LensCrafters 2004 Annual Report Download

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ANNUAL REPORT 2004

Table of contents

  • Page 1
    ANNUAL REPORT 2004

  • Page 2
    ANNUAL REPORT 2004 FISCAL YEAR ENDED DECEMBER 31, 2004

  • Page 3
    ANNUAL REPORT 2004

  • Page 4
    ... and related tax regime Corporate Governance Stock options plans and share buy back plans Luxottica Group capital stock information 15 years on the NYSE and four years on the MTA ADS and ordinary share performance on NYSE and MTA Average Euro/U.S. Dollar exchange rate: 1995-2004 93 Report of...

  • Page 5
    ANNUAL REPORT 2004

  • Page 6
    ... optical retail chain in North America, which joins LensCrafters, the largest chain in the sector in the region, in our portfolio of leading retail brands. Two outstanding fashion houses, Donna Karan and Dolce & Gabbana, also chose to partner with us in producing and distributing their eyewear...

  • Page 7
    ...- to premiumpriced prescription and sun frames. Luxottica Group is the leader in optical and sun retail distribution in North America and Asia Pacific through store chains LensCrafters, Sunglass Hut and those of OPSM Group. In 2004, Luxottica Group's presence in the North American market was further...

  • Page 8
    ... Euro in millions of US$ RETAIL NET SALES AND OPERATING MARGIN IN % 3,000 2,500 2,000 13% 1,500 1,000 500 2000 2001 2002 2003 2004 9% 5% 800 600 400 1,468 12.7% 2,154 14.9% 2,228 14.3% 2,028 13.3% 2,347 13.2% 19% 17% 1,200 1,000 1,600 1,400 WHOLESALE GROSS SALES AND OPERATING MARGIN IN % 1,076 23...

  • Page 9
    ... OF LUXOTTICA GROUP QUARTERLY RESULTS 2003 - 2004 (Subject to limited auditing review) 2004 In thousands of Euro (1) First quarter Second quarter Third quarter Fourth quarter Net sales Gross profit Operating income Income before taxes Net income Earnings per: Ordinary share in Euro ADS in...

  • Page 10
    ... results of Ray-Ban operations from the acquisition date (June 26, 1999). (6) Figures include results of Sunglass Hut operations from the acquisition date (March 31, 2001). (7) Results for 2000 have been calculated from the financial statements in Lire converted at the fixed exchange rate of Lire...

  • Page 11
    ANNUAL REPORT 2004

  • Page 12
    ... chains Pearle Vision, Sears Optical, Target Optical, and BJ's Optical, encompassing over 2,100 stores, and Cole Natio nal Manag ed Vis io n, jo in Luxo ttic a Gro up , representing an important step in the strategy of the Group. October SIGN IN G OF LICEN SIN G AGREEM EN T WITH DOLCE & GABBANA...

  • Page 13
    ANNUAL REPORT 2004

  • Page 14
    ANNUAL REPORT 2004 LUXOTTICA GROUP IN 2004 2004 was an extremely positive year for both the retail and wholesale d ivisions. The p erformance of retail c hains LensCrafters, Sung lass Hut and those of OPSM Group, especially in terms of profitability, was ab ove that of the rest of their resp ec ...

  • Page 15
    ... owner of retail brands such as Pearle Vision with an im p ortant network of whollyo wned sto res and in franc hising , as well as the operator of in-store optical departments Sears Optical, Target Optical and BJ's Optical (licensed brands). In ad d ition to the retail outlets, the Cole National...

  • Page 16
    ...develop and be properly positioned in the market. The Group sig ned new lic ensing ag reements with leading fashion houses Donna Karan and Dolce & Gabbana. Other license brands, already partners with Luxottic a Group , p osted sig nific ant g rowth rates, ensuring a strong performance for the entire...

  • Page 17
    ...sp ec ific value. It also provides clients with all-important pre- and post-sales services. This approach helps wholesale clients operate under ideal circumstances, increasing the market potential for premium optical products and services. MANUFACTURING In 2004 Luxottica Group continued its ongoing...

  • Page 18
    ANNUAL REPORT 2004

  • Page 19
    ANNUAL REPORT 2004

  • Page 20
    ...'s presence in the North American market was not only strengthened in terms of number of retail outlets, but also in overall reach and balance. T oday Luxottica Group manages the two most important optical retail chains in the industry in North America (LensCrafters and Pearle Vision) and is the...

  • Page 21
    ...of customers rating services received from very good to excellent. Regarding products sold, Luxottica Group's house, lic e n s e an d p rivate lab e l b ran d s re p re s e n te d ap p roximately 70% of units sold . Among the most popular were Adrienne Vittadini, Anne Klein, Brooks Brothers, Ray-Ban...

