MARCOLIN BOND REPORT AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2014 - - PDF document

1

MARCOLIN BOND REPORT AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2014

2 DISCLAIMER The following information is confidential and does not constitute an offer to sell or a solicitation of an offer to buy any securities of Marcolin S.p.A. or any of its subsidiaries or affiliates. Statements on the following pages which are not historical facts are forward-looking statements. All forward-looking statements involve risks and uncertainties which could affect Marcolin’s actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements produced by, or on behalf of, Marcolin.

3

TABLE OF CONTENTS

• I. OVERVIEW

..................................................................................................................................................................... 4

• II. PRESENTATION OF FINANCIAL INFORMATION ............................................................................................................. 7
• III. SUMMARY CONSOLIDATED INFORMATION

.................................................................................................................. 8

• IV. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .............. 13

APPENDIX – OTHER CONSOLIDATED FINANCIAL INFORMATION ..................................................................................... 26

Marcolin Bond Report as of and for the year ended December 31, 2014 Presentation of Financial Information 4

• I. OVERVIEW

This report as of and for the year ended December 31, 2014 should be read in conjunction with the annual report for the year ended December 31, 2014, which will be audited and made available within 120 days from the end of fiscal year 2014. This report focuses on the material changes in our results of operations and financial position from those disclosed in the report for the year ended December 31, 2014. Differently from the previously issued annual financial report, this report focuses on the consolidated results for the

• Group. In all interim 2014 reports, including this one, the results of operations of the Group, which includes

Marcolin, Cristallo and Viva, are discussed as those of one entity (whereas in the previous annual report the results

• f Marcolin and Viva were discussed jointly and at the end, separately). This is consistent with the strategy to fully

integrate Viva, its operations and its brands into the Marcolin Group. Due to the advanced stage of the Viva integration at December 31, 2014, as described under “Viva Acquisition and Integration”, the stand-alone income statement information for Viva and Marcolin previously presented in Appendices B and C is no longer included with this report. Marcolin is a leading global designer, manufacturer and distributor of branded sunglasses and prescription frames. We believe we are the world’s fourth largest eyewear wholesale player by revenue, with a broad portfolio of 22 licensed brands that appeal to key demographics across five continents. We manage primarily a licensed brand business, and we design, manufacture (or contract to manufacture) and distribute eyewear primarily bearing the brand names we have obtained pursuant to long-term, exclusive license agreements. We focus on high-performing brands with eyewear lines that enjoy international awareness. The Marcolin portfolio includes iconic labels such as Tom Ford, Roberto Cavalli, Tod’s, Montblanc, Zegna, Pucci, Swarovski, Guess, Diesel, Timberland, Gant and Harley-Davidson. The long tenure of licenses provides Marcolin with strong revenue visibility. The Group is now present in all leading countries throughout the world through its affiliates, partners and exclusive distributors. The Marcolin Group has a strong brand portfolio, with a good balance between luxury brands (high-end products distinguished by their exclusivity and distinctiveness and often characterized by a higher retail price) and mainstream ("diffusion") products (products influenced by fashion and market trends positioned in the mid and upper-mid price segments targeting a wider customer base), men's and women's products, and prescription frames and sunglasses. The luxury segment includes glamorous fashion brands such as Tom Ford, Tod’s, Balenciaga, Roberto Cavalli, Montblanc and now Zegna, Pucci and Agnona (the first two brands have been recently launched in 2015), while the diffusion segment includes brands such as Diesel, Swarovski, DSquared2, Just Cavalli, Timberland, Cover Girl, Kenneth Cole New York and Kenneth Cole Reaction. The house brands are the traditional "Marcolin" brand as well as National and Web.

• 1. Viva Acquisition and Integration

In December 2013, Marcolin bought the Viva International group (hereafter also “Viva”) by acquiring a 100% stake in Viva Optique, Inc. Viva is a leading eyewear wholesale designer and distributor of premium eyewear. Viva’s net sales are concentrated mainly in the diffusion category, with a strong position in prescription frames. Consistent with the growth strategy being pursued by Marcolin, the Viva acquisition has developed the Group into a true global player by expanding its scale, geographical presence, brand portfolio and product range. The Viva Group has added to the diffusion portfolio the brands Guess, Guess by Marciano, Gant, Harley Davidson, and

• ther brands targeted specifically to the U.S. market.

The diversity of the brands managed, the completion of the "diffusion" product range and the balance achieved between men's and women's products, and also between eyeglasses and sunglasses, are among the strategic factors behind this important acquisition. Moreover, Viva’s strong presence in the overseas market will enable Marcolin, which up to now has been concentrated in Europe, to become stronger in the United States by covering one third of the independent opticians, while continuing to focus on the Far East and Europe. Today Marcolin markets its products in over 100 countries with a wide distribution network across five continents.

Marcolin Bond Report as of and for the year ended December 31, 2014 Presentation of Financial Information 5 The complementary distinctive characteristics and specific expertise of the Marcolin Group and the Viva Group have given rise to a globally competitive eyewear company, to which Marcolin brings its know-how and background, enabling it to offer significant added value to the market in terms of both product range and global distribution. The merger of Viva’s and Marcolin’s operations generates significant cost synergies in terms of organization, sourcing, production and distribution, as well as cross-selling opportunities arising from the integration of the sales and distribution networks. Pursuant to the Viva integration, important cost synergies of approximately €10.0 million will be attained, exceeding the initially planned €8.5m. We adopted a prudent approach in order to not underestimate the de-synergies to support the increase volumes of the Business post integration in certain areas (i.e. Italy). The main differences between the current estimate and the initial estimate for run-rate synergies are: US:

• Higher savings related to the New Jersey and Arizona personnel reorganization (executives and sales force)
• Higher savings due to joint participation in fairs and exhibitions

UK:

• Higher savings related to the sales force reorganization
• Higher savings achieved on the closure of the Harrogate location
• Higher savings related to the personnel reorganization

In order to obtain the extra synergies, additional non-recurring costs (one-off costs) related to the integration were incurred, impacting on the P&L 2014 for €9.4m. Integration costs has been increased in France to change the status of the Sales Reps from “VRP” to “Attaché Commercial”. The negotiation has eliminated a potential liability in the future as “VRP” Reps have by law a pretty sizeable indemnity in case of termination of the contract. The main differences between current and initial estimated one-off costs, including capital expenditure (€12.1m in 2014), are related to:

• Higher severance costs for the personnel reorganization (partially due to the higher number of redundancies
• vs. what initially planned)
• Higher consultancy fees (SAP roll-out, integration support, tax and legal assistance, etc.)
• Higher costs/capex for setting up the new facilities, achieving performance improvements and optimizing the

supply chain All synergies are calculated assuming 2013 as the reference year; the run rate considers the 12-month effect of the

• savings. Part of the €10m actual run-rate synergies, €3.6m was realized in 2014, as set forth below.

Total US 2,970 UK 522 France 2 Brazil

• Hong Kong

114 Total 3,609

Full-year run-rate synergies are shown below:

Total US 6,571 UK 2,032 France 865 Brazil 383 Hong Kong 191 Total 10,043

Marcolin Bond Report as of and for the year ended December 31, 2014 Presentation of Financial Information 6 The Viva integration status at December 31, 2014 is summarized below:

• Synergies from Shared Services:

Efficiencies are generated in 2014 through the elimination of overlaps between foreign subsidiaries, savings in property executive management and back-office personnel, consolidation of corporate functions, and shared usage of

• perational, office, and distribution networks:



reorganization of foreign subsidiaries in progress: focusing mainly on the U.S. (including progressive and still in progress closure of AZ warehouse services and utilities), U.K, France, Brazil and Hong Kong;



sales force integration: U.S. fully executed; U.K., Brazil and Hong Kong completed; France in phase of completion;



corporate function and back-office function restructuring almost completed: fully in line with the integration plan.

• Operational Synergies:

Efficiencies through the consolidation of warehouse facilities, IT systems and procurement department savings:



warehouse and logistics consolidation: UK and HK Distribution Centers have been fully integrated in the Marcolin’s system, the planned integration of the two existing US facilities in the one in NJ by shutting down the warehouse in AZ is scheduled for the end of Q1 2015; Brazil logistic operation has been consolidated in the Alphaville warehouse at beginning of 2015, France warehouse is still partially operative while sales activities are already directly served from Italy;



IT: SAP rollout successfully achieved: all the countries are fully integrated in the Marcolin IT Platform, while VIVA US has gone live on October 1, 2014; final merge of US IT services in NJ is expected in April 2015; an updated Sales force automation mobile App has been released to support sales in all countries affected by integration.

• Synergies from redundancies at Executive level:

Analysis of redundancies completed. Implementation in U.S., U.K., France, Brazil and Hong Kong completed. The integration process is fully in line with the defined plans, with the main efforts spent in the first nine months of 2014 in the U.S., Europe (especially the U.K.) and Hong Kong while France and Brazil integration efforts were mainly focused in 2014 Q4 and they will be completed in 2015. Within the scope of the Viva U.K. integration, the International Distribution business unit was transferred to the parent company Marcolin Spa, and the Domestic Distribution business unit was transferred to Marcolin U.K. These

• perations has been successfully completed during the month of September 2014.

