ducati Motorcycles S.p.A. in 1996.

          We own the “Ducati” trademark and other trademarks associated with Ducati motorcycles. The “Ducati” trademark is registered in all countries that are signatory to the Madrid Agreement concerning the International Registration of Marks and is registered as a European Community trademark in all countries that are part of the European Union.  This trademark has also been registered in 44 additional countries on an ad hoc basis for motor vehicles.  In addition, we have registered the “Ducati” trademark in other classes of products, including toys, apparel, eyewear and watches in most of the countries in which the trademark for motors and vehicles is registered.

          On December 10, 2004, DMH sold the “Ducati Corse” trademark, one of the other trademarks associated with Ducati products, to its subsidiary, Ducati Corse, for the purchase price of €23 million, the value determined by independent professionals, plus VAT.  The transfer was made to allow Ducati Corse to develop the “Ducati Corse” brand separately from the “Ducati” brand, increasing its value by using it in the international racing competitions in which it participates.

          On December 11, 2004, DMH entered into a license agreement with Ducati Corse pursuant to which Ducati Corse grants Ducati the right to use (i) the “Ducati Corse” trademark for the manufacture and distribution of the “Replica Corse” motorcycle models and (ii) the Ducati Corse racing activities images for promotional and advertising purposes for a fee made up of a fixed part and a variable component (royalty) calculated as a percentage of the price of the “Replica Corse” products sold.

          On November 11, 2005, DMH entered into a license agreement with Fiat Auto S.p.A. pursuant to which DMH grants Fiat Auto S.p.A. the right to use the “Monster” trademark to market a new version of its car “Panda” called the “Panda Monster.”  Fiat Auto S.p.A. may also register the “Panda Monster” trademark for use in the automobile sector.

Governmental and Environmental Regulation

          Like other motorcycle manufacturers, we incur substantial costs in designing and testing products to comply with domestic and foreign safety and emissions requirements.

33



          Motorcycles sold in the United States, the European Union countries and other countries are subject to environmental emissions regulations and safety standards with which we must comply in order to sell products in these countries.  Applicable regulations in the United States include the emissions and noise standards of the U.S. Environmental Protection Agency and the more stringent emissions standards of the State of California Air Resources Board.  Ducati motorcycles sold in the United States are also subject to the National Traffic and Motor Vehicle Safety Act and the rules promulgated thereunder by the National Highway Traffic Safety Administration.  Regulations applicable to us in Italy include EU directives relating to emissions, pollution and noise, as well as national rules on emissions, pollution, noise and safety issued by the Ministry of Transport (Ministero delle Infrastrutture e dei Trasporti).  All of our motorcycle models are required to comply with applicable homologation regulations in the countries in which they are distributed.  We are also subject to a number of Italian governmental regulations relating to the use and storage of materials, discharge and disposal of factory waste and safety standards of facilities and processes.

Insurance and Product Liability

          We maintain insurance against a number of risks.  We insure against loss or damage to our facilities, against loss or damage to our products while they are in transit to customers, against certain potential environmental liabilities and against product liability claims.  While we do not cover 100% of these risks with insurance, we believe that our present level of insurance is adequate in the light of past experience.  We expect that our present insurance levels will be maintained on substantially the same terms and conditions in the future.

          We are engaged in a business that exposes us to possible claims for personal injury from the use of our products.  We currently maintain liability insurance with a per-occurrence limit of €20.0 million and an aggregate liability cap of €20.0 million per year.  See “Item 3. Key Information—Risk Factors—We may be subject to significant product liability claims.”

Description of Property

          The following table sets forth the principal properties in our use as of the date of this annual report.

Location

 

Approximate
Square
Meters

 

Principal Use

 

Status


 


 


 


Bologna, Italy(1)

 

124,487

 

Headquarters, production facility

 

See note

Cupertino, California, USA

 

1,161

 

Headquarters, Ducati North America

 

Leased

Paris, France

 

260

 

Headquarters, Ducati France

 

Leased

Cologne, Germany

 

408

 

Headquarters, Ducati Motor Deutschland

 

Leased

Tokyo, Japan

 

121

 

Headquarters, Ducati Japan

 

Leased

The Hague, Holland

 

400

 

Headquarters, Ducati North Europe

 

Leased

Marsta, Sweden

 

225

 

Offices and warehouse

 

Leased

Milton Keynes, England

 

450

 

Headquarters, Ducati U.K.

 

Leased



(1)     On June 29, 2001, we entered into a sale and leaseback transaction with Locafit S.p.A. with respect to a portion of our production facility.  See Note 5 to our audited consolidated financial statements included in Item 18 for additional information on this transaction.

          In addition to the above properties, we lease space in various other locations in the United States and Western Europe on a regular basis for warehouse storage of motorcycles and parts.

          We believe that our operating facilities are in good condition and are adequate, considered in light of our capital expenditure plans, for the development, manufacture and marketing of our current and anticipated products.  For addition information on our property and capital expenditures in our property, see “—Production” and “—Capital Expenditures.”

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Capital Expenditures

          Our capital expenditures in property, plant and equipment were, €10.4 million in 2004 and €10.6 million in 2005.  Capital expenditures in each of the years were principally related to our development initiatives.

          Investments in intangible assets, which include our capitalized development expenditures for these new models, amounted to € 15.1 million in 2004 and €20.5 million in 2005.  See “—Products and Distribution—Product Research and Development.”

          Our capital expenditures currently in progress relate principally to our continuing development initiatives related to new motorcycles and the Desmosedici, which we developed and began using in 2003 to compete in the MotoGP Championship.  We believe that competing in the MotoGP Championship will further enhance recognition of the Ducati brands for innovative design, advanced engineering and racing success and spur further innovation in the design and engineering of our motorcycles that will ultimately improve the quality and performance of our road models.  We spent €7.4 million during 2004 in connection with this project (of which €3.3 million were capitalized and are included in the total investments in intangible assets in 2004 described above), and €8.6 million (entirely capitalized) in 2005.  The expected cost for 2006 is €7.5 million.

Item 4A.   Unresolved Staff Comments

          None.

Item 5.   Operating and Financial Review and Prospects

          You should read the following discussion in connection with the audited consolidated financial statements included in Item 18 of this annual report.

          Our audited consolidated financial statements have been prepared in conformity with IFRS, which differs in certain significant respects from U.S. GAAP.  For a discussion of significant differences between IFRS and U.S. GAAP and the related reconciliation of net profit/(loss) and shareholders’ equity in our audited consolidated financial statements, refer to Notes 38, 39, and 40 to the audited consolidated financial statements.

Introduction

          Our revenues are derived principally from sales of motorcycles and, to a lesser extent, spare parts and engines, performance accessories and technical riding gear and enthusiast apparel.  Revenues and other income, costs and charges are accounted for net of returns, discounts, allowances and rebates.  In addition, although under IFRS the classification of dealer incentives (usually based on volume sold) is not specifically addressed, we have classified these costs as a reduction in revenues rather than as distribution costs, which is consistent with the approach followed by other companies operating in the automotive sector in the first-time adoption of IFRS.  Revenues from the sale of goods are recognized when the goods are delivered to the freight forwarder, at which time, under the related contractual terms, ownership passes to the purchaser, or, in the case of sales with title retention clauses, when the purchaser has assumed substantially all risks and rewards associated with ownership of the goods.  Sponsorship revenues are recognized as other income on an accrual basis over the lives of the related contracts, which usually reflect the length of the sporting season; the remuneration of the riders and the racing team is recognized on an accrual basis, with reference to the duration of the related contracts.

35



          We produce motorcycles in six model lines, which vary in their technical and design features and intended customers: Superbike, Super Sport, Sport Naked, Sport Touring, Multistrada and Sportclassic.  We sell our motorcycles and related products in 61 countries worldwide, with a primary focus on the Western European and North American markets, which together accounted for approximately 85% of our revenues in each of the last two years.  In 2005, no single country accounted for more than 15.0% of our revenues of motorcycles and related products, with the exception of Italy, which accounted for 27.8% and  the United States and Canada  which accounted for 18.8% of our revenues from motorcycles and related products.  This provides us with significant geographical diversity of revenues.  We have a global distribution network, directly controlling our sales in Italy and operating wholly owned distribution subsidiaries in North America, France, Germany, the Benelux countries (which is also responsible for Sweden and Norway), Japan and the United Kingdom.  Our manufacturing operations, based in Bologna, Italy, consist primarily of engine and motorcycle assembly and are not vertically integrated, resulting in a relatively low fixed cost structure.

          We use motorcycle registrations as an indicator of retail sales.  Motorcycle registrations reflect registrations with governmental authorities upon sales to end users.  Because we generally sell our motorcycles to importers and dealers, revenues are normally recognized upon sale to our importers and dealers before such motorcycles are bought and registered by end users.  The differences between our unit sales to our importers and dealers and registrations for corresponding periods reflect the increases and decreases in the inventories of our importers and dealers.  Registration data is unavailable or unreliable in certain of our less important markets, and even where reliable information is available, there is typically some delay in its publication by governmental authorities.  Accordingly, we estimate registrations based on information obtained from importers and dealers in the relevant markets where applicable and adjust such estimates as official data is published.

          Worldwide motorcycle sales and registrations are seasonal, peaking during the months of March through May (sales) and April through June (registrations).  Our motorcycle production levels are relatively stable throughout the year (excluding annual shutdown periods for the month of August and the last two weeks of December).  Consequently, we experience periods of inventory buildup from September through February in anticipation of the spring selling season.  Depending on market conditions and our commercial strategy, the level of inventory we hold or sell to importers and dealers at any time may change, as a result of which unit sales may be less seasonal than registrations.  See “Item 3. Key Information—Risk Factors—Our business is seasonal and we are required to predict levels of demand in advance and provide current motorcycle models to the market on a timely basis.”

          Motorcycle manufacturers typically present new models once a year at international trade shows held in September of each year.  Following these trade shows, we work closely with our distributors and dealers to anticipate demand for our motorcycles in the following year.  We endeavor to adjust the start of our new model year production to avoid a buildup in inventory of the previous year’s models.  Any such buildup can result in additional promotional expenses (e.g., rebates, discounts, complimentary accessories and other incentives) that we incur to reduce excess inventories (and which we account for as a reduction of revenues).

          Certain additional factors that adversely affected our results of operations over the last two years include: the strengthening of the euro against most other currencies, in particular the U.S. dollar (appreciation of approximately 9.9% on average and 7.8% at year end in 2004, with our revenues in U.S. dollars accounting for approximately 15.6% of our total revenues in 2004), the U.K. pound sterling and the Japanese yen.  See “Item 3. Key Information—Exchange Rates.”  This strengthening of the euro has principally impacted product prices.  In an effort to preserve our market share, we have generally kept unchanged our sale prices in the relevant local currency, with a consequent reduction in our gross margin.  We have engaged in foreign exchange transactions to hedge portions of our transactional exposure to such fluctuations in exchange rates, although such transactions protect us only from short-term fluctuations and not long-term variances.

36



For further information on our foreign exchange transactions, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.  Although the euro weakened in 2005, it has appreciated again in the first half of 2006 and we expect that its continued relative strength will impact our results of operations in 2006. our renewed participation in the MotoGP Championship starting in 2003.  We incurred approximately €8.6 million in research and development expenses and capital expenditures in connection with this participation in 2005, and expect to continue to incur a similar level of expenses for these purposes in the future;  the launch in 2005 of our sixth motorcycle line, the Sport Classic, in connection with which we incurred €1.4 million in research and development expenses and capital expenditures for fiscal year 2004 and €3.8 million for fiscal year 2005.  In 2005, we sold 3,274 Sport Classic motorcycles, or 9.5% of our total unit sales.

          Cost of sales consists primarily of variable costs, such as the cost of parts, components and labor, as well as depreciation of property, plant and equipment, amortization of capitalized development costs and research and development expenses that are not capitalized or included under distribution costs or general and administrative expenses.  In each of the last two years, approximately 75% of the total cost of sales incurred by Ducati was for parts and components.  Cost of sales is allocated to each product class (motorcycles, spare parts, accessories and apparel and other) as follows:  purchased materials and the cost of external processing are allocated to a product class (and to each motorcycle line within the motorcycle product class) based on the specific bills for materials of the products concerned; direct production costs for the motorcycle product class, made up of the cost of the workshops dedicated to each specific motorcycle line (including labor), are allocated 100% to the relevant motorcycle line to which such costs relate; indirect production costs, such as the warehousing of raw materials and finished motorcycles, logistics and general factory services are allocated 100% to the motorcycle product class (and, in turn, to each motorcycle line within the motorcycle product class based on the share of direct production costs allocated to that line); and development expenses that are not capitalized, making up approximately 30% of our development expenses, are allocated 100% to the motorcycle product class (and, in turn, to each motorcycle line within the motorcycle product class based on the share of direct production costs allocated to that line).

          Other income is from sponsorship income, licensing revenues, rental and the sale of scrap, sundry components and materials. 

          Distribution costs primarily include personnel costs, advertising and promotion costs, expenses relating to our racing program, charges for accrued warranty expenses and charges for doubtful accounts.  Distribution costs also include expenses relating to marketing and distribution, including certain expenses associated with our wholly owned distribution subsidiaries.  Costs for services are recognized on an accrual basis at the time the service is received.  Costs relating to remuneration for motorcycle racing drivers and racing teams are recognized according to the length of their respective contracts.

          General and administrative expenses primarily include personnel costs, depreciation of property, plant and equipment, amortization of intangible assets, charges for legal, administration and tax consultancy, telephone, cleaning , insurance costs, audit fees and other minor charges.

          Other expenses is a residual category and includes all expenses not included in other line items.

          Provisions for restructuring charges are recorded when: (i) there is a legal or constructive obligation to third parties; (ii) it is likely that resources will have to be used to settle the obligation; (iii) the amount of the obligation concerned can be estimated reliably; (iv) a formal program identifies the principal characteristics of the restructuring plan; and (v) interested third parties have a valid expectation that the Group will carry out the restructuring work because implementation has already started or because the salient points have already been communicated to them.

37



          Interest income represents financial income, primarily arising from bank deposits.

          Interest expense represents the financial cost of borrowing as well as other financial charges, primarily charges and commissions on ordinary current accounts, export/import-related charges and commissions, bond repurchase premiums and financial charges on forward contracts.

          Foreign exchange gain/(loss), net, consists primarily of the translation differences from conversion into euro of monetary assets and liabilities denominated in a currency other than the euro.  See “Item 3. Key Information—Risk Factors—We are subject to foreign currency exchange rate fluctuations, particularly with respect to the U.S. dollar, and to interest rate fluctuations.” Also included in foreign exchange gain/(loss), net, are the results of our forward contract hedging activities (forward currency contracts we enter into against future commitments to hedge the risk of currency fluctuations between the date of such a contract and the performance of the related commitment).  For further information on our hedging activities, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

          Income taxes comprise the current and deferred taxes that arise from our activities in the relevant period based on tax regimes applicable to us at the end of each accounting period.  DMH and its Italian subsidiaries are subject to two income taxes:  (i) corporate income tax (IRPEG until 2003 and IRES as of 2004) and (ii) local income tax (IRAP). The ordinary IRES tax rate for fiscal years 2004 and 2005 is 33%. The IRAP rate is equal to 4.25%.  See Note 31 to our audited consolidated financial statements included in Item 18 for further information.

          Intangible assets include capitalized development costs, comprised principally of the cost of personnel employed in development functions and the cost of materials and external consultants, where the expenditure is incurred for specific product development.  Research expenses and development costs that are not capitalized are expensed under cost of sales or, in the case of a portion of the costs related to the development of the “double twin” engine for the Desmosedici motorcycle developed to compete in the MotoGP Championship, general and administrative expenses.

          For a more detailed description of the line items in the consolidated statement of income prepared in conformity with IFRS that form part of our audited consolidated financial statements, see Note 31 to our audited consolidated financial statements included in Item 18.

Critical Accounting Policies and Estimates

          Our reported financial condition and results of operations are affected by accounting methods, assumptions and estimates that we are required to make in preparing our consolidated financial statements.  We base our estimates on historical experience and various other assumptions.  The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions should be considered in reviewing the discussion and analysis of our financial condition and results of operations below, as well as our audited consolidated financial statements.  Our significant accounting policies are disclosed in Note 1.c to our audited consolidated financial statements included in Item 18.  We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our audited consolidated financial statements.

          Inventories

          Inventories are stated at the lower of purchase or production cost and the estimated realizable value, based on market conditions, taking account of related selling expenses.  Purchase costs include the amounts paid to suppliers and any directly attributable related charges.  Manufacturing costs include the expenses incurred to bring the goods to their state at the balance sheet date.  These include both costs specific to individual goods and the costs incurred by the entire production process allocable to the goods.  In particular, all types of inventory are valued on the first in/first out (FIFO) method.  Inventories are stated net of an allowance that reflects losses on obsolete and slow-moving items.  The determination of estimated realizable value and the allowance for losses on obsolete or slow-moving items are based upon our historical experience and assumptions about future demand and market conditions. 

38



          Accounting for Long-Lived Assets

          Property, plant and equipment are recorded at purchase cost, including any directly related charges. Ordinary maintenance and repair expenditure that does not increase the value of the assets is expensed as incurred. Improvement expenditure that increases the useful lives of the assets is capitalized and depreciated over the residual lives of the assets. All other costs are charged to the statement of income as incurred.

          Assets under construction are recorded at cost and classified as “Construction in progress” until the work has been completed; upon completion, the cost is reclassified to the appropriate caption and subjected to depreciation.

          As required by IAS 17, fixed assets acquired under finance leasing contracts that, in substance, transfer all the risks and benefits of ownership to us, are recorded using finance lease accounting methodology. This involves capitalization of the original value of the asset and recognition of the outstanding principal due to the provider of finance, as well as the depreciation of the asset over its estimated economic and technical useful life. The principal element of lease installments is deducted from the outstanding liability to the lessor, while the interest element is charged to the statement of operations.

          Leased assets for which the lessor retains substantially all the risks and benefits of ownership are classified as operating leases. The costs of operating leases are charged to the statement of operations over the lives of the related lease contracts.

          At the time of the transition to IFRS on January 1, 2004, the exemption allowed by IFRS 1 (IFRS 1.16) was applied to the valuation of “Buildings” which, accordingly, were recorded at deemed cost, being their fair value on that date as determined by an independent appraisal.

          Goodwill is deemed to be an asset with an indefinite life and is not amortized, but subjected to annual impairment testing, or more frequently if there is evidence (specific events, changed circumstances) of a possible loss of value, as required by IAS 36 – Impairment of assets, to identify any losses of value at the level of the cash-generating unit to which such goodwill has been allocated by management. Any write-downs are not subject to reinstatement in the future.  On disposal of all or part of a previously-acquired business involving the recognition of purchased goodwill, the extent of the disposal gain or loss is determined having regard for the residual value of such goodwill.

          On the first-time adoption of IFRS, we elected not to apply IFRS 3 – Business combinations with retroactive effect for the businesses acquired before January 1, 2004; accordingly, the goodwill arising on acquisitions prior to the IFRS transition date is stated at the value previously determined under Italian accounting standards, subject to recognition of any losses in value identified.

          The brand name is deemed to be an intangible asset with an indefinite useful life and is not amortized, but subjected to annual impairment testing, or more frequently if there is evidence (specific events, changed circumstances) of a possible loss of value, as required by IAS 36 – Impairment of assets to identify any losses of value at the level of the cash-generating unit to which the brand name has been allocated by management.

          Other purchased or internally-produced intangible assets are recorded, in accordance with IAS 38 – Intangible assets, when it is likely that their use will generate future economic benefits and their cost can be determined on a reliable basis.  These assets are recorded at purchase or production cost and amortized on a straight-line basis over their estimated useful lives.

39



          Gains and losses arising on the disposal of intangible assets comprise the difference between their disposal and book values, and are reflected in the statement of income at the time of disposal.

          Intangible assets not yet ready are recorded at cost and classified as “Assets in progress” until the work has been completed; upon completion, the cost is reclassified to the appropriate caption and subjected to amortization.

          Research costs are expensed to the statement of income as incurred.

          The costs of development projects for the production of motorcycles and engines are only capitalized if the conditions specified in IAS 38 – Intangible assets (IAS 38. 57), are met, namely:  demonstrable technical feasibility of the product; intention of the company to complete the development project; reliable determination of the costs incurred for the project; and recoverability of the amounts recorded from the future economic benefits expected to derive from the development project.

          Capitalized development costs comprise solely the costs incurred that are directly attributable to the development process and are amortized on a systematic basis, commencing from the start of production, over the expected life of the product, which is usually five years.

          Development projects in progress are recorded at cost and classified as “Intangible assets in progress” until the project has been completed; upon completion, the cost is reclassified to the appropriate caption and subjected to amortization.

          At least once each year, we consider the recoverability of our tangible and intangible assets (including capitalized development costs), in order to determine if there is any evidence that such assets may have suffered a loss in value. If there is any such evidence, the recoverable value of the assets concerned is estimated to determine the extent of the related loss in value. Intangible assets with an indefinite useful life and intangible assets not yet available for use are subjected to an impairment test each year, or more frequently if there is evidence of a possible loss of value (IAS 36.10a).

          When the recoverable value of an individual asset cannot be estimated, we estimate the recoverable value of the cash-generating unit to which the asset belongs.

          The recoverable value of an asset is the greater of its fair value net of selling costs or its value in use. The value in use of an asset is determined with reference to its detailed income stream (layer valuation), gross of taxation, applying an after-tax discounting rate that reflects current market assessments of the time value of money and the risks specific to the asset. A loss in value is recognized if recoverable value is lower than book value. If, subsequently, an impairment loss other than for goodwill is recovered, in whole or in part, the book value of the asset or cash-generating unit is increased to reflect the new estimated recoverable value, without exceeding the value that would have been reported had no losses in value been recorded previously. The recovery of an impairment loss is recognized immediately in the statement of income.

          Accounting for long-lived and intangible assets involves the use of estimates for determining the fair value at the acquisition date, and the useful lives of the assets over which the costs of acquiring these assets are charged to the income statement.  The allocation of development expenses to be capitalized involves assumptions as to the recoverability of such costs from revenues generated by the relevant projects.

40



          Commitments and contingencies

          We are involved in various claims and legal actions arising in the ordinary course of business.  Litigation is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance.  We establish provisions for contingent liabilities in such matters when: (i) there is a legal or constructive obligation to third parties, (ii) it is likely that resources will have to be used to settle the obligation and (iii) the amount of the obligation concerned can be estimated reliably; and monitor such provisions on an ongoing basis.  It is possible that the final resolution of some of these matters may require us to make expenditures in excess of established reserves.

          Product warranty

          Product warranty obligations are estimated on the basis of a time-series analysis of labor and material costs incurred in connection with each individual model.  These estimates are established using historical information on the nature, frequency, and average cost of warranty claims, taking into account the registrations over the last 24 months and estimated costs for future recall campaigns.  We actively study trends of warranty claims and take action to improve vehicle quality and minimize warranty claims.  Actual costs against warranties, which cover both the cost of the parts under warranty and reimbursements to dealers of the margin previously paid to us on those parts and recorded within our revenues, totaled €13.4 million, or 4.2% of revenues, in 2005 and €14.4 million, or 4.0% of revenues, in 2004.  At December 31, 2005, we had a provision in our financial statements of € 5,8 million (€6.3 million in 2004) to cover future product warranty costs, which we estimate based our expected costs for the parts and related labor.  We believe that the warranty reserve is appropriate: however, actual claims incurred could differ from the original estimates. 

          Taxation

          Income taxes include all the taxes charged on our taxable income. Income taxes are recorded in the statement of income, except for those relating to items credited or debited directly to shareholders’ equity, in which case the related tax effect is recognized directly as part of shareholders’ equity. Provisions for taxation that might arise on the transfer of undistributed retained earnings from subsidiary companies are only recorded if there is a real intention to transfer such earnings. Other taxes unrelated to earnings, such as property and capital taxes, are recorded as other operating expenses. Deferred tax assets/liabilities are recorded using the full liability method. These are calculated on all the timing differences between the fiscal value of assets and liabilities and the book value recorded in the consolidated financial statements, with the exception of non-deductible goodwill and the differences arising on investments in subsidiary companies that are not expected to reverse in the foreseeable future, and on carried-forward tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized. In particular, given the history of recent losses, these estimates are primarily based on the scheduled reversal of taxable temporary differences and available tax planning opportunities.  The recoverability of deferred tax assets is reviewed at the end of each accounting period and any amounts whose recovery is no longer deemed probable are charged to the statement of income.

          Current, prepaid and deferred tax assets and liabilities are offset when the related income taxes are charged by the same tax authority and a legal right of offset exists. Deferred tax assets and liabilities are determined using the tax rates that are expected to apply in the various tax areas in which we operate when the related timing differences become deductible or taxable or expire in accordance with current legislation.

          Significant management judgment is required in determining our provision for deferred tax assets and liabilities.  The analysis is based on the estimates of taxable income in the jurisdictions in which we operate, the period over which the deferred tax assets and liabilities will be recoverable and available tax planning opportunities.  If actual results differ from these estimates, or we adjust these estimates in future periods, our financial position and results of operations may be affected.

41



          Allowance for Doubtful Accounts

          We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  We base our estimates on the aging of our accounts receivable balances and our historical write-off experience, customer credit-worthiness and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  If the financial condition of our customers were to deteriorate, actual write-offs may be higher than expected.

          Licensing

          Our sponsorship agreements are generally for a period of two to three racing seasons, and are related to Ducati Corse’s participation in the MotoGP Championship, the World Superbike Championship, or in some cases both.  Each contract specifies the amount of the overall sponsorship fee to be paid for Ducati Corse’s participation in each racing season for the relevant championship; such amounts are equal from year to year over the life of the sponsorship agreement.  There are no up-front payments; rather, payments are made upon Ducati Corse’s participation in each season.

          Almost all of the contracts include a clause pursuant to which the sponsor is entitled to terminate the contract and have no further obligation to make any future payments in the event that Ducati Corse does not register in the related championship.  While each contract differs as to the remedy available to the counterparty in the unlikely event that Ducati Corse withdraws during the course of a season, all contracts state that sponsors will not be reimbursed for amounts already paid if Ducati Corse completes the relevant racing season.  Only one of the sponsorship contracts includes an indemnity clause that requires Ducati Corse to make a payment to the sponsor in the event of early termination of the contract due to Ducati Corse’s failure to participate in (or withdrawal from) the relevant championship.  The full amount potentially due under such indemnity is disclosed in Note 18 to our audited consolidated financial statements included in Item 18.