  • Page 22
    ...of premium quality, fashion products, aimed at providing the best possible care and customer service, in-store optometrist and stateof-the-art op tic al finishing lab for q uic k turnaround of prescriptions. Optical retail chain focused on "trusted eyecare", adding to vision care a vast selection of...

  • Page 23
    .... With close to 1,200 in-store LensCrafters and Pearle Vision optical labs and eight central labs, Luxottica Group now manages one of the largest networks of optical manufacturing labs in the U.S., enabling the Gro up to c o ntinually enhanc e the q uality o f its products and services through the...

  • Page 24
    DISTRIBUTION classic Aviator model by Ray-Ban was one of the best selling models. Sunglass Hut stores number 1,584 in North America, 164 in Australia, New Zealand and Singapore, 110 in Europe. MANAGED VISION CARE - EYEMED VISION CARE With the integration of Cole National Managed Vision Care into ...

  • Page 25
    ... its distribution and retail structures as well as important investments in marketing, the Group is extremely effective in supporting its brand portfolio. At the same time, sales of Luxottica Group license b ran d b e n e fit fro m th e s u p p o rt o f c am p aig n s conducted by the fashion houses...

  • Page 26
    ANNUAL REPORT 2004

  • Page 27
    ANNUAL REPORT 2004

  • Page 28
    DISTRIBUTION HOUSE BRANDS 27

  • Page 29
    CHANGE YOUR VIEW

  • Page 30
    ...joined Luxottica Group portfolio of brands in 1999. Worn by countless m ovie stars and show business celebrities since day one, Ray-Ban's are sunglasses par excellence, by far the top-selling, m ost fam ous sunglasses in the world. The Ray-Ban collection sets itself apart for the superior quality of...

  • Page 31
    www.vogue-eyewear.com

  • Page 32
    ... name as the famous fashion magazine, the Vogue brand was acquired by Luxottica Group in 1990. Vogue models distinguish themselves thanks to their innovative design and broad selection of color frames, resulting in great appeal for women who follow the latest trends in fashion. www.vogue-eyewear.com

  • Page 33

  • Page 34
    ... symbolic of sun protection and optical perfection. Persol is the eyewear of choice for countless international celebrities and movie stars who complete their look with a coordinated selection, adding to their strong emotional appeal as a "star symbol". Persol frames stand out for their exclusively...

  • Page 35
    www. arnet t e. com BRU CE I RON S

  • Page 36
    ... s a cquir ed by Luxot t ica Gr oup in 1999. Quickly becoming the eyewear of choice for the board sport generation, t oda y it is a symbol of t he dyna mic, a ct ive lifest yle it r epr esent s. Ar net t e's design ca pt iva t es, br inging t oget her t he supr eme comfor t a nd ma ximum...

  • Page 37
    ... to REVO sunglasses, also available with a polarized filter. www.revo.com Created in 1989, Killer Loop became part of Luxottica Group portfolio in 1999. The Killer Loop brand evolved from a general sports image to a one that is more " urban style" , perfect for any time of the day. Killer Loop is...

  • Page 38
    ... since 1967, Luxottica Group's first line still best communicates the experience and tradition which are its essence. Luxottica is the ideal eyewear for those who seek classic style with clean lines and a premium quality frame. The brand has expanded its spectrum to include a new line (including...

  • Page 39
    ANNUAL REPORT 2004

  • Page 40
    DISTRIBUTION LICENSE BRANDS 39

  • Page 41
    ... b ut comfort and practicality. The p artnership b etween Brooks Brothers and Luxottica Group began in 1993. Characterized by light materials and sleek lines, Brooks Brothers collections are the essence of American style. It is a classically styled product, accessible to everyone, functional, light...

  • Page 42
    ... materials, painstaking attention to detail, and a contemporary, unmistakable design: all of these make Bvlgari eyewear precious, exclusive objects; veritable jewels. The Byblos brand has been licensed to Luxottica Group since 1989. Byblos models reflect a fresh, modern, nonconformist style, with...

  • Page 43
    ... agreement with Maison Chanel was signed in 1999 making Luxottica Group the first licensing company of this important luxury brand. Chanel collections reflect the brand's essential values, which translate into a uniq ue style of c reative shap es, m aterials and c olors. Chanel eyewear ap p eals to...

  • Page 44
    ...o th c lo th in g c o lle c tio n s an d ac c e s s o rie s . Eye w e ar d e s ig n is tre ate d w ith th e s am e harmonic, sophisticated flare as clothing. The Miu Miu brand was created in 1993 according to the specific wishes of Miuccia Prada designed for a clientele es p ec ially attuned to the...

  • Page 45
    ...from the design to the choice of materials, to the production and retail sales concept, to strategic publicity campaigns, creating a "chain of value" that generates overall quality. This extraordinary care is never ab and oned , b ut exp resses itself in refined d etails that mad e Prad a c reations...