In July 2014 a new branch was set up in Hong-Kong to serve the entire client base of VIVA and Marcolin in the Asia- Pacific region (APAC), and to manage the sourcing operations out of China. An important stage of the integration process includes 2015 merger, of the two US subsidiaries (Marcolin U.S./VIVA Optique), thus increasing the efficiency of the organization. . As part of this process, it has been decided to merge by April 2015 the current headquarters of Marcolin U.S. (Scottsdale) to the New Jersey operation, formerly the VIVA International Group headquarters. The combined headquarters in New Jersey will bring the company closer to its customers, reduce management layers and leverage efficiencies to increase speed-to-market advantages globally.

Marcolin Bond Report as of and for the year ended December 31, 2014 Presentation of Financial Information 7

• II. PRESENTATION OF FINANCIAL INFORMATION

This document focuses on the consolidated results for the Group which includes Marcolin, Cristallo and Viva. The discussion of the Group as one single entity is consistent with the strategy to fully integrate Viva and its

• perations and business into the Marcolin Group.

Marcolin was acquired by Cristallo on December 5th, 2012, and in October 2013 Cristallo underwent a reverse merger with and into Marcolin, within the scope of a corporate reorganization of the Group’s holding structure. In December 2013, Marcolin acquired Viva Optique, Inc. Accordingly, the Marcolin Group’s results of operations for the year ended December 31st, 2014 include the Viva Group’s results. In order to provide a meaningful period-on-period comparison, the results for the year ended December 31th, 2013 have been adjusted to include pro-forma the Viva Group’s results of operations for that period. This document presents the following financial information: 1) Summary financial information as of and for the year ended December 31st, 2014; 2) Management’s discussion and analysis of the financial condition and results of operations as of and for the year ended December 31st, 2014; 3) Appendix – Other Financial Information as of and for the year ended December 31, 2014. The consolidated income statement, consolidated statement of financial position, consolidated cash flow statement and other financial information of the Group as of and for the year ended December 31, 2014 are derived from the consolidated financial statements of the Marcolin Group as of and for the year ended December 31, 2014, according to the financial statement draft approved by the Board. Non-IFRS and Non-U.S. GAAP Measures The summary financial information set forth below contains certain non-IFRS and non-U.S. GAAP financial measures including “Pro-Forma Combined Adjusted Run-Rate EBITDA,” “EBITDA,” “EBITDA margin,” “Adjusted EBITDA,” “Adjusted EBITDA margin,” “Total debt”, “Net debt,” “Capital expenditures” and “Movements in working capital.” The non-IFRS and non-U.S. GAAP financial measures are not measurements of performance or liquidity under IFRS or U.S. GAAP.

Marcolin Bond Report as of and for the year ended December 31, 2014 Summary Financial Information 8

• III. SUMMARY CONSOLIDATED INFORMATION
• 1. Summary Consolidated Income Statement Information

For the year ended December 31, 2013 2014

(Pro-Forma) (As reported)

Revenue(1) 346,262 362,133 Cost of sales (133,349) (145.360) Gross profit 212,913 216,773 Selling and marketing costs (164,366) (169,250) General and administrative expenses (33,535) (31,711) Other operating income and expenses 4,226 4,120 Operating profit 19,238 19,932 Net finance costs (24,568) (12,830) Profit before taxes (5,330) 7,102 Income tax expense (3,226) (6,695) Net profit for the period (8,556) 407

(1)

Within the same consolidation perimeter, including Viva’s results for FY 2013 , net sales are up by 4.6% from 2013. The increase in the revenues at previous year exchange rates is 5.1%.

Operating profit was affected by a number of extraordinary items both for the twelve-month period ended December 31, 2013 and for the twelve-month period ended December 31, 2014. Please see “Adjusted EBITDA” for further details on such items.

• 2. Summary Consolidated Balance Sheet

As of December 31, As of December 31, 2013 2014

(As reported) (As reported) (In € thousands)

Property, plant and equipment 22,957 24,657 Intangible assets 29,341 37,213 Goodwill (1) 269,856 281,452 Inventories 68,301 100,075 Trade receivables 71,827 80,576 Cash and cash equivalents 38,536 36,933 Other current and non-current assets 53,822 50,809 Total assets 554,640 611,714 Long-term borrowings 195,891 199,152 Short-term borrowings 17,707 41,353 Trade payables 65,262 102,322 Other long-term and short-term liabilities 60,803 46,075 Total liabilities 339,663 388,901 Total equity 214,977 222,813 Total liabilities and equity 554,640 611,714

(1)

According to IFRS 3, "Business Combinations", the Viva Group acquisition consisted of a business combination, and as such was accounted for with the acquisition method. As permitted by IFRS 3, given the significance of the acquisition and the proximity to the 2013 reporting date, the initial accounting for the business combination was determined only provisionally in the financial statements for the year ended December 2013, and goodwill was determined on the basis of provisional, partial identification of the fair values of the acquired assets, liabilities and contingent liabilities. Within twelve months of the acquisition date, the business combination accounting was finalized with the identification and valuation of the acquired assets and liabilities. As a result of this process, goodwill was tested for impairment, and found to not have suffered any impairment losses.

Marcolin Bond Report as of and for the year ended December 31, 2014 Summary Financial Information 9

• 3. Summary Consolidated Cash Flow Statement Information

For the year ended December 31, 2013 2014 (Pro-Forma) (As reported)

(In € thousands)

Net cash from operating activities (13,157) (14,431) Net cash (used in) investing activities (58,177) (12,454) Net cash from/(used in) financing activities 43,763 26,130 Effect of foreign exchange rates and other non-cash items (2,255) (847) Net increase/(decrease) of cash and cash equivalents (29,826) (1,602)

• 4. Other Financial Information

We define EBITDA as profit for the period plus income tax expense, net finance costs, amortization and depreciation and bad debt provision. EBITDA is a Non-GAAP Financial Measure. The following table sets forth the calculation of EBITDA for the periods indicated.

For the year ended December 31, 2013 2014

(Pro-Forma) (As reported) (In € thousands)

Net profit for the period (8,556) 407 Income tax expense 3,226 6,695 Net finance costs 24,568 12,830 Amortization and depreciation 8,464 8,958 Bad debt provision 787 494 EBITDA (a) 28,489 29,384

(a) In the tables above the EBITDA for the twelve-month period ended December 31, 2013 is presented consistently with the same period 2014,

with the same reclassification of Marcolin Group, in order to provide comparable data.

We define adjusted EBITDA as EBITDA adjusted for the effect of non-recurring transactions which primarily refer to

• ne-off charges, non-recurring costs in relation to changes in management, and other extraordinary items. The

following table sets forth the calculation of adjusted EBITDA for the periods indicated.

For the year ended December 31, 2013 2014 (Pro-Forma) (As reported)

(In € thousands)

EBITDA 28,489 29,384 Costs related to PAI acquisition(a) 1,912

• Costs related to VIVA acquisition(a)

1,042

• Costs related to VIVA integration(b)
• 9,383

Senior management changes(c) 2,789 2,023 Restructuring of sales force(d) 1,404 Exceptional termination of licenses(e) 2,330

• Other(f)

876 3,041 Adjusted EBITDA 38,842 43,831

(a)

In 2013 Costs related to PAI and VIVA acquisition refer primarily to advisory fees and expenses related to the mandatory tender offer and consequent obligations (PAI acquisition) and costs related Viva acquisition (VIVA acquisition).

(b)

Costs related to Viva integration were incurred for the integration process of Viva as described in “Overview – Acquisition and Integration of Viva”.

(c)

Senior management changes relate to non-recurring employment termination expenses incurred in connection with the change in top management.

(d)

Restructuring of sales force relates to costs incurred in 2013 in restructuring the Italian and Brazilian sales force.

(e)

Exceptional termination of licenses in 2013 relates primarily to expenses and losses incurred on the John Galliano and Miss Sixty licenses that were terminated prior to their contractual expiration date. The John Galliano license was terminated following the impairment to the reputation of the brand, as a result of a scandal involving the designer, while the Miss Sixty license was terminated following the licensor’s initiation of insolvency procedures, resulting in damage to the brand reputation and a decrease in sales beyond the ordinary course of business.

(f)

Other relates to non-recurring expenses incurred in the development of certain licenses and new business.

