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The Benetton Group

Annual Report 1996 Benetton Group S.p.A. Villa Minelli Ponzano (Treviso), Italy Capital Stock: Lire 87,276,862,500 fully-paid Treviso Company Register 4424

Board of Directors Chairman and Managing Director Luciano Benetton Deputy Chairman and Managing Director Gilberto Benetton Managing Director Carlo Gilardi Directors Giuliana Benetton Carlo Benetton Gianni Mion Angelo Tantazzi Pierluigi Bortolussi Piero L. Frattin Secretary to the Board Piero L. Frattin Board of Statutory Auditors Chairman Dino Sesani Auditors Filippo Duodo Fanio Fanti Alternate Auditors Giovanni Pietro Cunial Aldo Laghi Independent Auditors Deloitte & Touche S.p.A.

Dear Shareholders, in 1996 the Benetton Group achieved a series of excellent results. The consolidated net income, in particular, reached a record level, almost double that of 1990. Over the same period, the stockholders’ equity has more than tripled. For the first time in our history, net indebtedness was reduced to zero and we ended the year with substantial liquidity. The dividend distributed to shareholders was up more than 18% on the previous year. As far as the overall organisation of the company is concerned, in addition to implementing an incisive plan to contain operating costs and to effectively manage financial risks, we continued to make progress in innovation and flexibility, enabling us to respond rapidly to changes in the market and to seize new opportunities for development. As a result, despite international stagnation in consumer spending, we sold three million more items in 1996 than in the previous year. Highest growth was achieved in some of the main European markets: France, Great Britain and Germany. Much of this success is undoubtedly due to revolutionary changes in our sales organisation world-wide, where priority has been given to larger, high quality shops, rather than to the number of outlets. During 1996, we opened several prestigious multi-purpose megastores, for example, in London (Benetton’s largest store) and in New York, where the outlet on Fifth Avenue occupies one of the city’s finest early twentieth-century buildings. Results to date confirm that our decision was justified, both in terms of profitability and the consolidation of the Group’s global image. Our emphasis on innovation and on achieving the best possible price-quality ratio, starting with the choice of raw materials, was also a factor in our commercial success during 1996. In particular, our technically advanced textile 206, combining practically and good looks, found immediate favour with the public: since it was first introduced, some 8 million items made from this fabric have been sold around the world. The Castrette complex, the world’s most advanced integrated production facility in the textile-clothing sector, has consolidated our manufacturing capacity in Europe and increased our competitiveness world-wide. Investment in new logistics technology has enabled us to significantly reduce transportation costs and, above all, to greatly improve the efficiency, speed and quality of our customer service. We know that we must continue with our efforts, and not content ourselves with the results achieved to date. We go forward justly satisfied with our past successes, but with the ideas, commitment, team spirit and openness needed to meet the challenges of the future. We have grown considerably in recent years. Now we are ready to embark on the next stage of our journey, initiating new phases of development.

Research & development Constant monitoring of the customs and trends developing throughout the world enables the Group to respond promptly and effectively to market requirements. This is combined with a special focus on the development of raw materials. The adoption of Fabric 206 (texturized polyester) and other innovative materials has enhanced the comfort and practicality of Benetton garments, making a critical contribution to their commercial success. Continuing expansion and the consolidation of the Group’s brands in world markets also depend on the completeness of the ranges and the spectrum of merchandise available. Furthermore, in a constant drive to improve the relationship between quality and price, research specialists seek out high-quality designs which combine affordable prices with an increasingly accurate response to market demand. Sales organization and markets Sales improved overall during 1996. The upturn was apparent both in shipments to Group customers and in their sales to the end customer. A generalized improvement in the results reported by sales outlets was symptomatic of an increasingly effective sales organization, combined with the timely delivery of merchandise responsive to market trends. Inventory turnover accelerated, while end-of-season stocks declined. In geographic terms, sales rose fastest in Europe. The upswing was apparent in almost all nations, including markets such as France and Germany, where growth was achieved despite weak consumer demand overall. Increases were particularly marked in the cases of the '012' and 'Zerotondo' childrenswear lines, thus confirming the validity of product and distribution policies developed in 1995. Sales of jackets and other outerwear have also continued to grow, notably among the adult lines. Expansion of the sales network has continued the program to open larger locations, including megastores in London (the world’s largest Benetton store), New York, San Francisco, Riyadh and Barcelona. The megastores offer complete ranges of garments and accessories across all Group brands, thus consolidating their distinctive character and international image. The sales network is set to expand further during 1997, with over 350 store openings scheduled world-wide. Distribution Following completion of the commissioning phase, the Robostore 2000 system has proved its worth by optimizing shipment quantities and meeting challenging targets in terms of flexibility and efficiency. Early achievements include the distribution of up to 10 million garments in just one month, thus ensuring timely response to market needs. Automation of garment packing and loading has minimized the use of personnel in operations involving the heaviest work and greatest risk of human error, while focusing the attention of staff on administration and control. As a consequence, vehicle waiting times have been cut significantly. The reduction in handling associated with the automated sorting of delivery batches has also helped to reduce distribution costs, especially with regard to handling and sorting in the loading bays. The introduction of new automated systems offset the 1996 rises in freight rates. Automatic, optimized batching has increased the number of garments per carton and considerably increased throughput capacity. This, in turn, has improved the ability to handle additional products and enhanced the effectiveness of the integrated logistics system. Capital investment The 1996 program of continuing innovation and modernization of the manufacturing system involved investment exceeding Lire 80 billion. The latest additions having reached full operational capacity, the Castrette industrial complex is now among the most modern and advanced of its kind in the world. Extending over more than 190,000 square meters, this facility fully integrates the production-warehousing-distribution cycle. In the Wool Division, the installation of another five centrifugal dyeing machines and additional dye-baths improved the layout of the dyeing section. Apart from raising output, this also improved product quality and workflows.

Manufacturing companies invested substantially, spending more than Lire 35 billion to technologically upgrade plant and machinery and optimize the efficiency of production processes. Continuing investment in communications systems based on optical-fiber technology has addressed the links between the Ponzano and Castrette sites, with the aim of further integrating the order-processing, production, warehousing and shipping stages. The program to renew the Group's central data-processing equipment has continued, with substantial enhancements to both processing and storage capacity through the introduction of new-generation hardware. This investment, in highly competitive market conditions, has generated significant savings in systems-operating costs. Investment in applications software focused on manufacturing activities and involved applying new software development technology to the management of fabric inventories for the Outerwear, Shirt and Jacket Divisions, and to integration of the transition from samples to full-scale production. The introduction of new EDI (Electronic Document Interchange) technology also improved the degree of integration between the Cotton Division and the principal fabric suppliers. Finance management Attention throughout the year again focused on the optimization of treasury management and on insulating the Group from exchange-rate exposures, in market conditions characterized by falling interest rates and the marked appreciation of the lira. The level of coordination and financial support for subsidiaries was maintained. Relevant developments during the final quarter included the progressive start-up of Benetton Gesfin SpA, whose activities include the centralization of treasury management and control of the Group’s financial exposures. Constant attention to operating efficiency, combined with the lower cost of money, resulted in a substantial reduction in financial charges. The equity in foreign subsidiaries was again hedged against exchange risks, to protect the value of the Group’s investments abroad. On December 10, 1996, a US $220-million multi-currency loan was arranged in the domestic market, coordinated by Banca di Roma SpA and Deutsche Bank SpA. The lending syndicate comprised over 30 leading banks at home and abroad. This 5-year loan, at LIBOR plus 0.20%, was received in lire in February 1997 and enabled the l993 loan, on less favorable terms, from Istituto Bancario San Paolo di Torino to be repaid early. Personnel and organization The Benetton Group employed 5,973 people at the end of 1996, including 4,358 in Italy, following a net reduction of 45 during the year. The decrease primarily arose from the rationalization of Japanese companies, some of which are no longer consolidated. During 1996, personnel management focused on the related issues of employee mobility and training in the context of the Group's world-wide expansion plans. The key themes were the constant development of skills relevant to the Group's global role, and promotion of Benetton's innovative business culture. On the industrial relations front, the agreement signed in 1994 was fully implemented with the fixing of pay rises for the next two years linked to the achievement of objectives and business-efficiency parameters. This process confirmed the wisdom of adopting this new type of accord, which more directly addresses the challenges posed by intensifying competition, primarily by creating a link between the requirements of the Group and the aspirations of employees. Licensing The program to expand and extend the reach of the Group's brands continued during 1996. Apart from the renewal of existing contracts, the year's efforts included preliminary negotiations concerning new territories and discussions with potential licensees of proven reliability. Expansion targets extend beyond clothing to new sectors, providing further evidence of the Group's dynamic, international stance. New ventures must meet established Benetton standards, including an optimal mix of quality, value for money, innovation and style. A key event during 1996 was the collaboration agreement with Renault, which supplies the engines for Benetton's Formula One racing cars. The new accord led to the production of the Benetton Twingo, which features typical Benetton colors, character and style.

Communication Communications during the year were closely integrated with social and humanitarian campaigns, conducted in collaboration with leading humanitarian organizations. The spring/summer '96 campaign, which used an image of three hearts, was launched in March to coincide with the international congress of SOS Racism, held to mark UNO's World anti-racism day at the headquarters of Fabrica SpA on the outskirts of Treviso. Other events included the "I Colori della Pace" (colors of peace) initiative, which involved junior-school children and their teachers in Italy, France, Belgium, Germany and Spain in a program of education for peace. The second 1996 campaign, using pictures of the Benetton family in straightjackets, disseminated an image of offbeat, original entrepreneurial creativity, via Europe's leading daily newspapers. Two campaigns were launched in the second semester, based respectively on an image of two horses (one black, one white), and a wooden spoon. The latter idea was developed with the FAO, to coincide with the world food summit held in Rome in November. Another important exercise in socially-relevant communications focused on Corleone, the infamous cradle of the Mafia; young people from the town featured as models for Benetton's spring-summer '97 catalog, to symbolize Corleone's will for social and cultural regeneration. In its second year, Fabrica’s communications academy addressed the theme of "human fears", mounting an exhibition of images along Venice's Canal Grande and at the Pecci Museum in Prato. The project also involved extensive collaboration with ARTE, the celebrated Franco-German cultural TV channel, which broadcast theme-based commercials. Colors Magazine became a bimonthly publication. Its standing was enhanced by distribution of the December 1996 issue together with Le Monde, the leading French daily.

Signori Azionisti, nell’esercizio 1996 il Gruppo Benetton ha raggiunto una serie importante di primati. L’utile netto consolidato, in particolare, è salito a un livello record: dal 1990 ad oggi è quasi raddoppiato. Il patrimonio netto, nello stesso arco di tempo, è più che triplicato. L’indebitamento netto, per la prima volta nella nostra storia, è stato azzerato e l’esercizio si è chiuso con una consistente liquidità di cassa. Il dividendo distribuito è aumentato di oltre il 18% rispetto allo scorso anno. Il sistema aziendale nel suo complesso, oltre ad attuare un incisivo piano di contenimento dei costi e una efficace gestione dei rischi finanziari, ha continuato il suo cammino sulla strada dell’innovazione e della flessibilità, per interpretare le continue evoluzioni del mercato e per cogliere nuove opportunità di sviluppo. Così pur in uno scenario internazionale caratterizzato da costumi stagnanti, nel 1996 abbiamo venduto tre milioni di capi in più rispetto all’anno precedente. Siamo cresciuti soprattutto in alcuni dei principali mercati europei, come Francia, Gran Bretagna e Germania. A questo successo ha sicuramente contribuito l’evoluzione dell’organizzazione commerciale, una vera e propria rivoluzione a livello globale, che ha portato a privilegiare la crescita dimensionale e qualitativa dei negozi rispetto alla loro entità numerica. Nel corso del 1996 abbiamo inaugurato alcuni prestigiosi megastore polivalenti, come quelli di Londra, il più grande negozio Benetton nel mondo, e New York, che ha sede nella Fifth Avenue, in uno dei più importanti palazzi storici del primo Novecento. I risultati finora ottenuti hanno confermato la bontà della nostra scelta, sia sotto il profilo della redditività, sia dal punto di vista del consolidamento dell’immagine e della notorietà internazionale del Gruppo. I concetti di innovazione e di attenzione a un ottimale rapporto tra qualità e costo dei prodotti, applicati a partire dalla ricerca delle materie prime, hanno a loro volta contribuito al felice esito commerciale del 1996. Le caratteristiche innovative del tessuto 206, in particolare, hanno immediatamente incontrato il favore del pubblico: dal momento del suo ingresso nel mercato circa 8 milioni di capi realizzati con questo tessuto, che unisce il pratico al bello, sono stati venduti in tutto il mondo. L’entrata a regime del polo tecnologico di Castrette, il centro industriale integrato più avanzato al mondo nel settore del tessile-abbigliamento, ha consolidato la nostra capacità produttiva in Europa e ci ha permesso di essere sempre più competitivi a livello globale. Nel sistema logistico gli investimenti in innovazione hanno reso possibili significativi risparmi nelle spese di trasporto e, soprattutto, un forte miglioramento nell’efficienza, nella rapidità e nella qualità del servizio ai clienti. Oggi, ancora una volta, sappiamo di dover andare avanti, senza fermarci sugli importanti risultati acquisiti. Ripartiamo con la comprensibile soddisfazione per il lavoro fatto, con le idee, l’impegno, lo spirito di squadra e l’apertura al futuro che animano il nostro presente. Siamo cresciuti molto in questi ultimi anni. Ora siamo pronti a intraprendere un’ulteriore tappa del nostro viaggio: a dare il via a ulteriori progetti di sviluppo.

La ricerca e sviluppo La costante attenzione all'evoluzione dei costumi e delle tendenze a livello mondiale, che ha consentito di rispondere al mercato in modo sempre più preciso e puntuale, è stata coniugata con un particolare impegno nella ricerca e sviluppo delle materie prime. L'utilizzo di materiali innovativi, come ad esempio il tessuto “206” in poliestere testurizzato, ha conferito ai prodotti un'ulteriore valenza in fatto di comodità e di praticità di utilizzo, contribuendo in modo determinante al loro successo commerciale. Il completamento dell’offerta, sempre più mirata nel numero delle proposte e nel contempo più allargata nei settori merceologici, è risultato un altro fattore essenziale per l’espansione commerciale e per il consolidamento dell'immagine dei marchi nei mercati mondiali. L’obiettivo di un sempre migliore rapporto tra qualità e prezzo ha inoltre impegnato gli specialisti della ricerca nella selezione di modelli di elevato livello qualitativo, proposti a costi equilibrati e sempre più aderenti alle richieste di mercato. L'organizzazione commerciale e i mercati Il 1996 ha segnato globalmente un netto miglioramento dei risultati di vendita sia verso la propria rete di clienti, sia di quest’ultima verso il consumatore finale. La maggiore incisività dell'organizzazione commerciale e la tempestività nel riassortimento degli articoli di tendenza nei mercati hanno generato un diffuso miglioramento dei risultati dei punti vendita, associato a un maggiore turn-over dei relativi magazzini e ad una diminuzione del loro livello a fine stagione. L’area che ha registrato la maggiore crescita dei volumi di vendita è stata l’Europa. L'incremento ha riguardato quasi tutti i Paesi, compresi mercati come Francia e Germania, dove lo sviluppo delle vendite Benetton è avvenuto in controtendenza rispetto a una scarsa dinamicità globale dei consumi. L'aumento delle vendite è stato particolarmente sensibile nelle linee bambino, 012 e Zerotondo, confermando la validità delle politiche di prodotto e di distribuzione pianificate fin dall’anno precedente. Si è inoltre accentuato il trend di crescita delle vendite di confezioni e di capispalla, in particolare nelle linee adulto. Per quanto riguarda l’espansione della rete di vendita, è proseguito il programma di aperture di negozi di grandi superfici, come i megastore aperti a Londra (il più grande negozio Benetton nel mondo), New York, San Francisco, Riyadh e Barcellona, in grado di offrire le collezioni complete di abbigliamento e accessori del Gruppo, consolidando anche la personalità e l'immagine internazionale dei marchi. Lo sviluppo della rete di vendita continuerà anche nel 1997, con la prevista apertura di più di 350 negozi in tutto il mondo. La distribuzione Completata la fase di avviamento, il sistema Robostore 2000 ha dimostrato la sua piena validità, ottimizzando i volumi di spedizione e raggiungendo elevati obiettivi di flessibilità ed efficienza. Il nuovo sistema, in particolare, ha consentito di distribuire sino a 10 milioni di capi in un solo mese, permettendo in tal modo di rispondere con prontezza alle richieste di mercato. L'automazione delle fasi di imballaggio e caricamento dei capi ha determinato una riduzione al minimo nell'utilizzo di addetti nelle operazioni più faticose e maggiormente esposte a errori umani, a favore di funzioni di controllo e gestione, riducendo nel contempo in modo sensibile i tempi di sosta degli automezzi. La diminuzione delle movimentazioni, a fronte di un riordino automatizzato delle partite di prodotto, ha anche permesso di ridurre i costi del processo distributivo, in particolare quelli relativi alle attività di movimentazione necessarie per lo smistamento delle merci nelle piattaforme di carico. L'utilizzo dei nuovi sistemi automatizzati ha permesso nel 1996 di compensare gli incrementi tariffari del mercato. L'automatica e ottimale composizione dei colli, con il conseguente aumento dei capi contenuti, ha reso possibile anche un notevole incremento della capacità di lavoro, aumentando la potenzialità del sistema, pronto a sostenere l'ulteriore inserimento di prodotti, e contribuendo a una sempre migliore gestione del sistema logistico integrato.