          The racing season in the MotoGP Championship and the World Superbike Championship runs from March to November.  We recognize all amounts due under our sponsorship contracts with respect to a given season as “other income” for the year ended December 31 in which such season falls under IFRS.  We believe that, in accordance with FASB Concept Statement No. 6, para. 79, these sponsorship activities do not constitute Ducati Corse’s ongoing major or central operations and that the amounts classified under “other income” under IFRS should be classified as “other operating income” under U.S. GAAP.

Trend Information

          Following negative results in 2005, our business continued to slow in the first quarter of 2006.  Since the end of 2005, no particularly significant trends have been seen in production or in costs or selling prices and no trends have been seen that are capable of positively or negatively conditioning our activities.  Compared to the same period of the previous year, our motorcycle registrations have remained stable during the first quarter of 2006, while sales have dropped, as expected, as a consequence of our policy aimed at reducing inventory at the Ducati retail stores and dealerships.  The 2006-2008 Business Plan described in “Item 4.  Information on the Company—Business Overview—Business Strategy— 2006-2008 Business Plan.” is mainly aimed at restoring our profitability and cash generating capacity by reducing overhead and promoting models in the high-end of our product range, which offer the highest margins.  Our 2006-2008 Business Plan, as well other strategic decisions we may make, may have a material effect on our future results.

Results of Operations

          The following table sets forth certain statement of income data expressed as a percentage of our revenues for the periods indicated:

42



 

 

Year ended December 31,

 

 

 


 

 

 

2004

 

2005

 

 

 



 



 

 

 

(Under IFRS)

 

 

 


 

Revenues

 

 

100%

 

 

100%

 

Cost of sales

 

 

(76.2)%

 

 

(81.8)%

 

Gross profit

 

 

23.8%

 

 

18.2%

 

Other income

 

 

8.5%

 

 

10.7%

 

Distribution costs and general and administrative expenses

 

 

(29.5)%

 

 

(34.7)%

 

Other expenses

 

 

(0.3)%

 

 

(0.6)%

 

Provisions for restructuring reserve

 

 

—  

 

 

(4.1)%

 

Operating profit (loss)

 

 

2.5%

 

 

(10.5)%

 

2005 Compared to 2004

          Revenues

          Revenues were €320.8 million in 2005, compared to €363.4 million in 2004, a decrease of €42.6 million, or 11.7%.  This decrease in revenues was attributable principally to a decrease in sales of motorcycles of approximately €37.3 million (-13.1%), which was primarily due to a deterioration in the mix of motorcycle models sold, with a higher proportion of sales of lower-price models, and a decrease in motorcycle unit sales.  The decrease was also attributable to a decrease in revenues from sales of accessories and apparel of €2.6 million (-8.1%), due to reduced motorcycle sales and to a decrease in other revenues of approximately €2.4 million due to a decrease in revenues from racing activities.

          In 2005, motorcycle sales accounted for 77.1% of revenues (78.3% in 2004).  Sales of spare parts accounted for 12.9% of revenues (11.4% in 2004) and sales of performance accessories, technical riding gear and enthusiast apparel accounted for 9.1% of revenues (8.7% in 2004).  Revenues from non-core activities represented 1.0% of revenues (1.5% in 2004).

          In 2005, we produced motorcycles in six different model lines, which vary in their technical and design features and intended customers:  Superbike, Super Sport, Sport Naked, Sport Touring, Multistrada and Sport Classic, introduced for sale in 2005. We produced 33,581 Ducati motorcycles in 2005, down 5.5% from 35,538 produced in 2004.  This decrease was due primarily to our strategic decision to align production with market demand in order to prevent excess inventory at Ducati dealers and retail stores.

          The 5.5% decline in unit sales of Ducati motorcycles, from 36,560 in 2004 to 34,536 in 2005, resulted principally from:  a 40.0% decrease in unit sales of our Superbike motorcycles, which was primarily attributable to the decrease in sales in the low end of the range of this product line, in particular the 749 model, and to the absence of the 998 Final Edition model, which was sold only in 2004; a 53.0% decrease in unit sales of our Sport Touring motorcycles mainly resulting from reduced sales of the ST3, for which there had been significantly high demand in 2004 from both dealerships and retail customers in connection with its launch; a 8.0% decrease in unit sales of our Sport Naked motorcycles, mainly due to the drop in sales of the M620 and S4R models, which was partly set off by the success of the new S2R model, which recorded sales of more than 9,700 units in 2005; a 28.0% decrease in unit sales of Super Sport motorcycles, mainly due to the mature stage in the product lifecycle of this product line.

          These decreases were partially offset by: a 58.0% increase in unit sales of our Multistrada motorcycles due primarily to the introduction of the new MTS 620 model; and sales of 3,274 motorcycles belonging to our new Sport Classic line, which sales amounted to 9% of our total sales.

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          Unit sales showed varying trends in our principal geographic markets.  Sales increased in the United States (+33.4%), Japan (+9.7%) and France (+9.3%) and remained substantially unchanged in Germany (+0.3%).  In Italy, our principal market, sales decreased (-27.4%).  Sales also decreased in the United Kingdom (-6.9%), the Benelux countries (-16.3%), and the countries served by importers (-4.5%).  These decreases reflect a general decline in demand in the respective local markets, which are related to macroeconomic factors as well as factors specific to the motorcycle sector.

          Ducati motorcycle registrations were 34,631 in 2005 compared to 35,887 in 2004, a decrease of approximately 3.5%.  In particular, registrations declined 15.0% in Italy (our principal market), 15.0% in Germany, 5.5% in Japan, 17.0% in the Benelux countries, and 16.0% in the United Kingdom, while they increased by 43.0% in Spain and 26.0% in the United States.  Our market share throughout the world decreased from 4.7% of our target market in 2004 to 4.4% in 2005.

          Cost of sales

          Cost of sales decreased from €276.7 million in 2004 to €262.4 million in 2005, a decrease of €14.3 million, or 5.2%, as a result of the decrease in total motorcycle units produced, decreased sales of accessories and apparel and other revenues, an increase in the capitalization of development costs (and a resulting decrease in uncapitalized development expenses included in cost of sales) and the extraordinary write-down of inventory, as contemplated in the 2006-2008 Business Plan.  As a percentage of revenues, cost of sales increased to 81.8% in 2005, compared to 76.2% in 2004, as a result of a worsening in the mix of motorcycle models sold, and a lower proportion of sales of other Ducati products that generate higher margins than motorcycle sales.  The increase also reflects the greater impact of our fixed costs on lower sales volumes. 

          Gross profit

          Gross profit was €58.5 million in 2005 compared to €86.7 million in 2004, a decrease of €28.2 million, or 32.5%, as a result of the trends in revenues and cost of sales described above.  As percentage of revenues, gross profit was 18.2% in 2005 compared to 23.8% in 2004.

          Other income

          Other income was €34.2 million in 2005 compared to €30.8 million in 2004, an increase of €3.4 million, or 11.0%. This increase was primarily attributable to increased income from sponsorship agreements, which increased from €22.5 million in 2004 to €25.2 million in 2005, as well as to Government contributions not received in 2004.

          Distribution costs

          Distribution costs were €89.4 million in 2005, compared to €87.5 million in 2004, an increase of €1.9 million, or 2.2%.  This increase was principally a result of higher personnel costs, which increased from €15.1 million in 2004 to €17.1 million in 2005, higher racing costs, including compensation to racing pilots and team management expenses, which increased from €11.6 million in 2004 to €13.5 million in 2005, and higher product delivery costs, which increased from €4.9 million in 2004 to €6.5 million euro in 2005.

          General and administrative expenses

          General and administrative expenses were €21.9 million in 2005, compared to €19.6 million  in 2004, an increase of €2.3 million, or 11.7%.  This increase was principally attributable to increased “other general and administrative expenses” (from €9.0 million in 2004 to €10.9 million in 2005) resulting from increased legal expenses relating to the implementation of relevant market regulations, and greater accruals and amortizations.

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          Other expenses

          Other expenses were €2.0 million in 2005 compared to €1.2 million in 2004, an increase of €0.8 million, or 66.6%.

          Restructuring reserve

          Our board of directors approved a €13.0 million provision for restructuring charges on December 16, 2005 (no reserves had been set aside in 2004), which is intended to allow for a reduction in dealer and retail store inventories as well as our corporate restructuring.

          Operating profit(loss)

          We had an operating loss of €33.6 million in 2005 compared to an operating profit of €9.2 million in 2004, a decrease of €42.8 million, principally for the reasons stated above.

          Interest income

          Interest income was €3.2 million in 2005 compared to €2.3 million in 2004, an increase of €0.9 million euro, or 39.1%, principally due to the higher interest rates we received in 2005.

          Interest expense

          Interest expense was €9.4 million in 2005 compared to €10.8 million in 2004, a decrease of €1.4 million, or 13.0%, principally as a result of our repayment of the 6.50% notes at maturity in May 2005 and our securing amendments to the Syndicated Loan Facility.

          Foreign exchange gains and losses, net

          We had a net foreign exchange loss of €1.2 million in 2005 compared to a net gain of €4.7 million in 2004, principally reflecting the trend of the exchange rate market and the adoption of new accounting principles in accordance with the IFRS starting on January 1, 2005.  See Note I.C. to our consolidated financial statements for a description of accounting principles relating to our currency swap agreements. 

          Income taxes

          Our income tax charge was €0.5 million in 2005 compared to €8.8 million in 2004, a decrease of €8.3 million, or 94.3%.  This decrease was primarily attributable to a decrease, from €3.1 million in 2004 to €1.9 million in 2005, in current taxes and the posting of net deferred tax assets of €1.4 million (compared to net tax liabilities of €5.7 million in 2004).  The decrease in current taxes was due to the reduction in our tax base for 2005 compared to 2004, which occurred even though DMH and Ducati Corse had benefited from a reduced tax base in 2004 resulting from the implementation of the so-called Tecno Tremonti Law.  The net deferred tax assets in 2005 were partially related to the establishment of our restructuring reserve.

          Net profit (loss) attributable to the Group

          We had a net loss attributable to the Group of €41.5 million in 2005, compared to a net loss of €3.5 million in 2004, an increase of €38.0 million, principally due to the reasons stated above.

U.S. GAAP Reconciliation

          The principal differences between IFRS and U.S. GAAP as they affect our audited consolidated financial statements for the years ended December 31, 2004 and 2005 were the accounting treatment of:  (i) the acquisition of the Ducati motorcycle business, (ii) deemed cost revaluation on buildings written off under US GAAP, (iii) development costs capitalized and reflected as part of investing activities under IFRS and expensed as incurred and reflected as part of operating activities under US GAAP (iv) derivative financial instruments and own shares accounting for the year ended December 31, 2004 as IAS 32 and 39 were adopted at January 1, 2005, (v) deferred taxes, (vi) stock-based compensation, and (vii) earnings per share.

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          Notes 38, 39 and 40 to the audited consolidated financial statements contain a detailed description of the differences between IFRS and U.S. GAAP, as well as a reconciliation of net profit and shareholders’ equity between IFRS and U.S. GAAP.

          Under IFRS, net loss was approximately €3.5 million in 2004 and €41.5 million in 2005.  Under U.S. GAAP, net loss approximated €2.1 million in 2004 and €74.8 in 2005.  Under IFRS, shareholders’ equity was approximately €157.8 million at December 31, 2004 and €118.7 million at December 31, 2005.  Under U.S. GAAP, shareholders’ equity approximated €74.4 million at December 31, 2004 and €4.0 million at December 31, 2005.

          For a description of new accounting pronouncements under U.S. GAAP, see Note 38 to our consolidated financial statements.

International Financial Reporting Standards

          Like all EU companies with shares listed on a regulated market in the EU, we are required to prepare our consolidated financial statements for each fiscal year starting on or after January 1, 2005, in accordance with IFRS.  We prepared our consolidated financial statements for the first time in accordance with IFRS for the year ended December 31, 2005.  In accordance with IFRS 1 (First Time Adoption of International Financial Reporting Standards), January 1, 2004, is the date of transition to IFRS, and we are required to restate our 2004 results in accordance with IFRS for comparative purposes.

          The preparation of the consolidated financial statements for the year ended December 31, 2005 in accordance with IFRS involved a change in our accounting policies.  As required by IFRS 1, the accounting policies adopted for the preparation of the consolidated financial statements as at December 31, 2005, have been consistently applied to the restatement of the consolidated financial statements as at December 31, 2004, presented for comparative purposes, and the balance sheet as at January 1, 2004, except for the application of IAS 32 and 39, relating, inter alia, to the recognition of financial instruments (hedging of exchange rate and interest rate risks, own shares and transaction costs), the effects of which, calculated retrospectively, have been applied starting from January 1, 2005, in accordance with IFRS 1.

          For a description of new accounting pronouncements under IFRS, see Note 1(c.xv) to our consolidated financial statements.

Liquidity and Capital Resources

          At December 31, 2005, the financial resources available to us from working capital and our financial arrangements were not sufficient to meet our working capital needs and fund our capital expenditure requirements. In response to our negative results for the year ended December 31, 2005, our board of directors approved a business plan for 2006-2008 in April 2006.  The board of directors also approved an €80 million capital increase to provide us the financial resources needed to implement our business plan, which was completed in June 2006.

          Based on our results for the year ended December 31, 2005, we were not in compliance with certain financial covenants contained in the Syndicated Loan Facility, which provides us with an aggregate of €100 million in available lines of credit.  We obtained a waiver of our non-compliance from the lending banks and also obtained the agreement of the lending banks to amend the financial covenants contained in the Syndicated Loan Facility to reflect the financial targets contained in our 2006-2008 business plan.  During the first half of 2006, we also entered into the New Loan, the Banca Intesa Loan and the BPVN Loan, which provided us with an aggregate of €55.0 million in available lines of credit.  At June 23, 2006, we had €220 million of available funds under the Syndicated Loan Facility, the New Loan, the Banca Intesa Loan and the BPVN Loan.

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          We believe that the financial resources available to us following our capital increase and from our current financial arrangements and working capital will be sufficient to meet our working capital needs and capital expenditure requirements during the implementation of our 2006-2008 business plan.  Any reduction in our financial resources from our operations or an inability to comply with the financial covenants contained in our loan agreements could impair our ability to fund our future liquidity needs and implement the 2006-2008 Business Plan.

          We had cash and cash equivalents at December 31, 2005, of €53.0 million, compared to €49.3 million at year-end 2004.  The increase of approximately €3.7 million reflected the following changes in our cash flows during the year:

          Cash provided by operating activities. Our principal ongoing source of liquidity is cash provided by operating activities.  Cash provided by operating activities increased by approximately €18.6 million from approximately €23.4 million in 2004 to approximately €42.0 million for the year ended December 31, 2005.  This increase primarily reflected:

 

a €41.3 million decrease in net working capital (defined as accounts receivable plus inventories less accounts payable) from €(6.3) million in 2004 to € 35.0 million in 2005;

 

 

 

 

the recording of a €13.0 million provision for restructuring made in 2005 that has not yet affected our cash position;

 

 

 

 

the recording of a write-down of intangible assets of approximately €9.3 million in 2005;

 

 

 

 

a €4.2 million increase in other current liabilities; and

 

 

 

 

a €2.8 million change in foreign exchange translation adjustment.

          These increases in cash were partly offset by:

 

a negative change of €38.0 million in our net result for the year, to a net loss of €41.5 million in 2005, compared to a net loss of €3.5 million in 2004;

 

 

 

 

a negative change of €6.6 million in deferred tax assets;

 

 

 

 

a €3.2 million decrease in depreciation and amortization;

 

 

 

 

a €2.5 million decrease in other payables to tax authorities;

 

 

 

 

a €1.0 million decrease in other current assets; and

 

 

 

 

a €0.7 million decrease in deferred tax liabilities.

          Our working capital is broken down as follows (in millions):

 

 

2004

 

2005

 

 

 



 



 

Accounts receivable

 

118.6

 

102.2

 

Inventories

 

 

92.3

 

 

81.4

 

Accounts payable

 

 

(77.5

)

 

(85.2

)

 

 



 



 

Total

 

133.4

 

98.4

 

 

 



 



 

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          Our accounts receivable at December 31, 2005, were €102.2 million, a decrease of 13.8% compared to December 31, 2004, primarily due to the decline in our sales during the year.

          Our inventories at December 31, 2005, were €81.4 million, a decline of nearly 11.8% compared to December 31, 2004, as a result of our stock reduction policy as well as the write-down of inventory for an amount equal to €5 million pursuant to the 2006-2008 Business Plan.

          Our accounts payable at December 31, 2005, were €85.2 million, an increase of nearly 9.9% compared to December 31, 2004, primarily reflecting the extensions in the payment terms obtained from the suppliers.

          Cash used in investing activities.  We used approximately €31.0 million for investing activities in 2005 (compared to €25.4 million in 2004), including €10.6 million for investments in property, plant and equipment (compared to €10.4 million in 2004) and €20.5 million for investments in intangible assets (compared to €15.1 million in 2004).  The increase in cash used for investments in intangible assets was mainly due to the capitalization of development costs relating to the competition motorcycles designed for the MotoGP World Championship and specifically those costs incurred in connection with technical solutions that will directly impact the development of the road version of the competition motorcycle, which is already part of our production plans and which was presented to the public during World Ducati Week in May 2004.

          Cash provided by (used in) financing activities.  We used €7.3 million cash in financing activities in 2005, compared to €17.3 million provided by financing activities in 2004.  The increased use of cash was primarily due to cost of the refinancing of the bond issue at maturity on May 31, 2005, in connection with which Ducati Motor Holding S.p.A. entered into the Syndicated Loan on May 9, 2005, and was only partially offset by €2.6 million cash generated from increases in share capital and reserves in connection with our stock option plans and as a result of our sale in March 2006 of 1,844,669 DMH shares owned by us.  See “Item 10.  Additional Information—Share Option Plans” and “—Buy Back Plan.”

          At December 31, 2005, we had available lines of credit of €100 million under the Syndicated Loan Facility, of which approximately €2.0 million had not been drawn down.    At December 31, 2005, our total long-term debt was €125.8 million, which included €62.1 million of long-term debt outstanding under the Syndicated Loan Facility; €45.0 million relating to securities issued by DDF1 in connection with our securitization program; €9.1 outstanding under our sale-and-lease-back transaction; and an aggregate of €9.6 million in subsidized loans from the Italian Ministry for Productive Activities.  For a more detailed description of each of these transactions, see “—Other Financial Transactions” below.

Other Financial Transactions

Syndicated Loan Facility

          On May 9, 2005, DMH and Ducati Corse entered into the €100.0 million Syndicated Loan Facility with a syndicate of seven Italian banks, arranged by Unicredit Banca Mobiliare.

          Under the Syndicated Loan Facility, €63.6 million of funds are available to DMH under a five-year credit line, and €36.4 million are available to DMH and Ducati Corse under a renewable one-year revolving credit line.  The long-term credit line currently bears interest at three-month Euribor plus 150 basis points.  The revolving credit line will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 120 basis points.  The interest rate on both the long-term credit line and the revolving credit line provide for step-up/step-down mechanisms that are triggered by changes in the levels of our economic and financial results.

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          As of December 31, 2005, €62.1 million and €35.9 million were outstanding under the 5-year credit line and the revolving credit line, respectively.  We have used funds from the Syndicated Loan Facility primarily to repay the outstanding €54.2 million aggregate principal amount of our notes maturing on May 31, 2005, and loans taken out to fund prior repurchases of some of our 6.50% notes (see “—Notes Due May 31, 2005,” below), as well as to fund additional working capital requirements.  Ducati Corse borrowed the €16.0 million available to it in order to help fund its purchase from DMH of the “Ducati Corse” trademark.  See “Item 4.  Information on the Company—Products and Distribution—Intellectual Property” for a discussion of this transaction.

          The obligations of DMH and the obligations of Ducati Corse under the Syndicated Loan Facility are guaranteed by DMH.  In connection with the Syndicated Loan Facility, DMH has granted the lending banks security interests in all present and future shares of Ducati Corse and Ducati North America owned by it and the “Ducati” trademark, as well as a floating lien on its equipment and inventory; Ducati Corse has secured the amounts borrowed by it with a pledge on the “Ducati Corse” trademark.  The Syndicated Loan Facility includes certain restrictions on our ability to pay dividends, make certain sales of assets, issue guarantees or make loans to third parties.  Events of default under the syndicated loan, which entitle the syndicate of banks to declare any amounts outstanding to be due and payable, include, but are not limited to, failure to pay interest or principal when due, failure to comply with certain financial covenants and other obligations under the Syndicated Loan Agreement, failure to pay other indebtedness when due, the occurrence of a change of control and the occurrence of certain bankruptcy or other insolvency events.

          Based on our preliminary results in 2005, we did not expect to be in compliance with the financial covenants regarding the Net Debt to EBITDA ratio and the EBITDA to Net Interest Expense.  In December 2005 the syndicate of lending banks agreed not to accelerate repayment under the Syndicated Loan Facility and to negotiate a waiver of our non-compliance.  We also requested amendments to the financial covenants to align them with the 2006-2008 Business Plan and to take into account that we will prepare our consolidated financial statements in accordance with IFRS starting with the financial statements for the year ended December 31, 2005. 

          The waiver and amendments were agreed to by the lending banks and became effective upon the purchase by WM, WM II and WM III of 30% less one share of our share capital and their commitment to exercise the subscription rights granted to it in connection with our €80,000 capital increase in the second quarter of 2006, and our entering into of an underwriting agreement with UBM, pursuant to which UBM agreed to purchase, or arrange for the purchase of, any subscription rights outstanding at the end of our offering of subscription rights to our shareholders and on the Italian Stock Exchange.  See “Item 4.  Information on the Company—History and Development of the Company” for a description of the purchase of our shares by WM, WM II and WM III and our capital increase and related offering of subscription rights.

          The amended financial covenants in the Syndicated Loan Facility require us to maintain for each quarter, with reference to the four previous quarters:

(i)  a Net Debt to EBITDA ratio of not greater than 3.5 until December 31, 2006, 3.0 from January 1, 2007, until December 31, 2007, 2.5 from January 1, 2008, until December 31, 2008, and 2.0 thereafter;

(ii)  an EBITDA to Net Interest Expense ratio of not less than 5.0 until December 31, 2006, and 7.5 thereafter; and

(iii)  maximum capital expenditures of €40 million in 2006 and 2007 and €36 million in 2008, 2009 and 2010.

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          The terms used in these ratios, including Net Debt, EBITDA and Net Interest Expense, are subject to specific definitions set forth in the Syndicated Loan Agreement.  For more detail, see the Summary in the English language of the Syndicated Loan Facility, as amended, incorporated by reference to Exhibit 4.1 of this document.

          For further detail of the changes to the financial covenants see Note 16 to our consolidated financial statements.

The New Loan

          On February 23, 2006, DMH entered into the €35 million New Loan with UniCredit Banca d’Impresa S.p.A.

          Under the New Loan, €15 million of funds are available to DMH for working capital and €20 million of funds are available to DMH for advance payment of commercial paper, with up to €10 million available for advance payment on orders and contracts.  The €15 million of funds for working capital is available under a renewable one-year revolving credit line that will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 175 basis points.  The €20 million of funds available for advance payment of commercial paper is available under a renewable one-year revolving credit line that will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 75 basis points, while the €10 million available for orders and contracts will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 150 basis points. 

          In addition to standard termination and default clauses, the New Loan includes certain restrictions on our ability to pay dividends, make certain sales of assets, issue guarantees or make loans to third parties and includes a “cross default” clause that is triggered by a default in any other loan to which we are a party (including the Syndicated Loan Facility, the Banca Intesa Loan and the BPVN Loan).  The New Loan also requires that we comply with the same financial covenants contained in the Syndicated Loan Facility.  See “—Syndicated Loan Facility” and Note 16 to our consolidated financial statements for more detail about the financial covenants contained in the Syndicated Loan Facility.

The Banca Intesa Loan

          On March 27, 2006, DMH entered into the €10 million Banca Intesa Loan.

          Under the Banca Intesa Loan, €3.5 million of funds are available to DMH for working capital and €6.5 million of funds are available to DMH for advance payment of commercial paper, with up to €3.5 million available for advance payment on orders and contracts.  The €3.5 million of funds for working capital is available under a renewable one-year revolving credit line that will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 175 basis points.  The €6.5 million of funds available for advance payment of commercial paper is available under a renewable one-year revolving credit line that will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 75 basis points, while the €3.5 million available for orders and contracts will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 150 basis points.

          In addition to standard termination and default clauses, the Banca Intesa Loan includes certain restrictions on our ability to pay dividends, make certain sales of assets, issue guarantees or make loans to third parties and includes a “cross default” clause that is triggered by a default in any other loan to which we are a party (including the Syndicated Loan Facility, the New Loan and the BPVN Loan).  The Banca Intesa also requires that we comply with the same financial covenants contained in the Syndicated Loan Facility.  See “—Syndicated Loan Facility” and Note 16 to our consolidated financial statements for more detail about the financial covenants contained in the Syndicated Loan Facility.

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The BPVN Loan

          On April 13, 2006, DMH entered into the €10 million BPVN Loan.

          Under the BPVN Loan, €5 million of funds are available to DMH for working capital and €5 million of funds are available to DMH for advance payment of commercial paper, with up to €2 million available for advance payment on orders and contracts.  The €5 million of funds for working capital is available under a renewable one-year revolving credit line that will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 175 basis points.  The €5 million of funds available for advance payment of commercial paper is available under a renewable one-year revolving credit line that will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 75 basis points, while the €2 million available for orders and contracts will bear interest at one-month, three-month or six-month Euribor, as determined by us, plus a current spread of 150 basis points.

          In addition to standard termination and default clauses, the BPVN Loan includes certain restrictions on our ability to pay dividends, make certain sales of assets, issue guarantees or make loans to third parties and includes a “cross default” clause that is triggered by a default in any other loan to which we are a party (including the Syndicated Loan Facility, the New Loan and the Banca Intesa Loan).  The BPVN also requires that we comply with the same financial covenants contained in the Syndicated Loan Facility.  See “—Syndicated Loan Facility” and Note 16 to our consolidated financial statements for more detail about the financial covenants contained in the Syndicated Loan Facility.