Marcolin Bond Report as of and for the year ended December 31, 2014 Summary Financial Information 10

For the year ended December 31, 2013 2014 (Pro-Forma) (As reported)

(In € thousands)

Property, plant and equipment (a) 2,929 5,101 Intangible assets(b) 1,629 7,353 Total capital expenditure 4,558 12,454

(a)

Investments of €5.1 million in property, plant and equipment mainly related to new asset purchases specifically: €1.4 million in plant and machinery, €1.4 million in equipment, € 0.9 million in hardware, € 0.9 million in factory restructuring and € 0.1 million to purchase the manufacturing plant from associate Finitec in liquidation and a €0.4 million advance to purchase the manufacturing plant in Fortogna.

(b)

Investments of €7.4 million in intangible assets mainly related to the lump sum agreed by the Parent Company for some licensors in order to extend licensing agreement periods. In addition, intangible assets under formation include Viva’s ERP software change and the Parent Company’s software and business application implementation totaling €3.6 million. As of December 31, 2013 As of December 31, 2014

(As reported) (As reported) (In € thousands)

Cash and cash equivalents (38,536) (36,933) Financial receivables (8,890) (7,497) Long-term borrowings 195,891 199,152 Short-term borrowings 17,707 41,353 Net indebtedness 166,172 196,074 For the year ended December 31, 2013 2014 (Pro-Forma) (a) (As reported)

(In € thousands)

(Increase)/decrease in trade receivables (3,425) (8,557) (Increase)/decrease in other receivables 1,158 438 (Increase)/decrease in inventories 5,215 (29,404) Increase/(decrease) in trade payables (13,057) 33,221 Increase/(decrease) in other liabilities (7,652) 3,107 Increase/(decrease) in current tax liabilities (214) (151) (Use) of provision (3,552) (2,463) Movements in working capital (21,527) (3,809)

(a)

Pro-forma movements in working capital includes Marcolin and Viva for the period 2013.

The cash flows absorbed by inventory are a consequence of the management decision to improve the service level provided to customers and to the initial build-up of inventory for the new brands which will start to be shipped in first quarter 2015 (Zegna and Pucci).

• 5. Summary Financial Information

For the year ended December 31, 2013 2014 (Pro-Forma) (As reported) EBITDA 28,489 29,384 Adjusted EBITDA 38,842 43,831 Adjusted EBITDA margin(a) 11.2% 12.1% Capital expenditures(b) 4,558 12,454 Net indebtedness(c) 166,172 196,074 Movements in working capital(d) (21,527) (3,809)

(a)

We define the adjusted EBITDA margin as adjusted EBITDA divided by revenue.

(b)

Capital expenditure consists of investments for the period in property, plant and equipment and intangible assets, as presented in the cash flow statement. The table above sets forth a breakdown of capital expenditure for the periods indicated.

Marcolin Bond Report as of and for the year ended December 31, 2014 Summary Financial Information 11

(c)

We define net debt as the total consolidated debt net of cash and cash equivalents. The table above sets forth the calculation of net debt for the periods indicated.

(d)

We define movements in working capital as the movements in trade and other receivables, inventories, trade payables, other liabilities, tax liabilities and use of provisions.

• 6. Other Financial and Non-Financial Data and Key Performance Indicators

Revenue, sales volume and average price per unit by geographic segment

For the year ended December 31, 2013

(Pro-Forma)

% of total 2014

(As Reported)

% of total Revenue

(In € thousands)

Italy 80,456 23.2% 95,594 26.4% Of which Italy Domestic(1) 21,444 6.2% 31,379 8.7% Of which Italy Export(2) 59,012 17.0% 64,215 17.7% France 37,126 10.7% 37,296 10.3% Rest of Europe 52,598 15.2% 50,081 13.8% North America 157,286 45.4% 156,942 43.3% Rest of World(3) 18,796 5.4% 22,221 6.1% Total 346,262 100.0% 362,133 100.0% Sales Volume(4)

(units in thousands)

Italy 1,724 12.8% 2,172 15.7% Of which Italy Domestic(1) 447 3.3% 685 5.0% Of which Italy Export(2) 1,277 9.5% 1,487 10.7% France 858 6.4% 820 5.9% Rest of Europe 1,856 13.8% 1,307 9.4% North America 8,374 62.3% 8,801 63.6% Rest of World(3) 639 4.8% 744 5.4% Total 13,451 100.0% 13,845 100.0% Average price per unit(5)

(€ per unit)

Italy 46.7 44.0 Of which Italy Domestic(1) 48.0 45.8 Of which Italy Export(2) 46.2 43.2 France 43.3 45.5 Rest of Europe 28.3 38.3 North America 18.8 17.8 Rest of World 29.4 29.9 25.7 26.2

(1) Italy Domestic relates to the revenue generated by Marcolin’s sales of products to the Italian market. (2) Italy Export relates to the revenue generated by Marcolin’s sales of products to the markets in which we do not have an operating subsidiary,

mainly in the Far East and Middle East.

(3) Rest-of-World sales relates to the sales generated by Brazilian and other non-North American and non-European subsidiaries (for example

Marcolin do Brasil Ltda, Viva Brasil Ltda, Marcolin Asia Ltd.).

(4) Sales volumes correspond to sales made to wholesale customers expressed in thousands of units. (5) Average price is calculated as revenue divided by sales volume.

Revenue, sales volume and average price per unit by brand type

For the year ended December 31, 2013

(Pro-Forma)

% of total 2014

(As Reported)

% of total Revenue

(In € thousands)

Luxury brands 154,469 44.6% 159,138 43.9% Diffusion brands 191,793 55.4% 202,996 56.1% Total 346,262 100.0% 362,133 100.0% Sales volume(1)

(units in thousands)

Luxury brands 2,011 15.0% 2,216 16.0% Diffusion brands 11,440 85.0% 11,628 84.0% Total 13,451 100.0% 13,845 100.0% Average price per unit(2)

(€ per unit)

Luxury brands 76.8 71.8 Diffusion brands 16.8 17.5 25.7 26.2

(1) Sales volume corresponds to sales made to wholesale customers expressed in thousands of units. (2) Average price is calculated as revenue divided by sales volume.

Marcolin Bond Report as of and for the year ended December 31, 2014 Summary Financial Information 12 Revenue, sales volume and average price per unit by product type

For the year ended December 31, 2013

(Pro-Forma)

% of total 2014

(As Reported)

% of total Revenue

(In € thousands)

Sunglasses 170,485 49.2% 178,695 49.3% Prescription frames 175,777 50.8% 183,438 50.7% Total 346,262 100.0% 362,133 100.0% Sales volume(1)

(units in thousands)

Sunglasses 7,313 54.4% 7,606 54.9% Prescription frames 6,138 45.6% 6,238 45.1% Total 13,451 100.0% 13,845 100.0% Average price per unit(2)

(In € per unit)

Sunglasses 23.3 23.5 Prescription frames 28.6 29.4 25.7 26.2

(1) Sales volume corresponds to sales made to wholesale customers expressed in thousands of units. (2) Average price is calculated as revenue divided by sales volume.

Revenue amounted to €362.1 million for the year ended December 31, 2014, an increase of €15.9 million, or 4.6%, from the €346.3 million for the year ended December 31, 2013. At previous year exchange rates, revenues for the year ended December 31st, 2014 was €363.9 million, up by €17.6 million, or 5.1%, from the previous year. A weak U.S. dollar affected U.S.$ transactions during the first three quarter of 2014, whereas in the last quarter the U.S.$ gained strength against the Euro. The full-year impact was 50 basis points. Heavily impacted were the BRL and the CA$, which fell by 750 and 780 basis points, while the GBP gained 510 basis points against the Euro. Additional information regarding revenues is provided in the following sections thereon of this Report.

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 13

• IV. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations in the periods set forth

• below. The following discussion should also be read in conjunction with “Presentation of Financial Information and

Other Data” and “Selected Consolidated Financial Information.” The discussion in this section may contain forward-looking statements that reflect our plans, estimates and beliefs and involve risks and uncertainties. Unless the context indicates otherwise, in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” references to “we,” “us,” “our,” or the “Marcolin Group” refer to Marcolin, including Cristallo, Viva and the consolidated group. Key Factors Affecting Our Financial Condition and Results of Operations

• 1. General economic conditions and consumer discretionary spending

Our performance is affected by the economic conditions of the markets in which we operate and trends in consumer discretionary spending. In a global scenario of improvement for the world economy, Italian eyewear continues to dominate the international market, demonstrating the sector's extreme dynamism and competitive strength, which make it one of the most successful sectors of the Italian economy. 2014 was a record year for Italian eyewear exports, enabling to overcome the chronic difficulties of the domestic market. The export markets that most appreciate the design and quality of Italian-made eyewear are Europe and the Americas (which collectively account for nearly 80% of Italian eyewear exports). The United States was the top market in 2014, and Europe performed very well, particularly Germany, the United Kingdom and France. New developments emerged from the Nordic Countries, which has become a very interesting area, with significant export results. The performance of eyewear exports to emerging countries highlights dynamic global trends, and the possibility to seize opportunities connected with this new dimension of market demand led by China, the United Emirates and Japan. The changing global scenario imposes new competitive rules for all businesses. In this fast-paced economy the product itself is of central importance, with innovation, quality, originality and added value making all the difference. The key to recovery is an emphasis on such characteristics, particularly specialization, penetration of high added-value niche markets, certified quality, and Italian manufacturing, which is increasingly appreciated throughout the world. In this respect, there are consistent signs of “reshoring” in the eyewear sector, i.e. bringing their manufacturing activities back to Italy (source: ANFAO). For the Marcolin Group the revenue for year ended December 31, 2014 has grown, at constant exchange rates, by about 5.0% compared to the revenue recorded for the same period in 2013 (on a constant perimeter basis, i.e. including both the results of Marcolin and Viva for both periods).

