LensCrafters 2006 Annual Report Download

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ANNUAL REPORT 2006
YEAR ENDED DECEMBER 31, 2006

Table of contents

  • Page 1
    ANNUAL REPORT 2006 YEAR ENDED DECEMBER 31, 2006

  • Page 2
    All pictures in this Annual Report are from Give the Gift of Sight and are portraits of some of the over 750,000 people worldwide who received free eyecare from this Luxottica Group Foundation in 2006. Further information on the Give the Gift of Sight Foundation can be found in the section dedicated...

  • Page 3
    ...report on Corporate Governance 2006 91 > Stock options plans and share buy-back plans 93 > Luxottica Group share capital information 94 93 95 Listings: 17 years on the NYSE and six years on the MTA ADS and Ordinary share performance on the NYSE and MTA and main indexes Average Euro/US$ exchange rate...

  • Page 4
    ... > Chairman's letter to shareholders 9 > Profile of Luxottica Group 13 > Key events of 2006 15 > Financial highlights 17 > Strategy 21 > Luxottica Group in 2006 23 > The Group's brands 27 > Distribution 39 > Manufacturing 43 > Human resources 45 > Give the Gift of Sight, a Luxottica Group foundation

  • Page 5
    Mali 2006

  • Page 6

  • Page 7
    ...of its brands. On the retail front, we moved ahead with our investment plan to further improve our store network and better position Luxottica Group to take advantage of new growth opportunities. These investments will continue in 2007. We launched the LensCrafters brand in China with the opening of...

  • Page 8

  • Page 9
    ... and luxury prescription frames and sunglasses. It is a global leader in eyewear, with nearly 5,700 optical and sun retail stores located primarily in North America, Asia-Pacific, China and the UK and a strong brand portfolio that includes Ray-Ban, the world's best-selling eyewear brand, as well...

  • Page 10
    ...| ANNUAL REPORT 2006 MILESTONES IN LUXOTTICA GROUP'S HISTORY 1961 1990 1995 1999 Starts out as a manufacturer of optical frames. Listing on the New York Stock Exchange (NYSE). Acquisition of LensCrafters, the leading premium optical retail brand in North America. Acquisition of the eyewear division...

  • Page 11
    SEZIONE DI APPARTENENZA | 11 < Mali 2006

  • Page 12

  • Page 13
    ... OF 2006 February Signing of a 10-year license agreement for the design, production and worldwide distribution of sunglasses and prescription frames under the Polo Ralph Lauren brand. May Acquisition of Shoppers Optical, one of the largest optical chains in Canada with 74 stores. Luxottica Group...

  • Page 14
    ... Average number of outstanding shares 453,174,041 In accordance to U.S. GAAP (1) 1 ADS = 1 ordinary share. (2) Proposed by the Board of Directors and to be submitted for approval at the Annual Shareholders' Ordinary Meeting on May 15, 2007. (3) Figures include results of OPSM Group operations from...

  • Page 15
    ... NET SALES GROSS PROFIT 2006 1,000 900 800 700 600 500 400 2002 2004 2005 2006 2003 600 500 NET SALES BY DISTRIBUTION Retail 70% 30% 400 300 2002 2004 2005 Wholesale 300 200 100 200 100 millions of Euro millions of US$ millions of Euro 2003 millions of US$ INCOME FROM OPERATIONS NET...

  • Page 16

  • Page 17
    ...of service and convenience. LensCrafters' new store concept was launched in April 2006 and is producing excellent results. Pearle Vision The longest-standing optical brand in the United States, Pearle Vision is again being perceived by consumers as the brand of "trusted eyecare," providing eye exams...

  • Page 18
    ... at its stores. Lens finishing labs are also expected to contribute to a reduction of the time and cost of finishing work provided by third parties. Managed Vision Care: EyeMed Vision Care EyeMed Vision Care is now the one of the largest managed vision care operator in the United States. Its ability...

  • Page 19
    ... excellent, constantly available pre- and post-sale services, the Group strives to satisfy customer expectations and market demands in the best manner possible. House brands Ray-Ban continues to be one of the great strengths of Luxottica Group's brand portfolio, given its excellent growth potential...

  • Page 20

  • Page 21
    ... also reported good results, especially in North America, where sales rose nearly 8%, confirming the current strength of the business and its potential for the future. Ray-Ban, the world's most recognized and best-selling eyewear brand, posted sales of Euro 1.4 billion (at retail value) thanks...