Notes due May 31, 2005

          We repaid the €54.2 million of our then-outstanding 6.50% notes at maturity on May 31, 2005.  These notes had been issued in an original principal amount of €100 million on May 31, 2000.  Prior to 2003, we used proceeds from the sale and lease-back transaction of our Bologna property to repurchase €9.0 million in aggregate principal amount of the notes.  In 2003, we bought back on the market €15.3 million in aggregate principal amount of the notes (at an average purchase price equal to 102.8% of their original par value), and in 2004, we bought back on the market €21.5 million in aggregate principal amount of our notes (at an average purchase price of 101.1% of their original par value).  We funded these repurchases through proceeds of corresponding committed bank loans.  Please see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Sensitivity” for additional details on these loans.  All repurchased notes were cancelled.

          On July 2, 2001, we entered into a “Credit-Linked” transaction, in which we acquired a €15.0 million note (the “Credit-Linked Note”) issued by the London branch of Banca Nazionale del Lavoro.  The Credit-Linked Note yielded an annual coupon of 5.89% and was repaid to us in full after it matured on May 31, 2005.

Short-term lines of credit

          We also have the possibility of using short-term credit lines.  As of December 31, 2005, €67.5 million was available under these short-term lines of credit and €24.5 million was outstanding under these short-term lines of credit.

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Securitization

          In 2005, we assigned to Ducati Desmo Finance 1 S.r.l. (“DDF1”) — a special purpose entity owned by two Italian companies in which we have no voting interest or ability to control management or board decisions — approximately €110 million of our trade receivables, as compared with approximately €127 million in 2004.  Of the receivables assigned in 2005, we have collected €102.7 million from DDF1 (and €117.3 million for 2004).  Of the remaining €7.4 million for 2005, €1.4 million is related to interest and expenses and €6.0 million is a so-called “deferred purchase price” payable by DDF1 to us to the extent that DDF1 has available funds based on the performance of the assigned receivables.  The securitization essentially exposes us to the risk of not collecting this deferred amount which is subordinated to the collection by DDF1 of the assigned receivables.  In addition, we are obligated to compensate DDF1 for any amounts (which typically are approximately €1 to 2 million per year) for rebates claimed by dealer debtors on receivables assigned and are committed to covering the operating costs of DDF1.  We continue to assign receivables to DDF1 on an ongoing basis.

          The receivables we assigned to DDF1 are part of our non-recourse roll-over securitization program, and we intend to assign additional receivables in similar transactions in 2006 and in subsequent years.  Our securitization program reflects a change in our credit management practices in Italy and Europe to benefit from savings relative to the cost of non-recourse factoring and interest income on planned financing activities previously carried out by third party factoring companies.  A number of foreign subsidiaries have also been gradually involved in the securitization program.  Currently, Ducati France, Ducati UK and Ducati Motor Deutschland sell receivables without recourse to DMH, which subsequently sells them to DDF1.  Ducati North America Inc.  and Ducati North Europe B.V. continue to enter into non-recourse factoring agreements.

          DDF1 initially financed the purchase of our receivables through a bridge loan from Banca Intesa, and thereafter through the issuance of €43 million in aggregate principal amount of bonds (€33 million of Class A bonds and €10 million of Class B bonds), which also served to replace the bridge loan granted by Banca Intesa.   The Class A bonds were taken up entirely by Banca Intesa, which then sold 99.5% of them to Romulus Funding Inc. (“Romulus”), a U.S. finance company that is wholly owned by Global Securitization Services LLC. We have no economic or voting interest in, or ability to control management or board decisions of, these companies. On December 21, 2004, DDF1 issued an additional €12 million in aggregate principal amount of Class A bonds, which were taken up entirely by Romulus.  On June 30, 2003, our North American subsidiary, Ducati North America Inc., purchased all of the Class B bonds as the principal manner in which we retain a certain degree of risk in our securitization financing as required by rating agencies and market practice. The bonds mature on July 28, 2009, earn interest at 3-month Euribor (paid quarterly in arrears), and are subordinated to the Class A bonds.  To finance the purchase of Class B bonds, DMH made a non-refundable payment of €10 million to Ducati North America Inc.

          As part of the securitization program, San Paolo IMI guaranteed on behalf of DMH in favor of DDF1, for a maximum of €5.8 million, any amounts that might be deducted by debtors, on the settlement of amounts already securitized, in recognition of rebates granted by the company on the achievement of their sales targets.

          In accordance with SIC-12—Consolidation—Special-purpose entities (SPE), DDF1 has been consolidated at December 31, 2005 and 2004, because the purchase by the seller of the asset-backed junior notes results, in substance, in the acquisition of control over DDF1, even though we have not equity interest in, or any legal right of control over, DDF1.

Loans from the Italian Ministry for Productive Activities

          We entered into several long-term loans with interest-relief with the Ministry for Productive Activities for projects linked with the Technological Innovation Fund (F.I.T.) for a total amount of €9.6 million.  These loans have a 5-year duration starting from the date on which technical and financial reports submitted in connection with the authorized duration of each project are approved.  These loans are in a “pre-amortization” phase from the date of the drawdown until the date on which the technical and financial reports are approved, so they generate interest payable by us, but not the obligation to repay the principal.

52



Derivative Financial Instruments for Hedging Purposes

          Our primary market risk exposure is foreign currency risk.  To manage this risk, we enter into derivative financial instruments (i.e., forward exchange contracts).  At December 31, 2005, we had €39.7 million in forward exchange contracts, compared to €23.9 million at December 31, 2004; this reduction reflects the fact that our board of directors decided upon a new hedging policy in December 2004.  Our currency exchange rate hedging policy in 2004 consisted of 18-month rolling coverage; our new currency exchange rate hedging policy consists of six-month rolling coverage that is consistent with the amount of our orders and receivables in currencies that we normally have in place.  We are also exposed to interest rate risk associated with short and long-term bank financings on which we pay a variable interest rate.  To manage this risk, we enter into interest rate swap agreements.  Our current interest rate hedging policy consists in covering exclusively long-term contracts, having duration greater than 18 months.

          For more information on our derivative financial instruments, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

Contractual Obligations

          We have various contractual obligations arising from our continuing operations.  The following represents our contractual obligations as of December 31, 2005, in thousands of euro:

Contractual Obligations:

 

 

Payments Due by Period

 

 

 


 

Contractual Obligations

 

Total

 

Less
than
1 year

 

1-3 years

 

4-5 years

 

After
5 years

 


 



 



 



 



 



 

 

 

(in thousands of euro)

 

Long-Term Debt (1)

 

 

116,703

 

 

—  

 

 

76,818

 

 

31,818

 

 

8,067

 

Capital Lease Obligations (production facility) (2)

 

 

12,401

 

 

3,280

 

 

9,121

 

 

—  

 

 

—  

 

Operating Leases

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Unconditional Purchase Obligations

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Other Long-Term Obligations

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 



 



 



 



 



 

Total Contractual Cash Obligations

 

 

129,104

 

 

3,280

 

 

85,939

 

 

31,818

 

 

8,067

 

 

 



 



 



 



 



 



(1) Long-term debt includes the €62.1 million outstanding under the long-term line of credit under the Syndicated Loan Facility; loans with interest-relief totaling €9.6 million from the Italian Ministry for Productive Activities for projects linked to the Technological Innovation Fund (F.I.T.); and €45 million relating to securities issued by Ducati Desmo Finance 1 S.r.l.

 

(2) This amount excludes aggregate interest as at December 31, 2005, of €0.8 million.  See Note 40 to our audited financial statements for additional information.

53



Research and Development

Intangible assets include capitalized development costs, comprised principally of the cost of personnel employed in development functions and the cost of materials and external consultants, where the expenditure is incurred for specific product development.  Otherwise, research and development costs are expensed under cost of sales or, in the case of part of the costs related to the development of a four-stroke “double twin” cylinder engine to compete in the MotoGP Championship, under distribution costs, together with all other costs related to racing activities.  Our capitalized development costs were €19.9 million in 2005 and €14.1 million in 2004.  Our expensed research and development costs were €6.6 million and €5.2 million for the same years.  These expensed costs included research expenses for specific projects on our racing program, which amounted to €2 million for 2005 and €1.0 million for 2004.  Amortization charges relating to our capitalized development costs were €7.9 million and €10.5 million in 2005 and 2004, respectively.  These amortization charges relate only to development costs capitalized since our September 1996 acquisition of the Ducati business, and may increase in future periods as a result of new capitalizations.  In relation to our research and development activity, we have benefited from financial assistance from the Italian Government, amounting to €0.1 million in 2004 and €2.5 million in 2005.  Such assistance is expected to continue in 2006.  See “Item 4.  Information on the Company—Products and Distribution—Product Research and Development.”

Item 6.  Directors, Senior Management and Employees

Directors

          The following table sets forth the names of the members of the current board of directors, their positions, year of initial appointment and date of birth.  All members of the board were appointed at the shareholders’ meeting held on April 10, 2006, and will serve until the shareholders’ meeting that approves our financial statements for the year ending December 31, 2006 is convened.

Name

 

Position

 

Year First
Appointed to
board of directors

 

Date of birth


 


 


 


Federico Minoli

 

Chairman and Managing Director

 

1996

 

1949

Carlo Campanili Bonomi

 

Vice Chairman

 

2006

 

1940

Mauro Benetton

 

Director

 

1998

 

1962

Massimo Bergami

 

Director

 

2005

 

1964

Roberto Consonni

 

Director

 

2006

 

1948

Marco Giovannini

 

Director

 

2006

 

1955

Roberto Maestroni

 

Director

 

2006

 

1975

Giampiero Paoli

 

Director

 

2006

 

1944

Antonio Perricone

 

Director

 

2006

 

1954

Dante Razzano

 

Director

 

1996

 

1948

Matteo Tamburini

 

Director

 

2006

 

1957

Ulrich Weiss

 

Director

 

1998

 

1936

          We have briefly summarized below the principal business activities, experience and other principal directorships, if any, of our current directors.

          Mauro Benetton was the Marketing Manager of Benetton Group S.p.A. from 1992 to 2003. Born in 1962, the eldest son of Luciano Benetton, he began working for the Benetton Group as a student, first in London and then in Paris.  In 1985, Mr. Benetton moved to Ponzano Veneto, Italy, to begin working at Benetton’s headquarters, where he was in charge of marketing for one of the Benetton’s main lines, Sisley.  Mr. Benetton planned and oversaw this brand’s successful re-launch. 

54



          Massimo Bergami has been a Full Professor of Management and Human Resource Management at the University of Bologna – School of Business since 2003, and Dean and Deputy Chief Executive Officer of Alma Graduate School of Information Technology, Management and Communication since 2000. He currently serves on the board of directors of Ferretti S.p.A. From 1999 to 2001, Mr. Bergami was advisor of the Italian Ministry of Industry and Foreign Commerce, and from 1996 to 1999 he was advisor of the Italian Ministry of Defense. Mr. Bergami graduated from the University of Bologna – School of Economics in 1990. He holds a Ph.D. in Management and has been Visiting Researcher and Visiting Professor at the New York University, University of Michigan, University of Florida and Bocconi University of Milan.

          Carlo Campanini Bonomi is Chairman of Investindustrial Ltd., Deputy Chairman of Investindustrial Partners Spain S.A. and a member of the board of directors of Recoletos S.A. He has been General Manager and Managing Director of International Chemical Cosmetics Co. S.p.A., a lecturer in Industrial Techniques at the Faculty of Business and Economics at the University of Pavia, Managing Director and subsequently Deputy Chairman and Chairman of Saffa S.p.A., Managing Director and subsequently Chairman of Mira Lanza S.p.A., Chairman of Invest, Chairman of Beni Immobili Italia, Chairman of Bi-Invest, Deputy Chairman of La Fondiaria S.p.A., director of Ebro Agricolas S.A. and Chairman of Sartiò S.A. Mr. Bonomi graduated in Economics and Business from the Bocconi University in Milan.

          Roberto Consonni is on the board of directors of Radici Film S.p.A and Ampere S.p.A. In the past, he was a director of Carapelli Firenze S.p.A. and of the associations Centromarca, UPA and Ecr-Indicod. He was previously General Manager of Lavazza S.p.A., a Division Manager at Chiari & Forti, Managing Director of Lever Italia and Europe General Manager of the Domestic Detergents division of Unilever HomeCare Europe, Marketing Director of Van den Berg Food Italy and Sales and Marketing Manager within the Personal Care Division of Unilever Italia. Mr. Consonni graduated in Economics and Business from the Bocconi University of Milan.

          Marco Giovannini is Chairman, Managing Director and majority shareholder of Guala Closures S.p.A., a company listed on the STAR segment of the Italian Stock Exchange. He is also a member of the board of directors of Pelliconi S.p.A., Unione Industriale di Alessandria and Consorzio Proplast, where he supports the R&D department of the Politecnico di Alessandria. In the past, Mr. Giovannini was Senior Vice-President of Carnaud Metalbox, now Crown Holdings, and a member of the board of directors of Carapelli S.p.A. and Pelliconi International Machinery. Mr. Giovannini graduated with a degree in Nuclear and Mechanical Engineering from Rome University.

          Roberto Maestroni   is a member of the board of directors of Gardaland S.p.A. He is Vice-President of Investindustrial S.p.A., a private equity company mainly active in southern Europe. He was formerly a consultant for the Australian market at Cavanna Olii, involved in international trade of olive oil. Mr. Maestroni holds a degree in Economics and Business from Bocconi University of Milan.

          Federico Minoli has been a director of DMH since September 1996 and Chairman since July 1998.  Mr. Minoli has been our Managing Director since March 2003, a position that he had previously held from April 1997 to July 2000.  He holds several other board level positions within the Ducati Group, including the position of Chairman of Ducati North America.  Mr. Minoli is a founding partner of HMD Partners (founded in 2003) and serves on the board of directors of Bally Shoefactories Ltd. and Mantero Finanziaria S.p.A. He is also a member of the supervisory board of Escada AG and SinnLeffers AG and is trustee of the Riders for Health Association.  Prior to joining DMH, Mr. Minoli was a partner and vice president of Bain & Co., the international management consulting firm.  From 1987 to 1989, Mr. Minoli held a number of senior positions at Benetton S.p.A., the international clothing retailer, including general manager of Benetton for Canada, the United States and Central America.  Prior to 1987, Mr. Minoli was a consultant with McKinsey & Co. and served with Playtex International and Procter & Gamble S.p.A.  He has also been a member of the board of directors of Bally International AG, Mantero Seta S.p.A., Almaweb and Gori & Zucchi Inc., the holding company of Uno A Erre Italia S.p.A., of which he was Chairman from November 2000 to March 2004.  He was also temporary Chief Executive Officer of Bally International AG from May 2001 to April 2002.  See also “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions”.

55



          Giampiero Paoli is an attorney and has been a member of the Bar in Italy since January 22, 1970. He holds management positions in the company Pin Up Stars. He was a Professor of Commercial Law at the Law Faculty of the University of Macerata from 1976 until 1990. He has been Chairman and Managing Director of various companies, which recently included being a member of the board of directors of G.D. S.p.A. from June 2000 until March 2002 and of Rimini Fiera S.p.A. from September 2004 until February 2006. He has written essays on bankruptcy and banking law.

          Antonio Perricone is Chairman of BS Investimenti SGR S.p.A. and BS Private Equity S.p.A. He is also a director of Electronics Futura S.p.A., Klopman International S.r.l., Segesta S.p.A., Quidnovi S.p.A. and World Motors S.A. In the past, Mr. Perricone was director of Carapelli Firenze S.p.A., Logic Control S.A., Guala Closures S.p.A., Salmoiraghi e Viganò S.p.A., as well as Managing Director of CCF Charterhouse, manager of Olivetti and Vice-President of American Express Bank. Mr. Perricone  graduated in Economics and Business from the University of Palermo and received a Masters Degree from the Business Management School at the Bocconi University of Milan.

          Dante Razzano is a principal and senior partner of InvestIndustrial S.p.A. He has been director of Ducati since September 1996 and holds management positions in Permasteelisa S.p.A. and Sistemi Tecnologici S.p.A. as well. Mr. Razzano was head of the Italian private equity division of Deutsche Morgan Grenfell from 1992 to 2003.  He was also managing director of Citibank NA and Chief Executive Officer of Citicorp’s Italian merchant bank from 1988 to 1992 (Citinvest S.p.A.), as well as responsible for southern European M&A for Citicorp, based in New York, in 1987.  From 1970 to 1986, he was Vice Chairman and manager of the Manufacturers Hanover Trust Co., New York.  Mr. Razzano also served on the board of directors of Sistemi Tecnologici Holding S.p.A. and Gardaland S.p.A.

          Matteo Tamburini is a chartered public accountant and auditor. He has been a partner of Studio Gnudi since 1998, and had previously been associated with Studio Gnudi since 1983. From 1981 until 1983 he worked for Grandi Lavori S.p.A. as an assistant to the Finance and Audit Director. He is a director of the Ordine dei Dottori Commercialisti (Association of Chartered Accountants) in Bologna. He holds management positions in Adaltis Inc., Adaltis Italia S.p.A., Alerion Industries S.p.A., Beghelli S.p.A., Ds-Data Systems S.p.A., Gnudi-Guatri Consulenti Associati S.r.l., IBS-Istituto Bancario Sanmarinese S.p.A., Marcolin S.p.A., Martelli Lavorazioni Tessili S.p.A., N.C.H. Network Computer House S.p.A., Promotor International S.p.A., Risanamento S.p.A., TAS Tecnologia Avanzata dei Sistemi S.p.A. He held supervisory positions with Ballantyne Cashmere S.r.l., CERMET S.c.a.r.l., Ciba Speciality Chemicals S.p.A., Ducati Corse S.r.l., Ferrari S.p.A., Gemmo S.p.A., Gruppo Concorde S.p.A., Imprenditori Associati S.p.A., Investitori & Partner Immobiliari S.p.A. – INPARTNER S.p.A., Kartogroup S.p.A., Mirage Granito Ceramico S.p.A. (Concorde Group), Olympic R.E. S.p.A., Serenissima SGR S.p.A. and Wrap S.p.A. (Merloni Group). He was Chairman of Ducati’s Board of Statutory Auditors from April 2000 until April 2006.

          Ulrich Weiss is a member of the board of directors of AFS International New York, Benetton Group S.p.A., the European Business School and Stiftung Marktwirtschaft. For 19 years, until May 1998, Mr. Weiss served in various capacities as a member of the board of directors of Fiat S.p.A. and Deutsche Bank AG. He was also responsible for Deutsche Bank’s business in Italy and was President of Deutsche Bank S.p.A., Milan. Dr. Weiss is currently a member of the supervisory boards of Bego Bremer Goldschlagerei, Bego Medical AG and Capital Partners S.p.A.

56



Board Committees

          Our Board of directors established a compensation committee in 1999.  The compensation committee proposes to the board the remuneration of our directors with special delegated powers, including the chairman and managing director, and has the authority to determine the remuneration of our managers.  Meetings of the compensation committee may be called by any member in accordance with the rules applicable to the board of directors.  Resolutions of the committee must be adopted by the vote of a majority of those present. The committee has the right to use external consultants at our expense. Messrs. Razzano, Perricone,  Bergami and Campanini Bonomi are currently the members of the compensation committee.

          To comply with the code of corporate governance issued by Borsa Italiana S.p.A., our board of directors established an internal control committee, which was mainly responsible for assessing the adequacy of the internal control system through an evaluation of work programs and reports prepared by those responsible for internal control, and for relations with external auditors.  The internal control committee reported to the board of directors about the work performed and the adequacy of the internal control system at least every six months, at the time of approving the annual financial statement and the semi-annual report. Starting  July 31, 2005, the internal control committee served as our audit committee for purposes of Rule 10A-3 (“Rule 10A-3”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Following the adoption of the one-tier corporate system, the functions of audit committee for purposes of Rule 10A-3 have been carried out by the Management Control Committee. See “Item 10. Additional Information—By-Laws—Corporate Governance System—Management Control Committee” for more information.

          As of the date of this filing, our new board of directors, appointed on April 10, 2006,  decided not to establish an executive committee.

Senior Management

          The following table sets forth the names of our senior officers who are not also directors, their respective positions, the year they were appointed to such positions and their date of birth.

Name

 

Position

 

Year Appointed

 

Date of
birth


 


 


 


Danilo Bernardini

 

Manager, Human Resources

 

1995

 

1948

Claudio Domenicali

 

Managing Director of Ducati Corse and
Manager, Research and Development

 

1999
2005

 

1967

Enrico D’Onofrio

 

Manager, Finance, Investor Relations and Internal Controls

 

2000

 

1957

Gianfranco Giorgini

 

Manager, Operations

 

1999

 

1953

Cristiano Silei

 

Manager, Sales

 

2005

 

1968

          We have briefly summarized below the principal functions and experience of our senior officers.

          Danilo Bernardini has been the manager of personnel and human resources since 1995.  Prior to joining Ducati, Mr. Bernardini was responsible for personnel at various units of Cagiva (including CRC) from 1987 and at our predecessor company from 1983 to 1987.  From 1977 to 1983, Mr. Bernardini held a number of positions at the Zanussi Group, an Italian appliance manufacturer.  In addition, Mr. Bernardini had previous experience as a sport journalist for the Italian motorcycling magazine, Motociclismo-Edisport. He holds a degree in Mechanical Engineering.

57



          Claudio Domenicali has been Managing Director of Ducati Corse S.r.l. since April 1999.  Mr. Domenicali is responsible for all Ducati Corse operations, including overseeing the hiring policies for riders, research and development, logistics, commercial and marketing activities, administration and information technology. Since January 2005 he has also been R&D Manager of DMH, with responsibilities relating to product design and marketing. He is also responsible for defining and developing new products, and, specifically, for defining and monitoring performance targets, quality, lead times and costs. Mr. Domenicali joined our predecessor company (Ducati Motorcycles S.p.A.) in 1991.  From 1994 to 1996, Mr. Domenicali was responsible for the technical office.  From 1996 to 1999, he was deputy technical manager of research and development while managing all the racing technical matters.  Mr. Domenicali holds a degree in Mechanical Engineering from the University of Bologna.

          Enrico D’Onofrio has been our manager of finance and manager of investor relations and internal controls since October 2000.  Prior to that, Mr. D’Onofrio worked for 17 years at Procter & Gamble, where he held a number of finance positions, including Finance Manager in Portugal and Director of Finance & Accounting at P&G headquarters in Belgium.  He began his career at Olivetti as a research and development analyst.  Mr. D’Onofrio holds a degree in Mechanical Engineering and a M.B.A. from Bocconi University in Milan.

          Gianfranco Giorgini has been the manager of operations since May 1999.  Among other things, Mr. Giorgini is responsible for purchasing, warehousing, production planning and distribution.  Prior to joining us, Mr. Giorgini held a variety of positions in a 25 year career with Lombardini Motori S.p.A., including serving as logistics manager from 1992 to 1997.

          Cristiano Silei joined DMH as sales manager in April 1997.  In the course of his career at Ducati, Mr. Silei has assumed a number of different responsibilities, including the development of our strategic plan, reorganization of our commercial department, general management of our North American subsidiary, evaluation of acquisition opportunities and start up of our website, Ducati.com.  In November 2004, Mr. Silei was appointed manager of sales of the Group.  Prior to joining Ducati, Mr. Silei was at the Paris and Milan offices of the Bain & Co. management consulting firm, where he specialized in business restructuring.  Mr. Silei also worked at the Rome office of Andersen Consulting in the area of business process reengineering.  Mr. Silei holds a degree in business administration from the Bocconi University in Milan.

Management Control Committee and Board of Statutory Auditors

          Following the adoption of the one-tier corporate system as our new corporate governance system on April 13, 2006, the board of directors appointed a Management Control Committee (instead of the board of statutory auditors), composed of non-executive and independent directors that will remain in office until the financial statements for the period ending December 31, 2006, are approved.

          In accordance with Article 15 of our By-Laws, the Management Control Committee is currently composed of three members, listed in the table below.

Name

 

Position

 

Year
Appointed

 

Born


 


 


 


Roberto Consonni

 

Member

 

2006

 

1948

Giampiero Paoli

 

Chairman

 

2006

 

1944

Matteo Tamburini

 

Member

 

2006

 

1958

          In terms of the compensation paid to members of the Management Control Committee for the 2006 financial year, the Company has estimated that these will amount to €120,000 (€40,000 for each member and the chairman) See “Item 10. Additional Information—By-Laws—Corporate Governance System—Management Control Committee”, for more details.

58



          The following table sets forth the names of the three members of the Board of Statutory Auditors, their respective positions, the year of their appointment and date of birth. These members were in office until the adoption of the one-tier corporate system, on April 10, 2006.

Name

 

Position

 

Year
Appointed

 

Born


 


 


 


Salvatore Lantino

 

Alternate

 

2004

 

1959

Italo Giorgio Minguzzi

 

Member

 

1998

 

1945

Gianluca Nanni Costa

 

Alternate

 

1998

 

1959

Francesco Serantoni

 

Member

 

1998

 

1941

Matteo Tamburini

 

Chairman

 

1998

 

1958

          During 2005, our statutory auditors received in the aggregate €166,000 in compensation for their services as statutory auditors to DMH and its subsidiaries.

          See “Item 10. Additional Information—By-Laws—Management Control Committee.”

Compensation of Directors and Senior Management

          Each of our directors is entitled to an annual compensation in return for his services as director equal to €15,000, in addition to reimbursement of expenses incurred in connection with the performance of their functions.

          In 2005, Mr. Minoli received cash compensation of $400,000 as annual base compensation for his services as chairman of Ducati North America and €250,000 as annual base compensation as Chairman and Managing Director of DMH.  For the year 2006, Mr. Minoli is entitled to receive $200,000 in annual base compensation for his services as chairman of Ducati North America and €250,000 and $200,000 in annual base compensation as Chairman and Managing Director of DMH.

          Mr. Minoli was also granted 500,000 share options during 2004, and 500,000 share options rights during 2005, in connection with our stock option plan approved in 1999. As of the date of this filing, no stock options have been granted for 2006.

          None of our other directors are beneficiaries under that plan.  See “Item 10. Additional Information—Share Option Plans.”