• 2. Licensing agreements

Licenses – key facts for the year 2013 and the year ended December 31, 2014 In the year ended December 31, 2014, the Marcolin Group continued with its efforts to rationalize and optimize both the brands and collections offered to its clients, a process that was launched in 2013. This process has included the following activities:  Balenciaga was re-launched, after the fashion house's designer change, with a sophisticated and elegant collection having great complexity, which was presented at the end of 2013 to a distinctive group of selected retailers; in January 2014, the group of distributors was extended, while continuing to focus on just a few prestigious names;  an important strategic alliance was created with the stipulation of licenses for the prestigious eyewear brands Ermenegildo Zegna and Agnona. The licensing agreement has a ten-year duration and involves the exclusive design, manufacture and global distribution of sunglasses and prescription frames. The Ermenegildo

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 14 Zegna and Zegna Couture collections have been launched in January 2015;  two existing licenses have been renegotiated and extended, resulting in improved terms and conditions for the Group;  at the end of April 2014 Marcolin exercised its option to renew the Tom Ford license, extending the license period; 

• n May 6, 2014, Viva renewed its licensing agreement with Skechers USA, Inc., an award-winning global

leader in the lifestyle and performance footwear industry; 

• n June 9, 2014, Marcolin Group and Emilio Pucci announced the stipulation of a worldwide exclusive license

agreement for the design, production and distribution of sunglasses and eyeglasses for the Emilio Pucci

• brand. The five-year, renewable license will become effective in January 2015;



• n July 2, 2014, the Group and M.lle Catherine Deneuve announced the renewal of their licensing agreement,

initially launched through a licensing partnership with Viva International in 1989, for the design, production and worldwide distribution of Catherine Deneuve optical frames and sunglasses; 

• n October 8, 2014, the license agreement with one of our licensor was renegotiated, resulting in strongly

improved terms and conditions for the Group. The negotiation recently finalized can be summarized as lower minimum royalties and advertising royalties over the course of the life of the License in exchange of one-off cash disbursement; 

• n December 23, 2014, Marcolin Group and Harley-Davidson announced that they extended their licensing

agreement for the design, production and distribution of eyewear collections of sunglasses and optical frames to December 2018. Other licensing events occurring after the 2014 closing are: 

• n January 19, 2015, Marcolin Group presented a new exciting project with Marcelo Burlon Country of Milan,
• ne of the most versatile and influential designers at this time, from which an exclusive eyewear collection

will emerge combining tradition, trends, know-how and innovational design; 

• n February 18, 2015, Marcolin Group and Timberland announced the early renewal of their licensing

agreement ending December 2018 for the design, production and distribution of eyewear collections of sunglasses and optical frames.

• 3. Distribution

In early 2014, following a review of our global operations, Marcolin made certain changes to the management of the Brazilian subsidiary. The recent Viva acquisition and the consequential integration process began with the review of the distribution network and sales force, with the objective of maximizing the distribution synergies possible and promoting cost

• efficiencies. The integration of Viva’s and Marcolin’s sales forces has been completed in the U.S., in the U.K., Brazil and

Hong Kong, while in France it is still in progress, in line with the defined integration plans. In Italy the complete restructuring of the sales force resulted in an increase in revenues and orders in the year ended December 31, 2014, as presented in the tables of the revenues by destination market. In 2013 Marcolin and the Rivoli Group (a leading player in the eyewear business in Middle East), stipulated a medium/long-term agreement for the distribution of Marcolin products in the Middle East. Marcolin assigned to the Rivoli Group the distribution in the Middle East of part of its portfolio of brands. This partnership is expected to further boost our presence in the Middle East. Within the process of consolidation of its distribution network, at the end of 2014 Marcolin has entered into JV agreements with two important players in China and Russia, which are strategic markets for the Group's growth. Both joint venture companies have started to generate revenues in January 2015. In 2015, consistently with its strategy of international expansion and direct control over attractive markets, the Marcolin entered into a JV agreement with local partners in Scandinavia. On February 25, 2015 Marcolin Nordic was announced and began operating by the end of the month. Its mission is to penetrate the Nordic market (Denmark, Finland, Norway, Iceland and Sweden), and distribute all brands in Marcolin’s portfolio.

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 15

• 4. Efficiency and cost control initiatives

Within the framework of the Viva integration, we have combined the two U.S. sales teams in the optical channel, given a significant increase in the share of certain Marcolin legacy brands (namely Diesel, Timberland, Cover Girl and Kenneth Cole). Also in the U.S., we have joined the Marketing Departments under a new leadership. These measures have generated sizable, unplanned savings in the personnel line of Sales & Marketing Costs which are not yet reflected in the end-of-year 2014 financials. The actions carried out in 2014 involved the termination of 91 employees and 20 sales representatives. In Hong Kong and the United Kingdom we consolidated Viva operations into Marcolin entities:

• we created the Hong Kong Branch of Marcolin UK to serve the entire client base of VIVA and Marcolin in

APAC and manage jointly the sourcing operations out of China;

• we transferred VIVA UK’s international business to Marcolin SpA for clients in Europe, Middle East and Africa

(EMEA) and Latin America (LATAM);

• we transferred VIVA UK’s Domestic business to Marcolin UK.
• 5. Production

In October 2014, Marcolin has entered into an agreement for the acquisition of a 3,500m² warehouse in Longarone (Fortogna area), in the heart of the eyewear district. The new site will be converted into a manufacturing plant for luxury products and will become fully operational in the second half of 2015, thereby enabling the Group to increase its manufacturing capacity and depend less on third parties in Italy. The acquisition of the new manufacturing facility will bring significant advantages to the Group among which: savings generated by the insourcing of production, stricter control on quality and production process and significant reduction of production lead-times.

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 16 Group Comparison of year ended December 31, 2013 against year ended December 31, 2014

• 1. Presentation of Financial Information

This document focuses on the consolidated results for the Group which includes Marcolin, Cristallo and Viva. The discussion of the Group as one single entity is consistent with the strategy to fully integrate Viva and its

• perations and business into the Marcolin Group.

Marcolin was acquired by Cristallo on December 5th, 2012, and in October 2013 Cristallo underwent a reverse merger with and into Marcolin, within the scope of a corporate reorganization of the Group’s holding structure. In December 2013, Marcolin acquired Viva Optique, Inc. Accordingly, the Marcolin Group’s results of operations for the year ended December 31st, 2014 include the Viva Group’s results. In order to provide a meaningful period-on-period comparison, the results for the year ended December 31th, 2013 have been adjusted to include pro-forma the Viva Group’s results of operations for that period. The consolidated income statement, consolidated statement of financial position, consolidated cash flow statement and other financial information of the Group as of and for the year ended December 31, 2014 are derived from the consolidated financial statements of the Marcolin Group as of and for the year ended December 31, 2014, according to the financial statement draft approved by the Board.

For the year ended December 31, 2013

(Pro-Forma)

% of revenue 2014

(As Reported)

% of revenue (In € thousands, except percentages) Revenue 346,262 100.0% 362,133 100.0% Cost of sales (133,349)

• 38.5%

(145,360)

• 40.1%

Gross profit 212,913 61.5% 216,773 59.9% Selling and marketing costs (164,366)

• 47.5%

(169,250)

• 46.7%

General and administrative expenses (33,535)

• 9.7%

(31,711)

• 8.8%

Other operating income and expenses 4,226 1.2% 4,120 1.1% Operating profit 19,238 5.6% 19,932 5.5% Net finance costs (24,568)

• 7.1%

(12,830)

• 3.5%

Profit before taxes (5,330)

• 1.5%

7,102 2.0% Income tax expense (3,226)

• 0.9%

(6,695)

• 1.8%

Net profit for the period (8,556)

• 2.5%

407 0.1%

• 2. Revenue by Brand Type and by Product Type

The following tables set forth an analysis of our revenues by product type and brand type for the periods indicated.