  • Page 46
    ... in a contemporary key. Sergio Tacchini, ever synonymous with sport and leisure, has been a licensed brand of Luxottica Group since 1993. Designed not only for those who love sports, but also for those who are looking for an eyewear for their free time. The collections are perfectly suited to the...

  • Page 47
    ... licensing agreement for the production and distribution of Versus eyewear was signed by Luxottica Group early in 2003, simultaneously with the Versace brand. Versus is the " yo ung " b rand in the Versac e " fam ily" . Targ eted at a young er clientele, Versus wearers want to follow fashion trend...

  • Page 48
    ANNUAL REPORT 2004

  • Page 49
    ANNUAL REPORT 2004

  • Page 50
    ...where the Group operates distribution subsidiaries, its main customers are retailers of mid- to premium-price eyewear, such as independent opticians, retail optical chains, stores sp ecializing in sung lasses and d uty-free shop s. In other countries, mainly in North America, customers als o in c lu...

  • Page 51
    ANNUAL REPORT 2004 MANUFACTURING Having its orig ins in what has b ec ome the g lob al c enter of eyewear manufac turing , Luxottic a Group has produced prescription frames and sunglasses for over 40 years, c ontrolling every p hase of the p ro d uc tio n p ro c es s , fro m the p urc has e o f ...

  • Page 52
    ... the Group to become global leader in eyewear and to be one of the manufacturers of premium prescription and sun frames with most efficient cost control and highest profitability. QUALITY: A KEY ASSET Product quality has always been Luxottica Group's main focus and has led to the integ ration...

  • Page 53
    ANNUAL REPORT 2004

  • Page 54
    ... final product, with a special focus on pre- and postsale services; - the effic ienc y and flexib ility of the manufac turing structure, ab le to q uickly resp ond to chang es in market demand. The vertic al integ ration of d esig n-m anufac turing distribution makes Luxottica Group's business model...

  • Page 55
    ... can find premium products, fashion advice and the highest level of service. Pearle Vision - The historic brand name in American optical retail, perceived by consumers as the brand of "trusted eyecare", providing eye exams of the highest standards as well as top quality eyewear. Luxottica Group will...

  • Page 56
    ... invest in new technology, production systems, and generally research and development, to maintain the c onsistently hig h ad d ed value of its p rod uc ts and service. Luxottica Group's growth in the retail segment in North America, especially in terms of volumes in the licensed brand segment, and...

  • Page 57
    ANNUAL REPORT 2004

  • Page 58
    ... to provide free eye exams and eyeglasses to communities in need. Since 1991, 88 international missions took place in over 25 countries. During this time, approximately 1,200 assoc iates have volunteered their servic es through these missions. Give the Gift of Sight also collects, through Luxottica...

  • Page 59
    ... work and enrich the rapport with customers. - The "Satellite Mission", with teams that can travel to reach people in need who live in remote areas, even hundreds of miles from the care centers. In 2004 the former LensCrafters Foundation changed its name to " Give the Gift of Sight, A Luxottica...

  • Page 60
    ANNUAL REPORT 2004

  • Page 61
    ANNUAL REPORT 2004

  • Page 62
    ANNUAL REPORT 2004 MANAGEMENT'S DISCUSSION AND ANALYSIS STATEMENTS OF CONSOLIDATED INCOME (for ...Net sales Cost of sales Purchases and inventory variance Manufacturing cost Manufacturing depreciation Manufacturing personnel cost Gross profit Operating expenses Selling expenses Royalties Advertising...

  • Page 63
    ...)/Sale of treasury shares Exercise of stock options Debt acquired through acquisitions Effect of exchange adjustments to net financial position Decrease/(increase) in net financial position Cash Restricted cash Bank overdraft and notes payable Current portion of long-term debt Long-term debt Net...

  • Page 64
    ... of the Things Remembered chain, for a total of Euro 75.7 million in the fourth quarter of 2004. The impact of the d ep rec iation of the U.S. Dollar ag ainst the Euro on sales of Luxottica Retail North America, the Group 's retail d ivision in North Americ a, was Euro 204.8 m illion. The c ontinued...

  • Page 65
    ...to 42.3% in 2 0 0 4 . Th is d e c re as e w as p rim arily d u e to th e significant increase in sales at Luxottica Retail North America without a corresponding increase in these COST OF SALES Cost of sales for 2004 inc reased 15.2%, to Euro 1,040.7 million, compared with Euro 903.6 million in 2003...

  • Page 66
    ... of fixed cost structures, arising from increased sales. Operating margins for retail sales decreased in 2004 to 13.2%, from 13.3% in 2003. It is expected that the c o nso lid atio n o f Co le Natio nal, where o p erating margins were lower than at other companies in the retail d ivisio n, will...

  • Page 67
    ... community, the Group maintains that their inclusion provides consistency in its financial reporting. Furthermore, these adjusted financial measures are one of the principal indicators used by management in planning and forecasting future periods. The results expressed at a constant exchange rate...