Gli investimenti I programmi di innovazione e aggiornamento del sistema produttivo sono continuati anche nel 1996, comportando investimenti per oltre 80 miliardi di lire. Con l'entrata in funzione a regime degli ultimi impianti, il complesso industriale di Castrette è oggi uno dei più moderni e avanzati al mondo, con una superficie totale coperta di oltre 190.000 metri quadri e un'organizzazione integrata del ciclo produzione-magazzino-distribuzione. Presso la Divisione Lana è stato migliorato il lay-out della tintoria con l’installazione di ulteriori cinque macchine di tintura centrifughe e altri bagni di tintura che hanno consentito, oltre all’incremento della produzione, anche il miglioramento del prodotto e dei flussi operativi. Particolarmente significativi gli investimenti effettuati dalle Società manifatturiere per un totale di oltre 35 miliardi di lire, finalizzati al miglioramento del livello tecnologico di impianti e macchinari e all’ottimizzazione dell’efficienza nel processo produttivo. Sono proseguiti anche gli investimenti nel sistema di comunicazione, basato su fibre ottiche, che interconnette le aree di Ponzano e di Castrette, con l’obiettivo di potenziare l’integrazione delle fasi di evasione degli ordini, produzione, magazzino e spedizioni. E’ inoltre continuato il rinnovo di tutte le apparecchiature centrali di elaborazione, con un notevole potenziamento della capacità di elaborazione e di memorizzazione, grazie all'utilizzo di tecnologie dell’ultima generazione; questi nuovi investimenti, attuati in una situazione di offerta informatica molto competitiva, hanno permesso di ridurre significativamente i costi di gestione. Gli investimenti in sistemi applicativi sono stati concentrati nell’area della produzione, applicando nuove tecnologie di sviluppo sia nella gestione del magazzino tessuti nelle Divisioni Confezioni, Camicie e Capospalla, sia nell’integrazione fra sviluppo del campionario e produzione. Nuove tecnologie di comunicazione EDI (Electronic Document Interchange) hanno consentito una migliore integrazione anche tra la Divisione Cotone e i maggiori fornitori di tessuti. La gestione finanziaria Durante l’esercizio 1996 è continuata con particolare attenzione l’attività rivolta all’ottimizzazione della gestione della tesoreria ed alla protezione dei flussi in divisa dai rischi di cambio, in presenza di un mercato che ha evidenziato, nel corso dell’anno, la marcata riduzione dei tassi d’interesse ed il sensibile apprezzamento della lira. E’ attivamente proseguito il coordinamento ed il supporto finanziario alle società controllate: nel corso dell’ultimo trimestre, in particolare, si è dato graduale avvio all’attività della Benetton Gesfin S.p.A., il cui oggetto sociale è, tra l’altro, quello di centralizzare la gestione della tesoreria e dei rischi finanziari nell’interesse del Gruppo. La continua attenzione all’efficienza operativa e la contrazione dei tassi hanno consentito di ottenere una sensibile riduzione degli oneri finanziari. Il patrimonio netto delle controllate estere è stato oggetto, anche nel 1996, di coperture valutarie al fine di immunizzare tali investimenti dalla fluttuazione dei cambi. In data 10 dicembre 1996 è stata perfezionata, sul mercato domestico, un’operazione di finanziamento multivaluta per 220 milioni di dollari USA, coordinata dalla Banca di Roma S.p.A. e dalla Deutsche Bank S.p.A.. Al sindacato hanno aderito oltre 30 banche primarie, sia italiane che estere. Il prestito, erogato in lire nel febbraio 1997, per una durata di 5 anni con un tasso pari al Libor + 0,20%, ha permesso il rimborso anticipato del finanziamento in lire erogato nel 1993 dall’Istituto Bancario S.Paolo di Torino a condizioni più onerose.

Il personale e l'organizzazione La popolazione del Gruppo Benetton, a fine 1996, era di 5.973 persone, di cui 4.358 in Italia. Rispetto al 31 dicembre 1995, si riscontra una diminuzione netta di 45 unità, dovuta principalmente alla razionalizzazione delle attività delle società giapponesi e al conseguente deconsolidamento di alcune di esse. Nel 1996 l'attività di gestione delle risorse umane ha seguito i percorsi paralleli della mobilità e della formazione, per rispondere alle esigenze derivanti dall'espansione dell'attività nel mondo e, nel contempo, operare per la continua evoluzione della qualità professionale delle persone, secondo criteri di carattere internazionale e di adesione all'innovativa cultura imprenditoriale del Gruppo. Sul versante delle relazioni industriali, nel corso del 1996 è stato completato l'accordo sottoscritto nel 1994 attraverso la definizione di incrementi salariali collegati a obiettivi e parametri di efficienza aziendale validi per il secondo biennio di durata, confermando la validità della scelta di una cultura contrattuale nuova, più consapevole delle esigenze imposte dalla crescente competizione, che ha soprattutto saputo coniugare le esigenze dell'impresa con quelle del personale. Le licenze E' continuato nel corso del 1996 il programma di espansione e diffusione dei marchi per mezzo non solo della conferma di contratti esistenti, ma anche con l'avvio di contatti per lo sviluppo in nuovi territori o di accordi con nuovi licenziatari selezionati e di riconosciuta affidabilità. L'obiettivo di espansione è stato rivolto non solo al tradizionale settore dell'abbigliamento, ma anche a nuovi settori, confermando lo stile dinamico ed internazionale del Gruppo, in coerenza con gli standard aziendali, come il rapporto ottimale tra qualità e prezzo, innovazione e immagine. Va senz'altro menzionata la collaborazione con il Gruppo Renault, già fornitore dei motori per le vetture del team di Formula Uno, che ha portato alla realizzazione della nuova automobile Twingo Benetton , "vestita" con i colori, il carattere e lo stile tipici del Gruppo. La comunicazione Nel corso del 1996 l'attività di comunicazione si è svolta in stretta integrazione con iniziative di carattere sociale e umanitario, realizzate in collaborazione con autorevoli organizzazioni umanitarie. La campagna istituzionale primavera-estate 1996, con l'immagine dei tre cuori, è uscita in parallelo alla riunione dei rappresentanti internazionali di SOS Racisme, tenutasi a marzo nella sede di Fabrica S.p.A., nei pressi di Treviso, in occasione della giornata mondiale contro il razzismo indetta dall'ONU. Un'altra iniziativa, “I colori della Pace”, ha coinvolto bambini e insegnanti delle scuole elementari di Italia, Francia, Belgio, Germania e Spagna in un programma di educazione alla pace. La seconda campagna 1996, con l'immagine della famiglia Benetton in camicia di forza, ha diffuso un'immagine di originale creatività imprenditoriale, fuori dagli schemi, sui maggiori quotidiani europei. Nella seconda parte dell'anno sono partite due campagne: l'immagine dei due cavalli, uno bianco l'altro nero, e quella del cucchiaio di legno, realizzata espressamente per la FAO, in occasione del Vertice Mondiale sull'Alimentazione, tenutosi in novembre a Roma. Un altro importante evento di comunicazione allargata ai temi della società civile ha riguardato la scelta di Corleone, conosciuta come culla del fenomeno mafioso, e dei suoi giovani quali protagonisti del catalogo della collezione Benetton per la primavera-estate 1997, per testimoniare la volontà di rinascita sociale e culturale della città siciliana. I progetti di Fabrica S.p.A., la scuola di comunicazione giunta al secondo anno di attività, hanno riguardato il tema delle “Paure dell'uomo”, con una mostra di immagini tenutasi a Venezia, lungo il Canal Grande, e presso il Museo Pecci di Prato, e una collaborazione continuativa con ARTE, il famoso canale televisivo culturale franco-tedesco, per la realizzazione di spot tematici. La rivista Colors, è diventata bimestrale e nel mese di dicembre ha ottenuto un'importante attestazione di stima, uscendo in allegato all'autorevole quotidiano francese Le Monde.

Consolidated financial statements as of December 31, 1996

Financial Highlights Operating results

(Billions of Lire) (Amounts in accordance with Italian GAAP) 1996 % 1995 %

Total Sales 2,871.1 100.0 2,939.1 100.0

Cost of Sales 1,716.6 59.8 1,721.3 58.6

Gross Margin 1,154.5 40.2 1,217.8 41.4

Income from Operations 401.7 14.0 443.8 15.1

Net income 245.7 8.6 220.3 7.5 Financial position and data per share (Billions of Lire, except per share amount) (Amounts in accordance with Italian GAAP)

1996 1995

Working Capital 1,512.3 1,551.1

Fixed Assets, net 592.3 618.0

Total Assets 3,864.3 3,837.1

Net Borrowing/ (liquidity) (133.0) 139.7

Stockholders' Equity 1,820.8 1,657.0 (Approximate amounts in accordance with US GAAP

Stockholders' Equity 1,824.0 1,624.1

Net Income 287.9 238.5

Earnings per Share (I) 1,650.0 1,366.0

Cash Dividend per Share (I) 500.0 400.0 (I) Since each ADS represents two Ordinary Shares, the ADS financial data may be computed by multiplying per share data by two.

The Benetton Group The Benetton Group achieved a number of important firsts in 1996. Consolidated net income reached a record level, net borrowings were turned into a substantial cash surplus (for the first time in the Group's history) and, as a consequence, net financial charges were a negligible percentage of consolidated revenues. These highly significant results derive from continuous innovations that have enhanced the Group’s business systems combined, in recent years, with incisive action to contain both fixed and variable costs. Consolidated net income amounted to Lire 246 billion, an improvement of 11.5% with respect to 1995. Net financial charges of Lire 12.6 billion compare with Lire 46.6 billion in 1995. Self-financing amounted to Lire 668 billion. Net liquidity of Lire 133 billion follows an improvement of Lire 273 billion during the year, despite the payment of dividends totaling about Lire 80 billion in 1996. Operating capital has fallen by almost Lire 150 billion, from Lire 1,285 billion to Lire 1,137 billion, while consolidated stockholders' equity of Lire 1,821 billion is 10% higher than at the end of 1995. Consolidated revenues of Lire 2,871 billion (Lire 2,939 billion in 1995) were influenced by the marked appreciation of the lira against major currencies (over 8% on average), as well as by the disposal and consequent deconsolidation of certain businesses no longer considered strategic to the optimization of the Group’s commercial and distribution systems. Volume rose by almost 4% overall. Substantial growth was achieved within the EU, notably in France, the UK, Spain, Portugal and Germany, as well as in Eastern Europe and some parts of the Middle East. Despite the appreciation of the lira, gross margin has remained at more than 40%, while operating income was 14% of revenues. The ongoing development and renewal of the retail network has contributed to the rise in the volume of products sold. Work continued in 1996 with, in particular, the opening of new megastores in London (the world’s largest Benetton store), New York, San Francisco, Barcelona, Moscow and Riyadh. These stores offer complete ranges of clothing and accessories covering all Benetton brands, thereby consolidating public awareness and the Group's image. On the industrial front, work was completed on the Castrette manufacturing facilities, which are currently the most advanced of their kind in the world. Investment in innovation has also focused on applying the latest technology to data processing and applications systems and, above all, to the continual enhancement of integrated logistics. Here, new automated systems have considerably improved efficiency and the speed of customer service, while reducing transport expenses by more than Lire 10 billion. This raises the net savings achieved in 1996 to almost Lire 45 billion, as a result of projects to reorganize and optimize activities in various sectors of the business, and in certain markets such as Japan. The Group Parent, Benetton Group SpA, reported net income of around Lire 125 billion, representing 5.9% of revenues. These were 5% higher than in 1995, following growth in the volume of garments sold despite the appreciation of the lira against export currencies. The cost of sales rose by Lire 133 billion, reflecting the increased volume of production and normal cost inflation. Rises in selling, general and administrative expenses mainly reflected prudent provisions against business risks (notably credit collection), and higher agents' commissions under a policy designed to enhance the effectiveness of distribution arrangements while expanding the sales network. Income from operations, Lire 259 billion, was 12.2% of revenues. Careful management of the exchange exposures specifically associated with commercial activities resulted in net gains of Lire 141 billion, partly due to the strengthening of the lira. The self-financing generated during the year, Lire 387 billion, was particularly significant to the treasury position.

0

1000

2000

3000

1990 1991 1992 1993 1994 1995 1996

2059 2304 2513 2751 2788 2939 2871

0%

10%

30%

50%

1990 1991 1992 1993 1994 1995 1996

36.2 38.1 39.2 42.2 41.2 41.4 40.2

Total sales (in billions of lire)

Gross margin (% on net sales)

0%

10%

15%

20%

5%

1990 1991 1992 1993 1994 1995 1996

12.9 13.5 14.2 14.8 13.9 15.1 14.0Income from operations (% on net sales)

0

50

150

250

200

100

1990 1991 1992 1993 1994 1995 1996

133 165 185 208 210 220 246Net income (in billions of lire)

Management’s discussion and analysis of financial condition and results of operations Results of Operations The following table sets forth certain items in billions of Lire and their respective percentages of total revenue for the years indicated. Comparisons in this table and in the following sections are based upon financial statement amounts derived under Italian GAAP and upon the international format financial information presented in the Selected Financial Data and in appendix 3 of the Consolidated Financial Statements. Year Ended December 31, 1994 1995 1996

Total revenue 2,788 100% 2,939 100% 2,871 100%

Gross margin 1,149 41.2% 1,218 41.4% 1,155 40.2%

Selling, general and administrative expenses 760 27.3% 774 26.3% 753 26.2%

Income from operations 389 13.9% 444 15.1% 402 14.0%

Net income 210 7.5% 220 7.5% 246 8.6% Benetton's results are seasonal, with revenues from Fall/Winter season sales higher than those from Spring/Summer season sales. During the 1994 to 1996 period, approximately 50% of Benetton's orders related to Fall/Winter collections, 45% to Spring/Summer collections and 5% to "flash" collections. 1996 compared to 1995 Consolidated revenues of Lire 2,871 billion (Lire 2,939 billion in 1995) were influenced by the marked appreciation of the lira against other major currencies (over 8% on average), as well as by the disposal and consequent deconsolidation of certain businesses no longer considered strategic to the optimization of the Group’s commercial and distribution systems. A generalized improvement in the results reported by sales outlets was symptomatic of an increasingly effective sales organization, combined with the timely delivery of merchandise responsive to market trends. Inventory turnover accelerated, while end-of-season stocks declined. In geographic terms, sales rose most significantly in Europe. The upswing was apparent in almost all nations, including markets such as France and Germany, where growth was achieved despite weak consumer demand overall. Increases were particularly marked in the cases of the '012' and 'Zerotondo' childrenswear lines, thus confirming the validity of product and distribution policies developed in 1995. Sales of jackets and other outerwear have also continued to grow, notably among the adult lines. The reduction in revenues, despite a substantial 4% rise in sales volumes compared with 1995, was caused by the appreciation of the lira against the principal foreign currencies used by the Group. The resulting erosion of revenues was compounded by the translation into lire of the results reported by foreign subsidiaries. This effect is clearly correlated with and offset by the net gain from currency management, which reflects hedging arrangements designed to manage the Group’s exposure to exchange rate volatility. Other revenues in 1996 were Lire 168.4 billion against Lire 171.5 billion in 1995, and mainly derived from sponsorship agreements related to the Formula I Championship and manufacturing sales and services provided to third parties. Despite normal cost inflation, the cost of sales declined by Lire 4.7 billion in 1996. Despite the appreciation of the lira, gross margin has remained at more than 40%, while operating income was 14% of revenues.

Continuing commitment to cost containment is evidenced by an overall reduction in selling and general expenses, both in absolute and percentage terms. Specifically: – Selling expenses rose by around Lire 7 billion or 0.4% of revenues. Following completion of the

commissioning phase, the Robostore 2000 system has proved its worth by optimizing shipment quantities and meeting challenging targets in terms of flexibility and efficiency. Early achievements include the distribution of up to 10 million garments in just one month, thus ensuring timely response to market needs.

? Automation of garment packing and loading has minimized the use of personnel in operations involving the heaviest work and greatest risk of human error, while focusing the attention of staff on administration and control. As a consequence, vehicle waiting times have been cut significantly.

? The reduction in handling associated with the automated sorting of delivery batches has also helped to reduce distribution costs, especially with regard to handling and sorting in the loading bays. The introduction of new automated systems offset the 1996 rises in freight rates.

? Automatic batching has optimized the number of garments per carton and considerably increased throughput capacity. This, in turn, has improved the ability to handle additional products and enhanced the effectiveness of the integrated logistics system.

? Agents' commissions increased by Lire 17 billion, however, reflecting the Company’s use of incentives to promote the expansion of the sales and distribution network.

– Advertising and sponsorship expenditure declined to 3.5% of revenues (from 4.1% in 1995), with a reduction in absolute terms of around Lire 18 billion.

– General and administrative expenses decreased by Lire 34 billion, thus saving about 1% of revenues. In greater detail, the payroll was Lire 16 billion lower than in 1995, following reorganization measures affecting manufacturing and other companies, combined with the closure of the Cosmetics Group and the divestment of Japanese companies no longer strategic to the sales and distribution network. Reorganization projects in various business sectors, coupled with the reorganization of operations among the Japanese subsidiaries and elsewhere, generated overall savings of around Lire 13 billion in general overhead expenditure. The levels of depreciation and operating expenditure were similar to those in 1995.

– Provisions increased by around Lire 24 billion, reflecting a prudent approach to supplementing the allowance for doubtful accounts, the reserve for legal disputes and the agents' leaving indemnity reserve.

The ratio of operating income to revenues declined slightly to 14% from 15.1% in 1995, despite the adverse effect deriving from the appreciation of the lira. Attention throughout the year again focused on the optimization of treasury management and on insulating the Group from exchange-rate exposures, in market conditions characterized by falling interest rates and the marked appreciation of the lira. The level of coordination and financial support for subsidiaries was maintained. Relevant developments during the final quarter included the progressive start-up of Benetton Gesfin S.p.A., whose activities include the centralization of treasury management and control of the Group’s financial exposures. Constant attention to operating efficiency, combined with the lower cost of money, resulted in a substantial reduction in financial charges. The equity in foreign subsidiaries was again hedged against exchange risks, to protect the value of the Group’s investments abroad. The net exchange gain of Lire 117 billion (Lire 46 billion in 1995) included in financial income and expense (Note 27) was derived from the translation of receivables and payables denominated in foreign currency using year-end exchange rates, coupled with the overall effect of exchange hedges and differences arising from cash receipts and payments denominated in foreign currencies. The substantial reduction in the Group's average borrowings resulted in a further decline in financial charges, which were at an extremely modest level in both absolute and percentage terms. In particular, net financial charges of Lire 12.6 billion were just 0.4% of revenues. The increase in “other expenses, net” reflected the prudent provisions to reserves discussed in the Notes to the Consolidated Financial Statements. The effective tax rate, based on income before income taxes and minority interests, amounted to 45.2%. Net income improved by 11.5% to 8.6% of revenues from 7.5% in 1995. The Group employed 5,973 people at the end of 1996, compared with 6,018 as of December 31, 1995.

0

1000

2000

1990 1991 1992 1993 1994 1995 1996

653 655 880 1122 1269 1285 1137

868 953 1315 1552 1851 1836 1712

-200

-100

0

400

500

200

100

300

1991 1992 1993 1994 1995 1996

171 325 425 303 140 -133

Net capital employedNet working capital (in billions of lire)

Net indebtedness (in billions of lire)

0

1000

1500

2000

500

1990 1991 1992 1993 1994 1995 1996

587 717 923 1063 1504 1657 1821Stockholders' equity (in billions of lire)

0

400

800

600

200

1990 1991 1992 1993 1994 1995 1996

133 165 185 208 210 220 246

338 425 458 594 526 614 668Cash flows Net income (in billions of lire)

Consolidated financial statements as of December 31, 1995 and 1996

Consolidated balance sheet as of December 31, 1995 and 1996

Assets (in millions of Lire) (Thousands

of US $) (1)

12/31/95 12/31/96 12/31/96

B FIXED ASSETS

I Intangible fixed assets

1 start-up and expansion expenses 17,349 11,458 7,543

2 research, development and advertising expenses 867 819 539

3 industrial patents and intellectual property rights 1,021 1,408 927

4 concessions, licenses, trademarks and similar rights 11,289 10,417 6,858

5 goodwill and consolidation differences 18,164 21,516 14,165

6 assets in course of formation and advance payments 3,340 3,101 2,041

7 other intangible fixed assets 22,626 31,789 20,928

Total intangible fixed assets 74,656 80,508 53,001

II Tangible fixed assets

1 real estate 354,687 340,414 224,104

2 plant and machinery 192,883 179,251 118,006

3 industrial and commercial equipment 3,919 5,931 3,904

4 other assets 60,342 60,912 40,100

5 assets under construction and advances to suppliers 6,186 5,758 3,791

Total tangible fixed assets 618,017 592,266 389,905

III Financial fixed assets

1 equity investments in:

(a) subsidiary companies 39,991 39,098 25,740

(b) associated companies 4,253 1,653 1,088

(d) other companies 2,907 2,490 1,639

Total equity investments 47,151 43,241 28,467

2 financial receivables due from:

(a) subsidiaries

- within 12 months 336 - -

- beyond 12 months 749 - -

Total financial receivables due from subsidiaries 1,085 - -

(d) third parties

- within 12 months 10,192 5,223 3,438

- beyond 12 months 34,162 14,976 9,859

Total financial receivables due from third parties 44,354 20,199 13,297

Total financial receivables 45,439 20,199 13,297

3 other securities 130,778 71,042 46,769

Total financial fixed assets 223,368 134,482 88,533

TOTAL FIXED ASSETS 916,041 807,256 531,439

(1) Exchange rate: US $ 1 = Lire 1,519 as of December 31, 1996.