For the year ended December 31, 2013

(Pro-Forma)

% of total 2014

(As Reported)

% of total Change Revenue by brand type (In € thousands) amount % Luxury brands 154,469 44.6% 159,138 43.9% 4,669 3.0% Diffusion brands 191,793 55.4% 202,996 56.1% 11,203 5.8% Total 346,262 100.0% 362,133 100.0% 15,871 4.6% For the year ended December 31, 2013

(Pro-Forma)

% of total 2014

(As Reported)

% of total Change Revenue by product type (In € thousands) amount % Sunglasses 170,485 49.2% 178,695 49,3% 8,210 4.8% Prescription frames 175,777 50.8% 183,438 50,7% 7,661 4.4% Total 346,262 100.0% 362,133 100.0% 15,871 4.6%

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 17 Revenue amounted to €362.1 million for the year ended December 31, 2014, an increase of €15.9 million, or 4.6%, from the €346.3 million for the year ended December 31, 2013. At constant exchange rates, the revenue for the year ended December 31, 2014 was €363.9 million, up by €17.6 million, or 5.1%, from the previous year. The adverse impact of 50 basis points is due in particular to the loss in value

• f the US$, BRL and CA$ against the Euro, offset in part by the appreciation of the GBP. We calculate the 2014 net

sales at constant exchange rates by applying the prior-year average exchange rates (of the U.S.$ and the other currencies relevant for the Group against the €) to the current financial data expressed in the original currency, in

• rder to eliminate the impact of currency fluctuations.

Overall, 13.8 million frames were sold, up 3.9% compared to 2013. Luxury prescription frames saw the largest increase (+26%), confirming the success of the strategy that focuses on this particular product. Due to the sales mix favoring luxury frames, the average unit price of prescription frames in general rose, despite a strategic decision to reduce the average unit price of luxury prescription frames to gain market share. Brand Type The above table setting forth revenue by brand type does not consider Swarovski’s reclassification to the “diffusion” brand segment after a successful strategic decision to position that brand in the mass market. Considering such reclassification, the diffusion brand revenue remained stable compared to the previous year, while the luxury brand revenue grew 10%. Therefore, the revenue increase derived mainly from luxury brands, specifically the most important brand, Tom Ford, and newly acquired Balenciaga. Regarding diffusion brand revenue, the (re-launched) house brand, Web and Timberland were among the best performers, compensating for a decrease in revenue from other diffusion brands. From a pricing standpoint, diffusion brands maintained rather consistent unit prices over the two years, while the average unit price of luxury brands decreased, due largely to a price repositioning strategy implemented primarily in Europe to meet new market demands ensuing from the economic recession in that region and to off-price sales of

• verstock.

Product Type The revenue increase for sunglasses and prescription frames was almost identical, at +4.8% for sunglasses and +4.4% for prescription frames. The average unit prices of sunglasses remained the same in the two years, while the price of prescription frames rose as a result of the increase of luxury products in the sales mix.

• 3. Revenue by geographical segment

Revenue is segmented by reference to the geographic area in which the reporting entity resides. The following tables set forth an analysis of our revenue by “geographic segment” for the periods indicated. See also “- Revenue by market destination” for an analysis of revenue by the “destination market”.

For the year ended December 31, 2013

(Pro-Forma)

% of total 2014

(As Reported)

% of total Change Revenue (In € thousands) amount % Italy 80,456 23.2% 95,594 26.4% 15,138 18.8% Of which Italy Domestic(1) 21,444 6.2% 31,379 8.7% 9,935 46.3% Of which Italy Export(2) 59,012 17.0% 64,215 17.7% 5,203 8.8% France 37,126 10.7% 37,296 10.3% 169 0.5% Rest of Europe 52,598 15.2% 50,081 13.8% (2,517)

• 4.8%

North America 157,286 45.4% 156,942 43.3% (343)

• 0.2%

Rest of World(3) 18,796 5.4% 22,221 6.1% 3,424 18.2% Total 346,262 100.0% 362,133 100.0% 15,871 4.6%

(1) Italy Domestic relates to the revenue generated by Marcolin’s sales of products to the Italian market. (2) Italy Export relates to the revenue generated by Marcolin’s sales of products to the markets in which Marcolin does not have an operating

subsidiary, mainly in the Far East and Middle East.

(3) Rest-of-World sales relates to the sales generated by Brazilian and other non-North American and non-European subsidiaries (for example

Marcolin do Brasil Ltda, Viva Brasil Ltda, Marcolin Asia Ltd.).

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 18 However, due to significant changes in the worldwide distribution strategies, including those resulting from Viva integration, the 2013 data is not fully comparable with that of 2014. In order to provide meaningful information in the revenue tables, like-for-like or adjusted revenue is referred to for the 2013 sales based on the distribution logics emerging in 2014. Italy As a result of implementing business initiatives aimed to strengthen relationships with customers, and of reorganizing the domestic market by revamping the structure of independent agents, the Italian market performed very well in 2014, with a significant increase in market share especially considering the recession present. Total combined revenues for the domestic and export markets reached €95.6 million, an increase of €15.1 million or 18.8% over the full previous year. It should be considered that for most of 2014 Viva brands previously sold by Viva UK (Rest of Europe) were sold by Marcolin Italy. This reclassification accounts for 1,650 basis points in the domestic market and 800 basis points in the export market.  As mentioned above, the domestic market had the most growth (29.8% adjusted, 46.3% non-adjusted), reaching €31.4 million. Vast portions of market share were gained under a new leadership and sales team focusing on the top luxury brands and the house brand, Web, and prescription frames were more prominent in the sales mix. The average unit price fell due to the addition of Viva diffusion brands. At a constant perimeter the prices were practically stable, with a slight decrease due mostly to off-price sales of an

• verstocked luxury brand.

 Italy Export revenue amounted to €64.2 million, up by 8.8% (+0.8% adjusted). The increase is due primarily to a different sales mix, with reduced diffusion brands and more luxury brands, and to the addition of Viva

• brands. Because of the new sales mix favoring luxury brands, average unit prices actually increased before

the Viva (diffusion) brands were added, although prices of some high-end products were reduced selectively. France Total revenues for the French entities in 2014 were €37.3 million, basically the same amount of the prior year. This result is considered positive, taking into account that new insurance regulations penalize luxury product pricing, and that Viva France was integrated into the French affiliate in the last quarter of the year. The combined entities make France a very important market for the Marcolin Group. In fact, France is the largest market for diffusion brands, second only to the USA, and is one of the largest markets for luxury products as well. Rest of Europe Rest-of-Europe sales derive from directly owned subsidiaries throughout Europe. Total revenues in 2014 were €50.1 million, a decrease of €2.5 million from 2013, before the aforementioned distribution changes involving Viva products. Once adjusted, total revenues remain flat compared to the previous year, at €52.4 million. The adjusted sales for diffusion and luxury brands were consistent year-on-year, with no significant change in the brand mix. The adjusted revenue from prescription frames rose significantly, mostly in the luxury brand segment, confirming the success of the long-term strategy to focus on prescription frames in directly controlled markets. North America North America revenues were €156.9 million in 2014, with a very slight decrease from the previous year. Due to the integration of Viva Optique, an important GAAP alignment was needed to harmonize Viva Optique’s accounting policies to those of the Marcolin Group. Excluding this extraordinary event, North America sales are up by 3.4% overall (4.4% at constant exchange rates, impacted significantly by the CA$). In 2014 the sales forces of Viva Optique and Marcolin USA were combined. This was a significant change that temporarily impacted revenues. Benefits from the integration were evident later in the year and will continue to emerge in 2015. Some diffusion brands with high brand equity but low market share are replacing other brands with low brand awareness but high market shares. This process will yield important results in the medium to long term. Overall the (adjusted) revenues from diffusion brands in North America were flat compared to the previous year. All things considered, the performance was acceptable. Luxury brands were the main drivers of the 2014 increase (+11% adjusted). The achievement of greater market share by our top brands in the Optical channel and in Department Stores, plus the introduction of Balenciaga, were the main drivers of growth in North America, where prescription frames once again had the highest revenue increase (+23%). Average unit pricing did not change significantly in the two years.

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 19 Rest of World Rest-of-World revenues were €22.2 million, an increase of €3.4 million or 18.2%. Sales in this segment are produced by the Group’s Brazilian and Asian affiliates. The revenue increase is almost entirely attributable to Asia, and mainly the diffusion segment, whose brands are shipped directly to Europe’s large retail chains. The Brazilian market was heavily impacted by exchange rate fluctuations. A 3% increase at current exchange rates was actually a 10.5% increase at constant exchange rates. Revenue from diffusion brands grew more than revenue from luxury brands, but the quantities sold were practically the same. In fact, the average unit price of high-end brand products was reduced in 2014 in order to meet local market demands ensuing from an aggressive pricing policy adopted by our main competitors.

• 4. Revenues by destination market

The table below sets forth Marcolin’s revenue by destination market. This information is relevant, as it shows the geographic concentration of our customers, rather than our distribution entities.