  • Page 68
    ... exchange rate fluctuations on the two years, consolidated sales for 2004 would have risen year-over-year 21.6%. The 6.9% increase in sales for 2004 calculated on a consistent basis over 2003 was p rimarily attrib utab le to inc reased sales of the Ray-Ban line as well as the new Versace and Prada...

  • Page 69
    ... sales in North Americ a, p artially offset b y the d e p re c iatio n o f th e U.S. D o llar, as p re vio u s ly mentioned. LIQUIDITY AND FINANCIAL RESOURCES Luxottic a Group financ es reg ular op erations and c om m erc ial exp ansion p rim arily throug h internally generated funds, trade credits...

  • Page 70
    ...million were reported, respectively. In December 2002, Luxottica Group entered into a new c red it fac ility ag reem ent with Banc a Intesa S.p.A. This unsecured credit facility was for a Euro 650 million line of credit. This credit facility consists of a Euro 500 million term loan, Euro 200 million...

  • Page 71
    ... covenants and, as of December 31, 2004, Luxottica Group was in fu ll c o m p lian c e w ith th e s e c o ve n an ts . Th is financing expires on September 30, 2008. On June 3, 2004, Luxottic a Group entered into a new credit facility agreement with a group of banks for Euro 740 million and US$ 325...

  • Page 72
    ANNUAL REPORT 2004

  • Page 73
    ANNUAL REPORT 2004 RECONCILIATION OF THE ITALIAN AND U.S. GAAP CONSOLIDATED FINANCIAL STATEMENTS Luxottica Group prepared the consolidated financial statem ents c ontained in this rep ort in ac c ord anc e with generally accepted U.S. accounting principles known as U.S. GAAP . Luxottica Group, ...

  • Page 74
    ...2004 Net sales Cost of sales 3,255,300 1,040,697 (7,204) 1,173 3,248,096 1,041,870 Gross profit Operating expenses Selling expenses Royalties Advertising...415 254,104 (8,199) Net income Net earnings per share (1) Net earnings per share, diluted No. of outstanding shares Total No. of shares 286...

  • Page 75
    ANNUAL REPORT 2004

  • Page 76
    ... 15, 2005. In order to be a ADS holder of record on June 22, 2005 and thus be entitled to such dividend, you must purchase the ADSs on or before June 17, 2005. The ordinary shares listed on the Milan Stock Exchange, and the ADSs listed on the New York Stock Exchange, will be traded ex-dividend on...

  • Page 77
    ... Und er the c urrently applicable Italy-U.S. Treaty, an Italian substitute tax at a reduced rate of 15% will generally apply to dividends paid by Luxottica Group to a U.S. resident entitled to treaty benefits who complies with the procedures for claiming such benefits, provided the dividends are not...

  • Page 78
    ... the Bank of New York to UniCredito Italiano, such bank shall endeavor to effect repayment of the entire 27% withheld or the balance between the 27% withheld at the time of payment and the rate actually applicable to th e AD S h o ld e r as th e c as e m ayb e . By way o f examp le, Italy and United...

  • Page 79
    ANNUAL REPORT 2004

  • Page 80
    ... op erations, in terms of sales and personnel, are particularly significant in Europe, North America, Australia, and Asia. 3. Luxottica is listed on both the NYSE and the Milan Stock Exchange, and must therefore comply with the requirements applicable to companies listed on these exchang es and , in...

  • Page 81
    ... whether its o rg anizatio nal, ad m inistrative and accounting structures are appropriate; 3. the b us ines s , inves tm ent and d evelo p m ent s trateg y fo r the entire Gro up , b as ed o n the proposals submitted by the Chief Executive Officer; 4. financial commitments and loans of a duration...

  • Page 82
    ... Internal Aud it Committee and member of the Human Resources Committee Claudio Del Vecchio Chairman and Chief Executive Officer of Retail Brand Alliance Inc., Chief Executive Officer of Luxottica U.S. Hold ing s Corp ., Exec utive Vic e-Presid ent of Avant Garde Optics LLC, Director of LensCrafters...

  • Page 83
    .... The Chief Executive Officer, Andrea Guerra, has full day to day authority with respect to Luxottica Group. His authority is set out in the resolutions made and the guidelines issued by the Board, although it does not extend to those powers reserved to the Board either by law, by the Company by...

  • Page 84
    ...appointed to audit the accounts of the Group and to provide related advice and assistance; 3. rec ommend ing ways of resolving any d isp utes between management and the external auditors with respect to financial reporting; and 4. approving the procedures for authorizing allowable non-audit services...

  • Page 85
    ...'s Corporate Governance framework. CODE OF CONDUCT CONCERNING INSIDER DEALING The Code on Insider Dealing approved by the Board of Directors provides detailed rules applicable to the trading in financial securities by persons who have access to relevant confidential information. The rules relate...