          On March 10, 2005, at the proposal of the compensation committee, the board of directors extended for the years 2005, 2006 and 2007 a retention plan already in effect for the years 1999 to 2004 (the “Retention Plan”).  The beneficiaries of the Retention Plan are Mr. Minoli and up to four additional senior officers of Ducati designated by the Managing Director, who may change them from year to year.  The Managing Director has identified the following beneficiaries for 2005: Enrico D’Onofrio, Claudio Domenicali and Filippo Preziosi. Under the Retention Plan, the beneficiaries are entitled to an extraordinary bonus ranging from 0% to 300% of their base salary, determined based on the annual percentage increase in certain measures of our financial performance. Bonuses under the Retention Plan vest on the date of approval of the consolidated financial statements for the year of reference and are payable in one lump sum within twelve months of such vesting, provided that the beneficiaries are our employees on the payment date.  In case of termination by us of a beneficiary’s employment for reasons other than just cause (giusta causa or giustificato motivo soggettivo), unvested bonuses are terminated but we are obligated to pay each such senior officer three times the amount of the vested bonus. On the basis of Ducati’s 2003, 2004 and 2005 results, no extraordinary bonuses have vested for those years under the Retention Plan.

          On March 23, 2006, at the proposal of the compensation committee, the board of directors approved the granting to Enrico D’Onofrio, manager of finance, investor relations and internal controls of DMH, of a bonus equal to the termination indemnity (corresponding to two times his annual salary) that he would be entitled to receive in the event of his resignation following a change of control of DMH.

59



          Our board of directors has also approved an end-of-term payment obligation of $1.2 million for Federico Minoli, which will be payable if he is removed or is not re-appointed as our managing director for reasons other than just cause before his sixtieth birthday in 2009.

          During the year ended December 31, 2005, the aggregate compensation paid to the senior officers listed above, exclusive of compensation to Mr. Minoli, was approximately €1.05 million.  This aggregate compensation does not include an additional €83,450 of compensation in the form of mandatory leaving entitlements to which our employees are entitled under Italian law (under Italian law, an employee is entitled to an end-of-employment payment which is accrued each year based on such employee’s annual salary).

          At December 31, 2005, we did not have any pensions and similar obligations for our directors and members of senior management, as they were only entitle to the reserve for mandatory leaving entitlements described above.

          Pursuant to our established management bonus plan, each of our managers, including the senior managers listed above and Mr. Minoli, is entitled to an annual bonus if certain conditions relating to our financial performance are met. Based on our results for 2003 and 2004, none of our executives earned a bonus for that year under this management bonus plan. In 2005, the board of directors agreed to suspend the management bonus plan and to replace it with an alternative plan. Pursuant to this alternative plan, if our earnings before interest, taxes, depreciation and amortization (“EBITDA”) exceeds €50 million, a bonus will be awarded to each manager who would have received a bonus pursuant to our management bonus plan had our results met the criteria specified for 2004.  The aggregate principal amount of bonuses available under this plan will be equal to the amount by which our EBITDA exceeds €50 million, with a maximum aggregate principal amount available of €2.5 million.  Individual performance will be considered in determining the amount of each individual manager’s bonus and will be assessed by senior management responsible for each individual manager and, in the case of Mr. Minoli, by the Compensation Committee. No bonus was earned in 2005 under this alternative plan.

          In addition, Ducati senior officers, including those listed above, received in the aggregate 920,000 share option rights during 2004, and 1,895,000 share option rights during 2005, in connection with our 1999 Stock Option Plan.  As of the date of this filing, no share option rights have been granted for 2006. See “Item 10. Additional Information—Share Option Plans”, for more information.

          Based on information provided to CONSOB, which is publicly available, and other information available to us, as of June 23, 2006, Mr. Minoli owned 450,000 of our outstanding shares and Mr. Seragnoli, a member of our board of directors from 1998 to 2006, owned (directly and indirectly) 9,860,132 of our outstanding shares.  At June 23, 2006, Mr. Minoli held 2,560,185 share option rights in connection with our 1997 Stock Option Plan and 2,500,000 share option rights in connection with our 1999 Stock Option Plan.  At June 23, 2006, none of our other directors owned any of our shares or share option rights.  See “Item 10. Additional Information—Share Option Plans” for a description of our stock option plans.

Employees

          As of December 31, 2005, we employed 1,134 persons worldwide (of which 1,005 were employed in Italy, 43 in the United States, 16 in the United Kingdom, 18 in France, 20 in Germany, 18 in Japan and 14 in the Netherlands), as compared to 1,139 at December 31, 2004 and 1,162 at December 31, 2003.  Of our employees, 898 were employed by DMH, of whom 550 were employed in operations and the remainder in research and development, sales, marketing and central functions. Our employees outside Bologna are engaged primarily in sales and marketing.  At December 31, 2005, our employees included 51 managers worldwide, as compared to 59 and 60 at December 31, 2004 and 2003, respectively. 

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          We believe that our relations with our employees are good.

          Under Italian law, employees are entitled to amounts based on salary and years of service upon leaving their employment.  We had a liability for such termination indemnities of € 9.7 million at December 31, 2005.  See Note 14 to our audited consolidated financial statements included in Item 18.  Under Italian law, we make social security and national healthcare contributions for our employees to the Italian government, which provides pension and healthcare insurance benefits.

          Employees in Italy are subject to national and company-specific collective bargaining agreements.  National agreements are negotiated collectively between the national associations of companies within a given industry and the respective national unions.  National agreements provide a basic framework on working conditions, including, among other things, pay, security and other provisions.  Our employees in Italy are principally subject to the National Metalworkers and Installers collective bargaining agreement, which was renewed in May 2003 and expires in December 2006 (except for its economic aspects, which were re-negotiated in January 2006 and expire in June 2007).

          Company-specific agreements are negotiated between individual companies and union representatives.  These agreements address issues of special importance to the relevant company and may supplement the basic provisions of the national framework contract.  Our company-specific agreement was signed in December 2003 and will expire in December 2007. This agreement affects approximately 450 of our employees at DMH and stipulates a wage increase in return for flexible working hours during the peak production season (January-May), subject to a maximum of 85 hours per week, which may be offset during the rest of the year (typically June-September). The terms of this agreement also provide for covered employees to be paid an annual performance bonus based on collective productivity, profitability and quality targets.

          We have not experienced any significant work stoppages due to strikes since 1996.

          We have approved an employee stock ownership plan.  For more information about this plan, see “Item 10. Additional Information—Employee Stock Ownership Plan.”

Item 7.   Major Shareholders and Related Party Transactions

Major Shareholders

          The following table sets forth information regarding the beneficial ownership of our shares by each shareholder known by us to be the beneficial owner of more than 2.0% of our shares and by each shareholder we expect to be the beneficial owner of more than 2.0% of our shares after the capital increase.  This information is based on information provided to CONSOB, which is publicly available, and other information available to us as of June 23, 2006.  As of that time, only WM, WM II, WM III and Giorgio Seragnoli had informed us of the amount of their participation in the capital increase.  As a result, the information in the following table regarding the number of shares beneficially owned by our other major shareholders does not reflect their participation in the capital increase, if any, and the related percentage data, which is based on our outstanding share capital following the capital increase, may differ substantially from the actual percentages of shares owned by these shareholders. 

          The shareholders listed below do not hold any different voting rights from those held by other ordinary shareholders.

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Name of Shareholder

 

Number of
Shares Owned

 

Percent of
Shares Owned

 


 



 



 

World Motors S.A.

 

 

49,643,838

 

 

15.48

%

World Motors White S.c.A.

 

 

23,684,088

 

 

7.39

%

World Motors Red S.c.A.

 

 

22,288,094

 

 

6.70

%

Columbia Wanger Asset Management L.P.

 

 

10,273,335

(1)

 

3.20

%(1)

Giorgio Seragnoli

 

 

9,860,132

 

 

3.07

%

Amber Capital L.P.

 

 

4,547,075

(2)

 

1.42

%(2)



(1) As of May 4, 2006, the date of the commencement of our subscription rights offering in connection with our capital increase, Columbia Wanger Asset Management L.P. (“Columbia Wanger”) beneficially owned 10,028,936 of our shares (equal to 6.29% of our then-outstanding share capital).  As of June 23, 2006, Columbia Wanger had not yet informed us of the amount, if any, of its participation in the capital increase.  If Columbia Wanger had exercised all of the subscription rights it received, its total number of shares would be 21,446,670, and its percent of shares owned would be 6.69%.

 

(2) As of May 4, 2006, the date of the commencement of our subscription rights offering in connection with our capital increase, Amber Capital L.P. beneficially owned 4,547,075 of our shares (equal to 2.85% of our then-outstanding share capital).  As of June 23, 2006, Amber Capital L.P. had not yet informed us of the amount, if any, of its participation in the capital increase.  If Amber Capital L.P. had exercised all of the subscription rights it received, its total number of shares would be 9,094,150, and its percent of shares owned would be 2.84%.

          On February 28, 2006, TPG Acquisition, the relative majority shareholder of the Company since 1996, agreed to sell to Invind Holdings (or its designee) a stake representing 30% less one share of our share capital held by TPG Acquisition.  Following Invind Holdings’ designation on March 27, 2006, the shares were purchased by WM (24,821,919 shares, equivalent to 15.58% of our share capital), WM II (11,144,047 shares, equivalent to 6.99% of our share capital ) and WM III (11,842,044 shares, equivalent to 7.34% of our share capital).  On April 4, 2006, TPG Acquisition sold its remaining stake in the Company (equivalent to approximately 3% of our share capital) on the market.

          WM is owned entirely by World Motor Holding S.à r.l.  (“WM Holding”), a company controlled by the same shareholder that controls Invind Holdings, except for two preferred shares, one of which is held by BS Investimenti S.g.r.  S.p.A., on behalf of the closed investment fund “BS Investimenti IV” (“BS1”), and one of which is held by the Canadian pension fund Hospitals of Ontario Pension Plan (“HOOPP”).  WM II. is owned by BS1 and BS Private Equity S.p.A. (“BS2”, together with BS1, “BS”), except for one class B share, which is held by WM.  WM and BS1 are general partners of WM II.  WM III is owned by HOOPP, except for one class B share, which is held by WM.  WM is a general partner of WM III. 

          As of June 15, 2006, we had 320,687,920 shares outstanding, of which 137,195 were in the form of ADSs (equivalent to 1,371,850 shares) held by 573 registered holders in the United States.

          Because brokers or other nominees hold certain shares and ADSs, the number of direct record holders in the United States may not be fully indicative of the number of direct beneficial owners in the United States or wherever the direct beneficial owners of such shares are resident.

Shareholder Agreement

          As of June 23, 2006, WM, WM II, and WM III (collectively, the “Luxcos”), owned in the aggregate 95,616,020 shares, or 29.82% of our outstanding shares, and, as a result, WMI, WMII and WMIII have the power to determine (or hold a veto right in respect of) matters requiring shareholder approval, including the appointment of our board of directors.  The Luxcos and and WM Holding, BS and HOOPP (collectively, the “Investors”) are parties to a three-year shareholder agreement, dated as of March 27, 2006, that regulates certain aspects of the corporate governance of DMH and the restrictions on transfers on the DMH shares held by each of the Luxcos.

          The information provided below about the shareholder agreement, based on the abstract of the shareholder agreement has been derived from publicly available information filed by the Luxcos and the Investors with regulatory authorities.

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          Corporate governance of DMH

          The list of directors to be presented to the shareholder meeting convened to appoint members to our board of directors will be comprised of a number of directors which, at WM’s discretion, may not be more than 12 nor less than 11, nominated as follows:

          (i)     60% of the candidates (rounded up to the nearest whole number) will be nominated by the directors of WM appointed by WM Holding;

          (ii)     30% of the candidates (rounded down to the nearest whole number) will be nominated by the director of WM appointed by BS1;

          (iii)     10% of the candidates (rounded down to the nearest whole number) will be nominated by the director of WM appointed by HOOPP, provided that at least one director must be one of those nominated by the WM director appointed by HOOPP. 

          One of the directors nominated by the directors of WM appointed by WM Holding will be the last on the list submitted.  Independent directors will be 50% appointed by the directors of WM appointed by WM Holding and 50% by the director of WM appointed by BS1.

          The Luxcos and the Investors will use their best efforts, within the limits of the law, to ensure that the first candidate on the sub-list proposed by the directors of WM nominated by WM Holding is appointed as the Managing Director of the Company.  If the directors of WM appointed by BS and HOOPP disagree, and this disagreement is justified, WM will ask an executive search agency to draw up a list of candidates from which the directors of WM will be required to select a Managing Director.

          Transfer restrictions on the DMH shares held by the Luxcos

          Lock-up period

          The Luxcos and the Investors have agreed that the DMH shares held by each of the Luxcos are subject to a lock-up period, which will end:

          (i)     on the first anniversary of the shareholder agreement (i.e., March 27, 2007) for transfers of DMH shares by WM;

          (ii)     on the fifth anniversary of the shareholder agreement (i.e., March 27, 2011), or on the third anniversary of the shareholder agreement (i.e., March 27, 2009) if the Agreement was not renewed on its expiry date, for transfers of DMH shares by WM II and WM III.

          Right of first refusal

          At the end of the respective lock-up periods, if any Luxco decides to sell its DMH shares, it must first offer such shares on a pro rata basis to the other Luxcos at the price determined by it.

          Tag-Along rights

          Without prejudice to the right of first refusal described above, if, at the end of the relevant lock-up period, WM intends to sell all or a portion of its DMH shares to a third party, WM II and WM III will have the right to insist that WM include, on a pro rata basis, the shares held by each of them.

          Drag-Along rights

          If WM receives an offer from a third party for no less than 90% of the DMH shares held by the Luxcos, at a share price above a predetermined threshold, WM II and WM III will be required to sell to that third party all the DMH shares held by them.

63



          Standstill

          For the duration of the shareholder agreement, each of the Luxcos and the Investors, on its own account or for each of its affiliates, undertakes, inter alia, not to (i) effect, participate in or propose to effect any purchase of DMH shares, (ii) enter into other shareholder agreements relating to DMH shares or (iii) act, along or in concert with others, to seek to take control or influence the board of directors or management of DMH.

Related Party Transactions

          Following is a brief description of various contractual relationships with associates, senior officers and members of our board of directors (see also “Item 6. Directors, Senior Management and Employees—Compensation of Directors and Senior Management”).

          In 2004, we entered into two commercial services agreements with Dream Engine S.r.l., whose sole director and indirect controlling owner at December 31, 2004, was Mr. Minoli, who, together with our then-Creative Director, David Gross, indirectly owned 99.9% of the company.  These agreements concern, respectively, the organization of the Motogiro d’Italia, a promotional tour of vintage motorbikes held in July 2004, the Centopassi, a five-day amateur motorcycle competition in northern Italy held in September 2004, and the 2004 World Ducati Weekend.  The aggregate invoices recorded for these events as of December 31, 2004, totaled €566,000.  On February 10, 2005, Mr. Minoli informed the board of directors that he has transferred his entire interest, directly and indirectly held, in Dream Engine S.r.l. to Mr. Gross in order to avoid his having any potential conflicts of interest in future transactions between Dream Engine and DMH.  In 2005, we entered into sponsorship agreements with Dream Engine S.r.l. regarding the 2005 and 2006 Centopassi and Motogiro d’Italia.

          In 2004, we paid Paolo Pietrogrande, a member of our board of directors from 1999 until 2006, €135,150 in compensation for consulting services.  We have also entered into commercial services agreements with Contemporanea Progetti S.r.l., a company in which a relative of Mr. Pietrogrande holds a 30% interest.  In 2004, we entered into an agreement with Contemporanea Progetti S.r.l., pursuant to which Contemporanea Progetti S.r.l. developed architectural projects to renovate the assembly line at Borgo Panigale production facility.  The value of the work completed by December 31, 2004, under this agreement totaled €98,000, which has been paid.  On January 19, 2005, we entered into an agreement with Contemporanea Progetti S.r.l. for the development of a new Ducati stand for fairs and other shows.  The value of this work, completed by October 2005, totaled €40 thousand plus VAT (including expenses).

          The above transactions were arranged on arm’s length terms.

          On April 14, 2004, we formed Ducati Retail S.r.l. a majority owned subsidiary (99.0% held by DMH and 1.0% held by Enrico D’Onofrio, our manager of finance).  Ducati Retail S.r.l. makes retail sales of Ducati products, including spare parts, and offers services in areas not served by our current distribution network as well as repair services and spare parts.

          On May 6, 2004, we formed Ducati Consulting S.r.l. to provide consulting and logistics services to all of the Ducati Group companies as well as to our suppliers and other manufacturers. Ducati Consulting S.r.l. is 85% held by DMH, with the remaining interests held by Messrs. Contino (5.0%), Pellerey (5.0%) and Lipparini (5.0%).  Until June 30, 2004, Mr. Contino was responsible for procurement at DMH, and Mr. Pellerey was responsible for a program to improve the efficiency of our plant.  Since July 2004, Messrs. Contino and Pellerey have been managing directors of Ducati Consulting S.r.l.  Mr. Lipparini was a director on the board of DMH until 2005.

64



          DMH has commercial relationships with other companies of the Ducati Group that handle product sales in specific countries (i.e., the United States, Germany, France, Japan, Netherlands and the United Kingdom).  These relationships include sales by DMH of motorcycles and related Ducati products to these companies (at prices reflecting the local market and competitive environment in the countries in which the purchasing companies operate) as well as after sales services (mainly warranties) carried out by those companies on DMH’s behalf.  Trade receivable and payable balances for those sales and other services in the amount of approximately €78.9 million and €15.3 million, respectively, existed as of March 31, 2006, between our subsidiaries and DMH.

          Financially, these companies operate independently, although some benefit from particular forms of centralized financing or loans granted by DMH, mostly in certain stages of growth (i.e., start-up) or during difficult market conditions.  The other subsidiaries involved in distribution self-finance their operations out of profits, and, if they need additional financing, by factoring their trade receivables without recourse.

          At December 31, 2005, the only significant debt payable that DMH owed to any of its subsidiaries was to Ducati Corse S.r.l. in the amount of approximately €1.9 million for Ducati Corse’s yet-to-be-paid-in share capital, which debt was satisfied as part of Ducati Corse’s purchase of the “Ducati Corse” trademark (discussed in further detail below), and to Ducati Consulting S.r.l. in the amount of approximately €64,000 for Ducati Consulting’s yet-to-be-paid in share capital.

          Ducati Corse was set up so that all aspects related to the racing division, including R&D, could be handled separately from the production and sales side of the business, which is handled by DMH.  In particular, DMH and Ducati Corse entered into the following agreements:

Right to use and manage DMH’s racing business as a going concern (“affitto di ramo di azienda”);

 

 

Sponsorship agreement pursuant to which DMH sponsors Ducati Corse’s racing activities; and R&D agreement pursuant to which Ducati Corse agreed to carry out R&D for DMH for sporting activities related to the MotoGP and Superbike Championships, management of a number of private teams in the Superbike Championship, and motorcycle production.

          The €1 million sponsorship contract entered into between DMH and Ducati Corse was mutually terminated in January 2004.  This decision reflects Ducati Corse’s greater operational autonomy in the world of racing following its receipt of increased financing from third-party sponsors, especially in connection with the company’s debut in the world MotoGP championships.  Increased sponsorship revenues have enabled Ducati Corse to forsake the start-up contributions initially needed from DMH.  Ducati Corse’s success is primarily due to the R&D agreement with DMH, which has enabled it to develop a MotoGP bike that provides considerable returns in terms of corporate image.

          On November 25, 2004, our board of directors and the board of directors of Ducati Corse approved the intercompany sale of the “Ducati Corse” brand name (name and team logo) by DMH to Ducati Corse for €23 million, the price determined by independent professionals, plus VAT.

          This decision was made to allow Ducati Corse to develop the “Ducati Corse” brand separately from the Group’s other brands using activities that it is directly involved in to enhance the brand’s value.  On May 19, 2005, Ducati Corse paid DMH €15.7 million in cash for the brand, with the balance of the purchase price covered by offset of the €7.4 million in unpaid capital due from DMH, as well as €4.5 million in account receivables due from DMH.

          In December 2004, DMH and Ducati Corse entered into a license agreement pursuant to which Ducati Corse grants to DMH the right to use (i) the “Ducati Corse” trademark on the Ducati Corse replica bikes manufactured by DMH and (ii) the Ducati Corse racing activities images in promotional materials.  As consideration, DMH will pay Ducati Corse an annual fee of €1.0 million plus VAT, as well as a royalty equal to 5% of the FOB price of each replica bike distributed.

65



Item 8.   Financial Information

Consolidated Financial Statements

          Please refer to “Item 18. Financial Statements” of this annual report.

Other Financial Information

Export Sales

          Export sales from Italy were approximately €231.8 million in 2005, as compared with €243.3 million in 2004, and represented 72.2% of our revenues in 2005 (66.7% in 2004). 

Legal Proceedings

          We are party to various claims and legal actions arising in the ordinary course of business.  We do not believe that any litigation to which we are a party is likely, individually or in the aggregate, to have a material adverse effect on our business, financial condition or results of operations.

          We are engaged in litigation with our former distributor in Belgium in connection with our decision not to renew our distributorship agreement and an alleged failure by our predecessor to deliver motorcycles in 1996.  On September 14, 1998, the Commercial Court of Liege found in favor of the distributor and awarded provisional damages of approximately 50.575 million Belgian francs (“BEF”) (approximately €1.25 million).  On September 21, 1998, we appealed this decision.  Notwithstanding our appeal, on February 24, 1999, the former distributor enforced the prior judgment by selling an inventory of Ducati motorcycles which it had previously attached in Belgium.  The proceeds of the sale were BEF 27,835,078 (approximately €690,013).  On May 27, 1999, the Court of Appeal of Liege found that Belgian courts lacked jurisdiction over the case and set aside the prior judgment.  The former distributor was adjudicated bankrupt on October 14, 1999.  Bankruptcy trustees of the former distributor appealed the May 27, 1999 judgment before the Supreme Court of Belgium, which rejected the appeal on June 21, 2001.  We have taken various steps to recover the proceeds of the sale and part of our legal expenses, which are equal to approximately BEF 23 million (approximately €570,000).  However, given the existence of secured creditors of the former distributor’s bankruptcy estate, we are unlikely to be successful in our efforts to recover these proceeds.  Although we have recorded provisions for this litigation in prior years (€23,000 in 2003), we have utilized these provisions in full and have recorded no provision in 2004 or 2005 because we do not expect to incur further costs in relation to this dispute.

          We are also engaged in litigation with Virginio Ferrari, the manager of one of the two racing teams sponsored by Ducati in the 1998 World Superbike Championship.  In December 1998, Mr. Ferrari filed a claim against us in the Italian courts in the amount of approximately €6.7 million, alleging that he had a three year agreement with Ducati for the sponsorship of a racing team and that we breached this agreement in electing not to sponsor Mr. Ferrari’s team for the 1999 World Superbike Championship.  The Court of first instance ordered us to pay damages of €310,000, plus interest and an additional amount to adjust for inflation, and legal expenses of €12,600.  Although we have appealed this decision, we recorded a provision for the entire amount of this judgment in our 2005 financial statements.

          In 2001, Michael Hailwood’s widow, individually and in her capacity as beneficiary of his estate, filed a claim before the Federal District Court of New Jersey against us and Ducati North America Inc. alleging trademark infringement, violation of a purported right of publicity and other claims with regard to the sale of MH 900e motorcycle.  We settled these claims in April 2003, agreeing to pay approximately €375,000 to Michael Hailwood’s widow, of which €349,000 has already been paid, and to enter into future agreements for the use of Michael Hailwood’s name.

66



Dividend Policy

          DMH has not paid any cash dividends on its shares since its formation in 1996.  The payment by us of any annual dividend must be proposed by the board of directors and is subject to the approval of the shareholders at the annual shareholders’ meeting.  Before dividends may be paid out of our unconsolidated net income in any year, an amount equal to 5.0% of such net income must be allocated to our legal reserve until such reserve is at least equal to one-fifth of the value of our issued share capital.  If our capital is reduced as a result of accumulated losses, dividends may not be paid until the capital is reconstituted or its stated amount is reduced by the amount of such losses.  Further, the Syndicated Loan Facility, the New Loan, the Banca Intesa Loan and BPVN Loan restrict our ability to pay dividends if a dividend distribution would cause DMH to be in violation of its financial covenants under these loan facilities.  The board of directors may authorize the distribution of interim dividends, subject to certain statutory limitations.

          Dividends are payable to those persons who hold the shares through an intermediary on the dividend payment date declared by the shareholders’ meeting.  Payments with respect to dividends are distributed through Monte Titoli on behalf of each shareholder with whom the shareholder has deposited his or her shares.  Holders of ADSs will be entitled to receive payments in respect of dividends on the underlying shares through The Bank of New York, as depositary for our ADSs, in accordance with the deposit agreement.

Significant Changes

           On February 28, 2006, TPG Acquisition agreed to sell to Invind Holdings (or companies designated by it) a stake representing 30% less one share of our share capital at a price per share of 0.85 euro.  After the designation by Invind Holdings on March 27, 2006, the shares were purchased by WM (24,821,919 shares, equivalent to 15.58% of our share capital), WM II (11,144,047 shares, equivalent to 6.99% of our share capital) and WM III (11,842,044 shares, equivalent to 7.43% of our share capital).  For more information about Invind Holdings and WM, WM II and WM III, see “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders.”  On April 4, 2006, TPG Acquisition sold its remaining DMH shares (approximately 3% of our share capital) on the market.  For more information, see “Item 4.  Information on the Company—History and Development of the Company.”

          At their April 10, 2006, meeting, our shareholders approved the appointment of a new board of directors, which is composed of Matteo Tamburini, Massimo Bergami, Roberto Consonni, Ulrich Weiss, Dante Razzano, Mauro Benetton, Federico Minoli, Carlo Pasquale Campanini Bonomi, Antonio Perricone, Marco Giovannini, Roberto Maestroni and Giampiero Paoli.  These board members will remain in office until the approval of our financial statements for December 31, 2006. 

           In light of recent negative market developments and unsatisfactory results, our management formulated a business plan for 2006-2008, which was approved by our board of directors on April 13, 2006.  The business plan focuses on improving profit margins and generating cash flows by increasing sales of motorcycle models in the high-end of our product price range and decreasing overhead costs.  For a description of the 2006-2008 Business Plan, see “Item 4.  Information on the Company —Business Overview —Business Strategy—2006-2008 Business Plan.” 