  • Page 22
    HOUSE BRANDS

  • Page 23
    ... into with Tiffany & Co. in 2006, which marked the famous luxury brand's debut in the eyewear market, further strengthens the Group's portfolio. The Tiffany & Co. agreement follows those with Burberry and Polo Ralph Lauren in 2005, Donna Karan and Dolce & Gabbana in 2004, renewals with Chanel and...

  • Page 24
    LICENSE BRANDS

  • Page 25
    SEZIONE DI APPARTENENZA | 25

  • Page 26

  • Page 27
    ...the markets. | 27 < GROUP RETAIL CHAINS WORLDWIDE Geographical area Retail chain North America LensCrafters Pearle Vision (*) Sunglass Hut Licensed Brands: Sears Optical Target Optical BJ's Optical Asia-Pacific OPSM Laubman & Pank Budget Eyewear Sunglass Hut China & Hong Kong Xueliang Optical Ming...

  • Page 28
    ...provide its customers with a highly-automated system for order management that reduces delivery times and minimizes inventory while providing high-quality products. RETAIL Luxottica Group's retail division includes: • LensCrafters, Pearle Vision (owned and franchise stores), Sears Optical, Target...

  • Page 29
    ... administrator of managed vision care programs for corporations, government agencies and health insurance providers in the United States. In the sun segment, Sunglass Hut is the biggest and best-known chain in North America with 1,502 stores. With its organization structure, Luxottica Group is able...

  • Page 30
    ... Ray-Ban, the world's best-selling sun brand. OPTICAL LensCrafters Eleven years after joining Luxottica Group, LensCrafters is North America's leading operator in the fashion and luxury eyewear segment, with 902 stores in the United States and Canada. In 2006, North American comparable store sales...

  • Page 31
    ... LensCrafters stores reported high sales performance in line with that of stores in the United States and Australia. Luxottica Group's premium brands, the high profile of its stores and its high level of service quality have been a great success, as reflected by its growing market share in Hong Kong...

  • Page 32
    ...lenses, lab services, contact lenses and accessories, all of which are provided with a high level of service and merchandising support. Licensed Brands Luxottica Group is the leading operator of licensed brand stores in the United States and Canada, with a network of 1,358 locations in Sears, Target...

  • Page 33
    ...the services that were launched in 2005. In 2006, Ray-Ban was introduced in all 941 stores. In general, sales growth in Sears Optical stores was higher than that of Sears' total sales. In 2006, Target Optical, which appeals to customers who enjoy fashion and novelty, reported improved performance in...

  • Page 34
    ... basis, rose nearly three times the average growth in retail sales in the United States. In the United States, Sunglass Hut further expanded with 90 new store openings and a restyling of another 153 stores, mainly in the key states of California, Florida, Texas and New York. In 2007, an additional...

  • Page 35
    ... and exclusive luxury brands. At the end of 2006, Luxottica Group entered a long-term license agreement for the design, production and exclusive worldwide distribution of Tiffany & Co.'s prescription and sun collections. This new agreement, marking Tiffany's debut in the eyewear market, is also...

  • Page 36
    ... REPORT 2006 OTHER ACTIVITIES LENS LABORATORIES Luxottica Group manages one of the largest networks of optical manufacturing labs in North America, with nine central labs and close to 900 lens finishing labs, mainly within LensCrafters stores. To support the growth in sales of anti-glare lenses...

  • Page 37
    Mali 2006

  • Page 38

  • Page 39
    ... in order to achieve the efficiency goals of each type of product and service it offers. Control of the various phases of production makes it possible to monitor the quality of products and processes, introduce new operating methods and exploit synergies. It also enables production time and costs to...

  • Page 40
    ...'s internal organization structure put in place new operating roles, such as controllers, industrial area managers, human resources managers and quality control managers. 2006 also saw the completion of weekly production programming projects at Sedico and Pederobba. A similar project is scheduled...

  • Page 41
    ... the main flows of fraudulent goods and to organize brand protection strategies accordingly. It has been established that most counterfeit eyewear products come from China. Luxottica Group is therefore concentrating its efforts on constant monitoring of production sites and customs offices in...