  • Page 86
    ... . INVESTOR RELATIONS An investor relations team, rep orting d irectly to the Chief Executive Officer, is dedicated to relations with the domestic and international financial community, investors and financial analysts, the media and the market. The relevant d o c um ents c o nc erning C o rp o rate...

  • Page 87
    ANNUAL REPORT 2004

  • Page 88
    ... share capital. This plan, now expired, required that the purchase be carried out on the New York Stock Exchange within 18 months of its approval. On March 20, 2003, Luxottica U.S. Holdings Corp. approved the purchase of up to 10,000,000 Luxottica Group ADS, representing an equal number of ordinary...

  • Page 89
    ANNUAL REPORT 2004

  • Page 90
    ANNUAL REPORT 2004 LUXOTTICA GROUP CAPITAL STOCK INFORMATION Luxottica Group S.p.A. listed on the NYSE on January 23, 1990. At the tim e of the Initial Pub lic Offering 10,350,000 ordinary shares were sold, equivalent to 5,175,000 Americ an Dep ositary Shares (eac h ADS equals two ordinary shares...

  • Page 91
    LUXOTTICA GROUP CAPITAL STOCK INFORMATION 15 YEARS ON THE NYSE AND FOUR YEARS ON THE MTA NYSE Quarterly ADS prices In US$ (1) High Low 15.18 15.18 16.30 17.99 2004 Close 15.82 16.90 17.85 20.39 2003 High 14.05 14.11 15.48 18.15 2002 High 19.82 20.85 18...

  • Page 92
    ... GROUP CAPITAL STOCK INFORMATION ADS AND ORDINARY SHARE PERFORMANCE ON NYSE AND MTA 25 NYSE: LUX 20 MTA: LUX 15 MIBTEL DJIA 10 5 01.01.2001 12.31.2001 12.31.2002 12.31.2003 12.31.2004 MTA (in Euro) Mibtel NYSE (in US$) Dow Jones Industrial Average AVERAGE EURO/U.S.DOLLAR EXCHANGE RATE...

  • Page 93
    ANNUAL REPORT 2004

  • Page 94
    ... the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor...

  • Page 95
    ... - net Investments Other assets Total other assets TOTAL 94 497,435 599,245 811,258 1,328,914 764,698 13,055 41,481 1,500,962 972,091 13,371 23,049 2,032,002 1,316,017 18,102 31,204 3,397,325 In accordance with U.S. GAAP (1) Translated for convenience at the New York City Noon Buying Rate as...

  • Page 96
    ... paid-in capital Retained earnings Accumulated other comprehensive loss, net of tax Total Less treasury shares at cost (6,434,786 and 6,434,786 shares at December 31, 2003 and 2004, respectively) In accordance with U.S. GAAP (1) Translated for convenience at the New York City Noon Buying Rate as...

  • Page 97
    ...2004 2002 (Euro thousands) 2003 (Euro thousands) 2004 (Euro thousands) (US$ thousands) (1) 2004 Net sales Cost of sales Gross profit Operating expenses Selling and advertising General and administrative Total... for convenience at the New York City Noon Buying Rate as determined in Note 1.

  • Page 98
    ... at cost Consolidated shareholders' equity Balances, January 1, 2002 Exercise of stock options Translation adjustment Minimum pension liability, less taxes of Euro 15.8 million Tax benefit on stock options Sale of treasury shares, net of taxes of Euro 5.5 million Purchase of treasury shares Change...

  • Page 99
    ...Total adjustments Cash provided by operating activities Cash flows from investing activities Property, plant and equipment: - Additions - Disposals Purchases of businesses net... GAAP (1) Translated for convenience at the New York City Noon Buying Rate as determined in Note 1. Cash used in investing activities 98 ...

  • Page 100
    ... Acquisition of businesses: Fair value of assets acquired 151,418 299,937 257,349 348,399 58,162 137,650 - 44,951 110,609 102,323 58,371 108,440 157,905 79,023 146,806 213,772 In accordance with U.S. GAAP (1) Translated for convenience at the New York City Noon Buying Rate as determined...

  • Page 101
    ANNUAL REPORT 2004

  • Page 102
    ... 31, 2004, LensCrafters operated 888 stores throughout the United States of America and Canada; Sunglass Hut operated 1,858 stores located in North America, Europ e and Australia; OPSM op erated 598 stores und er three b rand s ac ross states and territories in Australia, New Zealand, Hong Kong...

  • Page 103
    .... These facilities are usually short-term in nature or may contain provisions that allow them to renew automatically with a c anc ellatio n no tic e p erio d . Certain sub sid iary agreements require a guarantee from Luxottica Group S.p.A. Interest rates on these lines of credit vary and can be used...