          As contemplated in the 2006-2008 Business Plan and approved by the board of directors at its meetings on April 13 and May 4, 2006, we successfully completed an  €80,000,000 capital increase on June 23, 2006.  This capital increase was achieved through an offering of 160,343,960 subscription rights (representing the right to subscribe for 160,343,960 shares) to shareholders of DMH.  From May 8 to May 26, 2006, DMH shareholders exercised a total of 158,589,839 subscription rights and subscribed for the related 158,589,839 shares.  The 1,744,121 subscription rights that remained unexercised at the end of this period were sold on the Borsa Italiana between June 5 and June 9, 2006, and the related 1,754,121 were subsequently subscribed.

67



Item 9.  The Offer and Listing

Trading Markets and Share Prices

          The principal trading markets are Telematico for our shares and the New York Stock Exchange for our ADSs (each representing ten shares).  Our ADSs have been listed on the New York Stock Exchange and our shares have been listed on the Telematico since our initial public offering in March 1999.  The Bank of New York is our depositary for purposes of issuing the American Depositary Receipts (“ADRs”) evidencing the ADSs.  The following table sets forth the high and low closing prices of our ADSs as recorded on the New York Stock Exchange Composite Tape and the high and low closing prices of our shares as recorded on the Telematico, for the quarters and months indicated (source:  Bloomberg).

 

 

Mercato Telematico
Azionario Price per
Share

 

New York Stock
Exchange
Price per ADS

 

 

 


 


 

 

 

High

 

Low

 

High

 

Low

 

 

 


 


 


 


 

 

 

(in euro)

 

(in U.S. dollars)

 

2001

 

 

2.222

 

 

1.091

 

 

20.50

 

 

10.30

 

2002

 

 

2.031

 

 

1.396

 

 

20.50

 

 

13.65

 

2003

 

 

1.799

 

 

1.103

 

 

18.70

 

 

12.15

 

2004

 

 

1.420

 

 

0.867

 

 

17.55

 

 

11.50

 

2005

 

 

1.245

 

 

0.888

 

 

14.75

 

 

10.50

 

First Quarter 2004

 

 

1.420

 

 

1.277

 

 

17.55

 

 

16.00

 

Second Quarter 2004

 

 

1.360

 

 

1.122

 

 

16.50

 

 

14.00

 

Third Quarter 2004

 

 

1.167

 

 

1.049

 

 

14.40

 

 

13.05

 

Fourth Quarter 2004

 

 

1.130

 

 

0.867

 

 

13.90

 

 

11.50

 

First Quarter 2005

 

 

1.135

 

 

0.896

 

 

14.48

 

 

12.09

 

Second Quarter 2005

 

 

1.066

 

 

0.965

 

 

13.60

 

 

11.87

 

Third Quarter 2005

 

 

1.245

 

 

1.018

 

 

14.75

 

 

12.40

 

Fourth Quarter 2005

 

 

1.176

 

 

0.888

 

 

13.80

 

 

10.50

 

December 2005

 

 

1.039

 

 

0.888

 

 

12.15

 

 

10.50

 

January 2006

 

 

0.944

 

 

0.919

 

 

11.50

 

 

10.80

 

February 2006

 

 

0.911

 

 

0.871

 

 

11.25

 

 

10.45

 

March 2006

 

 

1.063

 

 

0.901

 

 

12.95

 

 

10.54

 

April 2006

 

 

1.050

 

 

0.972

 

 

12.75

 

 

12.00

 

May 2006

 

 

0.742

 

 

0.643

 

 

12.60

 

 

11.75

 

          In April 2001, our shares began trading on the Segmento Titoli con Alti Requisiti (or “STAR”) of Telematico.  This segment was created recently by Borsa Italiana S.p.A. for small- and medium-sized companies operating in traditional sectors of the economy and meeting stricter requirements relating to transparency, liquidity and corporate governance than those usually required for listing on the Telematico.  As part of the STAR admission requirements, we appointed Mediobanca to act as specialist for our shares.  The specialist is required to take a number of actions intended to support the market for our shares and to facilitate the communication of information about us to investors.

Item 10.  Additional Information

Share Option Plans

          1998 Stock Option Plan

          In September 1998, our shareholders approved a capital increase, to be completed by August 4, 2007, of up to 8,148,148 shares in connection with a share option plan approved by our board of directors in August 1998 for our then Managing Director and certain senior officers and independent consultants (the “1998 Stock Option Plan”).

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Pursuant to the 1998 Stock Option Plan, options to purchase 8,148,148 shares at an exercise price of euro 0.723 per share were assigned to beneficiaries.  Once the options to purchase have vested and the conditions to exercise have been satisfied, the options to purchase may be exercised only during a 30-day period following the date of shareholder approval of our financial statements.  The options to purchase expire on August 4, 2007.  Our capital is increased each year by the number of shares underlying the options to purchase exercised in that year.  Options are forfeited if the beneficiary is terminated for cause.

          Prior to 2004, options to purchase 1,500,963 shares had been exercised.  Options to purchase 325,444 shares were exercised in May and June 2004; options to purchase 533,630 shares were exercised in May and June 2005; and options to purchase 983,923 shares were exercised in May 2006.  As of June 23, 2006, 109,592 options had been cancelled, and options to purchase 4,694,596 shares remained exercisable.

          In May 2006, following the exercise by the relevant beneficiaries of the share option rights granted under the 1998 Stock Option Plan and in accordance with the resolutions taken by the shareholders meeting on September 7, 1998, the share capital of DMH increased to 160,343,960 shares. 

          1999 Stock Option Plan

          In September 1999, our board of directors also approved a stock option/stock appreciation rights plan (the “1999 Stock Option Plan”) for certain of our executive directors, officers and independent consultants designated by the compensation committee of the board of directors.  On March 11, 2004, our board of directors amended the 1999 Stock Option Plan to include expressly high-level employees of companies of the Ducati Group as covered by the plan.  Under 1999 Stock Option Plan, the board of directors may grant in any year, upon its approval of our preliminary consolidated income statement and balance sheet for the prior fiscal year (which approval typically occurs by February 15 of each year), stock options or stock appreciation rights (each such option or right, a “Right”) in respect of not more than 2.0% of our outstanding share capital.  The Rights expire seven years after the date of grant.  Unless otherwise determined by the board of directors, Rights vest in three equal annual installments starting on December 31 of the year following the year of grant, but are forfeited, whether or not vested, if the employee is terminated for cause. 

          Upon exercise, our obligation in respect of the Rights may be satisfied in shares or, if the Shares are no longer listed on the Telematico or the issuance of new shares or the buy back of existing shares have not been approved, in cash (calculated with reference to the market value of the shares at the time of exercise).  To exercise Rights, participants in the 1999 Stock Option Plan must pay us a strike price that is the greater of (i) our consolidated per share net worth at the time of exercise and (ii) the value of the shares on the grant date as determined in accordance with the tax provisions in force on such grant date (currently the average official price for the shares in the month preceding the grant date).  Based on the criterion described under (ii) above, the strike price would be €2.879 per share, €2.81 per share, €1.99 per share, €1.80 per share, €1.317 per share and €1.065 per share for Rights granted in 1999, 2000, 2001, 2002, 2004, and 2005, respectively.  Other than in the event of death or disability of a participant in the 1999 Stock Option Plan, once vested, rights granted prior to 2002 may be exercised only during a 30-day period following the approval by the board of directors of our consolidated financial statements for the prior fiscal year, and rights granted beginning in 2002 may be exercised only during a 30-day period following the approval by the board of directors of our preliminary consolidated income statement and balance sheet for the prior fiscal year.

          In each of 1999 and 2000, our board of directors granted an aggregate of 3,159,259 Rights under the 1999 Stock Option Plan to beneficiaries (53 in 1999 and 72 in 2000) selected by our compensation committee, including 500,000 Rights granted to Mr. Minoli each year.  In 2001, our board of directors granted an aggregate of 3,165,000 Rights to 75 beneficiaries, including 500,000 Rights granted to Mr. Minoli, and in 2002, our board of directors granted an aggregate of 3,960,000 Rights to 92 beneficiaries, including 500,000 Rights granted to Mr. Minoli.  Our board of directors did not grant any Rights in 2003.

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In 2004, our board of directors granted an aggregate of 3,170,000 Rights to 66 beneficiaries, including 500,000 Rights granted to Mr. Minoli, and in 2005, our board of directors granted an aggregate of 3,170,000 Rights to 66 beneficiaries, including 500,000 Rights granted to Mr. Minoli. As of June 23, 2006, no Rights have been granted under the 1999 Stock Option Plan for 2006.

          As determined by the board of directors, Rights granted in the years 1999 through 2005 vest in annual installments beginning on December 31 of the year following the year of grant, with 50% vesting in the first year and 25% vesting in each of the two subsequent years.  As of June 30, 2006, 14,540,000 Rights had been granted and had vested under the 1999 Stock Option Plan but none of these Rights had been exercised.  A total of 5,243,518 of these Rights had been cancelled, and 10,100,000 Rights remained exercisable, subject to the conditions set forth above.

          On May 2, 2000, our shareholders’ meeting approved a capital increase of up to 12 million shares in connection with Rights granted from 1999 to 2002 under the 1999 Stock Option Plan.

          On May 6, 2004, our shareholders’ meeting approved a capital increase of up to 1,585,000 shares in connection with Rights granted in 2004 to beneficiaries who are employees of the Ducati Group.

          On May 5, 2005, our shareholders’ meeting approved a capital increase of up to 1,588,000 shares in connection with Rights granted in 2005 to beneficiaries who are employees of the Ducati Group.

          As of June 23, 2006, the capital increases described above have not been executed.

Buy Back Plan

          At the May 5, 2005, annual meeting, our shareholders approved a plan (the “2005 Buy Back Plan”) pursuant to which, at the direction of our Chairman or of our chief financial officer, severally, duly empowered by our board of directors, we may: repurchase on the Telematico up to 12,110,000 of our shares (representing approximately 7.6% of our then issued and paid-in share capital); retain such shares as treasury shares; transfer such shares either to beneficiaries of (i) the 1999 Stock Option Plan, (ii) the Employee Stock Ownership Plan (See “—Employee Stock Ownership Plan”) and (iii) the 1997 Stock Option Plan, as required thereunder; or dispose, subject to applicable laws and regulations, of such shares on the Telematico to maintain liquidity of our shares on such stock exchange.

          Under the 2005 Buy Back Plan, we may repurchase these shares in one or more transactions over an 18-month period from May 5, 2005, at a per-share purchase price of not more than 10% above or below the market price for the shares on the Telematico on the day prior to any purchase.  There is no time limit under the 2005 Buy Back Plan in respect of the disposal of any shares repurchased before the end of this 18-month period.  Repurchases and disposals of our shares under the 2005 Buy Back Plan shall be carried out in accordance with applicable Italian law relating to buy back plans in Italy, as more fully described in “—By-Laws—Purchase by Us of Our Own Shares,” as well as certain conditions relating to the 1997 Stock Option Plan, the ESOP and the 1999 Stock Option Plan as more fully described in “—Share Option Plans.”

          During 2005 and the first half of 2006, we sold 3,769,249 of our own shares and, as of June 23, 2006, do not hold any of our own shares.

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Employee Stock Ownership Plan

          On February 14, 2002, the board approved an Employee Stock Ownership Plan (“ESOP”) to facilitate the purchase of our ordinary shares by non-director Ducati employees (including part-time employees) under indefinite contracts who are resident in Italy.  In each year, our Managing Director must decide to implement the ESOP for it to be effective.  Under the ESOP, each employee in any year through 2006 in which the ESOP is implemented can request to purchase, at a discount, a number of our ordinary shares not to exceed an amount equal to €3,000.  The request must be submitted within 20 days after the approval of our annual unconsolidated financial statements.

          To satisfy purchases of shares made under the ESOP, we would instruct a broker appointed by us to purchase on the Telematico on our behalf the number of shares equal to the total euro amount so requested for purchase by employees under the ESOP.  On the same day of such purchase, we assign the shares to employees upon payment of the purchase price minus a discount (funded by us) of one-third of such purchase price.  To be able to purchase our shares for delivery to the employees under the ESOP, we must obtain authorization by our shareholders of a buy back plan pursuant to which we may repurchase shares for purposes of the ESOP.  On May 5, 2005, the shareholders authorized us to purchase up to 12,110,000 shares on the Telematico within the subsequent 18 months, including shares to be delivered to employees under the ESOP.  See “—Buy Back Plan.”  Shares are purchased at current market prices within 20 days of receiving an employee’s request, provided that such prices are not more than 10.0% above or below the market price of the shares on the Telematico on the day prior to such purchase.  Only shares purchased as described above are used to satisfy purchases of shares under the ESOP.  The shares purchased by the employees under the ESOP may not be transferred for a period of three years; as a result, under Italian tax law, the discount we offer under the ESOP is not considered taxable income for the employees.

          Pursuant to the provisions applicable to share buy back plans, we may not purchase our shares, including those for delivery under the ESOP, unless, among other things, the amount of distributable or available reserves in our unconsolidated financial statements as approved for the prior year (after any distribution of dividends or repurchase of our shares for purposes other than as related to the ESOP that we may decide to make) is equal to or greater than the aggregate euro amount that represents all shares that ESOP beneficiaries would be entitled to purchase.  If the amount of distributable and available reserves is less than such aggregate euro amount, we may, at our discretion, implement the ESOP at a per-beneficiary subscription limit that is less than €3,000.

          The ESOP has not been implemented since its inception in 2002.

By-Laws

          The following is a summary of certain information concerning our shares and By-laws (Statuto) and of Italian law applicable to Italian companies whose shares are listed in a regulated market in the European Union.  The summary contains all the information that we consider to be material regarding the shares but does not purport to be complete and is qualified in its entirety by reference to the By-laws or Italian law, as the case may be.

          Italian companies whose shares are listed on a regulated market of the European Union are principally governed by two sets of rules — the Italian Civil Code (applicable to all Italian companies), and the Unified Financial Act (Testo Unico dell’Intermediazione Finanziaria, or “TUF”) of February 24, 1998, No.58, as amended, and implementing regulations thereof (applicable to listed companies).  In January 2003, the Italian government approved a wide-ranging reform of the corporate law provisions of the Italian Civil Code, which came into force on January 1, 2004.  In February 2004, the Italian government amended the TUF to coordinate it with the new corporate law provisions of the Italian Civil Code.  The amendments to the Italian Civil Code and to the TUF constitute the so-called 2004 corporate law reform.  On May 6, 2004, and on May 5, 2005, our shareholders approved a number of amendments to our By-laws required or made possible by the 2004 corporate law reform.  The amendments to our governance system adopted by our shareholders on May 5, 2005, entered into force at the time of our ordinary shareholders’ meeting held on April 10, 2006.  See also “—Corporate Governance System.”  In December 2005, the Italian parliament adopted the Investor Protection Act, which sets forth rules on corporate governance for listed companies aimed at preventing financial scandals.

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          Our shareholders approved, on January 26, 2006, the proposal of our board of directors to further amend the By-laws (i) to amend and extend our corporate purpose, and (ii) to increase our share capital by up to €80,000,000 through a rights offer to our shareholders.  See also “—General” and “—Authorization of Shares.”

General

          Our issued share capital consisted of 159,360,037 shares with no par value as of December 31, 2005, and 320,687,920 shares with no par value as of June 23, 2006.  All of the issued shares are fully paid, non-assessable and in registered form.

          We are registered with the Companies’ Registry of the Court of Bologna at n. 59309/98, with registered office at 3, Via A. Cavalieri Ducati, Bologna, Italy.

          As set forth in Article 4 of the By-laws, our corporate purpose is the production and sale of motorcycles, engines and other parts and components, including any type of accessories, tools and other products of any type whatsoever relating to the production and sale of these motorcycles, engines, parts and components.  We are also generally authorized to take any actions necessary or useful to achieve our corporate purpose.  On January 26, 2006, our shareholders amended Article 4 of our By-laws by expressly including financing activities, including granting collateral security and surety for third parties, and technical and financial coordination of companies or organizations in which we have an interest, amongst the secondary activities that we may conduct to accomplish our corporate purpose.

Authorization of Shares

          Additional shares may be authorized in connection with capital increases approved by our shareholders in an extraordinary meeting, but this authorization would generally be given only after recommendation by our board of directors.

          At a meeting on September 7, 1998, our shareholders authorized the issuance of up to 8,148,148 shares that are reserved for distribution to beneficiaries of the 1998 Stock Option Plan.  Our share capital increases each year as Rights are exercised Rights in accordance with the 1998 Stock Option Plan. As of June 23, 2006, 3,343,960 shares had been issued upon exercise of options by beneficiaries under the 1998 Stock Option Plan and options to purchase 4,694,596 shares remained exercisable.  See also “—Share Option Plans.”

          At a meeting on May 2, 2000, our shareholders authorized the issuance of up to 12 million shares, not subject to pre-emptive rights, in connection with the granting of Rights in the years 1999 through 2002 to beneficiaries of the 1999 Stock Option Plan.  At a meeting on May 6, 2004, our shareholders authorized the issuance of up to 1,585,000 shares, not subject to preemptive rights, in connection with the Rights granted in 2004 to beneficiaries of the 1999 Stock Option Plan.  At a meeting on May 5, 2005, our shareholders authorized the issuance of up to 1,588,000 shares, not subject to preemptive rights, in connection with the Rights granted in 2005 to beneficiaries of the 1999 Stock Option Plan.  As of June 23, 2006, no shares had been issued for implementation of the 1999 Stock Option Plan.  See also “—Share Option Plans.”

          As contemplated in the 2006-2008 Business Plan and approved by the board of directors at its meetings on April 13 and May 4, 2006, we successfully completed an  €80,000,000 capital increase on June 23, 2006. See “Item 4.  Information on the Company—History and Development of the Company.”

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Form and Transfer of Shares

          Pursuant to the TUF, Legislative Decree No. 213 of June 24, 1998 (“Decree No. 213”) and implementing Regulation No. 11768 of December 23, 1998 (“Regulation No. 11768”) of the CONSOB, since January 1, 1999, it is no longer possible for a shareholder to obtain the physical delivery of share certificates representing shares of Italian listed companies.  Shares of Italian listed companies are no longer represented by paper certificates and the transfer and exchange of shares takes place exclusively through an electronic book-entry system.  All shares must, accordingly, be deposited by their owners with an intermediary (each an “Intermediary”), which is defined by Regulation No. 11768 as: 

 

an Italian or EU bank;

 

 

 

 

a non-EU bank authorized by the Bank of Italy to operate in the Italian market;

 

 

 

 

a Società di Intermediazione Mobiliare, or SIM;

 

 

 

 

an EU investment company;

 

 

 

 

a non-EU investment company authorized by CONSOB to provide investment services in Italy;

 

 

 

 

an Italian asset management company;

 

 

 

 

a stock broker; the company which has issued the shares;

 

 

 

 

the controlling shareholder of the company which has issued the shares;

 

 

 

 

the Bank of Italy;

 

 

 

 

an EU or non-EU entity operating a centralized clearing system;

 

 

 

 

a financial intermediary operating a clearing system governed by art. 69 (2) and 70 of the TUF;

 

 

 

 

a financial intermediary registered on the list kept by the Bank of Italy under art. 107 of Legislative Decree No. 385 of September 1, 1993;

 

 

 

 

the Italian Post Office (Poste Italiane S.p.A.);

 

 

 

 

Cassa Depositi e Prestiti S.p.A.;

 

 

 

 

The Italian Ministry of Economics and Finance; and

 

 

 

 

the managers of foreign clearing, settlement and guarantee systems for financial instruments, provided that they are subject to supervision equivalent to that provided by Italian law.

          The Intermediary in turn deposits the shares with Monte Titoli or with another company authorized by CONSOB to operate a centralized clearing system.

          To transfer shares under the system introduced by Decree No. 213, the owners of shares are required to give instructions to their Intermediaries.  If the transferee is a client of the transferor’s Intermediary, the Intermediary simply transfers the shares from the transferor’s account to the account of the transferee.  If, however, the transferee is a client of another Intermediary, the transferor’s Intermediary instructs the company operating a centralized clearing system to transfer the shares to the account of the transferee’s Intermediary, which then registers the shares on the transferee’s account.

          Each Intermediary maintains a custody account for each of its clients setting out the financial instruments of such client and keeps a record of all transfers, payment of dividends, exercise of rights attributable to such instruments, charges or other encumbrances on the instruments.

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The account holder or any other eligible party (for example, in the case of a charge over the financial instrument, the chargee) may submit a request to the Intermediary for the issue of a certified statement of account.  The request must indicate the quantity of the financial instruments in respect of which the statement is requested, the rights which the applicant intends to exercise and the duration in respect of which the certificate’s validity is required.  Within two business days from the receipt of such request, the Intermediary shall issue a certified statement of account which constitutes evidence of the account holder’s ownership of the financial instruments indicated.  Once a certificate has been issued, the Intermediary may not effect any transfer of the corresponding securities until the certificate loses its validity or is returned.

          The new book-entry system commenced operations on October 5, 1998, when Monte Titoli cancelled all certificates representing listed financial instruments in its possession and returned them to the issuing companies.  At the same time, Monte Titoli registered the shares in accounts held under the name of the depositing Intermediaries and gave them and the issuing companies notice of the registration.  The Intermediaries, in turn, registered the shares in the shareholders’ accounts.  Since January 1, 1999, shareholders of listed companies have been allowed to exercise their rights only after they have deposited their share certificates with an Intermediary and authorized it to deposit the shares with a company operating a centralized clearing system.

          As a result of the foregoing, it is not possible for a shareholder to obtain physical delivery of share certificates representing shares.  Instead, transfers of shares are possible only using the procedures described above.

          The shares have been accepted for clearance through Euroclear and Clearstream.  Purchasers of shares may elect to hold such shares through Euroclear and Clearstream.  Persons owning a beneficial interest in shares held through Monte Titoli, Euroclear and Clearstream must rely on the procedures of Monte Titoli, Euroclear and Clearstream, respectively, and of the Intermediaries that have accounts with Monte Titoli, Euroclear and Clearstream, to exercise their rights as holders of shares.

Dividend Rights

          The payment by us of any annual dividend is proposed by the board of directors and is subject to the approval of the shareholders at the annual shareholders’ meeting.  Before dividends may be paid out of our unconsolidated net income in any year, an amount equal to 5.0% of such net income must be allocated to our legal reserve until such reserve is at least equal to 20% of the amount of our issued share capital.  If our capital is reduced as a result of accumulated losses, dividends may not be paid until the capital is reconstituted or reduced by the amount of such losses.  Further, the Syndicated Loan Facility, the New Loan, the Banca Intesa Loan and the BPVN Loan restrict our ability to pay dividends if a dividend distribution would cause DMH to violate its financial covenants under those loan facilities.  See “Item 5.  Operating and Financial Review and Prospects—Other Financial Transactions.”  The board of directors may authorize the distribution of interim dividends, subject to certain statutory limitations.

          Dividends are payable to those persons who hold the shares through an Intermediary on the dividend payment date declared by the shareholders’ meeting.  Dividends not collected within five years from the dividend payment date are forfeited to our benefit.  Payments in respect of dividends are distributed through Monte Titoli on behalf of each shareholder by the Intermediary with which the shareholder has deposited its shares.  Holders of ADSs are entitled to receive payments in respect of dividends on the underlying shares through The Bank of New York, as ADR depositary, in accordance with the deposit agreement relating to the ADRs.  See “Item 8. Financial Information—Dividend Policy.”

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Voting Rights

          Shareholders are entitled to one vote per share.  A cumulative voting system applies in case of appointment of members of the board of directors under our new corporate governance system.  See “Corporate Governance System.”

          Proxy solicitation may be carried out by certain professional investment and financial intermediaries, as well as certain companies whose sole purpose is to carry out proxy solicitation, on behalf of a qualified soliciting shareholder (generally, one or more shareholders who have owned at least 1.0% of our shares for more than six months and who have been so registered with us for the same period of time).

          Proxies may be collected by a shareholders’ association provided that such association has been formed by notarized private agreement, does not carry out business activities and is made up of at least 50 individuals, each of whom owns not more than 0.1% of our voting capital.  Members of the shareholders’ association may, but are not obliged to, grant proxies to the legal representative of the association, and proxies may also be granted in respect of only certain of the matters to be discussed at the relevant shareholders’ meeting.  The association may vote in different manners in compliance with the instructions expressed by each member who has granted a proxy to the association.

          As a registered shareholder, The Bank of New York, as ADR depositary, or its nominee is entitled to vote the shares underlying the ADSs.  The Deposit Agreement requires The Bank of New York (or its nominee) to accept voting instructions from owners of ADSs and to execute such instructions to the extent permitted by law.  Neither Italian law nor our By-laws limit the right of non-resident or foreign owners to hold or vote the shares.

Corporate Governance System

          Effective January 1, 2004, Italian stock corporations (società per azioni) may adopt one of two different corporate governance structures, as an alternative to the current traditional Italian model based on a board of directors (consiglio di amministrazione) and a board of statutory auditors (collegio sindacale).  The alternatives include (i) a one-tier model with a single board of directors, including a management control committee (comitato per il controllo sulla gestione) composed of independent non-executive directors (in lieu of the board of statutory auditors), or (ii) a two-tier model, with a management board entrusted with management responsibilities, and a supervisory board entrusted mainly with control and supervisory responsibilities, appointing and removing the members of the management board and approving the corporation’s annual financial statements.

          At an extraordinary meeting on May 5, 2005, our shareholders amended our By-laws, effective as of the ordinary meeting of shareholders held on April 10, 2006, to change our corporate governance system from the traditional Italian model and to adopt a one-tier system.  On April 10, 2006, (i) the terms of office of our former directors expired and new directors were appointed pursuant to the procedures described below in “—Corporate Governance System—Board of Directors”; (ii) the terms of office of the members of our former board of statutory auditors expired, and we no longer have a board of statutory auditors; and (iii) the board of directors has appointed the Management Control Committee from among its members.

Board of Directors

          Since our adoption of a one-tier corporate governance system, our board of directors must consist of seven to fifteen individuals, who are elected by our shareholders at an ordinary meeting according to the cumulative voting system described below.  Members of our board of directors, who may be, but are not required to be, our shareholders, are elected for up to three fiscal years, as determined by the shareholders from time to time, and may be reappointed for successive terms.