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

(in millions of Lire) (Thousands

of US $) (1)

12/31/95 12/31/96 12/31/96

C CURRENT ASSETS

I Inventories

1 raw materials, other materials and consumables 178,542 181,207 119,294

2 work in progress and semimanufactured products 139,110 122,500 80,645

4 finished goods and goods for resale 186,558 106,500 70,112

5 advance payments to suppliers 2,153 1,085 714

Total inventories 506,363 411,292 270,765

II Accounts receivable

1 trade receivables

- within 12 months 1,237,358 1,245,928 820,229

- beyond 12 months 731 10,708 7,049

Total trade receivables 1,238,089 1,256,636 827,278

2 subsidiary companies 7,585 3,604 2,373

3 associated companies 54 1,501 988

5 other receivables

- within 12 months 157,735 81,071 53,371

- beyond 12 months 1,347 920 606

Total other receivables 159,082 81,991 53,977

Total accounts receivable 1,404,810 1,343,732 884,616

III Financial assets not held as fixed assets

5 Treasury shares - 719 473

6 other securities 290,081 659,300 434,036

7 other financial receivables 127,244 4,399 2,896

8 differentials on forward transactions:

- within 12 months 74,647 71,735 47,225

- beyond 12 months 6,244 3,268 2,151

Total differentials on forward transactions 80,891 75,003 49,376

Total financial assets not held as fixed assets 498,216 739,421 486,781

IV Liquid funds

1 bank and post office deposits 430,067 485,070 319,335

2 checks 28,011 13,148 8,656

3 banknotes and coins 541 694 457

Total liquid funds 458,619 498,912 328,448

TOTAL CURRENT ASSETS 2,868,008 2,993,357 1,970,610

D ACCRUED INCOME AND PREPAID EXPENSES 53,030 63,649 41,902

TOTAL ASSETS 3,837,079 3,864,262 2,543,951

(1) Exchange rate: US $ 1 = Lire 1,519 as of December 31, 1996. The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

Consolidated balance sheet as of December 31, 1995 and 1996 Liabilities and stockholders' equity

(in millions of Lire) (Thousands of US $) (1) 12/31/95 12/31/96 12/31/96

A STOCKHOLDERS' EQUITY I Capital stock 87,277 87,277 57,457 II Additional paid-in capital 472,661 472,661 311,166 III Revaluation reserves 45,028 46,202 30,416 IV Legal reserve 17,455 17,455 11,491 V Reserves for treasury shares held - 719 473 VII Other reserves 814,282 950,880 625,991 IX Net income for the year 220,255 245,642 161,713

Group interest in stockholders' equity 1,656,958 1,820,836 1,198,707 Minority interests 38,863 24,603 16,197 TOTAL STOCKHOLDERS' EQUITY 1,695,821 1,845,439 1,214,904

B RESERVES FOR RISKS AND CHARGES 2 taxation 7,650 7,926 5,218 3 other 82,151 55,529 36,556 TOTAL RESERVES FOR RISKS AND CHARGES 89,801 63,455 41,774

C RESERVE FOR EMPLOYEE TERMINATION INDEMNITIES 58,736 62,521 41,159

D ACCOUNTS PAYABLE 1 bonds - within 12 months - 34,986 23,032 - beyond 12 months 279,527 235,775 155,218 Total bonds 279,527 270,761 178,250 2 convertible bonds repayable beyond 12 months 300 300 197 3 due to banks - within 12 months 730,024 804,787 529,813 - beyond 12 months 204,069 80,543 53,024

Total due to banks 934,093 885,330 582,837 4 due to other providers of finance - within 12 months 10,910 13,369 8,801 - beyond 12 months 16,519 15,262 10,048

Total due to other providers of finance 27,429 28,631 18,849 5 advances from customers 2,771 2,975 1,959

6 trade payables 517,298 540,043 355,525 7 securities issued - within 12 months 10,019 6,055 3,986 - beyond 12 months 1,811 708 466

Total securities issued 11,830 6,763 4,452 8 due to subsidiary companies 2,227 2,523 1,661

9 due to associated companies 385 205 135 11 due to the tax authorities 98,574 48,982 32,246 12 due to social security and welfare institutions 16,441 16,675 10,978 13 other payables - within 12 months 31,713 28,567 18,806 - beyond 12 months 2,123 1,909 1,257

Total other payables 33,836 30,476 20,063 TOTAL ACCOUNTS PAYABLE 1,924,711 1,833,664 1,207,152



(in millions of Lire) (Thousands of US $) (1) 12/31/95 12/31/96 12/31/96

E ACCRUED EXPENSES AND DEFERRED INCOME 1 accrued expenses and deferred income 67,423 58,793 38,705 2 premiums on bond issues 587 390 257 TOTAL ACCRUED EXPENSES AND DEFERRED INCOME 68,010 59,183 38,962 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 3,837,079 3,864,262 2,543,951 DISCLOSURE OF: COMMITMENTS, CONTINGENCIES AND MEMORANDUM ACCOUNTS

Guarantees given Guarantees 12,979 10,560 6,952 Endorsements 970 - - Other 148 1,144 753

Secured guarantees given To secure recorded payables - mortgages 69,991 91,171 60,020 Purchase commitments - 1,418 933 Sale commitments - 7,130 4,694

Guarantees received Notes lodged by third parties 20 20 13 Guarantees given by third parties 19,198 7,845 5,165

Other Securities to be sold forward 9,645 - - Currency to be sold forward 5,674,873 3,744,604 2,465,177 Currency to be purchased forward 3,204,780 2,050,226 1,349,721 Restricted receivables 8,133 25,474 16,770 Notes presented for discount 4,412 8,893 5,855 TOTAL COMMITMENTS, CONTINGENCIES AND MEMORANDUM ACCOUNTS 9,005,149 5,948,485 3,916,053



Consolidated statements of income for the years ended December 31, 1995 and 1996

(in millions of Lire) (Thousands of US $) (1) 1995 1996 1996

A VALUE OF PRODUCTION 1 Revenues from sales and services 2,939,134 2,871,108 1,890,131 2 Changes in work in progress, semi-manufactured products and finished goods (9,814) (81,220) (53,469) 4 Capitalization of internal work 2,292 3,608 2,375 5 Other income and revenues 25,427 18,669 12,290 TOTAL VALUE OF PRODUCTION 2,957,039 2,812,165 1,851,327

B PRODUCTION COSTS 6 Raw material, other materials, consumables and goods for resale 924,736 790,437 520,367 7 Services received 1,017,756 1,035,382 681,621 8 Leases and rentals 44,729 37,561 24,727 9 Payroll and related costs: a wages and salaries 241,934 229,049 150,790 b social security contributions 76,182 77,474 51,003 c employee termination indemnities 17,114 13,752 9,053 e other costs 2,036 1,353 891

Total payroll and related costs 337,266 321,628 211,737 10 Amortization, depreciation and writedowns: a amortization of intangible fixed assets 19,248 18,461 12,153 b depreciation of tangible fixed assets 81,741 76,451 50,330 d writedown of current receivables and of liquid funds 60,839 78,304 51,550

Total amortization, depreciation and writedowns 161,828 173,216 114,033 11 Changes in raw materials, other materials, consumables and goods for resale (28,221) (2,825) (1,860) 12 Provisions to risk reserves 7,357 13,638 8,978 14 Other operating costs 51,350 49,162 32,365 TOTAL PRODUCTION COSTS 2,516,801 2,418,199 1,591,968 DIFFERENCE BETWEEN VALUE AND COST OF PRODUCTION 440,238 393,966 259,359

C FINANCIAL INCOME AND EXPENSE 15 Income from equity investments 11,891 6,223 4,097 16 Other financial income: a from receivables held as financial fixed assets - subsidiary companies 94 75 50 - other companies 506 506 333 600 581 383 b from securities held as financial fixed assets not representing equity investments 17,141 15,821 10,415 c from securities included among current assets not representing equity investments 27,663 24,635 16,218 d Financial income other than the above - subsidiary companies 586 227 149 - associated companies - 6 4 - other companies 544,741 504,835 332,347 545,327 505,068 332,500

Total other financial income 590,731 546,105 359,516 17 Interest and other financial expense 593,008 448,435 295,217 TOTAL FINANCIAL INCOME AND EXPENSE 9,614 103,893 68,396

(in millions of Lire) (Thousands of US $) (1) 1995 1996 1996

D ADJUSTMENTS TO FINANCIAL ASSETS 18 Revaluations: a of equity investments 445 171 112 c of securities included among current assets not representing equity investments - 155 102

Total revaluations 445 326 214 19 Writedowns: a of equity investments 5,807 1,406 926 c of securities included among current assets not representing equity investments 3,118 417 274

Total writedowns 8,925 1,823 1,200

TOTAL ADJUSTMENTS TO FINANCIAL ASSETS (8,480) (1,497) (986)

E EXTRAORDINARY INCOME AND EXPENSE 20 Income: - gains on disposals 2,652 7,318 4,818 - other 14,210 9,216 6,067 Total income 16,862 16,534 10,885 21 Expense: - losses on disposals 3,673 2,030 1,337 - taxes relating to prior years 508 61 40 - other 42,958 53,638 35,311 Total expense 47,139 55,729 36,688 TOTAL EXTRAORDINARY INCOME AND EXPENSE (30,277) (39,195) (25,803) RESULTS BEFORE INCOME TAXES 411,095 457,167 300,966 22 Current income taxes 188,659 206,638 136,036

Income before minority interests 222,436 250,529 164,930 Income attributable to minority interests (2,181) (4,887) (3,217) 26 NET INCOME FOR THE YEAR 220,255 245,642 161,713



Statement of changes in consolidated stockholders’ equity for the years ended December 31, 1994, 1995, and 1996

(in millions of Lire)

Surplus from Other reserves

Additional monetary and Net income

Capital paid-in revaluation retained for Total

Stock capital of assets earnings the year

BALANCES AS OF DECEMBER 31, 1993 81,777 186,661 46,222 540,580 208,038 1,063,278

Allocation of 1993 net income to reserves - - - 208,038 (208,038) -

Capital increase 5,500 286,000 - - - 291,500

Dividends distributed, as approved at the

stockholders' meeting held on May 25, 1994 - - - (67,203) - (67,203)

Effect of deconsolidating subsidiary

companies

- - (1,106) 1,106 - -

Differences arising from the translation of

foreign currency financial statements - - - 6,361 - 6,361

Net income for the year - - - - 210,220 210,220




stockholders' meeting held on April 27, 1995 - - - (69,821) - (69,821)

Transfer to extraordinary reserve

of a part of surplus following the

monetary revaluation of assets - - (88) 88 - -


foreign currency financial statements - - - 2,368 - 2,368





stockholders' meeting held on April 30, 1996 - - - (74,185) - (74,185)

Monetary revaluation of fixed assets

carried out by a Spanish subsidiary in

accordance with local legislation - - 1,174 - - 1,174


foreign currency financial statements - - - (8,753) - (8,753)



Balances as of December 31, 1996

(thousands of US $) (1) 57,457 311,166 30,416 637,955 161,713 1,198,707



Statement of changes in minority interests for the year ended December 31, 1996

(in millions of Lire) Capital and Net Total reserves income

BALANCES AS OF DECEMBER 31, 1995 36,682 2,181 38,863

Allocation of 1995 net income 2,181 (2,181) - Capital stock increase 156 - 156 Purchase of equity investments (1,825) - (1,825) Disposal of equity investments and companies in liquidation (11,245) - (11,245) Deconsolidation of companies (587) - (587) Dividends distributed (4,812) - (4,812) Translation differences (834) - (834) Net income for the year - 4,887 4,887

BALANCES AS OF DECEMBER 31, 1996 19,716 4,887 24,603

Statements of consolidated cash flows for the years ended

December 31, 1994, 1995 and 1996 (in millions of Lire) (Thousands

of US $) (1)

1994 1995 1996 1996

Cash flows from operating activities

Income before minority interests 207,189 222,436 250,529 164,930

Depreciation and amortization 95,612 100,989 94,912 62,483

Amortization of deferred charges on long-term loans 1,832 2,033 4,596 3,026

Provision for collection losses and other non-cash charges 82,537 84,615 103,616 68,213

Provision/(utilization) of exchange fluctuations reserve (7,400) (4,139) 9,137 6,015

Extraordinary provision for contingencies - 25,398 19,236 12,664

Provision for income taxes 150,554 188,659 206,638 136,035

Losses (gains) on disposal of assets, investments, net 4,579 13,877 7,695 5,066

Payment of termination indemnities and use of other reserves (9,271) (19,547) (28,523) (18,777)

Self-financing 525,632 614,321 667,836 439,655

Payment of taxes (250,458) (149,553) (175,755) (115,704)

Increase in accounts receivable (100,768) (106,688) (112,045) (73,762)

(Increase) decrease in other operating receivables (69,621) 28,301 (9,450) (6,221)

(Increase) decrease in inventories (47,988) (17,202) 79,169 52,119

(Decrease) increase in accounts payable (18,338) 13,670 22,286 14,671

(Decrease) increase in other operating payables and accruals 37,101 (14,006) (12,908) (8,498)

Increase in operating capital (199,614) (95,925) (32,948) (21,691)

Net cash flows from operating activities 75,560 368,843 459,133 302,260

Cash flows from investing activities

Purchase of new consolidated subsidiaries (21,701) (17,994) (16,926) (11,143)

Purchase of tangible fixed assets (108,952) (120,605) (81,061) (53,365)

Investment in intangible fixed assets (32,580) (16,068) (29,788) (19,610)

Sales of tangible fixed assets 24,344 26,381 30,191 19,876

Disposal of intangible fixed assets 1,754 650 4,530 2,982

Net change in investment-related receivables and payables (2,512) 660 1,842 1,213

Net cash used in investing activities (139,647) (126,976) (91,212) (60,047)

Cash flows from other investing activities

Purchase of investments (358) (8,318) (3,429) (2,257)

Purchase of investments to be consolidated (29,613) (11,269) (18,781) (12,364)

Sales of investments 24,463 7,793 3,987 2,624

(Increase) decrease in other financial assets (6,614) (1,464) 19,610 12,910

Net cash used in other investing activities (12,122) (13,258) 1,387 913

Payment of dividends (80,200) (75,719) (78,997) (52,006)

Net financing (requirement) surplus (156,409) 152,890 290,311 191,120



of US $) (1)

1994 1995 1996 1996

Cash flows from financing activities

Change in stockholders' equity 300,767 4,900 1,384 911

Change in short-term borrowing (158,270) 99,378 253,564 166,928

Proceeds from issuance of long-term debt 56,422 52,703 36,498 24,028

Repayment of long-term debt (147,932) (75,937) (358,931) (236,294)

Change in securities held as fixed assets (133,784) (1,069) 58,301 38,381

Increase in other financial assets (2,588) (11,361) (4,933) (3,248)

Decrease in other financial assets 2,871 17,854 12,017 7,911

Assets leased to third parties 77,006 156 174 115

Decrease in lease financing (6,340) 1,883 2,261 1,488

Net cash provided (used) by financing activities (11,848) 88,507 335 220

Effect of translation adjustments (1,510) (15,217) 40,978 26,977

Net increase (decrease) in cash and cash equivalents (2) (169,767) 226,180 331,624 218,317

Cash and cash equivalents of newly acquired and disposed

of subsidiaries, net (5,442) (5,768) (4,876) (3,210)

Effect of translation adjustment on cash and cash equivalents 5,419 12,257 (39,362) (25,913)

Cash and cash equivalents at the beginning of the year 813,065 643,275 875,944 576,659

Cash and cash equivalents at the end of the year 643,275 875,944 1,163,330 765,853

Supplemental disclusures of cash flow information:

Cash paid during the year for interest expense 234,492 156,156 183,590 120,862

The "Payment of taxes" and "Change in other operating receivables" captions are stated net of tax credits totaling Lire 60,855

million, which were transferred within the Group in order to reduce the payment of outstanding taxes and advances.


(2) Cash and cash equivalents include liquid funds, other securities and other financial receivables considered financial assets

not held as fixed assets.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND 1996 The consolidated financial statements have been prepared in conformity with Chapter III of Decree 127/1991 of April 9, 1991, which implements the EC VII Directive. The notes to the consolidated financial statements explain, analyze and, in some cases, supplement the data reported on the face of the financial statements and include information required by article 38 and other provisions of Decree 127/1991. Additional information is also provided in order to present a true and fair view of the financial and operating position of the Group, even where this is not required by specific legislation. In order to assist the reader of the financial statements in understanding the Group’s financial performance during the three year period ended December 31, 1996, the Group has presented in appendix 3 the consolidated statements of income for each of the three years in the period ended December 31, 1996 and in appendix 2 the consolidated balance sheets as of December 31, 1995 and 1996 in a format consistent with an international format. Unless otherwise specified, amounts indicated in these notes are expressed in millions of Italian Lire. 1. Activities of the Group Benetton Group S.p.A. the Parent Company, and its subsidiary companies (collectively the "Group") primarily manufacture and market fashion apparel in wool, cotton and woven fabrics. The manufacture of finished articles from raw materials is primarily undertaken in Italy, partly within the Group and partly using subcontractors, whereas marketing is carried out through an extensive sales network both in Italy and abroad. This network consists of sales representatives and specialty stores that are almost exclusively independently owned. 2. Form and content of the consolidated financial statements The consolidated financial statements and related notes have been translated into English from the original version in Italian. They have been prepared in accordance with the accounting principles established by the Italian Accounting Profession, which may differ in certain respects from the principles generally accepted in other countries. The consolidated financial statements of the Group include the financial statements as of December 31, 1996 of Benetton Group S.p.A. and all the Italian and foreign companies in which the parent company holds, directly or indirectly, the majority of the voting rights. They also include the accounts of some 50%-owned companies over which the Group exercises a dominant influence. The companies included within the scope of consolidation are listed in appendix 1. The financial statements utilized for the consolidation are those prepared for approval at the stockholders' meetings. The financial statements of foreign subsidiaries have been reclassified, where necessary, for consistency with the format adopted by the parent company. The consolidated financial statements have been adjusted to comply with the accounting policies laid down by Decree 127/1991, those recommended by the Italian Accounting Profession and, in the absence thereof, by those established by the International Accounting Standards Committee (I.A.S.C.), consistently applied throughout the Group. In addition, the financial statements of minor subsidiaries located in highly inflationary countries are adjusted to reflect changes in the purchasing power of the local currencies.

