LensCrafters 2005 Annual Report Download - page 113

> 112 | ANNUAL REPORT 2005
responded specifically to the advertising. Such costs related to the direct response advertising are
amortized over the period during which the revenues are recognized, not to exceed 90 days. Generally,
other direct response program costs that do not meet the capitalization criteria are expensed the first
time the advertising occurs. Advertising expenses incurred for the years ended December 31, 2003,
2004 and 2005 were Euro 178.3 million, Euro 192.4 million and Euro 278.7 million, respectively.
With the acquisition of Cole in October 2004, the Company receives a reimbursement from its acquired
franchisees for certain marketing costs. Operating expenses in the Consolidated Statements of Income
are net of amounts reimbursed by the franchisees calculated based on a percentage of their sales. The
amounts received in fiscal 2004 and 2005 for such reimbursement were Euro 4.2 million and Euro 15.5
million, respectively.
Pervasiveness of estimates - The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant judgment
and estimates are required in the determination of the valuation allowances against receivables,
inventory and deferred tax assets, calculation of pension and other long-term employee benefit
accruals, legal and other accruals for contingent liabilities and the determination of the carrying value of
long-lived assets, among other items. Actual results could differ from those estimates.
Earnings per share - Luxottica Group calculates basic and diluted earnings per share in accordance
with SFAS No. 128, Earnings per share. Net income available to shareholders is the same for the basic
and diluted earnings per share calculations for the years ended December 31, 2003, 2004 and 2005.
Basic earnings per share are based on the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share are based on the weighted average number
of shares of common stock and common stock equivalents (options) outstanding during the period,
except when the common stock equivalents are anti-dilutive. The following is a reconciliation from
basic to diluted shares outstanding used in the calculation of earnings per share:
In thousands 2003 2004 2005
Weighted average shares outstanding - basic 448,664.4 448,275.0 450,179.1
Effect of dilutive Stock Options 1,537.7 2,085.9 3,124.3
Weighted average shares outstanding - dilutive 450,202.1 450,360.9 453,303.4
Options not included in calculation of dilutive
shares as the exercise price was greater than
the average price during the respective period 4,046.6 2,169.6 569.1
Fair value of financial instruments - Financial instruments consist primarily of cash, cash equivalents and
marketable securities, debt obligations and, in 2004, derivative financial instruments which are either
accounted for as fair value or cash flow hedges. Luxottica Group estimates the fair value of cash, cash
equivalents and marketable securities based on interest rates available to the Company and by comparison
to quoted market prices and its debt obligations, as there are no quoted market prices, based on interest
rates available to the Company. The fair value associated with financial guarantees has been accrued for
when applicable and is disclosed in Note 14. The fair values of letters of credit are not disclosed as it is not
practicable for the Company to do so and substantially all of these instruments are in place for operational
purposes such as security on leases and health benefits. At December 31, 2004 and 2005, the fair value of
the Company’s financial instruments approximated the carrying value.