  • Page 42

  • Page 43
    ...of the retail business during 2006. To support Luxottica Group's development plans, there was a major effort to further strengthen corporate-level processes, systems and instruments for managing and developing human resources during 2006. Such activities included: • Adoption of a labor requirement...

  • Page 44

  • Page 45
    ...| 45 < NORTH AMERICA Every year, the program offers free eye exams and new eyeglasses to tens of thousands of people in the United States and Canada. Since its beginnings in 1988, Give the Gift of Sight has helped around three million adults and children in North America. Luxottica Group-affiliated...

  • Page 46
    ... missions, particularly the international ones, require intense teamwork to optimize the use of resources and time and reach as many people as possible. 2006 In 2006, Give the Gift of Sight provided care to 753,207 people worldwide, up 13% from 2005. Over 404,000 people received eye exams or a pair...

  • Page 47
    Mali 2006

  • Page 48
    ... program reflects the Group's values and commitment to stakeholders in supporting vision-related causes and assisting communities in remote locations by providing free eye exams, prescription eyeglasses and sunglasses in Australia. Community I-Care's objective is also to offer the Group employees...

  • Page 49
    Paraguay 2006

  • Page 50
    ...report on Corporate Governance 2006 91 > Stock options plans and share buy-back plans 93 > Luxottica Group share capital information 94 95 95 Listings: 17 years on the NYSE and six years on the MTA ADS and Ordinary share performance on the NYSE and MTA and main indexes Average Euro/US$ exchange rate...

  • Page 51
    Mali 2006

  • Page 52
    15 7 9 11 10 17 16 14 6 3 13 4 12 5 8 1 2

  • Page 53
    ... INTERNAL CONTROL COMMITTEE Lucio Rondelli Tancredi Bianchi Mario Cattaneo Chairman (1) Executive Director. (2) Independent Director. (3) Appointed Lead Independent Director on February 19, 2007. (4) Appointed on February 19, 2007. (5) Resigned from the function as member of the Human Resources...

  • Page 54

  • Page 55
    ... INCOME (for years ended December 31) (Euro/000) | 55 < 2003 (1) 2004 (1) (2) (3) 2005 (1) (2) (3) 2006 (1) (2) (3) Net sales Cost of sales Purchases and inventory variance Manufacturing cost Manufacturing depreciation Manufacturing personnel cost Gross profit Operating expenses Selling...

  • Page 56
    ... of business net of cash acquired Sale of Pearle Europe Sale of Things Remembered Other Free cash flow Dividends Exercise of stock options Debt acquired through acquisitions Effect of exchange adjustments to net financial position Decrease/(Increase) in net financial position Cash Bank overdraft...

  • Page 57
    .... This increase was mainly attributable to increased sales of our Ray-Ban brand as well as the continued success of sales of branded products of our designer lines, such as Prada and Bvlgari, and the continued development of new branded products such as Dolce & Gabbana (which we began distributing...

  • Page 58
    ... from increased sales of our Ray-Ban brand and sales of branded products of our designer lines, Prada, Bvlgari and Dolce & Gabbana, which carry a higher gross margin than other lines, increased efficiency in our manufacturing facilities leveraging the fixed cost structure to produce more frames, and...

  • Page 59
    ...segment increased to 13.1% in 2006 from 11.6% in 2005. This increase in operating margin is attributable to lower store costs in the North American retail business, as well as increased net sales in the North American retail business due to the fixed cost store structure. Other income (expense), net...

  • Page 60
    > 60 | ANNUAL REPORT 2006 LIQUIDITY AND FINANCIAL RESOURCES The Company has relied primarily upon internally generated funds, trade credit and bank borrowings to finance its operations and expansion. Bank overdrafts represent negative cash balances held in banks and amounts borrowed under various ...

  • Page 61
    ...Banca Intesa Euro 200 million unsecured credit facility discussed above. The Intesa OPSM Swaps exchange the floating rate of Euribor for an average fixed rate of 2.38% per annum. On June 3, 2004, the Company and US Holdings entered into a new credit facility with a group of banks providing for loans...

  • Page 62
    Paraguay 2006

  • Page 63
    ... accordance with International Accounting Standards / International Financial Reporting Standards (IAS/IFRS), in compliance with EEC regulations (EEC Regulation no. 1606/2002). Beginning with the financial statements for fiscal year 2005, European companies listed on the Stock Exchange must prepare...