The significant differences between the Group's policies and accounting principles generally accepted in the United States, along with the related adjustments to consolidated net income and equity, are described in Note 32. A reconciliation between stockholders' equity and net income as reported in the statutory financial statements of the parent company, Benetton Group S.p.A., and the consolidated stockholders' equity and net income of the Group is presented within the note on stockholders' equity (notes 19 and 20). 3. Principles of consolidation The most significant consolidation principles adopted in the preparation of the consolidated financial statements are as follows: (a) The assets and liabilities of subsidiary companies are consolidated on a line-by-line basis and the

carrying value of investments held by the parent company and other consolidated subsidiaries is eliminated against the related stockholders' equity accounts.

(b) When a company is consolidated for the first time, any positive difference emerging from the

elimination of its carrying value on the basis indicated in (a) above, is allocated, where applicable, to the assets of the subsidiary. Any excess arising upon consolidation is accounted for as a "consolidation adjustment" and is classified as "Goodwill and consolidation differences". Negative differences are classified within the caption "Reserve for risks and charges arising on consolidation" if they reflect estimated future losses, otherwise, they are classified as part of the "Consolidation reserve" within stockholders' equity. Goodwill is amortized over its estimated useful life.

(c) Intercompany receivables and payables, costs and expenses, and all significant transactions

between consolidated companies, including the intra-Group payment of dividends, are eliminated. Unrealized intercompany profits and gains and losses arising from transactions between Group companies are also eliminated.

(d) The minority stockholders' interests in the net assets and results for the year of consolidated

subsidiaries is classified separately as "Minority interests" in the consolidated balance sheet and as “Income/(losses) attributable to minority interests” in the consolidated statement of income.

(e) The financial statements of foreign subsidiaries, including those operating in countries with hyper-

inflationary economies, are translated into Italian Lire using year-end exchange rates for balance sheet items and average exchange rates for the year for statement of income items. Differences arising from the translation into Lire of foreign currency financial statements are reflected directly in consolidated stockholders' equity.

The value of the stockholders' equity of foreign subsidiaries is hedged against exchange risks, mainly through the forward sale of currency. Any exchange differences arising from such capital hedging operations are classified as "Translation differences" and therefore adjust consolidated equity. Since 1994 the difference between the spot and forward exchange rates relating to these capital hedges is recorded as part of "Other financial income" within the statement of income (see note 27).

4. Accounting policies The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those applied by the Parent Company, as summarized below: Intangible fixed assets These are recorded at purchase cost, including related charges. Trademarks are stated at registration or purchase cost, as revalued as of December 31, 1983, in accordance with the provisions of Law 72 of March 19, 1983. The related revaluation surplus was credited to a specific stockholders' equity reserve. The amount is stated net of accumulated amortization, which is generally provided over twenty years. Intangible fixed assets are written down in cases where, regardless of the amortization accumulated, there is a permanent loss in value. The value of such assets is reinstated in future accounting periods should the reasons for such writedowns no longer apply. Costs deferred in connection with expansion projects and other deferred charges are amortized on a straight-line basis over the period they are expected to benefit, which is generally five years. Patents are amortized over three years. Goodwill and consolidation differences are amortized over ten years. Tangible fixed assets These are recorded at purchase or construction cost, as adjusted in certain circumstances through the application of specific monetary revaluation laws. Cost includes related charges and direct or indirect expenses reasonably attributable to the individual assets. Tangible fixed assets transferred within the Group as of December 31, 1980, were recorded at appraised values. The principal Italian Group companies restated the majority of their assets as of December 31, 1983 in a monetary revaluation in accordance with the provisions of Law 72 of March 19, 1983. These companies were also obliged by Law 413 of December 30, 1991 to revalue their real estate holdings. In 1996, a Spanish subsidiary restated its tangible fixed assets by Lire 1,210 million in a monetary revaluation in accordance with local legislation (Royal Decree 2607/96). Depreciation is computed on a straight-line basis using rates considered to reflect the estimated useful lives of tangible fixed assets. Half the annual depreciation rates are charged in the year the assets enter service. Tangible fixed assets are written down in cases where, regardless of the depreciation accumulated, there is a permanent loss in value. The value of such assets is reinstated in future accounting periods should the reasons for such writedowns no longer apply. The principal depreciation rates applied by consolidated companies are as follows: Buildings 3%

Plant and machinery 8% - 17.5%

Industrial and commercial equipment 25%

Furniture, furnishings and electronic machines

12% - 20%

Vehicles 20% - 25%

Aircraft 5% Ordinary maintenance costs are expensed as incurred. Costs that significantly improve or extend the life of an asset are capitalized and depreciated over its life. Assets acquired under finance leases are stated at their fair value at the start of the lease and the capital portion of the lease installments is recorded as a liability. Such assets are depreciated over their economic useful lives on the same basis as other tangible fixed assets.

Financial fixed assets Investments in subsidiaries not consolidated on a line-by-line basis, together with those in associated companies, are accounted for on an equity basis, as adjusted, where significant, to eliminate the Group's share of unrealized intercompany profits. The difference between the cost and the net equity of investments at the time they were acquired is allocated on the basis described in paragraph (b) of the consolidation principles. Equity investments of less than 20% in other companies are stated at cost, as written down where there is a permanent loss in value. The original value of these investments is reinstated in future accounting periods should the reasons for such writedowns no longer apply. Assets leased to third parties are recorded using lease accounting methodology. This involves eliminating the related fixed asset and accumulated depreciation accounts and recording the outstanding capital element of lease contracts as an asset. The excess of lease charges over the cost of the related asset is recognized as interest income on an accrual basis. Receivables included among financial fixed assets are stated at their estimated realizable value. Other securities held as financial fixed assets are stated at cost, as written down where there is a permanent loss in value, taking into account any accrued issue premiums and discounts. Inventories Inventories are stated at the lower of purchase or manufacturing cost, generally determined on a weighted average cost basis, or their market or net realizable value. Manufacturing cost includes raw materials and all direct or indirect production-related expenses. The calculation of estimated realizable value includes any manufacturing costs to be incurred and direct selling expenses. Obsolete and slow-moving inventories are written down to their useful or net realizable value. Accounts receivable and payable Accounts receivable and payable are stated at face value. Receivables are recorded at their estimated realizable value, net of appropriate allowances for doubtful accounts determined on a prudent basis. Other securities not held as fixed assets Such securities are stated at the lower of purchase cost or market value at the balance sheet date. The original value of these investments is reinstated in future accounting periods should the reasons for such writedowns no longer apply. Securities acquired subject to resale commitments represent the temporary investment of funds and are classified among other financial receivables and recorded at cost, which includes accrued interest. The difference between the spot and forward prices of such securities is accounted for as interest income and recognized as income on an accruals basis. Accruals and deferrals These are recorded to match costs and revenues in the accounting periods to which they relate. Reserves for risks and charges These reserves cover known or likely losses, the timing and amount of which cannot be determined at year-end. Provisions reflect the best estimate of losses to be incurred based on the information available. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reserve for employee termination indemnities This reserve represents the liability of Italian companies within the Group for indemnities payable upon termination of employment, accrued in accordance with labor laws and labor agreements in force. This liability is subject to annual revaluation using officially-established indices. Transactions in foreign currencies Transactions in foreign currencies are recorded using the exchange rates in effect at the transaction dates. Exchange gains or losses realized during the year are included in the consolidated statement of income. Foreign currency receivables and payables not hedged are reviewed using year-end exchange rates. A resulting net loss is credited to the exchange fluctuation reserve, which is classified among reserves for risks and charges-other, and debited to other financial expense in the consolidated statement of income. No adjustment is recorded for resulting net gains. Hedged receivables are not restated if no further exchange gains or losses would arise on collection. Income and expense relating to forward exchange contracts that hedge identifiable foreign currency assets, liabilities or contractual obligations are reflected in the consolidated statement of income upon expiration. Income relating to forward exchange contracts that were subsequently renegotiated are recorded in the consolidated statement of income in the year in which the renegotiation occured (Note 11). The value of forward contracts not hedging identifiable foreign currency assets, liabilities or contractual obligations are reviewed at year-end with reference to the difference between the forward exchange rates applicable to the contract at the balance sheet date and the contracted forward rates. Any net losses identified are charged to the consolidated statement of income. Refer to Note 27 for income and expense amounts recorded in the consolidated statement of income related to the above transactions. Fair value of financial instruments Financial instruments consist primarily of investments in cash, marketable securities, accounts receivable, accounts payable, debt obligations, forward exchange contracts, interest rate swap agreements and forward rate agreements. The fair value of debt obligations was estimated by discounting cash flows using interest rates currently available. The carrying amounts and estimated fair value of these obligations at December 31, 1996 were Lire 370,357 million and Lire 375,267 million, respectively. Fair value of forward exchange contracts are discussed in Note 24. The interest rate swap agreements and forward rate agreements expire within three months and therefore their carrying value approximates fair value. The carrying value of remaining financial instruments approximates fair value due to the short-term and/or variable rate nature of these instruments. Revenue recognition Revenues from product sales are recognized at the time of shipment to the customer, which represents the moment when ownership passes. Expense recognition Expenses are recorded in accordance with the matching principle. Advertising costs are charged to income in the year in which they are incurred.

Income taxes Current income taxes are provided by each consolidated company on the basis of a reasonable estimate of their tax liability for the year, in accordance with applicable local regulations. The consolidated financial statements also include a provision for deferred taxes principally arising from the reversal of excess depreciation, from lease accounting adjustments and from gains on the disposal of tangible fixed assets. Deferred taxes are provided net of tax assets deriving from tax payments that will be recoverable when timing differences reverse and from consolidation adjustments. Deferred taxes are also provided on certain equity reserves in consideration of possible future dividend distributions within the Group, given the liquidity available. Provision is not made for possible income taxes on monetary revalutation reserves which are permanently reinvested or for the potential deferred tax asset related to tax loss carry forwards. Cash flows The statement of consolidated cash flows provides information by type of flow and activity. Readily marketable securities are treated as cash equivalents. This statement has been prepared in accordance with the accounting principles discussed in Note 2. The Group does not believe any material differences exist between this format and a format in accordance with United States Generally Accepted Accounting Principles. Financial statements and information expressed in US dollars The financial statements are presented in Italian Lire and, for 1996, are also presented in US dollars solely for the convenience of the reader, at the year end exchange rate of US $ 1 = Lire 1,519, which was the noon buying rate of the US Federal Reserve Bank as of December 31, 1996, the last business day of the year. No representation is made that Lire amounts have been, could have been, or could be converted into US dollars at that or any other rate.

OTHER INFORMATION 5. Purchase of subsidiary companies and disposal of associated companies 1994 Benetton International N.V. acquired for £.11,000,000 (approximately Lire 28,000 million) full control over Benetton Engineering Ltd. from a subsidiary of Edizione Holding S.p.A.. The acquired company owns a 50% stake in TWR Group Ltd., which has been treated as a subsidiary since the Benetton Group controls the majority of voting rights at ordinary meetings. TWR Group Ltd. principally designs and develops prototype racing cars. Among Group companies in Italy, the interest in Azimut S.p.A., a company involved in the shirt and blouse production and distribution activities, was increased from 50% to 75%. The same reorganization involved the disposal to third parties of the Group’s interests (50% in both cases) in Altana Uno S.p.A. and Columbia S.p.A., non-operating companies whose shirt-sector activities had previously been transferred to Azimut S.p.A.. Texcontrol S.p.A. added to its manufacturing capacity by acquiring 100% of F.T. Srl, based in Follina (Treviso), a company specializing in the dyeing of wool fabrics. Two newly-formed wholly-owned subsidiaries also commenced operations under business rental agreements: Finitex S.p.A. specializes in the dyeing and printing of woven fabrics, and Tessuti di Pordenone S.p.A. is active in weaving. Galli Filati S.p.A., which manufactures and distributes carded woolen yarns, expanded by acquiring a plant in Caserta that specializes in the processing of this type of yarn. The Group increased from 50% to 90% its investment in Benetton Group Japan K.K.. 1995 In pursuit of increasing efficiency among the manufacturing subsidiaries of the Group, Manifatture Stefani S.p.A. acquired from Texcontrol S.p.A. 100% of Finitex S.p.A. and 100% of Tessuti di Pordenone S.p.A.. Maglificio Fontane S.p.A., now 75% owned by Benetton Group, acquired a 81% controlling interest in Maglifici Re.Mo. S.p.A. and took over this company’s activities in the processing of woolen knitwear. Maglifici Re.Mo. S.p.A. has since ceased operating. Benetton Group increased its 75% holding in Azimut S.p.A. to 100%, via the purchase from third parties of the remaining shares, and started direct production and distribution of shirts and blouses. Galli Filati S.p.A., completed the acquisition of 100% of the capital stock of Filma S.p.A., based in Valdagno (Vicenza), thereby adding the manufacture and processing of worsted woolen yarns to its range of activities. In the context of the program to strengthen and diversify the wool sector production cycle, Galli Filati S.p.A. also purchased a 50%-interest in the capital stock of Spiller S.p.A., based in Schio (Vicenza), which is active in raw materials and in wool and mixed-fiber fabrics. The Group's international development plans have also targeted new geographic areas, particularly Tunisia, where Benetton Tunisia S.a.r.l., a wholly-owned subsidiary, has begun the production of an initially limited range of products, and Oporto (Portugal), where Benetton Lda., another wholly-owned subsidiary, has been formed for manufacturing and distribution purposes. An additional 50% of the capital stock of United Colors of Benetton do Brasil S.A. was acquired in December 1995 with a view to strengthen management control of the Group's production and marketing structure in Brazil.

Benetton International N.V. has sold its holdings in Benetton Bosphorus Casual Wear A.S. (50%-interest) and in Benetton Sweden A.B.. The Group also sold its interests in Benetton Chu-Shikoku Co. Ltd., Kyushu Benetton Co. Ltd., Tohoku Benetton Co. Ltd. and Benetton Chubu Co. Ltd., all marketing companies, as part of the corporate restructuring taking place in Japan. 1996 In early 1996 the Group increased from 90% to 100% its investment in Benetton Group Japan K.K.. Developments in the continuing process of reorganizing the Group structure included transferring the interest in Calzaturificio di Varese S.p.A., a company quoted on the over-the-counter market, to Benfin S.p.A., a wholly-owned subsidiary of Benetton Group S.p.A.. This interest was increased during the first semester of 1996 from 63.08% to 85.92%, through the purchase of a (22.84%) holding from Edizione Holding S.p.A.. Following receipt of the necessary official approvals, Benfin S.p.A. launched a Public Offer to purchase the remaining 14.08% of the subsidiary's capital stock. The Company increased its interest to 96.988%, giving rise to an obligatory "residual" Public Offer in 1997, after which, the interest has been increased to 98.539%. As a result Calzaturificio di Varese S.p.A. will be cancelled from stock's official quotation. Azimut S.p.A., in 1996 has been merged into the Parent Company. In addition, attention is drawn to the following: – start of operations by Benetton Gesfin S.p.A., as part of the reorganization of financial services

provided to Group companies; – sale to third parties by Benetton Group Japan K.K. of 50% and 60% interests in, respectively, K.K. Via

Veneto (formerly Benetton Kanto K.K.) and Benetton Kansai K.K.; – sale to third parties by United Colors of Benetton do Brasil S.A. of its entire, 100% investment in Unirio

Comercio De Roupas Ltda.; – liquidation of United Agency K.K. and Benetton (Hong Kong) Ltd.. Benetton International N.V. entered into an agreement to sell Benetton Engineering Ltd. in December 1996. The sale is subject to receipt by the company, from the buyer, of the purchase price.

COMMENTS ON THE PRINCIPAL ASSET CAPTIONS (in millions of Lire) FIXED ASSETS 6. Intangible fixed assets This caption consists of the following: 12-31-1995 12-31-1996

Gross Net Gross Net

Start-up and expansion expenses 30,752 17,349 27,940 11,458

Research and development expenses 1,413 867 1,333 819

Industrial patents and intellectual property rights

1,505

1,021

2,615

1,408

Licenses, trademarks and similar rights 22,149 11,289 22,486 10,417

Goodwill 1,016 622 2,435 1,875

Consolidation differences 20,274 17,542 24,505 19,641

Total goodwill and consolidation differences

21,290

18,164

26,940

21,516

Assets in course of formation and advance payments

3,340

3,340

3,101

3,101

Expenses related to bond issues and loans

11,671

6,903

7,322

2,751

Costs for the purchase and development of software

12,623

5,593

13,023

7,018

Other 23,926 10,130 29,058 22,020

Total other intangible fixed assets

48,220 22,626

49,403 31,789

Total 128,669 74,656 133,818 80,508 Start-up and expansion expenses relate to capital stock increase costs of approximately Lire 7,600 million (Lire 10,000 million as of December 31, 1995). The residual balance principally relates to corporate reorganization costs, as well as expenses incurred in prior years to launch the "Fabrica" project. Research and development expenses reflect the capitalization of costs incurred for the development of new products. As indicated above, the parent company revalued the original cost of a trademark during 1983, as allowed by Law 72 of March 19, 1983. The monetary revaluation, Lire 4,430 million, was allocated to the Group's principal brandname. Consolidation differences amounting to Lire 19,641 million reflect the residual goodwill arising on the consolidation of the investments in Calzaturificio di Varese S.p.A.; Azimut S.p.A.; Filma S.p.A., owned by Galli Filati S.p.A.; Spiller S.p.A., owned by Stefani S.p.A.; Benetton Group Japan K.K.; Benetton Engineering Ltd.; Benetton Retail (1988) Ltd., and United Colors of Benetton do Brasil S.A.. Consolidation differences are amortized over ten years, which is considered appropriate since this is consistent with the accounting policies currently applied in the sector in which Group companies operate. "Other" mainly comprises leasehold improvements.

7. Tangible fixed assets Tangible fixed assets, amounting to Lire 592,266 million, are stated net of accumulated depreciation totaling Lire 519,285 million. Additions, totaling Lire 81,061 million, mainly concern: – plant and machinery purchased by Italian manufacturing companies to improve the efficiency of

their production processes; – completion of site works at the Castrette di Villorba industrial complex; – better layout of the dyeing departments at Castrette, with the installation of highly sophisticated

machinery that has improved workflows. Sales and retirements, Lire 26,955 million, concern: – sale of buildings and plant at the Camisano Vicentino and Resana factories; – replacement of machinery used by Italian and French manufacturing companies with more

technologically-advanced units. The depreciation charge for the year was Lire 76,451 million. The unamortized revaluations of tangible fixed assets still held as of December 31, 1996, recorded in accordance with Laws 72 of March 19, 1983, and 413 of December 30, 1991, net of retirements and disposals, amount to Lire 2,225 million and Lire 23,037 million, respectively. In 1996, a Spanish subsidiary restated its tangible fixed assets by Lire 1,210 million in a monetary revaluation in accordance with local legislation (Royal Decree 2607/96). Certain of the Group's tangible fixed assets are pledged as security for long-term loans from banks and other providers of finance. The outstanding balance of such loans is Lire 89,360 million as of December 31, 1996. Other tangible fixed assets are subject to reservation of title clauses that secure residual loans totaling Lire 1,811 million. Other assets include the following acquired under finance leases: 12-31-1995 12-31-1996

Real estate 9,950 13,341

Plant and machinery 11,372 12,590

Other assets 407 314

Less: accumulated depreciation (3,219) (4,180)

Total 18,510 22,065 Outstanding capital payments due to lessors as of December 31, 1996, classified as amounts due to leasing companies, are reported in the Note 22 "Due to other providers of finance". The Group has not significant operating leases.