For the year ended December 31, 2013

(Pro-Forma)

% of total 2014

(As Reported)

% of total Change Revenue (In € thousands) amount % Italy 24,981 7.2% 30,688 8.5% 5,707 22.8% Rest of Europe 99,422 28.7% 99,718 27.5% 296 0.3% Europe 124,402 35.9% 130,406 36.0% 6,004 4.8% USA 137,341 39.7% 140,187 38.7% 2,846 2.1% Asia 27,289 7.9% 30,701 8.5% 3,412 12.5% Rest of World 57,229 16.5% 60,839 16.8% 3,610 6.3% Total 346,262 100.0% 362,133 100.0% 15,871 4.6%

Italy Sales in the domestic (Italian) market rose significantly during 2014, the highest increase of all markets. The Italian market increased its portion of total Group sales from 7.2% to 8.5%, and is on its way to becoming the Group’s main market, especially for luxury “Made in Italy” eyewear. As mentioned previously, the sales force was overhauled in early 2014 when the Viva brands were added to the portfolio, with benefits evident in the second half of the year that will continue to emerge in 2015. Luxury brands had the most growth, in keeping with Marcolin’s emphasis on Italian-made products. Revenue from diffusion brands grew over 20%, thanks to our re-launched House brand (Web). Rest of Europe Revenue from the rest-of-Europe market remained flat at +0.3%. Diffusion brands were responsible for most of the

• increase. The market was characterized by a stagnant economy and regulatory changes (i.e. the new French insurance

regulations). Marcolin had a strong partnership with large retail chains, ensuring good diffusion and turnover for this type of brand. The average unit price rose due to the change in the distribution channel for Viva products, i.e. from distributors in 2013 to direct distribution through subsidiaries in 2014. As a result the prescription frame segment grew more than the sunglass segment since diffusion brands have a higher proportion of prescription frames than luxury brands. Average unit prices rose slightly due to the direct control of the Viva business in countries (Italy, Spain and Portugal) where Viva used to sell through distributors. USA In the U.S. market, revenues grew by 2.1%, or 2.6% at constant exchange rates mainly thanks to luxury brands, helped by the increase of consumer confidence and positive dynamic of the U.S. economy. The current strategy of Marcolin in U.S. is to expand its distribution network, leveraging on the growing demand from both department stores and independent opticians. Asia The Asian Far East market experienced double-digit growth at +12.5%. This result is attributable entirely to fashion brands, which performed extremely well especially in the sophisticated South Korean market, while diffusion brands were impacted by the reorganization of the distribution system in the region in the second half of the year; business there fully recovered at the end of 2014 and the new structure is now fully operational. Revenue from sales of prescription frames rose the most overall, but luxury sunglasses had the best performance, with an increase in average unit price due to their greater importance in the sales mix.

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 20 Rest of World From a geographical standpoint, “Rest of the World” includes the Middle East, Canada, Central America, South America, Africa and Oceania. The revenue produced in this market rose by 6.3% in 2014. The largest increase came from the Middle East, where a strong partnership with a local distributor gave a boost to sales, while Brazil and Canada were negatively impacted by exchange rates fluctuations. Revenue from luxury and diffusion brands rose at the same pace, reflecting an overall stability in the regions’ economies. Prescription frames represent 52% of sales, up from the 50% share of the previous year. This increase is attributable primarily to the focus on optical products in the high-end, luxury product segment.

• 5. Cost of sales

The cost of sales amounted to €145.4 million for the year ended December 31, 2014, an increase of €12.0 million, or 9.0%, from the €133.4 million for the year ended December 31, 2013. The cost of sales as a percentage of revenue is 40.1% for the year ended December 31, 2014 compared to 38.5% for the year ended December 31, 2013. The December 2014 gross profit is €3.9 million higher than that of the previous year. The main reasons for the decrease in Gross Profit margin are:  Price/Volume effect: it was a management decision to selectively reduce prices for certain product lines to accommodate specific market demands. Such price reduction was however more than balanced by a corresponding increase in the volumes, especially in Domestic and Key Accounts Channels, which also triggered a positive variance in the brand mix (as growth was generated by higher-margin brands).  FX Rate: profitability of Brazil and US were impacted by adverse FX dynamic. The following table sets forth an analysis of the cost of sales for the periods indicated:

For the year ended December 31, 2013

(Pro-Forma)

% of revenue 2014

(As reported)

% of revenue Change (In € thousands, except percentages) (amount) % Material and finished products 96,008 27.7% 100,271 27.7% 4,263 4.4% Personnel expenses 19,037 5.5% 19,480 5.4% 443 2.3% Outsourcing 6,946 2.0% 10,478 2.9% 3,532 50.8% Other expenses 11,357 3.3% 15,132 4.2% 3,775 33.2% Total 133,349 38.5% 145,360 40.1% 12,011 9.0%

The increase in cost of sales is attributable to the combined effect of the following changes:  Materials and finished products amounted to €100.3 million for the year ended December 31, 2014, an increase

• f 4.4% from the €96.0 million for the year ended December 31, 2013. Materials and finished products as a

percentage of revenue is 27.7% for the year ended December 31, 2014, in line with the previous year. The 2014 costs, which grew in proportion to the sales increase, are affected by non-recurring costs of €2.5m, included in the calculation of adjusted Ebitda. Excluding such non-recurring costs, the cost of materials and finished products is 27.0% of revenue.  Personnel expenses relating to production amounted to €19.5 million for the year ended December 31, 2014, an increase of 2.3% from the €19.0 million for the year ended December 31, 2013. Personnel expenses as a percentage of revenue is 5.4% for the year ended December 31, 2014 compared to 5.5% for the year ended December 31, 2013. The 2014 costs are affected by non-recurring costs of €0.4m, included in the calculation of adjusted Ebitda. Excluding such non-recurring costs, personnel expenses is 5.3% of revenue.  Outsourcing amounted to €10.5 million for the year ended December 31, 2014, an increase of €3.5 million, or 50.8%, from the €6.9 million for the year ended December 31, 2013. Outsourcing as a percentage of revenue is 2.9% for the year ended December 31, 2014, compared to 2.0% for the year ended December 31, 2013. This is due to the increase in volumes, supported by third party factories.  Other expenses amounted to €15.1 million for the year ended December 31, 2014, an increase of €3.8 million or 33.2% from €11.4 million for the year ended December 31, 2013. Other expenses as a percentage of revenue is 4.2% for the year ended December 31, 2014, compared to 3.3% for the year ended December 31, 2013. In both periods, other expenses were primarily related to transport and customs charges and, to a lesser extent, depreciation and amortization of assets associated with production activities. The growth in other expenses is

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 21 mainly attributable to higher customs charges, also driven by volume increases. The 2014 costs are affected by non-recurring costs of € 0.3m, included in the calculation of adjusted Ebitda. Excluding such non-recurring costs,

• ther expenses is 4.1% of revenue.
• 6. Selling and marketing costs

Selling and marketing costs amounted to €169.3 million for the year ended December 31, 2014, an increase of €4.9 million, or 3.0%, from the €164.4 million for the year ended December 31, 2013. Selling and marketing costs as a percentage of revenue is 46.7% for the year ended December 31, 2014, compared to 47.5% for the year ended December 31, 2013. The following table sets forth an analysis of selling and marketing costs for the periods indicated.

For the year ended December 31, 2013

(Pro-Forma)

% of revenue 2014

(As Reported)

% of revenue Change (In € thousands, except percentages) (amount) % Royalties 48,583 14.0% 44,391 12.3% (4,192)

• 8.6%

Of which VRA 39,591 11.4% 38,063 10.5% (1,527)

• 3.9%

Of which MAG 8,992 2.6% 6,328 1.7% (2,665)

• 29.6%

Personnel Expenses 65,149 18.8% 68,983 19.0% 3,834 5.9% Advertising and PR 21,038 6.1% 23,845 6.6% 2,808 13.3% Other costs 29,596 8.5% 32,030 8.8% 2,434 8.2% Total 164,366 47.5% 169,250 46.7% 4,884 3.0%

The €4.9 million increase in selling and marketing costs is primarily attributable to the combination of the following changes:  Royalties amounted to €44.4 million for the year ended December 31, 2014, a decrease of 8.6%, from the €48.6 million for the year ended December 31, 2013. Royalties as a percentage of revenue is 12.3% for the year ended December 31, 2014, compared to 14.0% for the year ended December 31, 2013. The 2013 costs are affected by non-recurring costs of €0.9m, included in the calculation of adjusted Ebitda. Excluding such non-recurring costs, royalties is 13.8% of revenue.  Personnel expenses relating to selling and marketing amounted to €69.0 million for the year ended December 31, 2014, an increase of €3.8 million, or 5.9%, from the €65.1 million for the year ended December 31, 2013. Personnel expenses as a percentage of revenue is 19.0% for the year ended December 31, 2014, in line with the same period of the previous year. The costs referring to agents, which grew in proportion to the sales growth, are affected by non-recurring costs of €0.4m in 2013 and of €2.0m in 2014, included in the calculation of adjusted

• Ebitda. Excluding such non-recurring costs, personnel expenses is respectively in 2013 18.7% of revenues, and in