  • Page 104
    ... Company believes have a finite life. Trade names are am o rtized o n a s traig ht- line b as is o ver p erio d s ranging from 20 to 25 years (see Note 6). Intangibles inc lud e am o ng o ther item s d istrib uto r netwo rks, customer lists and contracts, franchise agreements, and license agreements...

  • Page 105
    ...e rc h an d is e (b o th wholesale and retail), insuranc e and ad ministrative fees associated with the Company's managed vision care business, eye exams and related professional services, and sales of merchand ise to franchisees along with other revenues from franchisees such as royalties b ased on...

  • Page 106
    ... which are accrued as earned. Initial franchise fees are recorded as revenue when all material services or conditions relating to the sale of the franchise have been substantially performed or satisfied by Cole and when the related store begins operations. Accruals are established for amounts...

  • Page 107
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The wholesale and retail divisions may offer certain p rom otions d uring the year. Free fram es g iven to customers as part of a promotional offer are recorded as cost of sales at the time they are delivered to the c usto m er. D isc o unts and c o up o ...

  • Page 108
    ...on interest rates availab le to the Comp any and b y comparison to quoted market prices, when available. At December 31, 2003 and 2004, the fair value of the Comp any's financial instruments ap p roximated the carrying value. STOCK-BASED COMPENSATION The Company has elected to follow the accounting...

  • Page 109
    ... option-pricing model for options issued prior to January 1, 2004 and using a binomial model for options issued after such d ate with th e fo llo win g we ig h te d ave rag e assumptions: 2002 Dividend yield Risk-free interest rate Expected option life (years) Expected volatility Weighted average...

  • Page 110
    ... rre n c y s wap agreements, as part of its risk management policy to reduce its exposure to market risks from changes in interest and foreign exchange rates. Although it has not done so in the past, the Company may enter into other derivative financial instruments when it assesses that the risk can...

  • Page 111
    ... of international readers and has been made at the rate of Euro 1 to US$ 1.3538. Such rate was d etermined b y using the noon b uying rate of th e Eu ro to U.S. D o llar as c e rtifie d fo r c u s to m purposes by the Federal Reserve Bank of New York as of December 31, 2004. Such translations...

  • Page 112
    ...ic h is controlled by a Director of the Company. The license agreement expires on December 31, 2007. For the year end ed Dec em b er 31, 2004, royalties p aid to Retail Brand Alliance, Inc. for such agreement were Euro 0.1 million. STOCK INCENTIVE PLAN INVESTMENT On Dec em b er 31, 2001, a U.S. sub...

  • Page 113
    ...209 25,363 316,644 2004 50,656 24,486 358,016 Raw materials and packaging Work in process Finished goods Total 404,216 433,158 4. ACQUISITIONS AND INVESTMENTS A) SUNGLASS HUT INTERNATIONAL, INC. On Feb ruary 20, 2001, Luxottica Group formed an in d ire c t w h o lly- o w n e d U. S. s u b s id...

  • Page 114
    ... subsidiary in Australia, Luxottica South Pacific Pty Limited, for the purpose of making a cash o ffe r fo r all o u ts tan d in g s h are s , o p tio n s an d performance rights of OPSM Group Limited ("OPSM"), a publicly traded company on the Australian Stock Exchange. The cash offer commenced on...

  • Page 115
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In thousands of Euro Assets purchased Cash and cash equivalents Inventories Property, plant and equipment Prepaid expenses and other current assets Accounts receivable Trade name (useful life of 25 years, no residual value) Other assets including deferred...

  • Page 116
    ..., 2003, the Company formed an indirect who lly- o wne d s ub s id iary, C o lo rad o Ac q uis itio n C o rp . , fo r th e p u rp o s e o f a c q u irin g a ll th e o uts tand ing c o m m o n s to c k o f C o le, a p ub lic ly traded company on the New York Stock Exchange. On January 23, 2004, as am...

  • Page 117
    ... value) Customer list and contracts (useful life of 21-23 years, no residual value) Other intangibles Asset held for sale - Pearle Europe Other assets Liabilities assumed Accounts payable Accrued expenses and other current liabilities Deferred tax liabilities, net Long-term debt Bank overdraft Other...

  • Page 118
    ... in the Articles of Association of PE required Cole to m ake an offer to sell these shares to the shareholders of PE within 30 days of the change of control, which deadline was extended by agreement of the p arties. In Dec emb er 2004, sub stantially all the terms of the sale were established at...

  • Page 119
    ... Building, held under capital lease 1,141,774 Less: accumulated depreciation and amortization 644,339 1,282,500 683,255 Total 497,435 599,245 Dep rec iation and am ortization exp ense relating to property, plant and equipment for the years ended December 31, 2002, 2003 and 2004 was Euro 103...

  • Page 120
    ... Wholesale segment Total Balance as of January 1, 2003 Acquisitions (1) Change in exchange rates (2) (1) Goodwill acquired in 2003 and 2004 consisted primarily of the retail acquisitions of OPSM and Cole National and the wholesale acquisitions of the E.I.D. companies and I.C. Optics Group. (See...