8. Financial fixed assets Equity investments As of the balance sheet date, equity investments not consolidated on a line-by-line basis are as follows: 12-31-1995 12-31-1996

% Group ownership

Book value % Group ownership

Book value

Subsidiary companies:

- T.W.R. Group Ltd. 50% 36,399 50% 38,260

- Other minor investments - 3,592 - 838

Associated companies:

- Texmantova S.p.A. 21.73% 4,253 - -

- Other minor investments - - - 1,653

Other companies - 2,907 - 2,490

Total 47,151 43,241 Investments in subsidiary companies, amounting to Lire 39,098 million, include Lire 38,260 million relating to T.W.R. Group Ltd., which is carried on an equity basis since it operates in a sector dissimilar to that of the rest of the Group. The inclusion of this company within the scope of the consolidation would have distorted the consolidated financial statements to the point where they would not have provided a true and fair view of the financial and operating position of the Group. The balance, Lire 838 million, relates to other minor subsidiary companies, mainly foreign trading companies, that are carried at cost since they are either not yet operating or are in liquidation at the balance sheet date. Benetton International N.V. entered into an agreement to sell Benetton Engineering Ltd. in December 1996. The sale is subject to receipt by the company, from the buyer, of the purchase price. This subsidiary, which owns 50% of T.W.R. Group Ltd., is wholly owned by Benetton International N.V. The agreed sale price, £stg. 16,000,000, will generate a gain of £stg. 858,000 with respect to the original cost incurred, plus related interest at market rates. Other investments primarily represent minority interests in Japanese retail companies. Equity investments are analyzed in detail in an attachment. The 21.73% interest in Texmantova S.p.A. was judged no longer relevant to Group's diversification strategy and was accordingly sold. Financial receivables Financial receivables consist of the following: Balance Maturities (in years) Balance

12-31-1995 Within 1 1 to 5 Beyond 5 12-31-1996

Financial receivables:

- due within 12 months 10,019 4,170 - - 4,170

- due beyond 12 months 3,355 - 1,629 15 1,644

Assets leased to third parties:

- due within 12 months 173 1,053 - - 1,053

- due beyond 12 months 1,054 - - - -

Guarantee deposits 29,753 - - 13,332 13,332

Total 44,354 5,223 1,629 13,347 20,199 Financial receivables earn interest at market rates.

Assets leased to third parties This caption relates to an industrial building leased to United Optical S.p.A.. As is customary, the lessee is responsible for maintenance, insurance and other operating costs. The capital in the above leases is determined as follows: 12-31-1995 12-31-1996

Remaining lease payments, net of residual purchase option 408 96

Value of residual purchase option 1,000 1,000

Less: unearned interest income (181) (43)

Total 1,227 1,053 The entire capital financed, Lire 1,053 million, will be collected when the lease contract expires in 1997. Guarantee deposits Guarantee deposits, Lire 13,332 million, include Lire 10,982 million in connection with the lease of real estate used by Japanese subsidiaries. Other securities held as financial fixed assets This caption comprises: 12-31-1995 12-31-1996 Book value Face value Book value Face value

Long-term Government bonds (BTP) maturing in 1998 at 10.5%

80,012

80,000

50,490

50,000

Treasury Certificates cum Option (CTO) maturing in 1997 at 12.5% p.a.

50,000

50,000

20,000

20,000

Other securities 766 765 552 552

Total 130,778 130,765 71,042 70,552 These securities mainly represent the investment of liquidity by Benetton International N.V.. The long-term bonds (B.T.P.) held at December 31, 1995, together with Treasury Certificates (CTO) with a nominal value of Lire 30,000 million, were repaid on maturity during 1996. At the same time, the company acquired long-term bonds (B.T.P.), maturing in 1998, with a nominal value of Lire 50,000 million. These are stated at purchase cost, as adjusted by the accrued issue discount of Lire 305 million. Other securities comprise bonds issued by public agencies and others. Since these securities will be held until maturity, they are classified among financial fixed assets. Their carrying value, taking into account any related hedging transactions (asset swaps), approximates their market value.

CURRENT ASSETS 9. Inventories Inventories, Lire 411,292 million (Lire 506,363 million as of December 31, 1995), recorded net of the related inventory writedown reserve, consist of the following: 12-31-1995 12-31-1996

Raw materials, other materials and consumables

4,501 5,292

Work in progress and semimanufactured products

1,300

1,950

Finished goods 9,652 5,738

Total 15,453 12,980 The valuation of closing inventories at average cost is not appreciably different from their valuation at current purchase cost. 10. Accounts receivable Trade receivables As of December 31, 1996, trade receivables amount to Lire 1,256,636 million, of which approximately Lire 788,000 million are denominated in foreign currency (approximately Lire 821,900 million as of December 31, 1995). Open forward exchange contracts as of December 31, 1996 are used to hedge receivables totaling Lire 349,550 million and firm orders worth Lire 393,184 million at year-end exchange rates. Trade receivables also include Lire 139,733 million (Lire 148,280 million as of December 31, 1995) of bank receipts and notes deposited with financial institutions for collection. Additionally, this account includes approximately Lire 424,000 million relating to sales for the spring/summer season. In accordance with normal conditions of sale, the payment terms for the above amount commence from April 1997. The allowance for doubtful accounts as of December 31, 1996 amounts to Lire 168,883 million (Lire 169,935 million as of December 31, 1995). A prudent assessment of the specific and generic collection risks associated with receivables outstanding at year-end has resulted in suitable additional provisions to take account of the aging of certain balances and the difficult economic conditions in a number of markets. Lire 79,356 million was released from the allowance for doubtful accounts to cover losses during the year, while provisions for 1996 amounted to Lire 78,304 million compared with Lire 60,839 million in 1995. Amounts receivable from subsidiary and associated companies, Lire 1,501 million and Lire 3,604 million, respectively, mainly relate to trade and financial receivables due from companies not consolidated on a line-by-line basis. Other receivables As of December 31, 1996, other receivables include: VAT recoverable from the tax authorities in the amount of Lire 36,703 million (Lire 48,222 million as of December 31, 1995); tax credits, in the amount of Lire 16,257 million (Lire 68,377 million as of December 31, 1995); and other amounts due from the tax authorities totalling Lire 8,790 million (Lire 24,128 million as of December 31, 1995).

11. Financial assets not held as fixed assets Treasury shares This caption relates to shares of the Company’s stock acquired during the year by Benetton Group S.p.A., as resolved at the ordinary stockholders' meeting held on April 30, 1996. A total of 43,500 shares were purchased during September and October 1996 for Lire 719 million. No similar transactions occured in 1995. Other securities This caption comprises: 12-31-1995 12-31-1996 Book value Face value Book value Face value

Long-term Government bonds (BTP), as of December 31, 1996, maturing through 1998 and 1999, at interest rates between 8.5% and 10.5%

74,794

75,000

368,807

350,000

Consorzio di Credito per le Opere Pubbliche bonds, as of December 31, 1996, maturing through 1999 and 2002, at interest rates between 6.1% and 13.4%

48,329

47,000

134,490

128,100

European Investment Bank bonds in Italian Lire, as of December 31, 1996, maturing in 2000 and 2002, at interest rates between 8.5% and 11.25%

15,934

14,955

37,822

33,375

IBRD bonds in Italian Lire, as of December 31, 1996, maturing through 1998 and 2002, at interest rates between 10.4% and 11.63%

6,564

6,274

6,906

6,325

ENEL bonds, maturing in 2001 and 2002, at interest rates of 11.7% and 10.63%

-

-

44,678

41,700

Italian State Railway bonds, maturing in 2000 and 2002, at interest rates of 7.25% and 8.05%

-

-

12,399

12,000

Treasury Certificates (CCT), as of December 31, 1996, maturing in 2001, at floating interest rates

79,667

80,000

50,690

50,000

French Treasury bills (BTAN), matured in 1996, at an interest rate of 9%

58,476

58,214

-

-

Other 6,317 6,279 3,508 3,508

Total 290,081 287,722 659,300 625,008 These securities have been written down by Lire 417 million to reflect their market value, determined on the basis of average stockmarket prices for the month of December. "Other" includes various securities, reflecting the temporary deployment of liquidity by subsidiary companies. Other financial receivables This caption includes: 12-31-1995 12-31-1996

Short-term financing 117,244 4,399

Amounts due on repurchase agreements 10,000 -

Total 127,244 4,399 Short-term loans to employ liquidity and the repurchase agreements arranged at the end of 1995 were closed out in January 1996. The amount outstanding as of December 31, 1996 reflects short-term financing granted by subsidiary companies to third parties operating on behalf of the Group.

Differentials on forward transactions During 1996, as in prior years, the parent company sold forward the proceeds of future sales in order to optimize the management of exchange risk. In particular, forward contracts and other currency hedges have been put in place with maturities in 1997 and 1998. The value of these commitments, including the positions opened in 1995, is reflected among the "Commitments, contingencies and memorandum accounts". Part of these contracts, totaling Lire 1,332 billion, were subsequently renegotiated and the related positive differentials amounting to Lire 68,759 million are recorded within "Other financial income". Lire 65,491 million of such gains will be collected in 1997 and Lire 3,268 million in 1998. The residual balance, Lire 6,244 million, reflects the differentials emerging from similar positions opened in 1995, which will be collected in 1997. Such differentials, being highly liquid, are classified among current assets. 12. Liquid funds This caption consists of: 12-31-1995 12-31-1996

Current account deposits (Lire) 35,586 56,880

Current account deposits (foreign currency)

157,262 151,504

Time deposits (Lire) 150,414 182,694

Time deposits (foreign currency) 86,805 93,992

Checks 28,011 13,148

Banknotes and coins 541 694

Total 458,619 498,912 Average interest rates reflect market returns for the various currencies concerned. The balances as of December 31 reflect temporary high liquidity due to significant year-end receipts from customers. 13. ACCRUED INCOME AND PREPAID EXPENSES This caption is analyzed as follows:

12-31-1995 12-31-1996

Accrued income:

- financial income 33,900 36,525

- other income 3,041 527

Total accrued income

36,941 37,052

Prepaid expenses:

- financial charges 5,175 17,992

- rentals and leasing charges 4,028 4,104

- advertising and sponsorships 2,748 1,414

- other expenses 4,138 3,087

Total prepaid expenses

16,089 26,597

Total 53,030 63,649 Accrued financial income mainly relates to interest deriving from temporary investments. Prepaid financial charges mainly relate to deferred charges arising from the valuation by Benetton International N.V. of warrants attached to the Lire 200,000 million bond.

COMMENTS ON THE PRINCIPAL LIABILITY AND EQUITY CAPTIONS (in millions of Lire) STOCKHOLDERS' EQUITY 14. Capital stock The capital stock of Benetton Group S.p.A. is represented by 174,553,725 issued and fully-paid ordinary shares, par value Lire 500 each. The 1980 spinoff reserve and part of the monetary revaluation reserves were capitalized by Benetton Group S.p.A. in prior years by the issue of stock dividends. Capital stock, issued and fully-paid, amounts to Lire 87,276,862,500. 15. Additional paid-in capital This caption is unchanged with respect to the prior year. 16. Revaluation reserves This caption reflects the residual amount of revaluation reserves established in accordance with the provisions of Law 72 of March 19, 1983, together with the net surplus following the revaluation in accordance with Law 413/91 of December 30, 1991, and the monetary revaluation of tangible fixed assets by a Spanish subsidiary, in accordance with local legislation (Royal Decree 2607/96). Taxation has not been provided in respect of these reserves or of those capitalized, since, at this time, the conditions which would give rise to such taxation are not expected to occur. 17. Legal reserve This caption is unchanged with respect to the prior year. 18. Reserve for treasury shares held This balance, Lire 719 million, derives from the reclassification pursuant to article 2357-ter of the Italian Civil Code of part of the extraordinary reserve, following the 1996 acquisition of treasury shares during the year by Benetton Group S.p.A.. 19. Other reserves As of December 31, 1996, this caption amounts to Lire 950,880 million (Lire 814,282 million as of December 31, 1995) and includes: – Lire 174,877 million relating to other reserves of the parent company (Lire 112,947 million as of

December 31, 1995); – Lire 6,947 million relating to the cumulative translation adjustment generated by translating the foreign

currency financial statements of companies consolidated on a line-by-line basis; – Lire 769,056 million representing the additional equity of consolidated companies with respect to their

carrying value, together with other consolidation entries. The first of the schedules which follow reconciles the stockholders' equity and net income of Benetton Group S.p.A. with the corresponding consolidated amounts; the second lists the equity in consolidated subsidiaries attributable to minority stockholders.

Reconciliation of the stockholders' equity and net income of Benetton Group S.p.A. with the corresponding consolidated amounts 12-31-1995 12-31-1996

Stockholders' equity

Net income

Stockholders’ equity

Net income

Per Benetton Group S.p.A. financial statements

865,839

136,834

916,978

125,325

Group share of net income and stockholders' equity of consolidated subsidiaries, net of their carrying value

633,701

164,196

781,898

344,181

Elimination of dividends paid by consolidated subsidiaries

-

(64,255)

-

(187,967)

Allocation to fixed assets of the difference between the purchase price and the equity of new subsidiaries at the time they were acquired and related depreciation

94,369

(12,041)

76,688

(13,781)

Reversal of accelerated depreciation considering the useful lives of fixed assets and of intercompany gains on disposal of tangible fixed assets, net of the related tax effect

11,441

(367)

10,213

(1,231)

Application of finance lease accounting, taking account of the related tax effect

10,219

(1,801)

9,894

(325)

Recognition of deferred tax assets, net of deferred taxes on any future distribution of reserves from subsidiaries to the parent company

62,489

25

38,871

(23,601)

Elimination of intercompany profits included in the inventory of consolidated subsidiaries, net of the related tax effect

(19,675)

(7,345)

(12,512)

7,163

Adjustment to reflect the equity value of associated companies

(6,386)

(516)

2,531

1,551

Net effect of other consolidation entries 4,961 5,525 (3,725) (5,673)

Per Group's consolidated financial statements

1,656,958

220,255

1,820,836

245,642

Minority interests As of December 31, 1996 and 1995, minority interests in consolidated subsidiaries are as follows: 12-31-1995 12-31-1996

Italian subsidiaries:

Calzaturificio di Varese Group 36.92% 3.012%

Azimut Group 25% -

Socks & Accessories Benetton (S.A.B.) Group 50% 50%

Stefani Group 22% 22%

Texcontrol Group 18.125% 18.125%

Foreign subsidiaries:

Benetton Group Japan K.K. 10% -

K.K. Via Veneto 11.333% 50%

Beijing Benetton Fashion Co. Ltd. 50% -

Benetton China Japan K.K. 31% 9%

United Agency K.K. 14% -

Benetton Shoes Japan K.K. 50% 50%

Bene Moda K.K. 50% 50%

Benetton Egypt S.A.E. 50% 50%

DCM Benetton India Ltd. 50% 50%

Benetton Time S.A. 48% 48%

Colorben Comercio de Roupas Ltda. 50% -

Benetton Kansai K.K. 10% -

20. RESERVES FOR RISKS AND CHARGES Taxation reserve This reserve comprises: 12-31-1995 12-31-1996

Reserve for fiscal risks 7,650 7,782

Deferred taxes:

- Italian companies - 8,780

- Foreign companies - (8,636)

Total deferred taxes - 144

Total 7,650 7,926 The reserve for fiscal risks prudently covers contingent liabilities which may arise on the final settlement of outstanding disputes with the tax authorities. Deferred taxes represent differences between financial statement values and tax bases of assets and liabilities. Deferred tax liabilities (assets) are as follows: 12-31-1995 12-31-1996

Tax effect of eliminating intercompany profits

(17,113) (11,588)

Tax effect of provisions and costs that will become deductible in future accounting periods

(72,103)

(48,402)

Deferred taxes arising on the reversal of accelerated depreciation and the application of finance lease accounting

43,673

43,824

Deferred taxes on gains taxable over a number of accounting periods

19,331

18,061

Deferred taxes on the partial distribution of the reserves of foreign subsidiaries to the parent company

4,400

4,400

Other 6,822 (6,151)

Total (14,990) 144 Taxes that would be due upon the distribution of reserves have not been provided for, since the transactions which would determine such taxation are not expected to occur. The tax benefit of substantial loss carry-forwards accumulated by certain Italian and foreign consolidated companies will be recorded only when realized. Other reserves This caption is analyzed as follows: 12-31-1995 12-31-1996

Reserve for contingencies 32,532 44,346

Agents' leaving indemnity reserve 9,284 10,104

Exchange fluctuation reserve 40,335 1,079

Total 82,151 55,529 The reserve for contingencies has increased following the use of around Lire 7 billion and covers risks which may arise from current legal disputes. These include claims from German and French customers concerning, in particular, the effect of Benetton advertising campaigns. The judgements handed down so far have been favorable to the Group.

With regard to the dispute with Eco Swiss China Time Ltd. and Bulova Corp., ongoing legal procedures seek to quash or overturn the arbitration award of June 23, 1995, which ordered Benetton International N.V. to pay compensation of US$ 23.7 million to Eco Swiss China Time Ltd. and US$ 2.8 million to Bulova Corp., together with costs and the related interest. Stockholders will remember that in 1986, Benetton International N.V., a subsidiary of Benetton Group S.p.A., signed a license contract with Eco Swiss China Time Ltd. (the licensee) and Bulova Corp. (colicensee) for the use of the Benetton trademark in the timepiece sector. The duration of the contract was eight years and therefore expired in 1994. Significant problems in the relationship with Eco Swiss China Time Ltd. began to emerge at the end of 1989, such that, in 1991, Benetton International N.V. sent that company a letter notifying its intention to terminate the contract. The grounds indicated by Benetton were essentially that: – royalties were not being paid, or were inadequate; – the license was effectively being sublicensed to a subsidiary company of Eco Swiss China Time Ltd.; – the company refused to accept its share of the audit fees incurred by Arthur Andersen; – a number of group companies had gone bankrupt (including Eco Swiss S.p.A., the European

subholding of the Eco Swiss Group). Eco Swiss China Time Ltd. and Bulova Corp. did not accept the termination of the contract and, on the basis of an arbitration clause, took the case to arbitration in the Netherlands. Benetton International N.V. presented two appeals against the award: the first, based on the merits of the case, requesting that the award be quashed, and the second, raising objections based on legal grounds, that the award be overturned. Benetton International N.V., having previously applied for a stay of execution, obtained through the courts a temporary stay in regard to Eco Swiss China Time Ltd., pending the decision of the competent tribunals on the questions indicated above. On March 21, 1997, the Supreme Court in The Hague accepted the petition by Benetton International N.V. and remitted the case for consideration by the European Court of Justice in Luxembourg. This decision has had favorable consequences for Benetton International N.V., since it also resulted in the adjournment of proceedings before the Supreme Court in The Hague concerning a request by Eco Swiss China Time Ltd. to lift the stay of execution on the payment of the arbitration award. This positive result encourages Benetton International N.V. in the defense of its case and interests. Any risks which could emerge from the final outcome of proceedings are adequately covered by existing provisions. The agents' leaving indemnity reserve was created in prior years and is prudently maintained to reflect contingencies associated with the interruption of agency contracts in certain circumstances covered by Italian law. The provision of an additional Lire 9,282 million during 1996 follows utilizations during the year. The exchange fluctuation reserve reflects the net effect of adjusting the unhedged foreign currency receivables and payables of Italian companies in the Group using year-end exchange rates. 21. RESERVE FOR EMPLOYEE TERMINATION INDEMNITIES Movements in this reserve during the year were as follows:

Balance as of January 1, 1996 58,736

Provision for the year 13,752

Indemnities paid during the year (9,995)

Other movements 28

Balance as of December 31, 1996 62,521 "Other movements" reflect the opening balances of companies acquired during 1996. Related provisions charged in expense in 1994 and 1995 were Lire 13,595 million and Lire 17,114 million respectively.