  • Page 64

  • Page 65
    ... 23, 2007. In order to be a ADS holder of record on May 23, 2007 and thus be entitled to such dividend, you must purchase the ADSs on or before May 18, 2007. 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 May...

  • Page 66
    ... by Italy. Under the currently applicable Italy-U.S. Treaty, an Italian substitute tax at a reduced rate of 15% may generally apply to dividends paid by Luxottica Group to a U.S. resident entitled to treaty benefits who promptly complies with the procedures for claiming such benefits, provided the...

  • Page 67
    ...be used by ADS holders for the purpose of obtaining the direct application of the reduced tax rate under an applicable tax treaty. You can download those documents also here: Deutsche Bank Trust Company Americas Reclaim Notice and Forms (Link to DTC document) As soon as the required documentation is...

  • Page 68

  • Page 69
    ... Group; • Adoption of common organizational models; • Adoption of guidelines on the composition, operation and role of the subsidiaries' Boards of Directors - including guidelines regarding the delegation of management activities consistent with those adopted by Luxottica. Luxottica's corporate...

  • Page 70
    ...; 4) The approval of agreements having strategic nature, such as those having significant economic value or in any case involving liabilities for the Company exceeding three (3) years' duration. Furthermore, by resolution dated June 14, 2006, Luxottica's Board of Directors reserved the exclusive and...

  • Page 71
    ... Chief Executive Officer who, on the basis of the directives received by the Board, supervises all business structures and makes proposals to be submitted to the Board on the organizational structure of the Company and of the Group, the general development and investment plans, the financial plans...

  • Page 72
    ... Human Resources Committee Member of the Internal Control Committee Member of the Internal Control Committee The Chief Executive Officer is also an employee of the Company. Set out below is a list of the positions held by each of the Directors in other listed companies as well as finance, banking...

  • Page 73
    ... of the Board of Directors of LensCrafters Inc., and Sunglass Hut International Inc. Claudio Costamagna Member of the Board of Directors of Value Partners S.p.A. and DEA Capital S.p.A. Claudio Del Vecchio Chairman and Chief Executive Officer of Retail Brand Alliance Inc., Chief Executive Officer of...

  • Page 74
    ... of the directives received by the Board of Directors, the Chief Executive Officer supervises all business structures. He also draws up the proposals to be submitted to the Board of Directors as to the organizational structure of the Company and of the Group, the general development and investment...

  • Page 75
    .... The Chief Executive Officer was granted options to purchase Company's shares described in the Notes supplementing the financial statements as of December 31, 2006. Human Resources Committee. On June 14, 2006, the Board of Directors appointed within its members the new Human Resources Committee...

  • Page 76
    ... directly interested in the relevant resolution. During fiscal year 2006, the Committee met as described in the table attached to this Report. On February 19, 2007, the Board of Directors resolved upon specific allocations to provide the Committee with appropriate financial resources to perform...

  • Page 77
    ... REPORT ON CORPORATE GOVERNANCE 2006 | 77 < On November 6, 2006, after positive opinion given by the Internal Control Committee and the Board of Statutory Auditors, the Company's Board of Directors approved the Financial Risk Management Policy applicable to all companies within the Luxottica Group...

  • Page 78
    ... office was granted to the person in charge of Internal Audit of Luxottica Group, who reports to the Chairman and the Chief Executive Officer and reports on the execution of his duties to the Internal Control Committee and the Board of Statutory Auditors. Organizational, Management and Control Model...

  • Page 79
    ...the Human Resources Manager Officer (Mr. Nicola Pelà ) and a member of the Board of Statutory Auditors (Mr. Giorgio Silva). The Supervisory Body reports to the Board of Directors, the Internal Control Committee and to the Board of Statutory Auditors twice a year on the performed activity. To perform...

  • Page 80
    > 80 | ANNUAL REPORT 2006 properly collected and communicated to the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), so that they can make appropriate and prompt decisions on the information to be disclosed to the market. The internal control system supervising the drawing up ...

  • Page 81
    ... in Charge of the Internal Auditing for the prior authorization of allowed non-audit services, to be analytically identified, and examines any reports on the performance of the authorized services; • Examines any reports of the Chief Executive Officer and the Chief Financial Officer relating to...