  • Page 121
    ... the Ray-Ban trade names over a period of 20 years, as the Company believes these trade names to be finite lived assets. (2) Distributor network, customer contracts and lists, were identifiable intangibles recorded in connection with the acquisition of Cole in 2004. These assets have a finite life...

  • Page 122
    ... FINANCIAL STATEMENTS Estimated annual amortization exp ense relating ...2004 Income before provision for income taxes: - Italian companies - Foreign companies 229,527 309,915 146,055 243,738 149,479 307,674 Total Provision for income taxes: - Current Italian companies Foreign companies...

  • Page 123
    ... effective tax rate is as follows: Y ears ended December 31 2002 40.3% 2003 38.3% 2004 37.3% Italian statutory tax rate Aggregate effect of different rates in foreign jurisdictions Permanent differences, principally losses in subsidiary companies funded through capital contributions, net of non...

  • Page 124
    ... for sale - Pearle Europe Deferred revenue - extended warranty contracts Other, net Valuation allowance Net current deferred tax assets Non-current portion Difference in basis of fixed assets Net operating loss carryforwards Recorded reserves Occupancy reserves Depreciation Employee-related reserves...

  • Page 125
    ... the most recent year were open for such review. Certain Luxottica Group companies are s u b je c t to tax re vie w s fo r p re vio u s ye ars . Manag em ent b elieves no sig nific ant unac c rued liabilities will arise from the related tax reviews. As of December 31, 2004, the taxes that would be...

  • Page 126
    ...125,572 Senior unsecured guaranteed notes (c) 238,152 221,598 Credit agreement with various financial institutions (d) - 851,890 Capital lease obligations, payable in installments through 2005 745 4,107 Other loans with banks and other third parties, interest at various rates (from 2.47 to...

  • Page 127
    ... entered into a new unsecured credit facility with Banca Intesa S.p.A. The new unsecured credit facility provides borrowing availability of up to Euro 650 million. This facility includes a term portion of Euro 500 million which required a balloon payment of Euro 200 million in June 2004 and equal...

  • Page 128
    ...to eligible past and present employees of U.S. Holdings upon retirement. Pension benefits are ac c rued b ased o n leng th o f servic e and annual compensation under a cash balance formula. As of Dec em b er 31, 2004, assoc iates that work for the acquired Cole businesses and legal entities were not...

  • Page 129
    ...at the rec o m m end atio n o f C o le' s C hief Exec utive Officer at such time. This plan provides benefits in excess of amounts permitted under the provisions of the p revailing tax law. The p ens io n liab ility and expense associated with this plan are accrued using the sam e ac tuarial m ethod...

  • Page 130
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OBLIGATIONS AND FUNDED STATUS Pension plans SERP In thousands of Euro 2003 2004 2003 2004 Change in benefit obligations Benefit obligation at beginning of period Translation differences Service cost Interest cost Actuarial loss (gain) Acquisition ...

  • Page 131
    ... In thousands of Euro 2002 2003 2004 Components of net periodic benefit cost Service cost Interest cost Expected return on plan assets Amortization of actuarial loss Amortization of prior service cost Net periodic pension expense Additional information (Decrease)/Increase in minimum liability...

  • Page 132
    ... at September 30 Discount rate Rate of compensation increase Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, 2003 and 2004 Discount rate Expected long-term return on plan assets Rate of compensation increase 2004 2003 2004 6.00 % 4.75 % 5.75...

  • Page 133
    ...e th o d . U n d e r th is a p p ro a c h , th e assum p tion was arrived at b y ap p lying historic al averag e total returns b y asset c lass over various time horizons to the plan's current and target asset allo c atio n . Th e re s u ltin g as s u m p tio n w as als o b enc hm arked ag ainst the...

  • Page 134
    ...Co le companies acquired: - Cole p rovid es p ost-em p loym ent b enefits und er ind ivid ual ag reem ents for c ontinuation of health care benefits and life insurance coverage to former employees after employment but before retirement. As of Dec em b er 31, 2004, the ac c rued liab ility related to...

  • Page 135
    ...post retirement benefit plan maintained by Cole in connection with its acquisition of Pearle in 1996. This plan was closed to new participants at the time of Cole's ac q uisition of Pearle. Und er this p lan, the eligible former employees are provided life insurance and certain health care b enefits...

  • Page 136
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the funded status of the post-retirement benefit plan: In thousands of Euro 2003 2004 Change in benefit obligation Benefit obligation - beginning of year Translation differences Service cost Interest cost Plan participants...

  • Page 137
    ...pension benefits to re tire e s in ad d itio n to g o ve rn m e n t s p o n s o re d p ro g ram s . Th e c o s t o f th e s e p ro g ram s is n o t significant to the Company. 10. STOCK OPTION AND INCENTIVE PLANS STOCK OPTION PLAN Beginning in April 1998, certain officers and other key employees of...