22. ACCOUNTS PAYABLE The composition of and significant changes in this account group during the year are set out below: Bonds These consist of the following: – EuroLire bond, guaranteed by Benetton Group S.p.A., issued on July 29, 1993, by the Dutch subsidiary

Benetton International N.V., for Lire 200,000 million, bearing interest at 4.5% payable annually and repayable in 1998. The bonds carried 2,520,000 warrants, each giving the holder the right to receive, at the option of the Company’s management, either (i) one Ordinary Share which the Company would have to purchase in the stock market, or (ii) an amount in Lire equal to the closing price of one Ordinary Share on the Milan Stock Exchange (“MSE”). These warrants were exercised at their maturity, on July 29, 1996.

? ?The net cost of servicing the warrants, about Lire 38,300 million, is recognized on an accrual basis that reflects the accumulation of interest. The charge for 1996 amounts to about Lire 5,700 million.

– Bonds totaling LuxF 750 million (Lire 35,775 million at the December 31, 1996 exchange rate) were issued in 1994, by the subsidiary company, Benetton Finance, at a unit price of LuxF 102.25, repayable on August 4, 1999. Following an operation linked to an interest-rate swap, the bond bears interest at floating rates which, at year-end, was 8.8%. The bond is guaranteed by Benetton Group S.p.A. and listed on the Luxembourg Bourse.

– Bond issued on January 27, 1992, by Benetton España S.L. for Ptas 3,000,000,000, equivalent to Lire 34,986 million at the December 31, 1996 exchange rate. This bond, bearing interest at an annual rate of 12.10%, was repaid in full on January 27, 1997.

Convertible bonds – Ten-year bond, issued in 1988 by a Stefani Group company for Lire 300 million. This bond is convertible

at par from January 1, 1998. Due to banks Amounts due to banks at the balance sheet date are classified as follows: 12-31-1995 12-31-1996

Current account overdrafts 50,029 34,030

Import/export advances 71,221 53,810

Lines of credit, advances on receivables and other short-term loans 446,753 698,194

Long-term loans:

- due within 12 months 162,021 18,753

- due beyond 12 months 204,069 80,543

Total 934,093 885,330 Long-term loans include Lire 21,078 million and Lire 153,250 million due beyond five years as of December 31, 1996 and 1995, respectively. Amounts due to banks include around Lire 89,296 million secured by mortgages on tangible fixed assets. Group companies had the following lines of credit available at the balance sheet date: Lire 204 billion for current account overdrafts, and Lire 4,068 billion for advances on import/export transactions, the negotiation of trade notes and other short-term loans. The weighted-average interest rates at year end are as follows: - Overdrafts 9.58% - Import/export advances 5.62% - Advances against receivables and bank receipts 8.31% - Other short-term borrowings 7.00%

Long-term loans from banks outstanding as of December 31, 1996 and 1995 are as follows: 12-31-1995 12-31-1996

Loan from Efibanca (Ente Finanziario Interbancario S.p.A.) and the European Investment Bank, disbursed in two tranches, at annual interest rates of 8.375% and 7.755%, repayable in semiannual installments in arrears through 2003, secured by mortgages on real estate

50,000

47,274

Loan from Efibanca (Ente Finanziario Interbancario S.p.A.) at an annual interest rate of 9.75%, repayable in full on April 9, 1997

10,000

10,000

Loans from Efibanca (Ente Finanziario Interbancario S.p.A.) at an annual interest rate of 7.93%, repayable from 1998 through 2005, secured by mortgages on real estate

-

5,500

Loans from Fondo Rotazione Iniziative Economiche at annual interest rates between 6% and 8%, repayable in semiannual installments through 2004, secured by mortgages on real estate

5,079

9,746

Loan from IMI (Istituto Mobiliare Italiano), at a floating interest rate (7.40% at year end), repayable from 1999 through 2003, secured by mortgages on real estate

-

21,000

Other Lire loans secured by mortgages on real estate 3,144 2,463

Multicurrency loan obtained from an international banking syndicate for ECU 100,000,000, at floating interest rates that depend on the currencies chosen, repaid on February 6, 1996

152,191

-

Loan from Istituto Bancario San Paolo di Torino S.p.A., London branch, with the backing of leading international banks, at an annual interest rate of 8.487%, repayable in semiannual installments in arrears through 2003 but repaid early

136,282

-

Loans from Mediocredito delle Venezie at annual interest rates between 8.25% and 11.5%, secured by mortgages on real estate and liens on machinery, repaid in 1996

1,340

-

Loans from Friulia at annual interest rates between 7% and 10%, repaid in 1996

368

-

Other foreign currency loans obtained by foreign consolidated companies, secured by mortgages on real estate

7,686

3,313

Total long-term loans 366,090 99,296

Less - Current portion (162,021) (18,753)

Long-term loans, net of current portion 204,069 80,543 The non-current portions of these loans as of December 31, 1996 fall due as follows: 1998 12,106

1999 16,754

2000 15,349

2001 15,256

2002 and beyond 21,078

80,543

Due to other providers of finance Amounts due at the balance sheet date to other providers of finance are analyzed below: 12-31-1995 12-31-1996

Commercial paper 361 -

Other short-term loans 307 4,002

Long-term loans:



Due to leasing companies:



Total 27,429 28,631 Long-term loans obtained from other providers of finance outstanding as of December 31, 1996 and 1995 are as follows: 12-31-1995 12-31-1996

Loans from suppliers of machinery, repayable in installments over 24 months

11,601

7,771

Other Lire loans 417 417

Other foreign currency loans obtained by foreign consolidated companies, secured by mortgages on real estate

627

64

Total long-term loans 12,645 8,252

Less: Current portion (7,096) (5,647)

Long-term loans, net of current portion 5,549 2,605 The non-current portions of these loans as of December 31, 1996 fall due as follows: 1998 2,246

1999 33

2000 36

2001 39

2002 and beyond 251

2,605 The non-current portions of amounts due to leasing companies as of December 31, 1996 fall due as follows: 1998 3,431

1999 3,117

2000 1,918

2001 1,437

2002 and beyond 2,754

12,657

Notes payable These amount to Lire 6,763 million (Lire 11,830 million as of December 31, 1995) and include Lire 1,811 million of assisted loans under the Sabatini Law (Law 1329 of November 28, 1965) for the purchase of tangible fixed assets (Lire 5,429 million as of December 31, 1995). The maturities of such assisted loans as of December 31, 1996 are as follows: 1997 1,136

1998 543

1999 132

1,811 Due to subsidiary and associated companies Amounts due to subsidiary and associated companies, Lire 2,523 million and Lire 205 million, respectively, mainly comprise trade payables to companies not consolidated on a line-by-line basis. Due to tax authorities This caption is analyzed as follows: 12-31-1995 12-31-1996

Income taxes payable:

- Italian companies 57,670 15,337

- Foreign companies 12,627 12,345

Total income taxes payable 70,297 27,682

VAT payable 5,895 5,844

Other amounts due to tax authorities 22,382 15,456

Total 98,574 48,982 Income taxes payable are stated net of taxes paid in advance and all tax credits and withholdings that would reduce the tax liability. Due to social security and welfare institutions This balance totals Lire 16,675 million (Lire 16.441 million as of December 31, 1995) and reflects both the Group and employee contributions payable to these institutions at year-end. Other payables Other payables, totaling Lire 30,476 million, include Lire 19,415 million due to employees (Lire 20,175 million as of December 31, 1995) and other non-trading payables of Lire 11,061 million (Lire 13,661 million as of December 31, 1995). Accounts payable beyond five years are not included in this caption.

23. ACCRUED EXPENSES AND DEFERRED INCOME This caption comprises the following:

12-31-1995 12-31-1996 Accrued expenses: - financial charges 51,896 32,786 - other charges 3,432 1,914 Total accrued expenses 55,328 34,700 Deferred income: - financial income 1,528 6,623 - sponsorships 9,337 17,003 - other income 1,230 467 Total deferred income 12,095 24,093 Premiums on bond issues 587 390

Total 68,010 59,183 Deferred financial income mainly reflects interest deriving from hedging transactions arranged by Benetton International N.V. in connection with warrants attaching to the Lire bond discussed in note 22. 24. COMMITMENTS, CONTINGENCIES, MEMORANDUM ACCOUNTS These mainly include currency to be sold or purchased forward. This account group records the Lire value of commitments deriving from hedging contracts outstanding at the balance sheet date. In response to the volatility in exchange rates in the economic environment, the Group has implemented a strategy to manage the exposure of exchange rate fluctuations on consolidated operations. The Group principally utilizes forward exchange contracts to fulfill this strategy only with substantial and creditworthy multinational financial institutions. Therefore, there are no risks of counterparty nonperformance nor the economic consequences of counterparty nonperformance associated with these contracts. For the most part, the caption reflects transactions opened to hedge foreign currency receivables, firm orders and future sales. Some of those covering future sales were subsequently renegotiated by entering opposite transactions. Other transactions were entered into to hedge the exchange risk on capital invested by Group companies. The estimated fair values and relating contract amounts of the Group’s financial instruments at December 31, 1996 are as follows (in millions of lire): Forward contracts: Fair value Contract amounts Sell currency 3,462,987 3,744,604 Buy currency 1,912,543 2,050,226 Notional amount Forward rate agreements 100,000 Interest rate swaps 328,751 Forward exchange contracts expire from January 1997 through May 1998. Included in forward contracts, sell and buy currencies are respectively Lire 1,552,285 million and Lire 459,544 million of contracts that hedge identifiable foreign currency assets, liabilities, contractual obligations or foreign investments in subsidiary companies. The interest rate swap agreements and forward rate agreements expire within three months and therefore their carrying value approximates fair value. Purchase commitments include contracts to acquire tangible fixed assets. Sale commitments relate to a subsidiary company's contract to sell retail premises.

COMMENTS ON THE PRINCIPAL STATEMENT OF INCOME CAPTIONS (in millions of Lire ) 25. VALUE OF PRODUCTION Revenues from sales and services Revenues from sales of products and services are detailed below: 1995 1996

Sales of core products 2,724,372 2,666,418

Miscellaneous sales 50,601 45,205

(Discounts) (7,388) (8,938)

Royalty income 13,642 15,124

Miscellaneous revenues 157,907 153,299

Total 2,939,134 2,871,108 Miscellaneous revenues mainly reflect manufacturing, advertising and promotion services rendered to third parties. Information by geographic area The following information is provided by geographic area: Italy Europe The Other Inter- Consoli- (excluding Americas countries company dated Italy) (c) (d) transactions

1994 Net sales and other revenues (a) 882,744 1,019,478 227,302 658,148 - 2,787,672

Operating income (a) 151,153 175,040 (19,318) 93,841 (11,976) 388,740

Identifiable assets (b) 2,291,554 810,637 163,094 271,880 - 3,537,165

1995 Net sales and other revenues (a) 1,011,727 1,034,665 208,459 684,283 - 2,939,134

Operating income (a) 195,568 182,529 (23,737) 112,833 (23,390) 443,803

Identifiable assets (b)

2,633,545 825,485 143,331 234,718 - 3,837,079

1996

Net sales and other revenues (a) 1,064,201 1,004,175 192,450 610,282 - 2,871,108

Operating income (a) 214,529 110,184 (13,806) 85,060 5,714 401,681

Identifiable assets (b) 2,372,025 1,177,212 147,046 167,979 - 3,864,262

The appreciation of the Lira by more than 8% on average with respect to the principal operating currencies had an adverse influence on 1996 Group revenues. (a) Amounts principally determined by destination. (b) By geographic location. (c) Operating income in the Americas includes in operating results, Lire 2,409 million of loss in 1996 (Lire 15,961 million in 1995 and Lire 5,800 million in 1994) arising from Cosmetics Group; therefore it includes Lire 3,583 million of loss in 1996 (Lire 6,486 million in 1995 and Lire 8,083 million in 1994), arising from subsidiaries operating in countries with hyper-inflationary economies. (d) Identifiable assets in the Americas include the financial assets of Benetton Finance N.V., located in the Dutch Antilles, amounting to Lire 64,380 million as of December 31, 1996 (Lire 37,322 and 16,053 million respectively in 1995 and 1994).

Sales of core products, by business category 1995 1996

Clothing 2,259,385 2,191,326

Fabrics and yarns 193,059 226,621

Footwear 98,533 82,353

Accessories 158,887 149,105

Cosmetics 14,508 17,013

Total 2,724,372 2,666,418 Notwithstanding a rise in volume by about 4%, as discussed earlier, sales of clothing were adversely influenced by the appreciation of the Lira against the principal export currencies. Core product sales, by brand 1995 1996

Benetton 1,657,136 1,548,463

012, Zerotondo and 999 502,379 565,934

Sisley 321,555 308,709

Other sales 243,302 243,312

Total 2,724,372 2,666,418 26. PRODUCTION COSTS Purchasing costs This caption consists of the following:

1995 1996

Raw materials and finished goods 859,981 729,512

Other materials 30,025 29,383

Sundry purchases - advertising 2,212 3,295

Other purchases 34,261 29,921

(Discounts and rebates) (1,743) (1,674)

Total 924,736 790,437

Services received This caption consists of the following:

1995 1996

Subcontracted work 572,893 590,555

Transport and distribution 56,969 46,797

Commission expense 114,994 132,629

Advertising and promotion 116,538 97,516

Other services 156,362 167,885

Total 1,017,756 1,035,382 The drop in advertising and promotion costs is due, in particular, to the discontinuance of advertising in the cosmetics sector beginning in 1996. Other services mainly include power costs, maintenance costs, consultancy and other fees, insurance premiums and personnel travel expenses.

Payroll and related costs The decrease in payroll and related costs, Lire 15,600 million, is mainly due to the reorganization of production and commercial activities. This includes the closure of the Cosmetics group and the disposal of a number of Japanese marketing companies that were no longer considered strategic. Group personnel are listed below, by category:

1996

Average for the year

Managerial personnel 98 109

Clerical personnel 2,120 2,134

Factory personnel 3,501 3,542

Part-time personnel 254 211

Total 5,973 5,996 The fall in the number of employees (6,018 as of December 31, 1995) is primarily due to reorganizing the activities of Japanese companies and the resulting deconsolidation of a number of these companies. Amortization, depreciation and writedowns Amortization and depreciation are analyzed below, by asset category: Amortization of intangible fixed assets

1995 1996

Amortization of start-up and expansion expenses

7,219

6,205

Amortization of research, development and advertising expenses

273

251

Amortization of industrial patents and intellectual property rights

82

496

Amortization of licenses, trademarks and similar rights

1,775

1,771

Amortization of goodwill 147 313

Amortization of consolidation differences 1,616 2,760

Amortization of costs for the purchase and development of software

4,900

3,540

Amortization of other charges 3,236 3,125

Total 19,248 18,461 Depreciation of tangible fixed assets

1995 1996

Depreciation of real estate 12,259 12,725

Depreciation of plant and machinery 51,125 46,926

Depreciation of equipment 2,250 1,977

Depreciation of other assets 14,093 12,998

Depreciation of assets acquired under finance leases

2,014

1,825

Total 81,741 76,451

Writedowns The "Writedown of current receivables and of liquid funds", Lire 78,304 million, reflects a prudent provision to the allowance for doubtful accounts. This is discussed in more detail in the note on trade accounts receivable. Other operating costs This caption consists of the following:

1995 1996

Emoluments to Directors and Statutory Auditors

15,241 14,205

Indirect taxation 16,042 14,295

Losses on disposal of fixed assets 2,400 3,336

Losses on receivables 6,033 7,805

Other general expenses 11,634 9,521

Total 51,350 49,162 Indirect taxation includes capital taxes amounting to Lire 7,370 million in 1996 and Lire 7,689 million in 1995. Emoluments earned during the year by the Directors and Statutory Auditors of the parent company total around Lire 7,400 million and Lire 366 million, respectively. 27. FINANCIAL INCOME AND EXPENSE Income from equity investments This balance, Lire 6,223 million (Lire 11,891 million in 1995), includes Lire 5,948 million (Lire 10,349 million in 1995) of interest income on tax credits deriving from dividends distributed by consolidated subsidiaries. Other financial income This caption consists of the following:

1995 1996

From receivables held as financial fixed assets:

– assets leased to third parties 142 124

– other receivables held as financial fixed assets 458 457

Total 600 581

From securities held as financial fixed assets, not representing equity investments

17,141

15,821

From securities included among current assets not representing equity investments

27,663

24,635

Financial income other than the above:

– interest income from subsidiary companies 586 227

– interest income from associated companies - 6

– interest income from trade and other receivables 5,961 3,751

– interest income from banks 21,979 27,005

– miscellaneous financial income 59,900 71,285

– exchange gains and income from currency management

456,901 402,794

Total 545,327 505,068

Total 590,731 546,105

As discussed in note 3, other financial income includes approximately Lire 21,200 million (around Lire 24,100 million in 1995) of exchange gains on capital hedging transactions, representing the differentials between spot and forward exchange rates. This caption also includes: – positive differentials on interest rate swaps and forward rate agreements, approximately Lire 41,300

million (approximately Lire 18,100 million in 1995); – premiums collected on options and income deriving from the adjustment of warrant-related

transactions linked to the Lire 200,000 million bond issued by Benetton International N.V. (Note 22), approximately Lire 3,300 million (around Lire 8,400 million in 1995);

– income from currency swaps, approximately Lire 4,700 million (around Lire 8,600 million in 1995). Interest and other financial expense This caption consists of the following:

1995 1996

Interest expense on bonds 17,042 17,012

Interest expense on bank current accounts 10,464 5,362

Interest expense on import/export advances 5,003 3,992

Interest expense on advances against receivables

6,879 10,528

Interest expense on short-term loans 25,845 31,421

Interest expense on long-term bank loans 30,792 19,720

Interest expense on loans from other providers of finance

5,142

3,942

Miscellaneous financial expense 80,897 70,878

Exchange losses and charges from currency management

410,944

285,580

Total 593,008 448,435 Exchange losses are considerably lower than exchange gains. Miscellaneous financial expense mainly includes: – negative differentials on interest rate swaps, around Lire 11,200 million (around Lire 25,600 million in

1995); – the current portion of charges deriving from the valuation of warrants and of premiums paid for

options, amounting to approximately Lire 9,000 million (around Lire 17,000 million in 1995); – charges on currency swaps, approximately Lire 20,000 million (around Lire 19,500 million in 1995); – discounts allowed on the early settlement of trade receivables, approximately Lire 6,600 million

(around Lire 7,000 million in 1995); – bank charges and commission of approximately Lire 5,100 million (around Lire 6,200 million in 1995). 28. EXTRAORDINARY INCOME AND EXPENSE Income This caption includes:

1995 1996

Gains on disposals 2,652 7,318

Other income:

- Out-of-period income 7,653 5,101

- Other extraordinary income 6,557 4,115

Total 16,862 16,534

Expense This caption includes:

1995 1996

Losses on disposals 3,673 2,030

Taxes relating to prior years 508 61

Other expense:

- Donations 3,892 4,768

- Out-of-period expense 4,930 11,455

- Other extraordinary expense 34,136 37,415

Total 47,139 55,729 Out-of-period expense includes credit notes issued to customers for rebates and the return of goods supplied in prior years, as well as charges incurred by Benetton Formula Ltd. in relation to T.W.R. Group Ltd.. Other extraordinary expense includes compensation payments made to customers against accident and theft claims, charges in relation to settlements of various types, and provisions to the reserve for contingencies which may arise from current legal disputes. Income taxes The provision for income taxes includes the following amounts (in millions of Lire): 1994 1995 1996

Current:

Italian companies 137,132 189,365 171,676

Foreign companies 14,379 15,427 17,817

Deferred:

Italian companies (3,658) (10,953) 18,051

Foreign companies 2,701 (5,180) (906)

Total 150,554 188,659 206,638 The effective tax rate on income before taxes and minority interests is 45.2% (45.9% in 1995 and 42.1% in 1994). This is less than the ordinary Italian tax rate, primarily due to the effect of the lower rates applicable to the earnings of certain foreign subsidiaries, the use of tax loss carry-forwards and the receipt of tax-exempt income. The reconciliation of the effective tax rate is as follows: 1994 1995 1996

Italian statutory tax rate 53.2% 53.2% 53.2%

Aggregate effect of different taxation of foreign subsidiaries (15.8%) (10.0%) (12.3%)

Effect of writing down of the cost of consolidated investments (5.7%) (8.8%) (5.9%)

Effect of losses from consolidated subsidiaries 14.0% 15.1% 9.5%

Tax exempt income (0.8%) (1.2%) (2.3%)

Tax effect of loss carry-forwards (4.4%) (0.3%) (0.5%)

Other, net 1.6% (2.1%) 3.5%

Effective tax rate 42.1% 45.9% 45.2% See note 20 for composition of deferred tax assets and liabilities.