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          Pursuant to our By-Laws, each shareholder or group of shareholders holding at least 2.0% of our shares may present a slate, listing in progressive order at least seven and up to fifteen individuals.  Slates must be presented at least ten days prior to the date set for the meeting of shareholders on first call.  Each shareholder (or shareholders under common control) may present and vote for only one slate, and each candidate may appear on only one slate.

          In order to be eligible as members of the management control committee at least three members of the canditates on the slate, must be independent according to the criteria described in “—Significant Differences with Corporate Governance Practices under NYSE Rules—Independent Directors” below and must provide evidence of good standing.  Pursuant to our  By-laws, at least one of the first three candidates on each slate must be enrolled in the Italian registry of chartered accountants and have at least three years experience as an accountant.  If the other two candidates of the first three on a slate are not registered chartered accountants, they must either (i) have held for at least three years managerial or control positions in companies whose share capital amounts to at least €2 million, or within governmental entities active in the banking, financial or insurance sectors or in sectors which are closely connected to our business sector, or have had professional or academic experience in legal, economic, financial or technical matters closely connected to our business sector; or (ii) be chosen from individuals who have served as members of our board of directors or board of statutory auditors.

          If only one slate is presented, our board of directors will be composed of the individuals listed on such slate.  If more than one slate is presented, all of the candidates appearing on the slate that obtains the largest number of votes, except for the last one, will be elected as directors; the first candidate on the slate receiving the second-largest number of votes who meets the requirements described above for appointment as member of the Management Control Committee by the board of directors shall be elected as director and appointed as chairman of the Management Control Committee.

          In accordance with the By-laws, the board of directors has complete power of ordinary and extraordinary administration of our business (including the issuance of debt securities not convertible into our shares) and may perform all acts it deems advisable for the achievement of our corporate purposes, except for the actions reserved by applicable law or the By-laws to a vote of the shareholders at an ordinary or extraordinary shareholders’ meeting.  See also “—Meetings of Shareholders.”

          The board of directors must appoint a chairman (presidente) and may appoint a vice-chairman to replace the chairman when he is absent or unavailable.  The chairman of the board of directors and, in his absence, the vice-chairman and the managing directors, if any, are severally our legal representatives.  The board of directors may delegate powers to one or more managing directors (amministratori delegati), and/or to an executive committee composed of directors, and/or to one or more ad hoc committees of directors, determine the nature and scope of the delegated powers of each director and committee and revoke such delegation at any time.  Our By-laws provide that the chairman of the board of directors and, if any, the managing directors are members of the executive committee.  Our executive directors must ensure, under the supervision of the Management Control Committee, that our organizational and accounting structure is appropriate to our business and must report to the board of directors and to the Management Control Committee at least quarterly on the Company’s business and the main transactions carried out by us or by our subsidiaries.

          In accordance with Italian law and the By-laws, the board of directors may not delegate certain of its responsibilities, including those relating to the approval of the draft financial statements, the approval of merger and de-merger plans to be presented to shareholders’ meetings, increases in the amount of our share capital or the issuance of convertible debentures (if any such power has been delegated to the board of directors by vote of the extraordinary shareholders’ meeting) and the calling of an ordinary or an extraordinary shareholders’ meeting to resolve upon the actions to be taken by us in case of decrease of our shareholders’ equity to less than two thirds of our paid-in capital as a result of accumulated losses.  See also “—Meetings of Shareholders.”

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          The board of directors may also appoint a general manager (direttore generale) and one or more senior managers (direttori) who report directly to the board and confer powers for single acts or categories of acts to our employees or persons unaffiliated with us.

          Meetings of the board of directors are called by written notice by the chairman on his own initiative and must be called upon the request of the vice-chairman, any managing director or at least two other directors or upon the request of our Management Control Committee.  Meetings may be held in person, or by video-conference or tele-conference, in any member state of the European Union, the United States and Switzerland.  The quorum for meetings of the board of directors is a majority of the directors in office.  Resolutions are adopted by the vote of a majority of the directors present at the meeting.

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

          Under Italian law, directors may be removed from office at any time by the vote of shareholders at an ordinary shareholders’ meeting although, if removed in circumstances where there was no just cause, such directors may have a claim for indemnification against us.  Directors may resign at any time by written notice to the board of directors.  The board of directors must appoint substitute directors to fill vacancies arising from removals or resignations to serve until the next ordinary shareholders’ meeting.  If at any time more than half of the members of the board of directors appointed at a shareholders’ meeting resign or otherwise cease to be directors, the entire board of directors will be considered to have lapsed and the remaining members of the board of directors must promptly call an ordinary shareholders’ meeting to appoint a new board of directors.

          The remuneration of directors is determined by shareholders at ordinary shareholders’ meetings.  The board of directors or a committee of such board may determine the remuneration of directors that perform management or other special services for us, such as the Managing Director.  Directors are entitled to reimbursement for expenses reasonably incurred in connection with their functions.

Management Control Committee

          Since our adoption of a one-tier corporate governance system, a management control committee replaced our board of statutory auditors, which under the traditional corporate governance model was the supervisory board entrusted mainly with control and supervisory responsibilities, appointing and removing the members of the management board and approving the company’s annual financial statements.

          Our first Management Control Committee was appointed by the current board of directors at its first meeting and is composed of three independent directors who comply with the membership requirements described above (see “—Board of Directors”), one of whom must come from the slate that obtains the second-largest number of votes, if any such slate has been presented.  The remuneration of the members of the Management Control Committee must be decided by the board of directors if it is not resolved upon by shareholders at the meeting appointing the directors.

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          Pursuant to the TUF, the by-laws of listed companies adopting the one-tier governance system must (i) limit the number of mandates that members of a management control committee may have in other companies, and (ii) include clauses ensuring that minority shareholders may elect one member who will be appointed to be part of the management control committee (or two members if the committee is composed of more than three members).  Pursuant to our By-laws, our Management Control Committee must be composed of three directors who may not hold similar positions in more than three other listed companies (not counting our subsidiaries).

          Our By-laws provide for mechanisms to ensure that if a member of the Management Control Committee ceases to be a member of such committee, or of the board of directors, or no longer complies with the requirements described above, that member must be replaced on the Management Control Committee in such a way as to ensure that the membership requirements, and the minority shareholders’ rights as to the appointment, as described above, are satisfied.

          The duties of our Management Control Committee are to verify that we (i) maintain adequate organizational structure, internal controls and administrative and accounting systems and (ii) adequately instruct our subsidiaries to transmit to us information relevant to our disclosure obligations.  Our board of directors may delegate further tasks to the Management Control Committee, in particular with respect to the relationships with our external auditors.

          Our Management Control Committee must also carry out the functions of internal control committee pursuant to the STAR Governance Rules and, to the extent permitted by Italian law, audit committee pursuant to Rule 10A-3.  See “—Significant Differences with Corporate Governance Practices under NYSE Rules—Overview” below.

          Our Management Control Committee is required to meet at least once every ninety days.  Meetings of the Management Control Committee must be called by written notice by the chairman of the Management Control Committee at his own initiative or at the request of any other member, in which case the chairman must call the meeting without delay unless there are valid reasons not to convene it.  Meetings may be held in person, or by video-conference or teleconference.  The quorum for meetings of the Management Control Committee is a majority of its members.  Resolutions must be adopted by the vote of a majority of the members present at the meeting.

          In addition, the members of our Management Control Committee must attend shareholders’ meetings and the meetings of our executive committee if the latter is established.  Our Management Control Committee or two of its members may decide, upon informing the Chairman of the board of directors, to call a meeting of the board of directors or of the executive committee, if the latter is established.  Each member of our Management Control Committee may ask the other directors for information about our business or that of our subsidiaries.  Our Management Control Committee may carry out inspections and verifications on our premises and exchange information with the supervisory bodies of our subsidiaries or our external auditors.

          Our Management Control Committee must report its review activities and any irregularities detected during its review activities at the shareholders’ meeting convened to approve our annual unconsolidated financial statements.  Our executive directors must report to the Management Control Committee at least quarterly the Company’s business and the main transactions carried out by us or by our subsidiaries.

          Any shareholder may submit a complaint to our Management Control Committee regarding facts that such shareholder believes should be subject to scrutiny by the Management Control Committee, which must take any such complaint into account in its report to the shareholders’ meeting.

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If shareholders collectively representing 2.0% of our share capital submit such a complaint, the Management Control Committee must promptly undertake an investigation and present its findings and any recommendations to a shareholders’ meeting (which it shall convene if the complaint concerns serious irregularities and there is an urgent need to take action).

          The Management Control Committee may report to the court having jurisdiction over the Company serious breaches of the duties of the directors which may be prejudicial to us or to our subsidiaries.  Our Management Control Committee is also required to notify CONSOB without delay of any irregularities found during its review activities.  CONSOB may report to the competent court serious breaches of the duties of the members of our Management Control Committee.

External Auditors

          The TUF requires companies whose shares are listed on regulated markets of EU Member States to appoint a firm of external auditors that shall verify (i) during the fiscal year, that the company’s accounting records are correctly kept and accurately reflect the company’s activities, and (ii) that the financial statements correspond to the accounting records and the verifications conducted by the external auditors and comply with applicable rules.  The external auditors express their opinion on the financial statements in a report that may be consulted by the shareholders prior to the annual shareholders’ meeting.

          Under the TUF, as amended in December 2005 by the Investor Protection Act, the external auditors are appointed by the ordinary shareholders’ meeting for a six-year term (which may not be renewed more than once and which may not be further renewed until three years have elapsed from the termination of the previous appointment).  If the appointment is renewed, the person responsible for the audit must be replaced by another person.  Such appointment must be notified to CONSOB.

          On May 6, 2004, our shareholders appointed KPMG S.p.A., with legal offices at Via Vittor Pisani 25, Milan, Italy, as our external auditors for a third consecutive three-year term, in compliance with the law in force at the time.

Meetings of Shareholders

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

          Shareholders are informed of all shareholders’ meetings to be held by publication of a notice in the MF – Milano Finanza or Finanza & Mercati daily newspapers or in the Official Journal of the Italian Republic (Gazzetta Ufficiale) at least 30 days before the date fixed for the meeting (20 days if the meeting is called at the request of holders of at least 10% of the issued shares).  The above formalities and terms regarding the call notice may be reduced in other very limited circumstances.  As a matter of practice, we publish the notice in a national daily newspaper, as recommended by CONSOB.  Shareholders who, separately or jointly, represent at least 2.5% of our share capital may request, within five days of the publication of the notice convening the meeting, additions to the agenda, specifying in the request the additional items they propose. Such additions to the agenda may not be made for matters on which the shareholders meeting is required by law to resolve on proposals put forward by the directors or on the basis of a plan or report they have prepared.

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

          Extraordinary shareholders’ meetings may be called to pass upon the dissolution of the company, the appointment of receivers and similar extraordinary actions.  Extraordinary shareholders’ meetings may also be called to resolve upon proposed amendments to the By-laws, issuance of convertible debt securities, mergers and de-mergers, capital increases and reductions, where such resolutions may not be taken by our board of directors.  In particular, our board of directors may transfer our registered office within Italy or resolve upon other amendments to our By-laws when these amendments are required by law, resolve upon mergers by absorption into us of our subsidiaries in which we hold at least 90% of the issued share capital and reductions of our share capital in case of withdrawal of a shareholder.  Moreover, if, as a result of accumulated losses, our shareholders’ equity decreases to less than two-thirds of our paid-in capital but not below €120,000, and this decrease is not reduced within one-third of our paid-in capital in the fiscal year following that of the original decrease, the corresponding reduction of our share capital is resolved upon by our board of directors and not by our shareholders’ meeting.  Our board of directors may also resolve upon the issuance of shares or convertible debt securities if such powers have been previously delegated to the board of directors by a vote of the extraordinary shareholders’ meeting.

          The notice of a shareholders’ meeting may specify up to two meeting dates for an ordinary or extraordinary shareholders’ meeting; such meeting dates are generally referred to as “calls.”  The extraordinary meeting may be convened on third call through a new notice if the quorum required for shareholder action on second call is not reached.

          The quorum required for shareholder action at an ordinary shareholders’ meeting on first call is at least 50% of the total number of issued shares, while on second call there is no quorum requirement.  In either case, resolutions may be approved by holders of the majority of the shares present or represented at the meeting.  The quorum required at an extraordinary shareholders’ meeting on first, second and third call is at least 50%, more than one-third and at least one-fifth, respectively, of our issued shares.  Resolutions of any extraordinary shareholders’ meeting require the approval of at least two-thirds of the holders of shares present or represented at such meeting.  See also “—Pre-emptive Rights.”

          A shareholders’ meeting may be attended only by shareholders with voting rights, whose financial intermediary shall have delivered to us, at least two days prior to the date of the meeting on first call, a notice entitling the shareholder to attend the meeting.  Once the above notice is communicated to us by the relevant intermediary the shares cannot be disposed of until the meeting has taken place.

          Shareholders may attend the shareholders’ meeting by proxy.  A proxy may be given only for a single shareholders’ meeting (including, however, the first, second and third calls of such meeting), except as part of a general power of attorney or a power of attorney granted by a corporation, association, foundation or any other legal entity to one of its employees.  A proxy may be exercised only by the person expressly named in the applicable form.

          The person exercising the proxy cannot be our subsidiary, a director, auditor or employee of ours or of any of our subsidiaries. Any one proxy cannot represent more than 200 of our shareholders.  See “—Voting Rights.”

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Pre-emptive Rights

          Pursuant to Italian law, holders of shares (and holders of convertible bonds) are entitled to subscribe for new issuances of shares, debt securities convertible into shares and any other warrants, rights or options entitling the holders to subscribe for shares in proportion to their holdings, unless such issues are for non-cash consideration or pre-emptive rights are waived or limited by a resolution adopted at an extraordinary shareholders’ meeting by holders of a majority of the issued shares.  There can be no assurance that the U.S. resident owners of shares or owners of ADSs will be able to exercise fully any pre-emptive rights to which the holders of shares are entitled.  Pursuant to our Depositary Agreement with our ADR Depositary, the ADR Depositary, if requested by us, will use its best efforts to sell such warrants, rights or options and will allocate the proceeds of such sale for the account of the ADR owners.

Reports to Shareholders

          We are required to publish, in the Italian language, audited annual unconsolidated financial statements of DMH and our audited annual consolidated financial statements.  We also produce an annual report to shareholders in the Italian language which contains a directors’ report together with audited financial statements (consolidated and unconsolidated) of DMH.

          We are required to produce semi-annual and quarterly reports to shareholders in the Italian language which contain a directors’ report as well as our unaudited semi-annual and quarterly condensed financial statements (consolidated and, in the case of semi-annual statements only, unconsolidated).

          We prepare our financial statements in accordance with IFRS.  See “Presentation Of Financial and Other Information” and “Item 5. Operating and Financial Review and Prospects—International Financial Reporting Standards (IFRS).”

          We are also required to prepare annual reports on Form 20-F to be filed with the U.S. Securities and Exchange Commission containing, among other matters, our audited consolidated financial statements.

Preference Shares or Savings Shares; Other Securities

          We are permitted in accordance with Italian law to issue preference shares or savings shares.  Preference shares would typically not be entitled to vote in an ordinary shareholders’ meeting, but would be entitled to vote together with the shares in extraordinary shareholders’ meetings and could be entitled to vote in ordinary shareholders’ meetings as well if their terms so provided.  Savings shares are entitled to vote in neither ordinary nor extraordinary shareholders’ meetings.  However, Italian law provides for special meetings of holders of each class of shares for the approval of resolutions adopted by the shareholders which affect their rights vis-à-vis the other classes of shares.  Preference shares would have preferential rights to the payment of dividends and to the repayment of capital in the event of liquidation.  Savings shares typically have preferential rights to the payment of dividends, but the by-laws may provide for different or additional preferential rights.

          We have no currently authorized or outstanding preference shares or savings shares.  The authorization of preference shares and of savings shares requires an amendment to the By-laws and is thus subject to the approval by an extraordinary shareholders’ meeting.  See “—Meetings of Shareholders.”

          Pursuant to the 2004 corporate law reform, effective January 1, 2004, Italian companies are permitted to issue other classes of equity securities with different economic and voting rights, so-called participation certificates with limited voting rights, as well as so-called tracking stock, if their by-laws permit such issuance.  Our By-laws do not currently permit such issuance.

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          The power to issue debt securities not convertible into our shares is vested in our board of directors.

Liquidation Rights

          Pursuant to Italian law and subject to the satisfaction of the claims of all other creditors, shareholders are entitled to a distribution in liquidation that is equal to the value of their shares (to the extent available out of our net assets).  Holders of preference shares, if any such shares are issued in the future by us, would be entitled to a priority right to any such distribution from liquidation up to their par value.  Holders of saving shares, if any such shares are issued in the future by us and if our By-laws so provide, would be entitled to a priority right to any distribution from liquidation.  Thereafter, all shareholders would rank equally in their claims to the distribution or surplus assets, if any.  Ordinary shares rank pari passu among themselves in liquidation.

Purchase by Us of Our Own Shares

          We are permitted to purchase shares, provided we receive necessary authorization from the ordinary shareholders’ meeting and meet certain other conditions and limitations provided by Italian law.  Shares may only be purchased out of profits available for dividends or out of distributable reserves, in each case as appearing on the latest shareholder-approved unconsolidated financial statements.  Further, we may only repurchase fully paid-in shares.  The number of shares to be acquired, together with any shares previously acquired by us or any of our subsidiaries may not (except in limited circumstances) exceed in aggregate 10% of the total number of shares then issued and the aggregate purchase price of such shares may not exceed the earnings reserve specifically approved by shareholders.  Shares held in excess of such 10% limit must be sold within one year of the date of purchase.  Similar limitations apply with respect to purchases of our shares by our subsidiaries.

          A corresponding reserve equal to the purchase price of such shares must be created in the balance sheet, and such reserve is not available for distribution, unless such shares are sold or cancelled.  Shares purchased and held by us may be resold only pursuant to a resolution of our shareholders adopted at an ordinary shareholders’ meeting.  The voting rights attached to the shares held by us or our subsidiaries cannot be exercised, but the shares can be counted for quorum purposes in shareholders’ meetings.  Dividends and other rights, including pre-emptive rights, attached to such shares will accrue to the benefit of other shareholders.  However, our shareholders may authorize the exercise of pre-emptive rights relating to shares owned by us or our subsidiaries. 

          The TUF provides that the purchase by a listed company of its own shares and the purchase of shares of a listed company by its subsidiaries must be carried out so as to ensure the equality of treatment among shareholders.  Subject to certain limitations, the foregoing does not apply to shares being purchased by a company from its employees or from the employees of its controlling company or subsidiaries.

          At a meeting held on May 5, 2005, our shareholders approved a buy back plan for the repurchase of up to 12,110,000 of our shares over an 18-month period, replacing the plan approved on May 6, 2004.  See “—Buy Back Plan.”

          As of June 23, 2006, we do not hold any of our own shares.

Notification of the Acquisition of Shares and Voting Rights

          Pursuant to Italian securities laws, including the TUF and CONSOB Regulation No. 11971 of May 14, 1999 as subsequently amended (“Regulation No. 11971”), any acquisition of any interest in excess of 2.0% in the voting shares of a listed company must be notified to CONSOB and the company whose shares are acquired.  The voting rights attributable to the shares in respect of which such notification has not been made may not be exercised.  Any resolution taken in violation of the foregoing may be annulled if the resolution would not have been adopted in the absence of such votes.

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          In addition, any person whose aggregate interest in the voting shares of a listed company exceeds or falls below 2%, 5%, 7.5%, 10% and successive percentages being multiples of 5, respectively, of the listed company’s voting share capital, is obliged to notify CONSOB and the issuer.  For the purpose of calculating these ownership thresholds, shares owned by any person, irrespective of whether the voting rights attributable thereto are exercisable by such person or by a third party, are taken into consideration and, except in certain circumstances, account should also be taken of shares held through, or shares the voting rights of which are exercisable by, subsidiaries, fiduciaries or intermediaries.  For the purpose of calculating the ownership thresholds of 5%, 10%, 25%, 50% and 75%, shares should also be taken into account that: (i) a person has an option to, directly or indirectly, acquire or sell; and (ii) a person may acquire further to the exercise of a warrant or conversion right which is exercisable within 60 days.  The notification must be repeated when such person, upon the exercise of the right referred to in (i) or (ii) above, acquires or sells shares which cause his aggregate ownership in the listed company to exceed or fall below the relevant thresholds.  Notification should be made (except in certain circumstances) within five trading days of the event which gives rise to the notification obligation.

          Cross-ownership of listed companies may not exceed 2.0% of their respective voting shares and cross-ownership between a listed company and an unlisted company may not exceed 2.0% of the voting shares of the listed company and 10.0% of the voting shares of the unlisted company.  If the relative threshold is exceeded, the company which is the latter to exceed such threshold may not exercise the voting rights attributable to the shares in excess of the threshold and must sell the excess shares within a period of 12 months.  If such company does not sell the excess shares, it may not exercise the voting rights in respect of its entire shareholding.  If it is not possible to ascertain which is the latter company to exceed the threshold, subject to a different agreement between the two companies, the limitation on voting rights and the obligation to sell the excess shares applies to both of the companies concerned.  The 2.0% limit for cross-ownership is increased to 5.0% on the condition that such limit is exceeded by the two companies concerned only following an agreement authorized in advance by an ordinary shareholders’ meeting of each of them.  Furthermore, if a party holds an interest in excess of 2.0% of a listed company’s share capital, such listed company or the party which controls the listed company may not purchase an interest above 2.0% in a listed company controlled by the first party.  In case of non-compliance, voting rights attributable to the shares held in excess may not be exercised.  If it is not possible to ascertain which is the latter party to exceed the limit, the limitation on voting rights applies to both, subject to any different agreement between the two parties.  Any shareholders’ resolution taken in violation of the limitation on voting rights may be annulled if the resolution would not have been adopted in the absence of such votes.  The foregoing provisions in relation to cross-ownership do not apply when the thresholds are exceeded following a public tender offer aimed at acquiring at least 60% of a company’s ordinary shares or when a controlled company purchases shares of a controlling company within the limits set forth in Article 2359 bis of the Italian Civil Code and following the procedures described under “—Purchase by Us of Our Own Shares”; however, certain restrictions on the manner of purchase apply.

          Pursuant to the TUF, agreements among shareholders of a listed company or of its parent company, must be notified to CONSOB (within 5 days), published in summary form in the press (within 10 days) and filed with the Chamber of Commerce (within 15 days).  Failure to comply with the above rules renders the agreements null and void and the shares cannot be voted.  These rules apply to shareholders’ agreements which:

 

(i)          concern (including prior consultation for) the exercise of voting rights in a listed company or its controlling company;

 

 

 

 

(ii)          contain limitations on the transfer of shares of the companies under point (i), above, or of securities which grant the right to purchase or subscribe said shares;

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(iii)          provide for the purchase of shares or securities mentioned in point (ii), above; or

 

 

 

 

(iv)          have as their object or effect the exercise (including joint exercise) of a dominant influence over the companies under point (i), above.

          Any shareholders’ agreement of the nature described above may have a maximum term of three years or, if executed for an unlimited term, can be terminated by a party upon six months’ prior notice.  In case of a public tender offer, shareholders who intend to participate in the tender offer may withdraw from the agreement without notice, such withdrawal being effective only in the event that the relevant shares are actually sold.

          Regulation No. 11971 contains provisions which govern the method and content of the notification and publication of the agreements as well as of subsequent amendments thereto.  The regulation also provides that any party to an agreement referred to in (i) and (iv) above concerning more than 5% of the listed company’s share capital is obliged to notify CONSOB and the listed company in question of its overall shareholding in the listed company, unless such information has already been notified in compliance with other provisions of the TUF.

          In accordance with Italian anti-trust laws, the Italian anti-trust authority may prohibit the acquisition of control in a company which would thereby create or strengthen a dominant position in the domestic market or a significant part thereof and which would result in the elimination or substantial reduction, on a lasting basis, of competition, provided that certain turnover thresholds are exceeded.  However, if the turnover of the acquiring party and the company to be acquired exceed certain higher turnover thresholds, the anti-trust review of the acquisition falls within the exclusive jurisdiction of the European Commission.

Minority Shareholders’ Rights

          Shareholders’ resolutions which are not adopted in conformity with applicable law or our By-laws may be challenged (with certain limitations and exceptions) within ninety days by absent, dissenting or abstaining shareholders representing individually or in the aggregate at least 0.1% of our share capital (as well as by our board of directors or our board of statutory auditors).  Shareholders not reaching this threshold or shareholders not entitled to vote at our meetings may only claim damages deriving from the resolution.

          Dissenting or absent shareholders may require us to buy back their shares for the average closing price of the previous six months as a result of shareholders’ resolutions approving, among other things, material modifications to our corporate purpose or of the voting rights of our shares, our transformation from a stock corporation into a different legal entity, the transfer of our registered seat outside Italy or the de-listing of our shares from Telematico.

          Each shareholder may bring to the attention of our Management Control Committee facts or acts which are deemed wrongful.  If such shareholders represent more than 2.0% of our share capital, our Management Control Committee must investigate without delay and report its findings and recommendations to the shareholders’ meeting.

          Shareholders representing more than 2.5% of our share capital have the right to report to the court having jurisdiction over us serious breaches of the duties of our directors which may be prejudicial to us or to our subsidiaries.  In addition, shareholders representing at least 2.5% of our share capital may commence derivative suits before the court having jurisdiction over us against our directors, statutory auditors and general managers.  We may waive or settle the suit unless shareholders holding at least 2.5% of the shares vote against such waiver or settlement.  We will reimburse the legal costs of such action in the event that the claim of such shareholders is successful and the court does not award such costs against the relevant directors, statutory auditors or general managers.

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          Minority shareholders may appoint a member of our board of directors pursuant to the cumulative voting system described in “—Corporate Governance System – Board of Directors” above.  The director appointed by the minority shareholders will then be appointed by the board of directors as chairman of our Management Control Committee. 