  • Page 82
    ... the values chart supporting all business activity, and is continuously reviewed and updated to take into account the suggestions deriving in particular from the US regulations. The Code of Ethics currently in force, which applies throughout the Group, was approved by the Board of Directors on...

  • Page 83
    ... issued a new version of the Corporate Governance Code, replacing the one drawn up in 1999, as amended in 2002. These new provisions take into account both the experience built up during the last years by the best practices of the listed companies in Italy and the main foreign markets, and the...

  • Page 84
    ...the old Code of Conduct. The new Procedure Concerning Internal Dealing approved by the Board of Directors regulates in detail the behavioral and information obligations relating to dealings in financial instruments performed by so-called "relevant parties", of which a list is provided. The "Relevant...

  • Page 85
    ... the regulations in force in Italy and the U.S., in view of the fact that Luxottica shares are listed both on the telematic stock market organized and managed by Borsa Italiana and on the New York Stock Exchange. Any further constraints imposed by any local laws applicable to individual non-Italian...

  • Page 86
    .... 58/1998 for fiscal years 2006-2011; 7. Approval of the 2006 Stock Option Plan and related rules. VII. INVESTOR RELATIONS An investor relations team, reporting directly to the Chief Executive Officer, is dedicated to relations with the national and international financial community, investors and...

  • Page 87
    ... and accounting structure adequacy, the Company's Board of Directors resolved: (a) Pursuant to the application criteria no. 1.C.1. a) and 1.C.1. b) of the Corporate Governance Code, to approve a report concerning the Luxottica Group corporate, organizational and accounting structure, identifying...

  • Page 88
    ...; (m) To appoint as Chief Executive Officer Mr. Andrea Guerra, Executive Director in charge of supervising the operation of the Internal Control system, with tasks and functions set out in the Corporate Governance Code; (n) In compliance with the Application Criterion 8.C.1.c), to approve the...

  • Page 89
    Mali 2006

  • Page 90

  • Page 91
    ... purchase of up to 11,500,000 Luxottica Group's ADS, representing an equal number of ordinary shares, equivalent to 2.5% of Luxottica Group's authorized and issued share capital. This plan required that the purchase be carried out on the New York Stock Exchange within 18 months of its approval. On...

  • Page 92

  • Page 93
    ..., 1990. At the time of the Initial Public Offering 10,350,000 ordinary shares were sold, equivalent to 5,175,000 American Depositary Shares (each ADS equals two ordinary shares). The issue price was US$ 19 per ADS. In June 1992 Luxottica Group's Board of Directors approved a change in the conversion...

  • Page 94
    > 94 | ANNUAL REPORT 2006 LISTINGS: 17 YEARS ON THE NYSE AND SIX YEARS ON THE MTA NYSE ADS (Quarterly - In US$ 2006 Low High Close Low (1) ) 2005 High Close Low 2004 High Close Low 2003 High Close Low 2002 High Close First Second Third Fourth Year 24.90 24.36 25.32 29.31 24.36 29.05 30.54 ...

  • Page 95
    ...19.11 15.74 18.43 Six-year high: Euro 24.46 on November 8, 2006. Six-year low: Euro 9.25 on March 12, 2003. ADS AND ORDINARY SHARE PERFORMANCE ON THE NYSE AND MTA AND MAIN INDEXES Share (MTA - Euro) ADS (NYSE - US$) AVERAGE EURO/US$ EXCHANGE RATE: 1995-2006 1995 (1) First quarter Second quarter...

  • Page 96
    ... 104 106 Statements of Consolidated Income Consolidated Balance Sheets Statements of Consolidated Shareholders' Equity Statements of Consolidated Cash Flows 109 > Notes to Consolidated Financial Statements 161 > Key contacts and addresses 163 > Luxottica Group main operating companies in the world

  • Page 97
    Mali 2006

  • Page 98

  • Page 99
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 99

  • Page 100
    > 100 | ANNUAL REPORT 2006

  • Page 101
    ... FOR THE YEARS ENDED DECEMBER 2004, 2005 AND 2006 (*) 2004 2005 (Euro/000) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 101 < 2006 2006 (US $/000) (1) NET SALES COST OF SALES GROSS PROFIT OPERATING EXPENSES Selling and advertising General and administrative Total operating expenses...