29. TRANSACTIONS WITH RELATED PARTIES The Benetton Group engages in commercial and financial transactions with subsidiaries of Edizione Holding S.p.A. (the ultimate parent company) and other companies which, either directly or indirectly, are linked by common interests with the ultimate parent company. The conditions of such transactions are fully consistent with those applied in the ordinary course of business. The effect of such transactions is summarized below: 1995 1996

Accounts receivable 11,800 6,018

Accounts payable 4,800 2,639

Purchase of raw materials 8,900 9,452

Other costs and services 22,900 22,770

Sales of products 10,100 7,325

Services provided and other income 3,600 5,260 30. LEGAL MATTERS Benetton has been a party to a number of lawsuits, primarily with customers, arising in the normal course of business. In particular, Benetton has been a party to a number of lawsuits with French and German customers alleging a drop in sales caused by Benetton's advertising campaigns and refusing to pay for goods supplied on a regular basis. So far, all judgements rendered by German and French Courts have been in favour of Benetton. An additional provision of Lire 4,000 million has nonetheless been prudently recorded to cover risks which might arise from these legal disputes. The amount is considered adequate in view of the above legal pronouncements and because the amounts due by these customers have been written down to their estimated realisable value in the 1996 consolidated financial statements. Benetton International N.V. ("BINV") is a party to various disputes with Eco Swiss China Time Ltd. ("Eco") and Bulova Corporation ("Bulova"), arising from a trademark licensing agreement entered into by the companies in 1986. The agreement provided for the manufacture and sale by Eco of timepieces carrying the Benetton and Bulova trademarks. BINV attempted to terminate the agreement in 1991, prior to its expiration date in 1994, but an arbitral tribunal in The Netherlands subsequently held that it was not entitled to do so. In June 1995, the tribunal awarded Eco approximately US$ 23.7 million and Bulova US$ 2.8 million, together with interest and costs. (Also see note 20 to the Consolidated Financial Statements). BINV has challenged the awards in two separate proceedings in the courts of the Netherlands. The merits of the challenges have still not been finally determined by the Netherlands courts, although a District Court has initially denied one of them. This order is currently on appeal. In the interim, after previously denying a stay in one of the two proceedings, the Court of Appeal of the Hague on March 28, 1996, granted a stay of enforcement in the other proceeding of the principal award made to Eco. The principal ground of the Court of Appeal’s decision was that the 1986 licensing agreement was void and unenforceable as a matter of the competition law of the European Union. The award made to Bulova had previously been paid by BINV, although it is subject to recovery if BINV ultimately prevails on the merits of its challenges to the arbitral awards. In March 1997 the Supreme Court in The Hague, in the context of the stay proceedings, referred to the European Court of Justice in Luxembourg five preliminary questions of EU Competition Law, thus suspending the stay proceedings. BINV anticipates that the full merits of its various challenges to the awards, including the application of European Union competition law, will be the subject of lengthy additional proceedings in the Netherlands courts.

As those proceedings continue, a separate arbitral proceeding initiated by BINV is pending in The Hague. BINV contends in this second arbitral proceeding both that it satisfied any obligations it may have had to negotiate in good faith regarding an extension of the 1986 licensing agreement and that it is entitled to substantial awards of compensatory and other damages from Eco and Bulova regarding conduct occurring during and since the expiration of that agreement. BINV submitted its Statement of Claim on April, 1996 and Eco and Bulova subsequently asserted substantial counterclaims for damages. A hearing on the preliminary questions of the applicability of art. 85 of the EU Treaty and choice of law took place in December 1996 and the parties are waiting for a decision by the arbitral panel. BINV also anticipates that the arbitral proceedings will continue for a lengthy period. 31. SUBSEQUENT EVENTS In March 1997, Benetton Group S.p.A. entered into a collaboration agreement with the Inditex Group, one of Spain's largest garment manufacturer-distributors with an extensive network of directly-operated stores in its local and other European markets. An equal joint venture to be formed under the accord will market garments bearing the Zara label in Italy, via a new chain of retail stores. At a meeting held on April 29, 1997 the stockholders authorized the Board of Directors (pursuant to Article 2420 of the Italian Civil Code and Article 7 of the Articles of Association) to issue bonds up to a maximum of Lire 500 billion, both in the Italian and international markets. The proceeds of the issue, which may take place on one or more occasions over three years, are to be applied to possible investments and reformulating the Group’s debt program. The Board was authorized to determine the rate of interest and the term (up to a maximum of 7 years). At the same meeting the shareholders resolved upon a one-for-twenty-five bonus share issue, which will be carried out at the end of June 1997. This issue will raise the paid-in capital from Lire 87,276,862,500 to Lire 90,767,937,000 and the issued shares from No. 174,553,725 to No. 181,535,874.

32. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES The Group's accounting policies that differ significantly from accounting principles generally accepted in the United States of America (“US”) are described below: Differences which have an effect on net income and Stockholders' equity (a) Revaluation of Fixed Assets and Trademarks In 1991 and prior years, certain categories of property, plant and equipment and trademarks were revalued to amounts in excess of historical cost. This procedure, which was authorized by Italian law, was allowed under Italian accounting practice to give consideration to the effects of local inflation. Revaluations were credited to stockholders' equity and revalued assets are depreciated over their remaining useful lives. Accounting principles in the US do not permit the revaluation of such assets. The reconciliation to accounting principles in the US eliminates the effect of the revaluation. As of December 31, 1996, the residual gross amount of revaluation was Lire 13,683 million for fixed assets and Lire 4,430 million for trademarks. Surplus from monetary revaluation of assets reserve, amounting to Lire 46,202 million, represents the original revaluation effected in accordance with Italian and Spanish Law and still subject to taxation in case of distribution. The 1991 revaluation resulted in an asset revaluation of Lire 27,104 million for legal and tax purposes and a Lire 4,030 million revaluation for consolidated financial reporting purposes (considering the partial offsetting of the revaluation with the reversal of excess depreciation on the same fixed assets reflected as adjustment in the consolidated financial statements and prior years consolidating entries related to purchase price allocation). In order to maintain a record of the amount of asset revaluation for legal and tax purposes, Lire 23,074 million was transferred from other reserves to "surplus from monetary revaluation of assets". In 1996, a Spanish subsidiary restated its tangible fixed assets by Lire 1,210 million in a monetary revaluation in accordance with local legislation (Royal Decree 2607/96). The increase in surplus from monetary revaluation of assets reserve, amounting to Lire 1,174 million, represent the original net revaluation effected in accordance with Spanish Law. The Lire 8,848 million adjustment in the reconciliation of stockholders' equity represents the remaining excess of revaluations for financial reporting purposes and differs from the 46,202 million Lire "surplus from monetary revaluation of assets" in the statement of stockholders’ equity because: a) Revaluations made for legal purposes (and subject to taxation in case of distribution) ?? but not for consolidated financial reporting purposes, as noted above. b) Depreciation on the revalued assets. c) Sales of revalued assets. (b) Purchases and Sales with Parent Company The Group has entered into several significant purchases and sales of companies with its parent, Edizione Holding S.p.A., and an affiliate of Edizione. The prices paid were based upon independent appraisal. The Group recorded the assets of purchased businesses at their acquisition value. Goodwill was charged directly to consolidated equity. In the case of sales transactions, the difference between carrying value and selling price was reflected as a gain in the accompanying financial statements. Under US generally accepted accounting principles, transactions between members of a "controlled group" should not result in gains or losses, or increases in asset carrying values. Accordingly, gains recognized on these transactions have been reversed in the accompanying reconciliation.

Generally accepted US accounting principles also require the use of a method of accounting, consistent with "pooling of interests" accounting, for acquisitions and dispositions between members of a "controlled group" if the amounts involved are material. The accompanying reconciliation has not been restated to reflect these transactions as a "pooling of interests" as the net aggregate effect of the transactions is not material. (c) Accounting for Goodwill Up to 1992, goodwill on investments acquired was charged or credited to stockholders' equity at the date of purchase. This policy differs from US generally accepted accounting principles which require that such differences be reflected as an asset in the balance sheet of the acquiring company and then amortized over a period not in excess of 40 years. The adjustment in the accompanying reconciliation has been made to recognize the goodwill on acquisitions from third parties made in 1990 and prior years originally amounting to Lire 7,330 million. Goodwill is being amortized over a 10 year period, corresponding to the estimated useful lives of the underlying assets acquired. (d) Deferred Charges The Group has deferred certain taxes paid on capital stock increases and stock exchange listing costs and is amortizing these amounts over 5 years. Under US generally accepted accounting principles, these taxes and listing costs would have been considered to be a reduction of the proceeds received and charged to capital stock or additional paid-in capital. The accompanying reconciliation reflects the adjustment to follow US generally accepted accounting principles. (e) Foreign Currency Translation Since 1989, the Group's policies and procedures with respect to the translation of financial statements of foreign subsidiaries operating in hyper-inflationary economies, have been in conformity with the requirements of Statement of Financial Accounting Standards No. 52. Group accounting policies state that long term debts denominated in a foreign currency are translated using the exchange rate at the balance sheet date, with losses included in the determination of net income and unrealized net gains deferred. In addition the accompanying reconciliation in 1994 provides the cumulative effect on net income for US GAAP of change in accounting for premiums on forward contracts entered into in order to hedge investments in foreign subsidiaries (note 3). The Company has forward contracts maturing in 1997 and 1998 in order to hedge future sales in foreign currencies for a total amount of Lire 657 billion. Since such contracts do not hedge firm commitments, they are to be considered as anticipatory hedging and, under US GAAP, accounted for as speculative transactions, using the mark to market valuation (“m.t.m.”). Such valuation results in a net unrealized gain of Lire 3.0 billion before taxes at December 31, 1996, (Lire 13.6 billion as of December 31,1995). At December 31,1994 the “m.t.m.” of anticipatory hedging resulted in a net loss (Lire 2.3 billion) and in accordance with Italian GAAP was reflected in the consolidated financial statements. Therefore at December 31, 1994 the “m.t.m.” was consistent with US GAAP .

(f) Accounting for Deferred Income Taxes The Group provides for deferred income taxes on timing differences between book and taxable income which are expected to become payable or recoverable in the foreseeable future using the liability method. The accompanying reconciliation reflects the tax effects related to reconciling adjustments. In 1992, Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" was issued in the US and was adopted by the Group in the year 1993. The deferred tax methodology required under US GAAP differs in certain circumstances from the deferred income tax methodology under Italian GAAP due to different treatment of tax assets mainly deriving from tax loss carry-forward. Under the terms of a law approved in December 1996, the Italian government is obliged to issue by November 1997 one or more legislative decrees introducing a new Regional Tax on Businesses and Professional Activities. Although all the rules applicable to this new tax are not set out in the above Law, it does contain certain guidelines to which the government is obliged to adhere. The new tax will substitute several existing taxes, including ILOR (locale income tax). It is expected to become effective from the 1998 tax period. The Company has adjusted deferred tax assets in its Italian financial statements for this anticipated change. Under US GAAP the measurement of current and deffered tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The following tables include a reconciling item of approximately Lire 19 billion related to this anticipated change. (g) Net Income per Share Under Italian accounting principles, earnings per share are not required to be disclosed. The approximate net income per share amounts, based on income determined in accordance with accounting principles generally accepted in the US as shown in the accompanying reconciliation, have been calculated based on the average number of shares outstanding. (h) Marketable securities Under Italian GAAP, marketable securities are carried at the lower of cost or market value. Under US GAAP, effective with fiscal years beginning after December 15, 1993, companies are required to adopt Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investment in Debt and Equity Securities (SFAS 115)”, which changes the accounting for investments in marketable securities from a lower of cost or market methodology to a fair market value methodology. Under this methodology, the Company would classify its marketable securities as available for sale; however, the effect of SFAS 115 on net income and shareholder’s equity is not significant. (i) Treasury shares Under Italian GAAP, the purchase by a Company of its own stock is accounted for as an investment and the establishment of a separate reserve within stockholders’ equity. Since the Company’s intent with respect to this stock is short term, they have been classified as marketable securities in the Italian balance sheet. Under US GAAP this purchase is accounted for as treasury stock and presented as a reduction of stockholders’ equity in the balance sheet. Differences which have an effect on the format of the financial statements The Group’s balance sheet and income statement format is in accordance with Italian reporting requirements and differs from the financial statement format typically followed under the requirements of US GAAP. The Group has included in appendix 2 and 3 financial statements prepared in accordance with Italian GAAP but reclassified to follow an international financial statement presentation format.

The following tables summarize the significant adjustments to consolidated net income and stockholders' equity which would be required if accounting principles generally accepted in the US had been applied instead of those established or adopted by the Italian Accounting Profession.

(Millions of Lire)(1) (Thousands of US $) (1) (2)

1994 1995 1996 1996 Net income: Net income as reported in the consolidated statements of income 210,220 220,255 245,642 161,713 Items increasing (decreasing) reported income:

Reduction in depreciation and amortization of fixed assets and trademarks as a consequence of the elimination of revaluation, including impact of disposals

5,160

475

476

313

Adjustment related to acquisitions and dispositions of companies under common control

13,695

9,435

10,502

6,914

Amortization of goodwill (1,052) (1,989) (733) (483) Adjustment of deferred charges 2,831 2,831 2,831 1,864 M.t.m. gain deriving from adjustment to conform anticipatory hedging transactions to SFAS 52

-

13,643

2,981

1,963

Accounting for deferred income tax 1,492 2,605 29,281 19,276 Tax effect of reconciling adjustments (5,376) (8,774) (3,045) (2,004) Net income before cumulative effect of change in accounting for premiums on capital hedging

226,970

238,481

287,935

189,556

Cumulative effect of change in accounting for premiums on capital hedging

9,200

-

-

-

Net income in accordance with accounting principles generally accepted in the US

236,170

238,481

287,935

189,556

Income per share before cumulative effect of accounting change

1,307

1,366

1,650

1.09

Cumulative effect of change in accounting for premiums on capital hedging

53

-

-

-

Net income per share amounts in accordance with accounting principles generally accepted in the US

1,360

1,366

1,650

1.09

(1) Except per share data, which are in Lire and US $. (2) Exchange rate: US $ 1 = Lire 1,519 as of December 31, 1996.

Year Ended December 31,

(Millions of Lire) (Thousands of US $) (1)

1994 1995 1996 1996 Stockholders' equity: Balance as reported in the consolidated balance sheets

1,504,156 1,656,958 1,820,836 1,198,707

Items increasing (decreasing) stockholders' equity:

Elimination of revaluations of fixed assets and trademark net of related depreciation and amortization

(8,625)

(8,150)

(8,848)

(5,825)

Adjustments related to acquisitions and dispositions of companies under common control

(64,222)

(55,434)

(49,289)

(32,448)

Reinstatement of goodwill previously written-off 4,991 3,002 2,269 1,494 Adjustment of deferred charges (11,325) (8,494) (5,663) (3,728) M.t.m. gain deriving from adjustment to conform anticipatory hedging transactions to SFAS 52

-

13,643

16,624

10,944

Accounting for deferred income tax 20,988 23,593 52,874 34,808 Treasury shares - - (719) (473) Tax effect of reconciling adjustments

7,766 (1,008) (4,053) (2,669)

Balance in accordance with accounting principles generally accepted in the US

1,453,729

1,624,110

1,824,031

1,200,810


Differences which do not have an effect on net income and stockholders’ equity (J) Amortization of License As discussed in Note 4 the Group is not amortizing certain license costs, as the amounts will be fully recoverable upon disposal of the underlying assets. Under US generally accepted accounting principles, such amounts would be amortized over the life of the license. No adjustment has been made for this item in the accompanying reconciliation, as the amounts involved are not significant. (K) Transactions in foreign currencies As discussed in Note 4, the Group records income, relating to forward exchange contracts that were subsequently renegotiated, on the date of renegotiation. Under US GAAP, only the m.t.m. at the balance sheet date would be recorded in the consolidated statement of income. No adjustment has been made for this item in the accompanying reconciliation, as the amounts are not deemed material. (l)Purchases and Sales with Parent Company As mentioned in section (b) of Note 32, under US GAAP transaction between a “controlled group” should not result in gains or losses, or increases in asset carrying values. During 1996, the Group purchased Benetton Gesfin S.p.A. (formely Schemaventi S.p.A.) from Edizione Holding S.p.A. and third parties. The Group recorded a deferred tax asset related to the excess of purchase price over net equity (Lire 2,495 million). In the US GAAP stockholder’s equity reconciliation, the Group has reduced stockholder’s equity for the amount of the excess related to Edizione Holding. The remaining amount (Lire 1,057 million) related to third parties shoud be classified as goodwill and not a deferred tax asset for US GAAP. (m) Traslation differences The Group has recorded an additional deferred tax liability (Lire 484 million) for translation differences arising from the current year translation of foreign deferred taxes. A deferred tax liability would not be recorded under US GAAP.