2014 18.5% of revenue.  Advertising and PR amounted to €23.8 million for the year ended December 31, 2014, an increase of €2.8 million,

• r 13.3%, from the €21.0 million for the year ended December 31, 2013. Advertising and PR expenses as a

percentage of revenue is 6.6% for the year ended December 31, 2014, compared to 6.1% for the year ended December 31, 2013. In 2014, costs were incurred for additional advertising and public relations activities; greater advertising investments were made in the house brands and for the Venice International Convention, held in December 2014, which all the Group’s top customers attended, including those acquired through the Viva

• acquisition. The costs are affected by non-recurring costs of €0.8m in 2013 and €0.5m in 2014, included in the

calculation of adjusted Ebitda. Excluding such non-recurring costs, Advertising and PR costs are respectively in 2013 5.8% of revenues, and in 2014 6.4% of revenue.  Other costs amounted to €32.0 million for the year ended December 31, 2014, an increase of €2.4 million, or 8.2%, from the €29.6 million for the year ended December 31, 2013. Other costs as a percentage of revenue is 8.8% for the year ended December 31, 2014, compared to 8.5% for the year ended December 31, 2013. The other costs refer principally to transportation expenses on sales, business travel, rent and services. The costs are affected by non-recurring costs of €0.5m in 2013 and €1.1m in 2014 for distribution, and €2.0m in 2013 and €4.0m in 2014 for commercial costs, included in the calculation of adjusted Ebitda. Excluding such non-recurring costs, other costs is respectively in 2013 7.8% of revenues, and in 2014 7.4% of revenue.

• 7. General and administrative expenses

General and administrative expenses amounted to €31.7 million for the year ended December 31, 2014, a decrease of €1.8 million, or 4.8%, from the €33.5 million for the year ended December 31, 2013.

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 22 General and administrative expenses as a percentage of revenue is 8.8% for the year ended December 31, 2014, compared to 9.7% for the year ended December 31, 2013. The costs are affected by non-recurring costs of€4.4m in 2013 and €3.7m in 2014, included in the calculation of adjusted Ebitda. Excluding such non-recurring costs, general and administrative expenses is respectively in 2013 8.4%

• f revenues, and in 2014 7.8% of revenue.

The decrease in general and administrative expenses is the result of successful actions taken by the Group to improve efficiency and contain costs for the reduction of the Management Fee charged by the former Parent company of VIVA. In addition, the decrease in G&A expenses is attributable to a decrease in legal and consulting fees incurred during the year ended December 31.

• 8. Other operating income and expenses

Other operating income and expenses resulted in net income of €4.1 million for the year ended December 31, 2014, compared to the net operating income of €4.2 million for the year ended December 31, 2013. Other operating income and expenses as a percentage of revenue is 1.1% for the year ended December 31, 2014, compared to 1.2% for the year ended December 31, 2013. In both periods other net operating income primarily relates to prior period adjustments, refunded transport costs, insurance refunds and compensation for damages regarding product returns, and other income and expenses.

• 9. Net finance costs

Net finance costs amounted to €12.8 million for the year ended December 31, 2014, compared to €24.6 million for the year ended December 31, 2013. Net finance costs as a percentage of revenue is 3.5% for the year ended December 31, 2014, compared to 7.1% for the year ended December 31, 2013. This item was affected primarily by the following:  interest payments totaling €17.0 million on the bond notes issued by Marcolin S.p.A., paid in May and November;  the reversal of bond issue costs, accounted for under IFRS with the financial method of amortized cost over the life of the bond notes (ending November 2019), had a negative impact of €1.4 million;  the net interest costs of €1.3 million include bank interest expense of Marcolin and its subsidiaries;  additional finance costs regarding financial discounts, actualization and others for the balance. The Group’s foreign currency exchange in 2014 resulted in a net loss of €2.6 million (including fair value measurement

• f currency hedges in place at the end of the year and end-of-period currency adjustments on asset and liability items

accounting). Moreover, positive currency differences emerged on the loan denominated in U.S. dollars between Marcolin S.p.A. and Marcolin USA Corp., which has appreciated in value due to the stronger U.S. dollar.

• 10. Income tax expense

The income tax expense amounted to €6.7 million for the year ended December 31, 2014, an increase of €3.5 million, compared to the €3.2 million for the year ended December 31, 2013. Income tax expense as a percentage of revenue is 1.8% for the year ended December 31, 2014, compared to 0.9% for the year ended December 31, 2013. The increase in income tax expense is primarily attributable to the increase in profit before tax. * * * * *

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 23

• 11. Working Capital

The table below sets forth a summary of the movements in the Group’s working capital, as derived from our consolidated cash flow statements for the periods indicated.

For the year ended December 31, 2013 2014 (Pro-Forma) (a) (As reported) (In € thousands) (Increase)/decrease in trade receivables (3,425) (8,557) (Increase)/decrease in other receivables 1,158 438 (Increase)/decrease in inventories 5,215 (29,404) Increase/(decrease) in trade payables (13,057) 33,221 Increase/(decrease) in other liabilities (7,652) 3,107 Increase/(decrease) in current tax liabilities (214) (151) (Use) of provision (3,552) (2,463) Movements in working capital (21,527) (3,809)

(a)

Pro-forma movements in working capital includes Marcolin and Viva for the period 2013.

 Nearly the entire increase in trade receivables concerns non-overdue receivables, and is attributable to the sales

• increase. With a constant perimeter, the Group’s (including Viva) twelve-month average days sales outstanding

(DSO) at December 31, 2014 is substantially consistent with its 2013 full-year DSO (87 days). The increase in trade receivables is attributable largely to the increase in sales, especially considering that deliveries concentrated at the end of the year. Credit quality remained consistent with the that of past trends. In 2014 the recent credit improvement lost momentum, but the extreme emphasis on credit management and client selection made it possible to keep the DSO under control, especially in the current difficult macro-economic environment.  The increase in trade payables is attributable to the turnover increase and the increase in inventory as discussed in the point below. The balance at the end of 2014 was affected somewhat by the recognition of payables due to some licensors under important license renewals stipulated in the year, which will bring cash flows in 2015. With a constant perimeter, the Group’s twelve-month average days payables outstanding (DPO) at December 31, 2014 improved compared with its 2013 full-year DPO.  The increase in closing inventories is attributable to an increase in “current” finished product inventories, due to the higher turnover, the effects of sales initiatives undertaken to reduce back orders (goods not being available at the warehouse), and use of continuing lines at warehouses (“never out of stock”). In contrast, inventories of products from former collections (obsolete and slow-moving stock) fell considerably from those of 2013. Moreover, importantly, the inventory increase is attributable to the discontinuity represented by products with new brands, particularly Zegna and Pucci, which will be launched shortly.

• 12. Capital Expenditures

Our capital expenditures primarily consisted of the maintenance and modernization of our production and logistics facilities, and investments in obtaining new licenses or extending/improving terms and conditions of existing licenses. Capital expenditures in property, plant and equipment over the period covered by this analysis primarily relate to the maintenance and replacement of production plant and machinery. The following table sets forth our capital expenditures for the periods indicated as derived from our cash flow statement.

For the year ended December 31, 2013 2014 (Pro-Forma) (As reported)

(In € thousands)

Property, plant and equipment (a) 2,929 5,101 Intangible assets(b) 1,629 7,353 Total capital expenditures 4,558 12,454

(a)

Investments of €5.1 million in property, plant and equipment mainly related to new asset purchases specifically: €1.4 million in plant and machinery, €1.4 million in equipment, € 0.9 million in hardware, € 0.9 million in factory restructuring and € 0.1 million to purchase the manufacturing plant from associate Finitec in liquidation and a €0.4 million advance to purchase the manufacturing plant in Fortogna.

(b)

Investments of €7.4 million in intangible assets mainly related to the lump sum agreed by the Parent Company for some licensors in order to extend licensing agreement periods. In addition, intangible assets under formation include Viva’s ERP software change and the Parent Company’s software and business application implementation totaling €3.6 million.

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 24

• 13. Liquidity (Cash and cash equivalents)

The €1.6 million decrease in cash and cash equivalents from December 31, 2013, and the changes in the Group’s cash position as compared to December 31, 2013 are presented in the Cash Flow Statement below.

• 14. Cash Flow Statement

The following table sets forth our consolidated cash flow statement for the periods indicated.