  • Page 102
    ... net (less allowance for doubtful accounts, Euro 27.6 million in 2005 and Euro 22.7 million in 2006, US$ 30.0 million in 2006) Sales and income taxes receivable Inventories, net Prepaid expenses and other Deferred tax assets, net Assets of discontinued operations Total current assets PROPERTY, PLANT...

  • Page 103
    ... (Euro/000) 2006 2006 (US$/000) (1) CURRENT LIABILITIES Bank overdrafts Current portion of long-term debt Accounts payable Accrued expenses: • Payroll and related • Customers' right of return • Other Income taxes payable Liabilities of discontinued operations Total current liabilities LONG...

  • Page 104
    ... Amount Additional paid-in capital Retained earnings Unearned Stock-based compensation BALANCES, JANUARY 1, 2004 Exercise of stock options Translation adjustment Minimum pension, liability, net of taxes of Euro 0.2 million Tax benefit on stock options Change in fair value of derivative 454,477...

  • Page 105
    ... of taxes of Euro 5.5 million Unrealized gain on available-for-sale securities, net of taxes of Euro 0.5 million Diluted gain on business acquisitions, SAB 5-H gain Excess tax benefit on stock options Change in fair value of derivative instruments, net of taxes of Euro 1.8 million Dividends declared...

  • Page 106
    ...net CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF ACQUISITION OF BUSINESSES Accounts receivable Prepaid expenses and other Inventories Accounts payable Accrued expenses and other Accrual for customers' right of return Income taxes payable Total adjustments CASH PROVIDED BY OPERATING ACTIVITIES...

  • Page 107
    ...fees Decrease in overdraft balances Exercise of stock options Excess tax benefit from stock-based compensation Dividends CASH USED IN FINANCING ACTIVITIES OF CONTINUING OPERATIONS (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND EQUIVALENTS, BEGINNING OF YEAR Effect of exchange rate changes...

  • Page 108
    Mali 2006

  • Page 109
    ..., Luxottica Group is engaged in the design, manufacturing, wholesale distribution and marketing of house brand and designer lines of mid to premium-priced prescription frames and sunglasses. Through the Company's retail operations the Company owns and operates 5,280 retail locations worldwide and...

  • Page 110
    ... agreements require a guarantee from Luxottica Group S.p.A. Interest rates on these lines of credit vary and can be used to obtain various letters of credit when needed. Inventories - Luxottica Group's manufactured inventories, approximately 75.4% and 66.7% of total frame inventory for 2005 and 2006...

  • Page 111
    ...any reason, the Company believes that an event has occurred that may impair goodwill. Such tests are performed at the reporting unit level which consists of two units, Wholesale and Retail, as required by the provisions of SFAS 142. For the years ended December 31, 2004, 2005 and 2006, the result of...

  • Page 112
    ... local statutory requirements (see Note 10). Revenue recognition - Revenues include sales of merchandise (both wholesale and retail), insurance and administrative fees associated with the Company's managed vision care business, eye exams and related professional services, and sales of merchandise...

  • Page 113
    ..., are recognized upon receipt by the customer at the retail location, or when goods are shipped directly to the customer for internet and catalog sales. In some countries, the Company allows retail customers to return goods for a period of time and as such the Company has recorded an accrual for the...

  • Page 114
    ... sales at the time they are delivered to the customer. Discounts and coupons tendered by customers are recorded as a reduction of revenue at the date of sale. Managed vision care underwriting and expenses - The Company sells vision insurance plans which generally have a duration of up to five years...

  • Page 115
    ...for operational purposes such as security on leases and health benefits. The fair value of the TR Note was based on discounted projected cash flows utilizing an expected yield. At December 31, 2005 and 2006, the fair value of the Company's financial instruments approximated the carrying value. Stock...

  • Page 116
    ...the fair value of options granted was estimated on the date of grant using a binomial lattice model with the following assumptions: 2004 2005 Plan I (a) 2006 Plan II (b) Plan III (c) Dividend yield Risk-free interest rate Expected option life (years) Expected volatility Weighted average fair value...

  • Page 117
    .... Luxottica Group uses derivative financial instruments, principally interest rate and currency swap 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...

  • Page 118
    ... | ANNUAL REPORT 2006 In September 2006, FASB issued SFAS no. 158, Employer's Accounting for Defined Benefit Pension Other Post Retirement Plans, which requires the Company to recognize an asset or liability for the funded status (difference between fair value of plan assets and benefit obligation...