Appendix 1

Companies and Groups included within the scope of consolidation as of December 31, 1996

Name of the company Location Currency Capital Group

stock interest

Companies and Groups consolidated on a line-by-line basis:

Parent company

Benetton Group S.p.A. Ponzano Veneto (TV) Lit. 87,276,862,500

Italian Subsidiaries

Benfin S.p.A. Ponzano Veneto (TV) Lit. 90,000,000,000 100%

. Calzaturificio di Varese Group Ponzano Veneto (TV) Lit. 8,808,569,580 96.988%

. Stefani Group Grumolo delle Abbadesse (VI) Lit. 600,000,000 78%

. Texcontrol Group Ponzano Veneto (TV) Lit. 17,000,000,000 81.875%

. Galli Filati Group Prato (FI) Lit. 4,000,000,000 100%

Bencom S.p.A. Ponzano Veneto (TV) Lit. 3,000,000,000 100%

. Benair S.p.A. Ponzano Veneto (TV) Lit. 3,000,000,000 100%

Fabrica S.p.A. Ponzano Veneto (TV) Lit. 8,000,000,000 100%

. Colors Magazine S.r.l. Ponzano Veneto (TV) Lit. 199,000,000 100%

Benetton Fashion S.p.A. Ponzano Veneto (TV) Lit. 70,000,000,000 100%

. Socks & Accessories Benetton (S.A.B.) Group Sesto Fiorentino (FI) Lit. 1,000,000,000 50%

Benlog S.p.A. Ponzano Veneto (TV) Lit. 27,400,000,000 100%

Benetton Gesfin S.p.A. Ponzano Veneto (TV) Lit. 80,000,000,000 100%

Foreign subsidiaries

Benetton U.S.A. Corp. Delaware US $ 34,654,000 100%

. Benetton Retail Corp. Delaware US $ 1,301,000 100%

Benetton Holdings N.V. Amsterdam f. 45,434,000 100%

. Benetton Cosmetici Holding S.A. Lugano SwF 8,050,000 100%

. Benetton Cosmetici S.A. Lugano SwF 50,000 100%

. Benetton Cosmétiques France S.A. Paris F 28,050,000 100%

. Benetton Cosmetics Corp. New York US $ 3,500,000 100%

. Benetton Group Japan K.K. Tokyo Yen 400,000,000 100%

. Benetton Japan K.K. Tokyo Yen 400,000,000 100%

. Benetton Shoes Japan K.K. Tokyo Yen 60,000,000 50%

. Bene Moda K.K. Tokyo Yen 60,000,000 50%

. Benetton China Japan K.K. Tokyo Yen 50,000,000 91%

. K.K. Via Veneto Tokyo Yen 232,500,000 50%

. Benetton Argentina S.A. Buenos Aires $Arg 500,000 100%

. Benetton Mexico S.A. de C.V. Mexico City N$ 27,740,000 100%

. Egyptian European Clothing Manufacturers S.A.E. Alexandria LE 4,000,000 50%

. DCM Benetton India Ltd. New Delhi Rs. 80,000,000 50%

. Benetton (Far East) Ltd. Hong Kong Hk $ 51,000,000 100%

. United Colors of Benetton do Brasil S.A. Sao Josè dos Pinhais R$ 19,707,528 100%

. Colorben Comercio de Roupas Ltda. Sao Paulo R$ 5,000 100%

. Colors Brasil Roupas Ltda. Rio de Janeiro R$ 1,000 100%

. Novaben Comercio de Roupas Ltda. Rio de Janeiro R$ 50,000 100%

Name of the company Location Currency Capital Group

stock interest

Benetton International N.V. Amsterdam f. 244,260,000 100%

. Benetton Finance N.V. Curaçao US $ 26,000 100%

. Benetton Finance S.A. Luxembourg Lit. 1,000,000,000 100%

. Benetton France Trading S.a.r.l. Troyes F 240,000,000 100%

. Benetton France S.A. Troyes F 40,000,000 100%

. Benetton Realty France S.A. Troyes F 272,000,000 100%

. Catys S.a.r.l. Troyes F 410,040 100%

. Benetton España S.L. Castellbisbal Ptas. 100,000,000 100%

. Benetton S.A. Castellbisbal Ptas. 200,000,000 100%

. Benetton Lda. Maia Esc 20,000,000 100%

. Benetton (U.K.) Ltd. London £ 52,334 100%

. Benetton Formula Ltd. London £ 3,900,000 100%

. Benetton Retail (1988) Ltd. London £ 10,000,000 100%

. Benetton Società di Servizi S.A. Lugano SwF 50,000 100%

. Benetton do Brasil Textil Ltda. Sao Josè dos Pinhais R$ 10,405 100%

. United Colors Communication S.A. Lugano SwF 1,000,000 100%

. Benetton Services S.A. Lugano SwF 1,400,000 100%

. Benetton Korea Inc. Seoul W 110,000,000 100%

. Benetton Time S.A. Luxembourg US $ 300,000 52%

. Benetton Engineering Ltd. Enstone £ 12,342,000 100%

. Benetton Tunisia S.a.r.l. Akouda At 303,900 100%

Investments carried at equity:

. Benetton Kansai K.K. Osaka Yen 110,000,000 40%

. Beijing Benetton Fashion Co. Ltd. Beijing Y 3,797,620 50%

. Shanghai Benetton Ltd. Shanghai Y 2,780,000 54.6%

. Benetime Japan K.K. Tokyo Yen 10,000,000 24%

. T.W.R. Group Ltd. Kidlington £ 20,000,000 50%

. Benetton Central Europe Ltd. Warsaw Zloty 4,224,000 100%

. Benetton China Holdings Ltd. Hong Kong US $ 2,600,000 50%

Investments in subsidiaries and associated companies carried at cost:

. Azfin International B.V. Amsterdam f. 40,000 100%

. Benetton Australia Pty. Ltd. Sidney $A 1,000 100%

Consolidated balance sheets as of Appendix 2 December 31, 1995 and 1996 (reclassified for an international format) (in millions of Lire) (Thousands

of US $) (1)

Assets 12/31/95 12/31/96 12/31/96

Current Assets

Cash 458,619 498,912 328,448

Marketable securities 400,092 680,019 447,675

Differentials on forward transactions 80,891 75,003 49,377

Financial receivables 141,324 12,173 8,014

Assets leased to third parties 173 1,053 693

Accounts receivable

Trade receivables 1,410,432 1,416,312 932,398

Other receivables 158,510 81,071 53,371

Less - Allowance for doubtful accounts (169,935) (168,883) (111,180)

1,399,007 1,328,500 874,589

Inventories 506,363 411,292 270,765

Prepayments and accrued income 53,030 63,649 41,902

Total current assets 3,039,499 3,070,601 2,021,463

Investments and other non-current assets

Investments 47,151 43,241 28,467

Securities held as fixed assets 20,767 51,042 33,602

Guarantee deposits 29,753 13,332 8,777

Financial receivables 4,104 1,644 1,082

Other non current receivables 2,078 11,628 7,655

Assets leased to third parties 1,054 - -

104,907 120,887 79,583

Fixed assets

Land and buildings 447,822 439,877 289,583

Plant, machinery and equipment 505,931 523,913 344,906

Office furniture, furnishings and electronic equipment 65,656 67,635 44,526

Vehicles and aircraft 47,931 48,123 31,681

Construction in progress and advances for fixed assets 6,186 5,758 3,791

Finance leases 21,729 26,245 17,278

Less - Accumulated depreciation (477,238) (519,285) (341,860)

618,017 592,266 389,905

Intangible assets

Licenses and trademarks 12,310 11,825 7,785

Deferred charges 62,346 68,683 45,215

74,656 80,508 53,000

Total assets 3,837,079 3,864,262 2,543,951

(1)Exchange rate: US $ 1 = Lire 1,519 as of December 31, 1996. The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.


of US $) (1)

Liabilities and stockholders' equity 12/31/95 12/31/96 12/31/96

Current liabilities

Bank loans 568,003 786,034 517,468

Bonds - 34,986 23,032

Short-term loans 668 4,002 2,635

Current portion of long-term loans 172,735 25,536 16,811

Current portion of lease financing 3,146 3,720 2,449

Accounts payable 528,624 550,665 362,518

Other payables and accruals 144,899 125,725 82,768

Reserve for income taxes 70,297 27,682 18,224

Total current liabilities 1,488,372 1,558,350 1,025,905

Long-term liabilities

Bonds 279,827 236,075 155,415

Long-term loans, net of current portion 211,429 83,823 55,183

Other long-term liabilities 2,123 1,942 1,279

Lease financing 10,970 12,657 8,332

Reserve for termination indemnities 58,736 62,521 41,159

Reserve for deferred income taxes - 144 95

Other reserves 89,801 63,311 41,679

652,886 460,473 303,142

Minority interests in consolidated subsidiaries 38,863 24,603 16,197

Stockholders' equity

Capital stock 87,277 87,277 57,457

Additional paid-in capital 472,661 472,661 311,166

Surplus from monetary revaluation of assets 45,028 46,202 30,416

Other reserves and retained earnings 816,037 962,107 633,382

Translation differences 15,700 6,947 4,573

Net income for the year 220,255 245,642 161,713

1,656,958 1,820,836 1,198,707

Total liabilities and stockholders' equity 3,837,079 3,864,262 2,543,951



Appendix 3

Consolidated statements of income for the years ended December 31, 1994, 1995 and 1996

(reclassified for an international format) (in millions of Lire) (Thousands

of US $) (1)

1994 1995 1996 1996

Revenue

Net sales 2,640,752 2,767,585 2,702,685 1,779,253

Other revenues 146,920 171,549 168,423 110,877

2,787,672 2,939,134 2,871,108 1,890,130

Cost of sales

Material and net change in inventories 804,809 872,790 809,982 533,234

Payroll and related cost 160,619 171,687 172,412 113,504

Subcontract work 562,863 549,958 616,189 405,654

Industrial depreciation 54,428 59,226 56,759 37,366

Other manufacturing costs 56,335 67,631 61,231 40,310

1,639,054 1,721,292 1,716,573 1,130,068

Gross margin 1,148,618 1,217,842 1,154,535 760,062

Selling, general and administrative expenses

Payroll and related cost 160,242 165,579 149,216 98,233

Distribution and transport 56,007 56,969 46,797 30,808

Sales commission 107,301 114,994 132,629 87,313

Advertising and promotion 132,803 119,993 101,638 66,911

Depreciation and amortization 41,184 41,763 38,153 25,117

Other expenses 262,341 274,741 284,421 187,242

759,878 774,039 752,854 495,624

Income from operation 388,740 443,803 401,681 264,438

Other (income) expenses

Foreign currency (gain) loss, net 3,194 (45,957) (117,214) (77,165)

Interest income (188,646) (131,422) (142,292) (93,675)

Interest expense 229,449 178,062 154,913 101,983

Other (income) expense, net (13,000) 32,025 49,107 32,329

30,997 32,708 (55,486) (36,528)

Income before taxes and minority interests 357,743 411,095 457,167 300,966

Income taxes 150,554 188,659 206,638 136,036

Income before minority interests 207,189 222,436 250,529 164,930

Minority interests (3,031) 2,181 4,887 3,217

Net income 210,220 220,255 245,642 161,713



SCHEDULE VIII Valuation and qualifying accounts As of December 31, 1994, 1995 and 1996

(in millions of Lire)

Description Balance at

Beginning

of Period

Additions

Charged to

Profit/Loss

Other(1) Deductions Balance at

End of

Period

Deducted in the Balance Sheets from the assets to which it applies:

Allowance for doubtful accounts

1994 150,084 66,888 (1,818) (41,878) (2) 173,276

1995 173,276 60,839 (3,389) (60,791) (2) 169,935

1996 169,935 78,304 (4,763) (74,593) (2) 168,883

Inventory valuation reserve

1994 16,252 5,036 1,008 (8,327) 13,969

1995 13,969 12,291 (420) (10,387) 15,453

1996 15,453 9,382 (1,827) (10,027) 12,981

Other reserves

- Exchange fluctuation reserve

1994 55,561 12,187 1 (21,819) 45,930

1995 45,930 6,285 (4) (11,876) 40,335

1996 40,335 14,366 (102) (53,520) 1,079

- Risk reserve

1994 7,099 5,360 (1,147) (4,987) 6,325

1995 6,325 30,517 (1,218) (3,092) 32,532

1996 32,532 23,046 (3,516) (7,716) 44,346

- Taxation reserve

1994 7,580 50 - - 7,630

1995 7,630 - 20 - 7,650

1996 7,650 130 63 (61) 7,782

- Reserve for agents’ termination indemnities

1994 9,219 272 (840) (254) 8,397

1995 8,397 2,239 - (1,352) 9,284

1996 9,284 9,282 - (8,462) 10,104

- Total other reserves

1994 79,459 17,869 (1,986) (27,060) 68,282

1995 68,282 39,041 (1,202) (16,320) 89,801

1996 89,801 46,824 (3,555) (69,759) 63,311

(1) Represents balances of acquired companies, transfers from other reserve accounts and the effect of translation adjustment.

(2) Represents write-offs of uncollectible accounts.

REPORT OF THE BOARD OF STATUTORY AUDITORS ON THE CONSOLIDATED FINANCIAL STATEMENTS To the Stockholders of Benetton Group S.p.A., the Parent Company, As part of our duties pursuant to Article 41 of Decree 127/91, we have examined the consolidated financial statements of the Benetton Group as of December 31, 1996, which report net income of Lire 245,642 million, total assets of Lire 3,864,262 million, total liabilities of Lire 2,018,823 million, stockholders’ equity of Lire 1,845,439 million, and memorandum accounts totaling Lire 5,948,485 million, together with the Report on Operations. Based on the information and documentation received from the Directors and Management, we confirm the following: a) Examination of the consolidated financial statements 1. Our examination was performed in accordance with the law that regulates consolidated financial

statements, with the standards of conduct recommended by the Italian accounting profession and with generally-accepted accounting principles. The financial statements were audited by Deloitte & Touche S.p.A., who have not communicated to us any censurable matters concerning the Parent Company or any of its subsidiaries.

2. The financial statements of the subsidiary and associated companies included within the scope of consolidation were examined, as required by the law, by their respective Boards of Statutory Auditors and Independent Auditors. We have not been informed by the independent auditors or any other party of irregularities of any kind in relation to such financial statements.

3. In our opinion, the abovementioned consolidated financial statements reflect the accounting records of the Parent Company and the information received from subsidiary companies, and have been prepared in conformity with the principles of consolidation and the criteria for establishing the scope of consolidation laid down in Decree 127/91. The instructions contained in Articles 32 and 38 of the Decree mentioned have also been respected. Accordingly, taken as a whole, the consolidated financial statements fairly present the financial position of the Benetton Group as of December 31, 1996, and its results for the year then ended.

b) Examination of the Report on Operations

1. We have examined the report of the Directors on the results of operations that accompanies the

consolidated financial statements, in order to verify compliance with Article 40 of Decree 127/91 and determine its consistency with such statements pursuant to Article 41 of the same Decree.

2. On the basis of the work we performed, the Board of Statutory Auditors believes that the Report on Group Operations is properly presented and is consistent with the consolidated financial statements.

THE BOARD OF STATUTORY AUDITORS Dino Sesani Fanio Fanti Filippo Duodo Ponzano Veneto, April 7, 1997

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS BENETTON GROUP S.P.A. We have audited the accompanying consolidated balance sheet of BENETTON GROUP S.p.A. (an Italian Corporation) and subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of certain subsidiaries, which financial statements represented 8 percent of total consolidated assets as of December 31, 1996 and 7 percent of total consolidated revenues for the year then ended. The financial statements of these subsidiaries were audited by other independent auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included in the consolidated financial statements for those entities, is based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, based on our audit and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BENETTON GROUP S.p.A. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for the two years ended December 31, 1996, in conformity with the accounting principles established or adopted by the Italian Law and the Italian Accounting Profession. The accounting principles referred to above vary in certain respects from accounting principles generally accepted in the United States of America. A description of the significant differences and the adjustments required to conform consolidated net income and stockholders’ equity for the two years ended December 31, 1996, to generally accepted accounting principles in the United States are set forth in Note 32 to the consolidated financial statements. Our audit comprehended the translation of Italian Lire amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 4. Such U.S. dollar amounts are presented solely for the convenience of international readers.

DELOITTE & TOUCHE S.p.A. Treviso, Italy April 8, 1997

Information for Stockholders Informazioni agli Azionisti Corporate Headquarters Sede Benetton Group S.p.A. Benetton Group S.p.A. Villa Minelli Villa Minelli 31050 Ponzano (TV) 31050 Ponzano (TV) Italy Italy Capital Stock: Lire 90,767,937,000 fully paid Cap. Soc.. Lit. 90.767.937.000 i.v. Registered No. 4424 Treviso R.I. di Treviso n. 4424 Tel.: (39) 0422-4491 Tel.: (39) 0422-4491 Stock Exchange Listings Borse Valori Benetton Group S.p.A. stock is listed on the following Stock Exchanges: Milan,

Il Titolo Benetton Group S.p.A. è quotato alle Borse Valori di Milano,

Frankfurt, New York (symbol BNG) and is admitted for trading on the Stock Exchange Automated Quotation System (SEAQ International) in London. Investor Relations Investor Relations Office Benetton Group S.p.A. Villa Minelli 31050 Ponzano (TV) Italy Tel.: (39) 0422-449412

Francoforte, New York ed è trattato alla SEAQ di Londra Rapporti con gli investitori Ufficio Rapporti con gli investitori Benetton Group S.p.A. Villa Minelli 31050 Ponzano (TV) Italia Tel.: (39) 0422-449412 Assemblea Annuale

e Pagamento dei Dividendi Annual Meetings L’assemblea annuale degli azionisti si tiene and Payment of Dividends presso la sede della società normalmente Annual meetings of stockholders are held at in aprile. Company’s Headquarters normally in April. I dividendi vengono pagati generalmente Dividends are paid usually about the middle intorno alla metà di maggio. of May. Stock Transfer Agent For holders of ADRs:

Depositario per gli ADR Per possesori ADR: Morgan Guaranty Trust Company

Morgan Guaranty Trust Company 60 Wall Street New York, New York 10260

60 Wall Street New York, New York 10260 U.S.A.

U.S.A. Documentazione per gli Azionisti Reports available to Stockholders The following reports may be obtained without charge: Annual Report Half-Year Report.

Sono disponibili gratuitamente: Bilancio Relazione semestrale Eventuali richieste possono essere inoltrate a: Ufficio Relazioni con gli Azionisti

Requests should be addressed to: Stockholder Relations Corporate Secretary’s Office Benetton Group S.p.A.

Segreteria della Società Benetton Group S.p.A. Villa Minelli 31050 Ponzano (TV)

Villa Minelli Italia 31050 Ponzano (TV) Italy

Società di Revisione

Independent Accountants

Deloitte & Touche S.p.A. Viale della Repubblica, 22

Deloitte & Touche S.p.A. 31020 Fontane di Villorba - (TV) Viale della Repubblica, 22 Italy 31020 Fontane di Villorba - (TV) Italy

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