  • Page 138
    ... TO CONSOLIDATED FINANCIAL STATEMENTS STOCK INCENTIVE PLANS Luxottic a Group g ranted stoc k op tions to c ertain employees under an incentive plan. These options vest and became exercisable only if certain financial performance measures were met over a three-year period ending December 2004. As of...

  • Page 139
    ...design, manufacture, wholesale distribution and marketing of house brand an d d e s ig n e r lin e s o f m id - to p re m iu m - p ric e d prescription frames and sunglasses. The Company operates in the retail segment through its retail division, consisting of LensCrafters, Sunglass Hut, since April...

  • Page 140
    ...hic seg m ents inc lud e Italy, the m ain manufacturing and distribution base, North America (which includes the United States of America, Canada and Caribbean islands), Asia Pacific (which includes Australia, New Zealand, Singapore, Malaysia, Thailand, China, Hong Kong, Japan and T aiwan) and Other...

  • Page 141
    ...of products with the Prada and Miu Miu trade names. The Prada license agreement expiration date is in 2013. In June 2004, the Company signed a new licensing agreement for the design, production and worldwide distribution of Donna Karan and DKNY prescription frames and sunglasses. The initial term of...

  • Page 142
    ... costs solely as a p ercentag e of sales. Certain agreements, which provide for the operations of departments in a major retail chain in the United States contain short-term cancellation clauses. Future m inim um annual rental c o m m itm ents fo r operating leases are as follows: Total royalties...

  • Page 143
    ... of the leases from the date each agreement was signed. H o wever, und er the c o m m o n law o f the United Kingdom, the lessor still has the right to seek payment of certain amounts from the Company if unpaid by the new obligor. If the Company is required to pay under these guarantees, it has...

  • Page 144
    ... Pearle Vision, Inc., and Pearle Vision Care, Inc. The claims allege various statutory violations related to the op eration of Pearle Vision Centers in California including violations of California laws g o verning relatio ns hip s am o ng o p tic ians , optical retailers, manufacturers of frames...

  • Page 145
    ... New York had begun an investigation into the Company's pricing and d istrib ution p rac tic es relating to sung lasses under applicable state and federal antitrust laws. The offic e of the Attorney General rec ently ad vised the Company that it has closed its investigation without taking any action...

  • Page 146
    ... the Company is ultimately required to make the public offer, it expects the aggregate cost of the offer to be approximately Eu ro 1 6 m illio n , in c lu d in g s tip u late d in te re s t increments. O n July 14, 2004, a shareho ld er o f Co le filed a shareholders' class action complaint against...

  • Page 147
    ANNUAL REPORT 2004

  • Page 148
    ANNUAL REPORT 2004 KEY CONTACTS AND ADDRESSES REGISTERED OFFICE OF THE COMPANY Via C. Cantù 2 20123 Milano - Italy Phone + 39 02 86334.1 Fiscal code 00891030272 Vat number 10182640150 CUSTODIAN BANK UNICREDITO ITALIANO UniCredit Produzioni Accentrate Via Volta, 1 20093 Cologno Monzese (MI) - ...

  • Page 149
    ANNUAL REPORT 2004

  • Page 150
    ANNUAL REPORT 2004 LUXOTTICA GROUP SUBSIDIARIES IN THE WORLD EUROPE LUXOTTICA S.r.l. KILLERLOOP EYEWEAR S.p.A. Stabilimento di Agordo Via Valcozzena, 10 32021 Agordo (BL) - Italy Tel. + 39 0437 644.1 LUXOTTICA BELGIUM N.V . Airport Business Center Luchthavenlei 7/A 2100 Deurne - Belgium Tel. + 32 ...

  • Page 151
    ... Inc. 947 Verbena Road Mississauga, Toronto Ontario L5T 1T5 - Canada Tel. + 1 905 5642400 LUXOTTICA SUN CORPORATION 7300 N.W. 19 St. Suite 305 33126 Miami - Florida - USA Tel. + 1 305 4770070 LUXOTTICA RETAIL LENSCRAFTERS Inc. 4000 Luxottica Place Mason, Ohio 45040 - USA Tel. + 1 513 7656000 150

  • Page 152
    ... Pty Ltd 75 Talavera Road, Macquarie Park, North Ryde - NSW 2113 - Australia Tel. + 61 2 98152000 SUNGLASS HUT AUSTRALASIA Pty Ltd 75 Talavera Road, Macquarie Park, North Ryde - NSW 2113 - Australia Tel. + 61 2 98152000 LUXOTTICA GULF LLC Al Attar Business Tower Sheik Zayed Road P .O. Box 62504...

  • Page 153
    Graphic art Letizia Marino Consultancy and co-ordination Ergon Comunicazione Printing Grafiche Antiga - Italy