  • Page 119
    ... for top management of the Company at an exercise price of Euro 13.67 per share (the closing stock price at December 31, 2005 on the Milan Stock Exchange was Euro 21.43 per share). The stock options to be issued under the stock option plan vest upon meeting certain economic objectives. Prior to 2006...

  • Page 120
    ... expense associated with the annual stock option plans and with the Company's October 2004 performance plan grants, September 2004 shareholder grant and July 2006 performance plans grants was included in general and administrative expense for the fiscal year ended December 2006. Total receivables...

  • Page 121
    ...available-for-sale" security and as such changes in its fair value will be included in accumulated other comprehensive income and reclassified to earnings when realized. For fiscal 2006 there were no amounts reclassified from other comprehensive income into earnings. 5. ACQUISITIONS AND INVESTMENTS...

  • Page 122
    ... common stock of Cole, a publicly traded company on the New York Stock Exchange. On January 23, 2004, as amended as of June 2, 2004 and July 15, 2004, the Company and Cole entered into a definitive merger agreement with the unanimous approval of the Boards of Directors of both companies. On...

  • Page 123
    ... Association of PE required Cole to make 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 parties. In December 2004, substantially all the terms of the sale were established at a final cash selling price...

  • Page 124
    ... financial statements. The acquisition was made as result of the Company's strategy to continue expansion of its retail business in North America. • In September 2005, the Company purchased 27 stores in Canada from Symbol of Sight, Ltd known as Precision Optical. The acquisition was accounted...

  • Page 125
    ...the top premium optical markets in mainland China, as well as in Hong Kong. The acquisition was accounted for in accordance with SFAS 141 and, accordingly, the total consideration of Euro 30.3 million has been allocated to the fair market value of the assets and liabilities of the company as defined...

  • Page 126
    ... the Company's Consolidated Financial Statements. • In November 2006, the Company completed the acquisition, which was announced in June 2006, of Modern Sight Optics, a leading premium optical chain that operates a total of 28 stores in Shanghai, China. Modern Sight Optics has an existing position...

  • Page 127
    ... based on their fair value at the date of the acquisition. The acquisition was made as a result of the Company's strategy to continue expansion of its retail business in the United States of America. • On January 25, 2007, Luxottica Group announced that, in compliance with directions issued by the...

  • Page 128
    ... the corporate headquarters of the North American retail division and the expansion of the distribution center in Atlanta. Certain tangible assets are maintained in currencies other than Euro (the reporting currency) and, as such, balances may fluctuate due to changes in exchange rates. For the year...

  • Page 129
    ...The LensCrafters, Sunglass Hut, OPSM and Cole trade names are amortized on a straight-line basis over a period of 25 years and the Ray-Ban trade names over a period of 20 years, as the Company believes these trade names to be finite-lived assets. (b) Distributor network, customer contracts and lists...

  • Page 130
    ... may fluctuate due to changes in exchange rates. Estimated annual amortization expense relating to identifiable assets, including the identifiable intangibles attributable to recent acquisitions for which the purchase price allocation is not final, is shown below: Years ending December 31, (Euro...

  • Page 131
    ... (or group) owns. This resulted in resetting of asset cost basis for tax purposes, and in the relevant uplifts in fixed assets and intangibles as at the date of tax consolidation which occurred in December 2006 when OPSM lodged the consolidated 2005 tax return. Beginning with fiscal year 2004, for...

  • Page 132
    ... of the change in the Italian tax rate was immaterial and has been included in deferred tax expense. Italian companies' taxes are subject to review pursuant to Italian law. As of December 31, 2006, tax years from 2001 through the most recent year were open for such review. Certain Luxottica Group...

  • Page 133
    ... earnings of certain subsidiaries, the Company has provided for an accrual for Italian income taxes related to declared dividends of earnings. At December 31, 2006, the Company had restricted Federal net operating loss carryforwards in the United States of America of approximately Euro 105.6 million...

  • Page 134
    ... credit facility discussed above. As such changes in the fair value of the Intesa Swaps were included in OCI until they were recorded in the financial statements. The Intesa Swaps exchanged the floating rate based on Euribor for a fixed rate of 2.985% per annum. In September 2003, the Company...