Tender Offer Rules

          Pursuant to the TUF, a public tender offer must be made by any person that, by reason of its purchases of shares, holds more than 30% of the shares of an Italian company listed on an Italian regulated market entitling their holders to vote on the appointment or revocation of the directors or the commencement of derivative suits against them (for purposes of this section, and as applicable to our shares, the “Ordinary Shares”).  The tender offer must cover all the Ordinary Shares of the listed company.  Similarly, a tender offer for all the Ordinary Shares of a listed company must be made by any person who, having more than 30% of the Ordinary Shares without exercising majority voting rights at ordinary shareholders’ meetings, acquires — by way of acquisition or exercise of subscription or conversion rights — during a 12-month period more than an additional 3% of the Ordinary Shares.  Moreover, according to a release issued by CONSOB if, as a result of a share buy back effected by a listed company, the controlling shareholder of that company holds more than 30% of the outstanding Ordinary Shares (i.e., exclusive of treasury stock), the obligation to launch a tender offer is triggered.  Likewise, the obligation to launch a tender offer is triggered when a share buy back results in an increase of more than 3% of the outstanding Ordinary Shares owned by the controlling shareholder originally holding more than 30% but less than 50% of the company’s outstanding Ordinary Shares.  The offer must be launched within thirty days from the date on which the relevant threshold was exceeded, at a price not lower than the average of the weighted average of the market price for the shares in the previous twelve months, and the highest price paid for the Ordinary Shares by the offeror in the same period.

          Under Regulation No. 11971, a purchaser is exempted from the tender offer obligation when:  (i) the purchaser’s equity interest, as a result of an acquisition, does not exceed the 30% threshold by more than 3% (provided that the purchaser commits (a) not to exercise the voting rights pertaining to any Ordinary Shares exceeding the 30% threshold and (b) to sell any shares exceeding the 30% threshold within 12 months from the date of purchase); (ii) another person (or several persons acting jointly) already owns more than 50% of the outstanding Ordinary Shares, (iii) the 30% threshold is exceeded as a result of a capital increase in connection with a debt restructuring plan approved by CONSOB, (iv) the 30% threshold is exceeded as a result of transfers of Ordinary Shares among related persons, (v) the 30% threshold is exceeded as a result of the exercise of pre-emptive rights, (vi) the 30% threshold is exceeded through mergers or demergers having an industrial purpose, approved by the shareholders of the company whose shares would otherwise be the target of the tender offer.  The TUF provides further that the acquisition of an interest above 30% of the Ordinary Shares of a company does not trigger the obligation to launch a 100% tender offer if the person concerned has exceeded the threshold as a result of a public tender offer launched on all of the Ordinary Shares of the company.  If a person exceeds the above 30% threshold as a result of a public tender offer launched on 60% or more, but on less than all, of the Ordinary Shares of the company, the person concerned is exempted from the obligation to launch a 100% tender offer if (i) the tender offer has been approved by shareholders of the company holding a majority of the Ordinary Shares (excluding the offeror and the current majority shareholder), and (ii) the offeror (its subsidiaries, controlling person, related companies and other person connected to it by virtue, inter alia, of shareholders’ agreements) has not acquired more than 1% of the Ordinary Shares of the company in the preceding 12 months; CONSOB shall ensure compliance with these conditions before allowing the offer to be launched.  After such an offer has been completed, the offeror nevertheless becomes subject to the duty to launch an offer for 100% of the Ordinary Shares if, in the course of the subsequent 12 months, (i) it (or its affiliates) purchases more than an additional 1% of the Ordinary Shares of the company, or (ii) if the company approves a merger or split-up.

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          Finally, the TUF provides that anyone holding 90% or more of the voting shares of a company must launch an offer for the remaining voting shares unless an adequate distribution is restored so as to ensure proper trading within a period of 120 days.  Any shareholder holding more than 98% of the voting shares of a listed company following a tender offer for all such shares issued by the company, has the right to obtain title to the remaining shares within four months after the end of the tender offer if it has stated in the offer document its intention to make such an acquisition at a price set by a court-appointed expert.

Liability for Mismanagement of Subsidiaries

          Pursuant to the 2004 corporate law reform, companies and other entities that, acting in their own interest or the interest of third parties, mismanage a company subject to their direction and coordination powers are liable to such company’s shareholders and creditors for ensuing damages.  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.  As of June 23, 2006, we are not subject to the direction and coordination powers of any entity because we actually independently take all the decisions regarding the management of our company.  However, we exercise direction and coordination power over our subsidiaries Ducati Retail S.r.l., Ducati Corse S.r.l. and Ducati Consulting S.r.l.

Significant Differences with Corporate Governance Practices under NYSE Rules

Overview

          Corporate governance rules for Italian stock corporations whose shares are listed on the Italian Stock Exchange (the “ISE”), are set forth in the Italian Civil Code, in the TUF and in the corporate governance rules set forth by the voluntary code of corporate governance issued by the ISE (the “Corporate Governance Code”).  As described in more detail below, these Italian corporate governance rules differ in a number of ways from those applicable to U.S. domestic companies under NYSE listing standards, as set forth in the NYSE Listed Company Manual.

          As a general rule, our main corporate bodies are governed by the Italian Civil Code and the TUF and are assigned specific powers and duties that are legally binding and from which there can be no derogation.  The Corporate Governance Code builds on this general framework and sets forth recommendations for responsible corporate governance intended to reflect generally accepted best practice.  While these recommendations are not legally binding, the regulations issued by the ISE require that its listed companies issue an annual compliance report disclosing which recommendations, if any, are not being followed and why, and as part of the STAR admission requirements set forth by the ISE regulations, we are required to comply with certain rules contained in the Corporate Governance Code (the “STAR Governance Rules”).  The annual compliance report must also contain a general description of our corporate governance system.  As stated in our annual compliance report to the ISE, issued on March 24, 2006, we comply with the STAR Governance Rules and are substantially in compliance with the other rules set forth in the Corporate Governance Code.

          Recently ISE has issued and published a new Code of Corporate Governance: the listed companies are invited to comply with the new Code of Corporate Governance by the end of the current fiscal year and to state said compliance in the annual compliance report to the ISE to be issued in 2007.

          We currently follow a one-tier corporate governance system, with a board of directors (consiglio di amministrazione), including a Management Control Committee (comitato per il controllo sulla gestione).  See “—By-Laws—Corporate Governance System” for a description of the powers and duties of our board of directors and of our Management Control Committee.

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The members of the board of directors owe duties of loyalty and care to us.  As required by Italian law, a firm of external auditors is in charge of auditing our financial statements.  See “—By-Laws—External Auditors.”  The members of our board of directors and the firm of external auditors are directly and separately appointed by shareholder resolution at our general shareholders’ meetings.

          Our Management Control Committee must carry out the functions of internal control committee established by our board of directors as required by the Star Governance Rules. As internal control committee, our Management Control Committee is mainly responsible for assessing the adequacy of our internal control system and for relations with our external auditors.  See “Item 6. Directors, Senior Management and Employees—Board Committees.”  Our Management Control Committee also serves as our audit committee for purposes of complying with Rule 10A-3 and NYSE listing standards, to the extent permitted by Italian law.  See “—By-Laws—Corporate Governance System.”

          Following is a summary of the significant differences between Italian corporate governance rules and practices as we have implemented them and those applicable to U.S. issuers under NYSE listing standards, as set forth in the NYSE 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 relationships, among others.”  More specifically, a director is not independent if such director or an immediate family member, has certain specified relationships with the company, its parent, any consolidated subsidiary, its internal or external auditors, or any company that has significant business relationships with the company, its parent or any consolidated subsidiary. Ownership of a significant amount of stock is not a per se bar to independence.  In addition, a three-year “cooling off” period following the termination of any relationship that compromised a director’s independence must lapse before that director can again be considered independent.

          Our practice.  Pursuant to the STAR Governance Rules, our board of directors must include an adequate number (at least three out of eleven) of non-executive independent directors, such that their views carry significant weight in the adoption of the board’s resolutions.

          Under the STAR Governance Rules, a director is not independent if he or she (i) has significant relationships of an economic nature, directly, indirectly or on behalf of third parties, with the issuer or its affiliates (that is, its subsidiaries, executive directors or controlling shareholder(s)); (ii) holds, directly, indirectly or on behalf of third parties, an equity interest affording control or a significant influence over the issuer; (iii) is a party to a shareholders agreement for the control of the issuer; or (iv) has close family relations with an executive director, controlling shareholder or other persons who do not themselves qualify as independent.  The following economic relationships are deemed significant for purposes of the director independence requirements: (a) business relationships entertained in the current or the previous year, including through companies which the director controls or is an executive director of, unless the relationships are at market conditions, are not such as to influence the director’s autonomous judgment and do not have a value exceeding 5% of the annual turnover of either party to the transaction;  (b) professional services rendered, including through a partnership, in the current or the previous year, unless the services are rendered at market conditions, are not such as to influence the director’s autonomous judgment and the consideration does not exceed 5% of the director’s annual income or €200,000; and (c) employment relationships or serving as an executive director in the previous three years.

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          Compliance with the independence requirements is assessed periodically by our board of directors.  As of March 24, 2006, the date of this year’s annual compliance report to the ISE, our board consisted of 11 directors, seven of whom qualified as independent directors under the STAR Governance Rules.

          The members of our Management Control Committee must meet independence requirements mandated by Italian law.  Their independence is assessed on the basis of a few general principles, rather than detailed rules.  In particular, a person who (i) is a director, or the spouse or a close relative of a director, of our company or any of our affiliates; (ii) has an employment or consulting or similar relationship with our company or any of our affiliates; or (iii) has an economic relationship with us or any of our affiliates which might compromise his/her independence, cannot be appointed to our Management Control Committee.  Although there is no formal cooling off requirement, if a member of the Management Control Committee who is a registered chartered accountant (i) during his term entertains, or entertained in the two years prior to the appointment, a regular or material consulting relationship with the company that appointed him as member of the Management Control Committee or with any of its subsidiaries, or (ii) during his term is employed by, or serves as a director of – or was employed or served as a director in the three years prior to the appointment – the company that appointed him as member of the Management Control Committee or any of its controlling entities, such member’s license may be suspended or withdrawn.]  Finally, we are required to provide in our By-laws a mechanism to permit minority shareholders to elect one member of the Management Control Committee who shall also be appointed chairman.  See “—By-Laws—Current Corporate Governance System—Statutory Auditors.”

          At least three members of our board of directors have to meet the independence requirements applicable to the members of our Management Control Committee described above.  See also “—Audit Committee and Internal Audit Function” below for a description of further independence requirements of the members of our Management Control Committee.

Executive Sessions

          NYSE domestic company standards.  In order to empower non-management directors of U.S. companies listed on the NYSE to serve as a more effective check on management, non-management directors must meet regularly in executive sessions, and, if the board includes directors who are not independent, the independent directors must meet alone in an executive session at least once a year. 

          Our practice.  In Italy, neither non-executive directors nor independent directors are required to meet in executive sessions.  The members of our Management Control Committee are required to meet at least once every 90 days. 

Audit Committee and Internal Audit Function

          NYSE domestic company standards.  U.S. companies listed on the NYSE are required to establish an audit committee that satisfies the requirements of Rule 10A-3 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 “whistleblower” 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, except to the independent auditor.

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          Our practice.  Our Management Control Committee serves as our “audit committee” for purposes of complying with Rule 10A-3, to the extent permitted by Italian law.  See “—By-Laws—Corporate Governance System.” In order to comply with Rule 10A-3 our Management Control Committee has assumed the following functions: approve procedures, which may include delegation of pre-approval authority to one or more designated members of the committee, for the retention of the External Auditors for any permitted audit service other than the audit of our financial statements and any permitted non-audit service, and determine the fees for such services;  oversee, to the extent permitted under Italian law, the work of the External Auditors, including (i) resolution of disagreements between management and the External Auditors regarding financial reporting, and (ii) assessment of the External Auditors’ work plan concerning the carrying out of the Company’s audit and their audit reports and letters of recommendations; exchange information and consult with the External Auditors, including with respect to obtaining, reviewing and discussing reports from the External Auditors regarding:  (1) all critical accounting policies and practices to be used; (2) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with our management officials, ramifications of the use of these alternative disclosures and treatments, and the treatment preferred by the External Auditors and the reasons for favoring that treatment; and (3) other material written communications between the External Auditors and our management, such as any management letter or schedule of unadjusted differences; establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; review with the Chief Executive Officer and the Chief Financial Officer our disclosure controls and procedures on an annual basis, including management’s conclusions about the effectiveness of such disclosure controls and procedures and any material non-compliance with them; review with management and the External Auditors the financial information to be included in the Company’s Annual Report on Form 20-F;

          The three members of our Management Control Committee comply with the independence requirements set out in Rule 10A-3 in addition to those set out under the STAR Governance Rules. 

          We have an internal audit function, which we have not outsourced.

Compensation Committee

          NYSE domestic company standards.  Under NYSE standards, the compensation of the chief executive officer of a U.S. domestic company must be approved by a compensation committee (or equivalent) composed entirely of independent directors.  The compensation committee must also make recommendations to the board of directors with regard to the compensation of other executive officers, incentive compensation plans and equity-based plans that are subject to board of directors’ approval.  Disclosure of individual management compensation information for these companies is mandated by the Exchange Act’s proxy rules, from which foreign private issuers are generally exempt.

          Our practice.  As a matter of Italian law, the compensation of executive directors is determined by the board of directors, while our shareholders determine the compensation of non-executive directors.  The compensation of our executive directors, including the chairman and the Managing Director, is proposed by our compensation committee and approved by our board of directors.  See “Item 6. Directors, Senior Management and Employees—Board Committees.”  Our equity-based compensation plans are proposed by our board of directors, after consultation with our compensation committee, and approved by our shareholders.  The Corporate Governance Code recommends that a majority of the members of the compensation committee be non-executive directors.  All of the four members of our compensation committee are non-executive directors (one of whom qualifies as independent under the STAR Governance Rules).  Our compensation committee does not produce a compensation report.  We disclose the compensation of each of the members of our board of directors (including our Managing Director) in our annual financial statements prepared in accordance with Italian law as well as in Item 6 of this annual report on Form 20-F.

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Nominating Committee

          NYSE domestic company standards.  Under NYSE standards, a U.S. domestic company must have a nominating/corporate governance committee (or equivalent) composed entirely of independent directors that, among other things, is responsible for nominating directors and board committee members.

          Our practice.  We do not have a nominating/corporate governance committee (or equivalent) responsible for nominating our directors or our board committee members.  Directors may be nominated by any of our shareholders, and the board of directors appoints the members of its committees and our Managing Director without prior nomination by any committee.  Members of our board of directors are elected according to a cumulative voting system, with slates presented by shareholders holding, individually or collectively, at least 2.0% of our shares, so as to allow our minority shareholders to elect one member of our board of directors, who will also be appointed as the chairman of the Management Control Committee.  See “—By-Laws—Corporate Governance System—Board of Directors.” 

Corporate Governance Guidelines/Code of Business Conduct and 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 of 2002 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 proper use of company assets; legal compliance; and encouraging the reporting of illegal and unethical behavior.  Corporate governance guidelines must address, at a minimum, director qualification standards, responsibilities and compensation; directors’ access to management and independent advisers; management succession; director orientation and continuing education; and an annual performance evaluation of the board.

          Our practice.  We have adopted certain corporate governance guidelines (including with respect to our internal control system and internal dealing).  As noted in Item 16B of this annual report, we have also adopted a code of conduct and a code of ethics for our directors, employees and others acting on our behalf which, together with our guidelines for the treatment of confidential information, constitute a “code of ethics” as defined in Section 406 of the Sarbanes-Oxley Act.  We refer to these documents, collectively, as our code of ethics.

          We believe that our code of ethics addresses the relevant issues contemplated by the NYSE standards applicable to U.S companies noted above.  Our corporate governance guidelines, on the other hand, do not address all of the issues contemplated by the NYSE standards.

          As noted above, we are required to issue an annual report describing our corporate governance system and disclosing the level of our compliance with the recommendations of the Corporate Governance Code.

          As of April 1, 2006, we have adopted (i) the Company’s internal dealing code drafted in accordance with section 114 comma 7 TUF, as amended, and sections from 152-sexies to 152-octies Regulation No. 11971, and (ii) the procedure for the holding of the Group Register of persons and/or entities having access to privileged information, pursuant to section 115-bis TUF and sections 152-bis and following Regulation No. 11971.

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Certifications as to Violations of NYSE Standards

          NYSE domestic company standards.  Under NYSE listing standards, the chief executive officer of a U.S. company listed on the NYSE must certify annually to the NYSE that he or she is unaware of any violation by the company of the NYSE corporate governance listing standards, and to disclose that such certification has been made in the company’s annual report to shareholders (or, if no annual report to shareholders is prepared, its annual report on Form 10-K). The chief executive officer must also promptly notify the NYSE in writing if any executive officer of the company becomes aware of any material non-compliance with the NYSE corporate governance listing standards.  A U.S. company listed on the NYSE must also submit an annual written affirmation to the NYSE, within 30 days of its annual shareholders’ meeting and in a form specified by the NYSE, regarding its compliance with applicable NYSE corporate governance standards. A U.S. company listed on the NYSE is further required to submit an interim written affirmation to the NYSE upon the occurrence of specified events, including changes to the board of directors or its audit, nominating/corporate governance or compensation committees and changes in the status of independent directors.

          Our practice.  Under the NYSE rules, as of July 31, 2005, we are required to submit an annual written affirmation to the NYSE, within 30 days of the filing of our annual report on Form 20-F with the U.S. Securities and Exchange Commission, regarding our compliance with applicable NYSE corporate governance standards.  We are also required to submit to the NYSE an interim written affirmation any time we are no longer eligible to rely on, or choose to no longer rely on, a previously applicable exemption provided by Rule 10A-3, or if a member of our audit committee ceases to be deemed independent or an audit committee member had been added.  In addition, under NYSE rules, our chief executive officer must notify the NYSE in writing if any executive officer becomes aware of any material non-compliance by us with NYSE corporate governance standards.

Material Contracts

          On May 9, 2005, DMH and Ducati Corse entered into a €100.0 million Syndicated Loan Facility, with a syndicate of seven Italian banks, under which we have borrowed €63.6 million that is available to us under a five-year credit line, and €36.4 million (of which €16 million was borrowed by Ducati Corse) that is available under a renewable one-year revolving credit line.  The Syndicated Loan Facility is described in more detail in “Item 5. Operating and Financial Review and Prospects—Other Financial Transactions.”

Exchange Controls

          No exchange control consent is required in Italy for the transfer to persons outside of Italy of dividends or other distribution with respect to, or of the proceeds from the sale of, shares of an Italian company.

          However, Italian resident and non-resident investors who transfer, directly or indirectly (through banks or other intermediaries) into or out of Italy, cash, investments or other securities in excess of €12,500 must report all such transfers to the Italian Exchange Office (“Ufficio Italiano Cambi” or “UIC”).  In the case of indirect transfers, banks or other intermediaries are required to maintain records of all such transfers for five years for inspection by Italian tax and judicial authorities.  Non-compliance with these reporting and record-keeping requirements may result in administrative fines or, in the case of false reporting or in certain cases of incomplete reporting, criminal penalties.  The UIC is required to maintain reports for a period of ten years and may use such reports, directly or through other government offices, to police money laundering, tax evasion and any other crime or violation.

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          Individuals, non-profit entities and partnerships that are residents of Italy must disclose on their annual tax returns all investments and financial assets held outside Italy, as well as the total amount of transfers to, from, within and between countries other than Italy relating to such foreign investments or financial assets, even if at the end of the taxable period foreign investments or financial assets are no longer owned.  No such tax disclosure is required if (i) the foreign investments or financial assets are exempt from income tax; or (ii) the total value of the foreign investments or financial assets at the end of the taxable period or the total amount of the transfers effected during the fiscal year does not exceed €12,500.  Corporate residents of Italy are exempt from these tax disclosure requirements with respect to their annual tax returns because this information is required to be discussed in their financial statements.

          We cannot assure you that the present regulatory environment in or outside Italy will continue or that particular policies presently in effect will be maintained, although Italy is required to maintain certain regulations and policies by virtue of its membership in the European Union and other international organizations and its adherence to various bilateral and multilateral international agreements.

Taxation

Taxation

          The following is a summary of certain United States federal and Italian tax matters.  The summary contains a description of the principal United States federal and Italian tax consequences of the purchase, ownership and disposition of ordinary shares or ADSs by a holder who is a citizen or resident of the United States or who otherwise will be subject to United States federal income tax on a net income basis in respect of the ordinary shares or ADSs.  This summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase, hold or dispose 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 10.0% or more of the voting shares of DMH or who may be subject to special tax rules, such as banks, tax-exempt entities, insurance companies 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.  Nor does this summary 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 or performs personal services in Italy.

          The summary is based upon tax laws and practice of the United States and Italy as in effect on the date of this annual report.  Prospective purchasers and current holders of ordinary shares or ADSs are advised to consult their own tax advisors as to the U.S., Italian or other tax consequences of the purchase, beneficial ownership and disposition of ordinary shares or ADSs, including, in particular, the effect of any state, local or national 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 “Treaty”), and are not subject to an anti-treaty shopping provision that applies in limited circumstances, are referred to as “U.S. holders.”  Beneficial owners who are citizens or residents of the United States, corporations organized under U.S. law and U.S. partnerships, estates or trusts (to the extent their income is subject to U.S. tax either directly or in the hands of partners or beneficiaries) generally will be considered to be residents of the United States under the Treaty.  Special rules apply to U.S. holders that are also residents of Italy.  A new tax treaty to replace the current Treaty was signed on August 25, 1999, but has not yet been ratified by Italy. The new treaty would not change significantly the provisions of the current Treaty that are discussed below (except that it would clarify the availability of benefits to certain tax-exempt organizations).  These laws are subject to change, possibly on a retroactive basis. Unless otherwise stated, this summary assumes that a U.S. holder is eligible for the benefits of the Treaty.

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          For purposes of the Treaty and the United States Internal Revenue Code of 1986, holders of American Depositary Receipts evidencing ADSs will be treated as the beneficial owners of the underlying shares represented by those ADSs.

          Tax on Dividends

          Italian law provides for the withholding of income tax at a 27.0% rate on dividends paid by Italian companies to shareholders who are not residents of Italy for tax purposes.  Accordingly, the amount initially made available to the Depositary for payment to U.S. holders will reflect withholding at the 27.0% rate.

          Under domestic Italian law, a non-resident holder of shares of common stock may recover up to four-ninths of the tax withheld on dividends by presenting evidence to the Italian tax authorities that income tax has been fully paid on the dividends in the non-resident holder’s country of residence in an amount at least equal to the total refund claimed. Non-resident holders seeking such payments from the Italian tax authorities have experienced extensive delays and incurred expenses.

          Alternatively, the 27.0% withholding tax may be reduced pursuant to an income tax convention between Italy and the non-resident holder’s country of residence. The Treaty provides for a 15.0% withholding tax.

          Under current Italian law, all shares of Italian listed companies (including DMH’s shares) must be held in a centralized clearing system authorized by CONSOB.  Under applicable tax provisions, if the ordinary shares are held through the centralized clearing system managed by Monte Titoli (the only such system currently authorized in Italy), no withholding tax on dividends is applied by DMH.  Instead of the withholding tax, a substitute tax (imposta sostitutiva) is applied on dividend distributions to non-resident holders of ordinary shares (or ADSs relating to such shares) at a rate equal to the withholding tax that would otherwise be due.  The substitute tax is applied by the resident or non-resident Intermediary (as defined by CONSOB Regulation 11768 of December 23, 1998) with which the ordinary shares are deposited and which participates in the Monte Titoli system (directly or through a foreign centralized clearing system participating in the Monte Titoli system).  The procedures to be followed by a non-resident holder in order for the Intermediary with which the ordinary shares are deposited to apply a reduced rate of tax pursuant to an applicable income tax convention are as follows: the Intermediary must receive (i) a declaration of the non-resident holder that contains certain data identifying the non-resident holder and indicating the existence of all the conditions necessary for the application of the relevant income tax convention and the determination of the applicable treaty rate of withholding and (ii) a certification by the tax authorities of the non-resident holder’s country of residence that the holder is a resident of that country for purposes of the income tax convention and, as far as it is known to such authorities, the holder has no permanent establishment in Italy (which certificate will be effective until March 31 of the year following submission).  If the ordinary shares are deposited with a non-resident Intermediary, such Intermediary must appoint as its fiscal representative in Italy a bank or an investment services company that is resident in Italy, or the permanent establishment in Italy of a non-resident bank or investment services company, or a company licensed to manage a centralized depository and clearing system, to carry out all duties and obligations relating to the application and administration of the substitute tax.

          Since the shares underlying the ADSs will be held by the custodian in the centralized clearing system managed by Monte Titoli, the substitute tax regime described above will apply to the ADSs.  In order to enable eligible U.S. holders to obtain a reduction at source or a refund of withholding tax under the Treaty, DMH and the Depositary have agreed to certain procedures.  According to such procedures, the Depositary will send holders of the ADSs certain instructions before the dividend payment date specifying the documentation required and the deadlines for submission.  The documentation generally will include the holder’s declaration and the tax certification specified under points (i) and (ii) in the preceding paragraph. In order to comply with the documentation described under point (ii) above, eligible U.S. holders must obtain a certificate of residence from the U.S.

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Internal Revenue Service (“IRS”) (Form 6166) with respect to each dividend payment, unless a previously filed certification will be effective on the dividend payment date, and produce it together with a statement whereby such holder represents to be a U.S. resident individual or corporation and not to maintain a permanent establishment in Italy. 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 six to eight weeks.  Accordingly, holders requiring this certification should submit their requests to the IRS as soon as possible after receiving instructions from the Depositary.  In the case of ADSs held through a broker or other financial intermediary, the required documentation should be delivered to such financial intermediary for transmission to the Depositary.  In all other cases, eligible U.S. holders should deliver the required documentation directly to the Depositary at least five business days prior to the date set for the payment of dividends.

          If the documentation is not provided in the time allotted, or if the Intermediary (i.e., the custodian in the case of the ADSs) determines that the documentation does not satisfy the prescribed requirements or that applicable law does not permit it to apply directly the reduced Treaty rate, the Intermediary will withhold tax at the 27.0% rate, and eligible U.S. holders may claim a Treaty refund of 12.0% of the dividend (representing the difference between 27.0% and the 15.0% Treaty rate) directly from the Italian tax authorities. U.S. residents seeking refunds from the Italian tax authorities have encountered extensive delays and incurred expenses.