As of December 31, As of December 31,

2013 2014 Marcolin Group Marcolin Group (Pro-Forma) (As reported) (In € thousands) Operating activities Profit before income tax expense (5,330) 7,102 Depreciation, amortization and impairment 8,767 8,611 Accruals to provisions 24,324 (4,978) Cash flows from operating activities before changes in working capital and tax and interest paid 27,761 10,735 Movements in working capital (21,527) (3,809) Income taxes paid (1,938) (3,500) Interest paid (17,452) (17,858) Net cash flows from operating activities (14.a) (13,157) (14,431) Investing activities (Purchase) of property, plant and equipment (3,085) (6,179) Proceeds from the sale of property, plant and equipment 156 1,077 (Purchase) of intangible assets (1,629) (7,353) (Acquisition) of investments (53,619)

• Net cash (used in) investing activities (14.b)

(58,177) (12,454) Adjustments to other non-cash items (2,404) (4,583) Financing activities Net proceeds from/(repayments of) borrowings (644) 26,130 Other cash flows from financing activities 44,407

• Net cash from/(used in) financing activities (14.c)

43,763 26,130 Net increase/(decrease) in cash and cash equivalents (29,975) (5,338) Effect of foreign exchange rate changes 149 3,736 Cash and cash equivalents at beginning of period 68,361 38,536 Cash and cash equivalents at end of period 38,536 36,933

14.a Net cash flows from operating activities Net cash flows from operating activities absorbed €14.4 million for the year ended December 31, 2014. This cash absorption is primarily attributable to non-recurring payments related to one-off costs impacting on Ebitda (of which €9.4m concerning to the Viva integration project), in addition to other non-recurring items for the period, primarily related to Bond expenses paid in January 2014, cash outflows related to JV projects, and payments due to HVHC. 14.b. Net cash flows used in investing activities Net cash flows used in investing activities amounted to €12.5 million for the year ended December 31, 2014. Investing activities for the year ended December 31, 2014 primarily related to:  Investments of €5.1 million in property, plant and equipment mainly related to new asset purchases specifically: €1.4 million in plant and machinery, €1.4 million in equipment, € 0.9 million in hardware, € 0.9 million in factory restructuring and € 0.1 million to purchase the manufacturing plant from associate Finitec in liquidation and a €0.4 million advance to purchase the manufacturing plant in Fortogna;  Investments of €7.4 million in intangible assets mainly related to the lump sum agreed by the Parent Company for some licensors in order to improve the economic terms of the licensing agreement and extend licensing agreement periods. In addition, intangible assets under formation include Viva’s ERP software change and the Parent Company’s software and business application implementation totaling €3.6 million.

Marcolin Bond Report as of and for the year ended December 31, 2014 MD&A 25 14.c. Net cash flows from/used in financing activities Net cash flows used in financing activities amounted to €26.1 million for the year ended December 31, 2014, consisting of net repayments of borrowings.

• 15. Capital Resources

As of December 31, 2014, our total financial debt was €240.5 million (as of December 31, 2013 it was €213.6 million). The main component of the total financial debt is the HY Bond, which was issued in November 2013, with maturity on November 14, 2019, a nominal value of €200 million, and 8.5% interest. Interest is paid semiannually. The other components of total financial debt relate primarily to current financial liabilities, including bank payables. In 2014, the Company was granted a medium/long-term credit line to cover medium/long-term financial requirements associated with investments in joint-ventures in China and Russia, which are expected to be drawn on at the end of 2014 and beginning of 2015. The credit line is for €5.0 million, 50% of which backed with an irrevocable guarantee from SACE S.p.A., granted specifically to fund Italian companies that invest in projects aimed to make their businesses more international, whether directly or indirectly. The financial liabilities include amounts due to the HVHC, Inc. Group (an investor in subsidiary Marcolin USA, Inc.), US$2 million of which is due in the short term; the remaining medium/long-term portion, due in 2 years, is recognized as non-current financial liabilities, and both are discounted in accordance with the applicative accounting standards. The €25 million revolving credit facility was drawn for €20 million as of December 31, 2014, while it was undrawn as of December 31, 2013.

• 16. Other information/Quantitative and Qualitative Disclosures about Market Risk

As of December 31, 2014, there were no material changes in the risk factors disclosed in our report as of and for the year ended December 31, 2013.

Marcolin Bond Report as of and for the year ended December 31, 2014 26

APPENDIX – CONSOLIDATED FINANCIAL INFORMATION

• 1. Financial Information for the Year Ended December 31, 2014

The summary consolidated financial information as of and for the year ended December 31, 2014 presents the key financial indicators discussed in the section “Summary Consolidated Information”. The accounting principles used for the preparation of the Consolidated Financial Information are the International Financial Reporting Standards endorsed by the European Union (“IFRS”). It should be noted that Viva prepares its consolidated financial statements in U.S. dollars in accordance with the generally accepted accounting principles in the United States (“US GAAP”). In order to provide information which is homogeneous with that of Marcolin, the historical income statements and statements of financial position of Viva have been adjusted, based on a preliminary analysis, to reflect the different accounting principles adopted by Marcolin compared to those of Viva.

• 2. Summary Consolidated Financial Information

(in € thousands except percentages) As of and for the year ended Dec 31, 2014 Revenues …………………………………………..……………………………………………………………………………………………………………………. 362,133 EBITDA ……………………………………………………………………………………………………………………………………………………………………. 29,384 Adjusted EBITDA …………………………….……………………………………………………………………………………………………………………… 43,831 Adjusted EBITDA margin (1) ………………….………………………………………………………………………………………………………………….. 12.1% Adjusted run-rate EBITDA (2) …………………….………………………………………………………………………………................................... 50,265 Adjusted run-rate EBITDA margin ……………….………………………………………………………………………………………………………….. 13.9% Cash and cash equivalents (3) ……………………………….…………………………………………………………………………………………………. 36,933 Total financial debt (4) ……………………………………………………………………………………………………………………………………………… 240,504 Net financial debt (5) ……………………………………………………………………………………………………………….………………………………. 196,074 Cash interest expense (6) ………………………………………………………………………………….………………………................................... 17,858

(1)

Adjusted EBITDA margin is adjusted EBITDA divided by combined revenues.

(2)

The following table sets forth the calculation of adjusted run-rate EBITDA for the periods indicated:

(in € thousands) As of and for the year ended Dec 31, 2014 Adjusted EBITDA …………………………………………………………………….……………………………………………………………………………… 43,831 Additional synergies (a) …………………………………………………………………………………………………...……………………………………… 6,434 Adjusted run-rate EBITDA ……………………………………………………………………………………………………………………………………. 50,265

(a)

Pursuant to the Viva integration, important cost synergies will be realized which will reach approximately €10.0 million, above the initial planning of €8.5m. Synergies of €3.6 million were achieved at the end of 2014 and from 2015 the full amount is expected. Full-year synergies primarily are generated by shared services, operational synergies and elimination of duplicate executive functions and include efficiencies generated through the reduction of overlaps between foreign subsidiaries, savings in property executive management and back-office personnel, consolidation of corporate functions, and shared usage of operational, office, and distribution networks. Operational synergies include efficiencies generated through the consolidation of warehouse facilities in the U.S., consolidation of IT systems and procurement department savings.

Pursuant to the Viva integration, important cost synergies of approximately €10.0 million will be attained, exceeding the initially planned €8.5m. We adopted a prudent approach in order to not underestimate the de-synergies to support the increase volumes of the Business post integration in certain areas (i.e. Italy). The main differences between the current estimate and the initial estimate for run-rate synergies are: US:

• Higher savings related to the New Jersey and Arizona personnel reorganization (executives and sales force)
• Higher savings due to joint participation in fairs and exhibitions

UK:

Marcolin Bond Report as of and for the year ended December 31, 2014 27

• Higher savings related to the sales force reorganization
• Higher savings achieved on the closure of the Harrogate location
• Higher savings related to the personnel reorganization

In order to obtain the extra synergies, additional non-recurring costs (one-off costs) related to the integration were incurred, impacting on the P&L 2014 for €9.4m. Integration costs has been increased in France to change the status of the Sales Reps from “VRP” to “Attaché Commercial”. The negotiation has eliminated a potential liability in the future as “VRP” Reps have by law a pretty sizeable indemnity in case of termination of the contract. The main differences between current and initial estimated one-off costs, including capital expenditure (€12.1m in 2014), are related to:

• Higher severance costs for the personnel reorganization (partially due to the higher number of redundancies
• vs. what initially planned)
• Higher consultancy fees (SAP roll-out, integration support, tax and legal assistance, etc.)
• Higher costs/capex for setting up the new facilities, achieving performance improvements and optimizing the

supply chain All synergies are calculated assuming 2013 as the reference year; the run rate considers the 12-month effect of the

• savings. Part of the €10m actual run-rate synergies, €3.6m was realized in 2014, as set forth below.

Total US 2,970 UK 522 France 2 Brazil

• Hong Kong

114 Total 3,609

Full-year run-rate synergies are shown below:

Total US 6,571 UK 2,032 France 865 Brazil 383 Hong Kong 191 Total 10,043

(3)

Cash and cash equivalents is derived from the Marcolin Consolidated Statement of Financial Position as of December 31, 2014.

(4)

Total financial debt represents the consolidated short-term and long-term borrowings of the Marcolin Group.

(5)

Net debt represents consolidated total debt less consolidated cash and cash equivalents and other current and non-current financial assets.

(6)

Cash interest expense represents primarily the interest expense in connection with the €200 million bond issued (8.5% interest rate).