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

          The gross amount of dividends (that is, the amount before reduction for Italian withholding tax) paid to U.S. holders of ordinary shares or ADSs will be subject to U.S. federal income taxation as dividend income and will not be eligible for the dividends-received deduction allowed to domestic corporations. The Italian withholding tax (less any refunds to which such holder is entitled under the Treaty) will be treated as a foreign income tax which such holders may elect to deduct in computing their taxable income or, subject to the limitations on foreign tax credits generally, credit against their U.S. federal income tax liability.

          Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2011 with respect to our ADSs will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.” Dividends paid on the ADSs will be treated as qualified dividends if (i) the ADSs are readily tradable on an established securities market in the United States, and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”).  The ADSs are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed.  Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2004 or 2005 taxable year.  In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2006 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 establish that dividends are treated as qualified dividends.  Because such procedures have not yet been issued, it is not clear whether the Company will be able to comply with them.  Holders of ADSs and common shares should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances.

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          Tax on Capital Gains

          Capital gains realized by non-resident shareholders on the disposal of a “qualified” shareholding held as a capital asset and not in connection with a permanent establishment through which such shareholders carry on or perform business services in Italy are subject to Italian personal or corporate income tax, for an amount equal to 40% of the overall gain.  Losses can be offset against taxable gains for a corresponding amount and, if in excess, can be carried forward up to four years.  A “qualified” shareholding is constituted by ordinary shares or ADSs and/or rights representing more than 5.0% of a listed company’s total share capital or more than 2.0% of its share capital voting in the ordinary shareholders meeting.  A disposal of a “qualified” shareholding occurs if in any 12-month period immediately following the date when a shareholding reaches one of the thresholds illustrated above, the shareholder engages in disposals of ordinary shares or ADSs that, individually or in aggregate, constitute a “qualified” shareholding.  The taxable gain realized by a non-resident shareholder who is an individual would be subject to progressive personal income tax rates (currently, the marginal tax rate is equal to 43.0%, plus a surcharge generally of up to 1.9%, depending on the municipality in which such non-resident shareholder earns the highest Italian-source income).  The taxable gain realized by a non-resident corporate shareholder would be subject to corporate income tax, currently levied at a rate of 33.0%.

          Generally, a capital gains tax (“CGT”), levied at a rate of 12.5%, is imposed on gains realized upon the transfer or sale of “non-qualified” shareholdings whether held within or outside Italy.  A “non-qualified” shareholding is constituted by an interest in DMH which does not reach the thresholds described above.  However, under domestic law, an exemption applies to gains realized on the disposal of “non-qualified” shareholdings in an Italian company the shares of which are listed on a regulated market, such as the DMH shares, even when such shareholdings are held in Italy. A statement whereby the holder declares to be a non-Italian resident may be required in order to benefit from this exemption.

          Furthermore, pursuant to the Treaty, a U.S. holder will not be subject to Italian tax on any realized gains unless such U.S. holder has a permanent establishment in Italy to which the ordinary shares or ADSs are effectively connected.  To this end, U.S. holders selling ordinary shares or ADSs and claiming Treaty benefits may be required to produce appropriate documentation establishing that the above mentioned conditions have been met.  Other countries have executed income tax conventions with Italy providing for a similar treatment of Italian tax on capital gains.  No tax on capital gains will be imposed on the deposit or withdrawal of shares in return for ADSs.  U.S. holders of ordinary shares or ADSs will be subject to U.S. federal income tax on any capital gains to the same extent as on other gains from the disposition of stock.

          Gains realized by U.S. holders on the sale or other disposition of ADSs or shares generally will be subject to U.S. federal income tax as capital gains.  Such gain will be long-term capital gain if the ADSs or shares were held for more than one year.  The net amount of long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at a maximum rate of 20.0%; however, net long-term capital gain recognized by an individual U.S. holder after May 5, 2003 and before January 1, 2011 generally is subject to taxation at a maximum rate of 15.0%.  Deposits and withdrawals of shares by a U.S. holder in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

          Taxation of Distributions from Capital Reserves

          Special Italian tax rules apply to the distribution of capital reserves. Under certain circumstances, such a distribution may be considered as taxable income in the hands of the recipient depending on the reserves of the distributing company outstanding 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 advisor in connection with any distribution of capital reserves.

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          Transfer Tax

          An Italian transfer tax is normally payable on the transfer of shares in an Italian company.  The transfer tax will not be payable with respect to any transfer of ordinary shares or ADSs involving non-Italian residents concluded either on a regulated market or with a bank or an investment services company.

          Estate and Gift Tax

          As of October 25, 2001, the Italian estate and gift tax has been abolished and consequently any transfer of ordinary shares or ADSs occurring by reason of death or gift as of that date is no longer subject to any Italian estate and gift tax.

          However, should a gift of ordinary shares or ADSs for a value exceeding the materiality threshold of €180,759.91 occur and the relationship between the donor and the beneficiary not qualify for the exemption regime applicable to gifts made in favor of certain family members (e.g., spouse, parents, children, grandchildren), a registration tax of €168 would be due insofar as the gift agreement is either executed or registered in Italy.  The materiality threshold is increased to €516,456.91 in case the beneficiary is a person with a handicap recognized pursuant to applicable law.

Documents on Display

          We are subject to the information reporting requirements of the Exchange Act applicable to foreign private issuers.  In accordance therewith, we file reports, including annual reports on Form 20-F, periodic reports on Form 6-K and other information with the U.S. Securities and Exchange Commission.  These materials, including this annual report on Form 20-F, are available for inspection and copying at the Commission’s Public Reference Room at 100 F Street, N.W., 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 were not required to make filings with the Commission by electronic means prior to November 4, 2002.  Any filings we make electronically will be available to the public over the Internet at the Commission’s website at www.sec.gov.  Information appearing on the Commission’s website is not incorporated by reference into this annual report.  This annual report and other reports and information filed by us with the Commission will also be available for inspection by ADS holders at the Corporate Trust Office of The Bank of New York at 101 Barclay Street, New York, New York 10286.

Item 11.  Quantitative and Qualitative Disclosures About Market Risk

          Our primary market risk exposure is foreign currency risk, which can adversely affect our revenues and operating profits.  To manage this risk, we enter into forward exchange contracts.  At December 31, 2005, we had €39.7 million net in forward exchange contracts (both sales and purchases), compared to €23.9 million at December 31, 2004.  We are also exposed to interest rate risk associated with short and long-term bank loans bearing variable interest rates.  To manage this interest rate risk exposure, we enter into interest rate swap agreements. 

          The following discussion should be read in conjunction with Notes 34 to our audited financial statements, which provide more information on our derivative instruments.

96



Exchange Rate Sensitivity

          As our sales are denominated in various foreign currencies (primarily the U.S. dollar, Japanese yen and U.K. pound sterling, in which collectively 33.3% of our sales were denominated in 2005), our sales and operating results are affected by the impact of fluctuations in foreign currency exchange rates on product prices and certain operating expenses as well as the effect of such fluctuations on the translation into the euro of the foreign currency – denominated results of operation of our foreign subsidiaries operating outside the euro zone.

          We engage in certain foreign exchange transactions to hedge portions of our transactional exposure to fluctuations in exchange rates between the euro and these foreign currencies.  Our currency exchange rate hedging policy until December 2003 was to cover, during the last quarter of each year, the sales in the coming year.  Beginning January 2004, we hedged the expected cash flow from sales denominated in foreign currencies for the subsequent 18 months on a rolling basis.  However, at the end of 2004, we revised our hedging policy; our new hedging policy consists of six-month rolling coverage that is consistent with the amount of our orders and receivables in currencies that we normally have in place.  We are not a party to leveraged derivatives and do not hold or issue derivative instruments for speculative purposes. 

          The table below provides information at December 31, 2005, about our receivables and derivative financial instruments by functional currency and presents such information in euro.  The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange rates.  The estimated fair value of receivables is considered to approximate their carrying value because receivables have a short maturity.  For foreign currency forward exchange agreements, the table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates.  These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.

 

 

Expected Maturity Date

 

Total

 

Fair Value

 

 

 


 

 

 

At December 31, 2005

 

2006

 

2007

 

2008

 

2009

 

Beyond
2009

 

 

 


 


 


 


 


 


 


 


 

 

 

(euro equivalent in thousands, except exchange rate information)

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.K. Pound Sterling

 

 

5,263,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,263,292

 

U.S. Dollar

 

 

24,962,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,962,221

 

Japanese Yen

 

 

30,689,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,689,082

 

Australian Dollar

 

 

4,479,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,479,008

 

CHF (Swiss francs)

 

 

2,713,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,713,475

 

Forward Exchange Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.K. Pound Sterling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

17,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(137

)

Average contract exchange rate

 

 

0.6907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

27,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(343

)

Average contract exchange rate

 

 

1.2054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Japanese Yen

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

3,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

Average contract exchange rate

 

 

137.7284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Australian Dollar

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

8,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

Average contract exchange rate

 

 

1.6234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

5,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

Average contract exchange rate

 

 

1.5391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar

 

 

—  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Japanese Yen

 

 

—  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

97



          At December 31, 2005, the aggregate notional amount of our outstanding forward exchange contracts was €62.7 million.  We had forward exchange contracts denominated in U.K. pounds sterling with a notional amount of €17.6 million (with an average contract exchange rate of £0.69); in U.S. dollars with a notional amount of €27.3 million (with an average contract exchange rate of US$1.2054); in Australian dollars with a notional amount of €8.5 million (with an average contract exchange rate of AUD 1.6234); in Japanese yen with a notional amount of €3.6 million (with an average contract exchange rate of JPY 137.7284); and in Swiss franc with a notional amount of €5.6 million (with an average contract exchange rate of CHF 1.5391).

Interest Rate Sensitivity

          In 2005, our primary source of debt financing was the Syndicated Loan Facility, which we entered into on May 9, 2005.

          We used the €63.6 million, five-year credit line under the facility to repay the €54.2 million outstanding principal amount of our notes due May 31, 2005 and to repay loans taken out to repurchase part of the Notes.  The Notes had been our primary source of financing before we repaid them with the proceeds from the Syndicated Loan Facility.  The Notes were subject to a fixed interest rate of 6.50% per annum and did not expose us to substantial market risk for changes in interest rates.  See “Item 5.  Operating and Financial Review and Prospects—Other Financial Transactions—Syndicated Loan Facility.”  The Syndicated Loan Facility bears interest at variable interest rates, which exposes us to greater market risk for changes in interest rates.  However, as described below, by using interest rate swaps related to these loans, we effectively converted our debt under these loan agreements into fixed rate debt to minimize our interest rate risks.]  We are managing our interest rate exposure under the five-year credit line of €63.6 million through the use of an interest rate swap entered into on May19, 2005, that effectively fixes the interest rate on the five-year credit line at 2.755.

          A hypothetical, instantaneous increase of one percentage point in the interest rates applicable to our variable interest rate debt would have increased our interest expense for the year ended December 31, 2005 by approximately €1.2 million.  This sensitivity analysis is calculated for the drawn down credit lines with variable interest rates (drawn down credit lines with fixed interest and drawn down credit lines with variable interest rates with collateral interest rate swap transactions are not included).

          Actual results in the future may differ materially from these estimated results due to actual developments in global financial markets.  The analysis methods we used to assess and mitigate the risks discussed above should not be considered projections of future events or losses. 

Item 12.  Description of Securities Other than Equity Securities

          Not applicable.

98



PART II

Item 13.  Defaults, Dividend Arrearages and Delinquencies

          None.

Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds

          Not applicable.

Item 15.  Disclosure Controls and Procedures

          We have evaluated under the supervision and with the participation of our management, including our managing director and manager of finance, the effectiveness of our disclosure controls and procedures as of December 31, 2005.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based upon our evaluation, our managing director and manager of finance concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our managing director and manager of finance, as appropriate to allow timely decisions regarding required disclosure.

          There was no change in our internal control over financial reporting during 2005 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16.  [Reserved]

Item 16A.  Audit Committee Financial Expert

          Our Management Control Committee fulfils the role of audit committee for purposes of complying with Rule 10A-3, to the extent permitted by Italian law.  Our board of directors has determined that a member of our management control committee, Matteo Tamburini, is an “audit committee financial expert” within the meaning of this Item 16A.  Gianpiero Paoli, Matteo Tamburini and Roberto Consonni are “independent” as defined by Rule 10A-3 of the Securities Exchange Act of 1934, as amended.

Item 16B.  Code of Ethics

          We have adopted a code of ethics, made up of a code of conduct, a code of ethics and our guidelines for the treatment of confidential information, that, collectively, constitute a “code of ethics” as defined in Item 16B of Form 20-F under the Exchange Act.  Our code of ethics applies to our managing director, to our manager of finance and to persons performing similar functions, as well as to our directors, other officers and employees.  Our code of ethics is available on our website at www.ducati.com. If we amend the provisions of our code of ethics that apply to our managing director and to our manager of finance and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website at the same address.  Information appearing on the website is not incorporated by reference into this annual report.

99



Item 16C.  Principal Accountant Fees and Services Audit and Non-Audit Fees

          The following table sets forth the fees billed to us by our independent auditors, KPMG S.p.A. (“KPMG”), during the fiscal years ended December 31, 2004 and 2005: 

 

 

Year ended December 31,

 

 

 


 

 

 

2004

 

2005

 

 

 


 


 

 

 

(in thousand of euro)

 

Audit fees

 

 

513

 

 

694

 

Audit-related fees

 

 

317

 

 

55

 

Tax fees

 

 

40

 

 

—  

 

Other fees

 

 

—  

 

 

—  

 

 

 



 



 

Total fees

 

 

870

 

 

749

 

          Audit fees in the above table are the aggregate fees billed by KPMG to the various companies of the Group in connection with the audit of our annual financial statements and the review of our interim financial statements.  Audit-related fees in the above table are the aggregate fees billed by KPMG for other services, primarily provided in relation to accounting due diligence to support our evaluation of potential acquisitions, the transition to IFRS, and the opinion we are required by law to obtain in connection with the increase in capital relating to our stock option plans and the Capital Increase.  Tax fees in the above table are fees billed by KPMG for tax compliance and other tax advice.  All audit and non-audit services were pre-approved by our internal control committee.

Audit Committee Approval Policies and Procedures

          For the appointment of our independent auditor, as required under Italian law, our board of directors submits a resolution to our shareholders’ meeting, which is responsible for the appointment.  On May 6, 2004, our shareholders appointed KPMG as our independent auditors for a third consecutive three-year term.  See “Item 10. Additional Information—By-Laws—External Auditors.”

          Following the shareholders’ meeting of April 10, 2006, and the entry into force of the one-tier corporate governance system, the Management Control Committee has replaced the internal control committee and serves as our audit committee.  See “Item 10. Additional Information—By-Laws—One-Tier Corporate Governance System”

Item 16D.  Exemptions from the Listing Standards for Audit Committees

          Not applicable.

100



Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchaser

          The following table provides information on Ducati’s purchases of its shares in 2005:

2005

 

Total
Number of
Shares
Purchased
(a)

 

Average Price
Paid per
Share in euro
(b)

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
(c)

 

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs
(d)

 


 


 


 


 


 

January 1-31

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

February 1-29

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

March 1-31

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

April 1-30

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

May 1-31

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

June 1-30

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

July 1-31

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

August 1-31

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

September 1-30

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

October 1-31

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

November 1-30

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

December 1-31

 

 

 

 

 

 

 

 

 

 

 

12,080,786

 

Total

 

 

—  

 

 

—  

 

 

—  

 

 

12,080,786

 



(d) At a May 5, 2005, meeting, our shareholders approved a plan (the “2005 Buy Back Plan”) pursuant to which, at the direction of our Managing Director or our Manager of Finance, Investor Relations and Internal Controls, severally, duly empowered by our board of directors, we were authorized to repurchase on the Telematico up to 12,110,000 of our shares (representing approximately 7.6% of our then issued and paid-in Share Capital, in order to: retain such shares as treasury shares; transfer such shares either to beneficiaries of the Employee Stock Ownership Plan or the 1999 Stock Option Plan, as required thereunder; or dispose, subject to applicable law, of such shares on the Telematico to maintain liquidity of our shares on such stock exchange.

          See “Item 10. Additional Information—Buy Back Plan.”

Item 17.  Financial Statements

          Not applicable.

Item 18.  Financial Statements

Independent Auditors’ Report of July 7, 2006

F-1

Consolidated Balance Sheets as of December 31, 2004 and 2005

F-2

Consolidated Statements of Operations for the years ended December 31, 2004 and 2005

F-3

Consolidated Statements of Changes of Shareholders’ Equity for the years ended December 31, 2004 and 2005

F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2005

F-5

Notes to Consolidated Financial Statements

F-6

 

 

Schedules:

 

 

 

Schedule II — Valuation and Qualifying Accounts For the Years Ended December 31, 2004 and 2005

F-113

101



Item 19.  Exhibits

Exhibit
Number

 

Description


 


1.1

 

By-laws of the Company, amended and restated as of June23, 2006 (in English translation).

 

 

 

2.1

 

Deposit Agreement among Ducati Motor Holding S.p.A. and The Bank of New York, as Depositary, and the owners of American Depositary Receipts, dated March 31, 1999 (incorporated by reference to our Registration Statement on Form F-6, File No. 333-10026).


4.1

 

Summary in the English language of the Syndicated Loan Facility among Ducati Motor Holding S.p.A., Ducati Corse S.r.l., UniCredit Banca Mobiliare S.p.A., as Administrative Agent, and the lenders named therein, dated May 9, 2005, and amended as of February 13, 2006, in the aggregate principal amount of €100,000,000.

 

 

 

8

 

Subsidiaries as of the end of the year covered by this annual report:  see “Item 4. Information on the Company—Organizational Structure.”

 

 

 

12.1

 

Certification by Federico Minoli, Managing Director, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

12.2

 

Certification by Enrico D’Onofrio, Manager of Finance, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

13.1

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

102



Signatures

          The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

 

DUCATI MOTOR HOLDING S.P.A.

 

 

 

 

 

/s/ Federico Minoli

 

 


 

 

Federico Minoli

 

 

Managing Director

 

 

 

 

 

 

 

 

/s/ Enrico D’Onofrio

 

 


 

 

Enrico D’Onofrio

 

 

Manager of Finance

 

 

 

 

 

 

 

 

Date:  July 14, 2006

103



Report of Independent Registered Public Accounting Firm

To the Shareholders of

Ducati Motor Holding S.p.A.

We have audited the accompanying consolidated balance sheets of Ducati Motor Holding S.p.A. and subsidiaries (the “Ducati Group”) at December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the two year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement schedule (Schedule II — Valuation and Qualifying Accounts). These consolidated financial statements and the financial statement schedule are the responsibility of the management of Ducati Motor Holding S.p.A. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with 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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ducati Motor Holding S.p.A. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 2005 in conformity with International Financial Reporting Standards as adopted by the European Union. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 37 to the consolidated financial statements, in 2005 the Ducati Group changed its basis of accounting from accounting principles generally accepted in Italy to International Financial Reporting Standards as adopted by the European Union.

International Financial Reporting Standards as adopted by the European Union vary in certain respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Notes 38, 39 and 40 to the consolidated financial statements.

/s/ KPMG S.p.A.

Bologna, Italy

July 7, 2006

F-1



Ducati Motor Holding S.p.A. and subsidiaries
Consolidated Balance Sheets
(expressed in € ‘000)

 

 

Notes

 

Year ended
December 31,
2005

 

Year ended
December 31,
2004

 

 

 


 


 


 

Current assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

16

 

 

53,017

 

 

49,327

 

Accounts receivable, net

 

 

2

 

 

102,232

 

 

118,622

 

Inventories, net

 

 

3

 

 

81,380

 

 

92,293

 

Other current assets

 

 

4

 

 

9,217

 

 

25,787

 

 

 

 

 

 



 



 

Total current assets

 

 

 

 

 

245,846

 

 

286,029

 

 

 

 

 

 



 



 

Non-current assets

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

5

 

 

66,556

 

 

70,288

 

Goodwill and intangible assets with an indefinite life

 

 

6

 

 

86,050

 

 

86,050

 

Other intangible assets, net

 

 

7

 

 

39,665

 

 

38,268

 

Equity investments

 

 

8

 

 

20

 

 

20

 

Deferred income tax assets

 

 

9

 

 

24,662

 

 

21,665

 

Other non-current assets

 

 

 

 

 

386

 

 

403

 

 

 

 

 

 



 



 

Total non-current assets

 

 

 

 

 

217,339

 

 

216,694

 

 

 

 

 

 



 



 

Total assets

 

 

 

 

 

463,185

 

 

502,723

 

 

 

 

 

 



 



 

Current liabilities

 

 

 

 

 

 

 

 

 

 

Short term bank borrowings

 

 

16

 

 

64,148

 

 

151,080

 

Accounts payable

 

 

10

 

 

85,203

 

 

77,463

 

Income and other taxes payable

 

 

11

 

 

5,537

 

 

8,298

 

Other current liabilities

 

 

12

 

 

20,202

 

 

15,936

 

Provisions for risks and charges - current portion

 

 

13

 

 

18,621

 

 

4,726

 

 

 

 

 

 



 



 

Total current liabilities

 

 

 

 

 

193,711

 

 

257,503

 

 

 

 

 

 



 



 

Long-term liabilities

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

16

 

 

125,824

 

 

63,782

 

Employees’ leaving entitlements

 

 

14

 

 

9,669

 

 

8,482

 

Deferred income taxes

 

 

15

 

 

13,697

 

 

12,207

 

Income and other taxes payable

 

 

11

 

 

—  

 

 

1,292

 

Provisions for risks and charges - long-term portion

 

 

13

 

 

1,525

 

 

1,663

 

 

 

 

 

 



 



 

Total long-term liabilities

 

 

 

 

 

150,715

 

 

87,426

 

 

 

 

 

 



 



 

Total liabilities

 

 

 

 

 

344,426

 

 

344,929

 

 

 

 

 

 



 



 

Shareholders’ equity

 

 

17

 

 

 

 

 

 

 

Share capital

 

 

 

 

 

82,867

 

 

82,590

 

Reserves

 

 

 

 

 

75,559

 

 

72,606

 

Retained earnings (losses)

 

 

 

 

 

1,780

 

 

6,051

 

Profit (loss) for the period

 

 

 

 

 

(41,464

)

 

(3,469

)

 

 

 

 

 



 



 

Total shareholders’ equity attributable to the Group

 

 

 

 

 

118,742

 

 

157,778

 

 

 

 

 

 



 



 

Shareholders’ equity attributable to minority interest

 

 

 

 

 

17

 

 

16

 

 

 

 

 

 



 



 

Total shareholders’ equity

 

 

 

 

 

118,759

 

 

157,794

 

 

 

 

 

 



 



 

Total liabilities and shareholders’ equity

 

 

 

 

 

463,185

 

 

502,723

 

 

 

 

 

 



 



 

See accompanying notes to consolidated financial statements

F-2



Ducati Motor Holding S.p.A. and subsidiaries
Consolidated Statements of Income
(expressed in € €’000, except per share data which is stated in €)

 

 

Note

 

Year ended
December 31,
2005

 

Year ended
December 31,
2004

 

 

 


 


 


 

Revenues

 

 

22

 

 

320,847

 

 

363,359

 

Cost of sales

 

 

23

 

 

(262,392

)

 

(276,708

)

 

 



 



 



 

Gross profit

 

 

 

 

 

58,455

 

 

86,651

 

Other income

 

 

25

 

 

34,184

 

 

30,810

 

Distribution costs

 

 

26

 

 

(89,443

)

 

(87,490

)

General and administrative expenses

 

 

27

 

 

(21,855

)

 

(19,564

)

Other expenses

 

 

 

 

 

(1,978

)

 

(1,226

)

Restructuring reserve

 

 

13

 

 

(13,000

)

 

—  

 

 

 



 



 



 

Operating profit (loss)

 

 

 

 

 

(33,637

)

 

9,181

 

Interest income

 

 

28

 

 

3,242

 

 

2,320

 

Interest expense

 

 

29

 

 

(9,366

)

 

(10,836

)

Foreign exchange gain (loss), net

 

 

30

 

 

(1,191

)

 

4,690

 

 

 



 



 



 

Profit (loss) before income taxes

 

 

 

 

 

(40,952

)

 

5,355

 

Income taxes

 

 

31

 

 

(511

)

 

(8,824

)

 

 



 



 



 

Net profit (loss)

 

 

 

 

 

(41,463

)

 

(3,469

)

Net profit (loss) attributable to minority interest

 

 

 

 

 

(1

)

 

—  

 

 

 

 

 

 



 



 

Net profit (loss) attributable to the Group

 

 

 

 

 

(41,464

)

 

(3,469

)

Net profit (loss) per share, basic

 

 

 

 

 

(0.26

)

 

(0.02

)

Net profit (loss) per share, diluted

 

 

 

 

 

(0.26

)

 

(0.02

)

Number of shares outstanding

 

 

 

 

 

159,360,037

 

 

158,826,407

 

See accompanying notes to consolidated financial statements

F-3



Ducati Motor Holding S.p.A. and subsidiaries
Consolidated Statements of Shareholders’ Equity
for the years ended December 31, 2005 and 2004
(expressed in € ‘000, except share data which is stated in number of shares)

 

 

Shares
Number

 

issued
Amount

 

Share
premium

 

Transition
reserve to
IFRS

 

Cumulative
translation
adjustment

 

Reserve
for
own shares

 

Other
reserves

 

Retained
earnings
(losses)

 

Total

 

Minority
interest

 

Total
Shareholders’
equity

 

 

 


 


 


 


 


 


 


 


 


 


 


 

Balance at December 31, 2003 in accordance with Italian GAAP

 

158,500,963

 

 

82,420

 

 

19,488

 

 

—  

 

 

534

 

 

391

 

 

49,518

 

 

6,048

 

158,399

 

 

—  

 

 

158,399

 

Adoption of IFRS January 1, 2004

 

 

—  

 

 

—  

 

 

—  

 

 

3,577

 

 

(534

)

 

—  

 

 

-3

 

 

3

 

 

3,043

 

 

—  

 

 

3,043

 

 

 


 


 


 


 


 


 


 


 


 


 


 

Balance at December 31, 2003 in accordance with IFRS

 

158,500,963

 

 

82,420

 

 

19,488

 

 

3,577

 

 

—  

 

 

391

 

 

49,515

 

 

6,051

 

161,442

 

 

—  

 

 

161,442

 

(Note 37)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in shareholders’ equity during 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss of the year

 

 

—  

 

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