  • Page 135
    ... by the Company and Luxottica S.r.l., a wholly owned subsidiary. The notes contain certain financial and operating covenants. US Holdings was in compliance with those covenants as of December 31, 2006. In December 2005, US Holdings terminated the fair value interest rate swap agreement described...

  • Page 136
    ... option to choose weekly or monthly interest periods. The credit facility contains certain financial and operating covenants. OPSM was in compliance with these covenants as of December 31, 2006. Long-term debt, including capital lease obligations, matures in the years subsequent to December 31, 2006...

  • Page 137
    ... related labs and distribution centers. Additionally, the Company amended the pension accrual formula for the Cole associates, as well as all new hires for the Company. The new formula has a more gradual benefit accrual pattern. However, the Pension Plan Protection Act of 2006 will require a change...

  • Page 138
    ... 138 | ANNUAL REPORT 2006 A subsidiary of the Company sponsors the Cole National Group, Inc. Supplemental Pension Plan. This plan is a nonqualified unfunded supplemental executive retirement plan for certain participants of the Cole pension plan who were designated by the Board of Directors of Cole...

  • Page 139
    ... recognized in other comprehensive income 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 included in...

  • Page 140
    ... benefit cost for years ended December 31, 2006 and 2005 Discount rate Expected long-term return on plan assets Rate of compensation increase Mortality table 5.75% 8.50% 4.25% RP-2000 5.75% 8.25% 4.25% RP-2000 5.75% n.a. 4.25% RP-2000 5.75% n.a. 4.25% RP-2000 For 2006, the Company's long-term rate...

  • Page 141
    ... plans, which cover certain present and past employees of the Cole companies acquired: • Cole provides, under individual agreements, postemployment benefits for continuation of health care benefits and life insurance coverage to former employees after employment. As of December 31, 2005 and 2006...

  • Page 142
    ... rates and annual compensation. Health benefit plans - The Company partially subsidizes health care benefits for eligible retirees of certain subsidiaries in the United States of America. Employees generally become eligible for retiree health care benefits when they retire from active service...

  • Page 143
    ...Service cost Interest cost Plan participants' contributions Actuarial gain (loss) Change in plan provisions Benefits paid Benefit obligations, end of year Change in plan assets Fair value of plan assets, beginning of year Company contribution Plan participants' contributions Benefits paid Fair value...

  • Page 144
    ...231 249 1,503 Contributions - The expected contributions for 2007 are Euro 0.2 million for the Company and Euro 0.08 million for the employee participants. For 2006, a 12% (10% for 2005) increase in the cost of covered health care benefits was assumed. This rate was assumed to decrease gradually to...

  • Page 145
    ... to report a minimum pension liability measured as the excess of the accumulated benefit obligation over the fair value of plan assets and any recorded pension accrual. SFAS no. 158 also requires employers to recognize in other comprehensive income gains or losses and prior service costs or credits...

  • Page 146
    ... the compensation costs of the plans had been determined under a fair-value based method for the previous periods are reported in Note 1. A summary of option activity under the Plans as of December 31, 2006, and changes during the year then ended is as follows: Number of options outstanding Weighted...

  • Page 147
    ... < Retail Division which vested and became exercisable on January 31, 2007 as certain financial performance measures were met over the period ending December 2006. At December 31, 2005, there were options to acquire 1,000,000 shares (the closing ADR price at December 31, 2005 on the New York Stock...

  • Page 148
    ... 148 | ANNUAL REPORT 2006 A summary of option activity under the performance plans as of December 31, 2006, and changes during the year then ended are as follows: Performance plan Number of options oustanding Weighted Weighted Aggregate average average intrinsic exercise price remaining value (Euro...

  • Page 149
    ...and marketing of house brand and designer lines of mid- to premium-priced prescription frames and sunglasses. The Company operates in the retail segment through its Retail Division, consisting of LensCrafters, Sunglass Hut International, OPSM, Cole National, Xueliang, Ming Long and Modern Sight. The...

  • Page 150
    ...of acquired retail businesses. The geographic segments include Italy, the main manufacturing and distribution base, United States and Canada (which includes the United States of America, Canada and Caribbean islands), Asia Pacific (which includes Australia, New Zealand, China, Hong Kong, Japan) and...

  • Page 151
    ... gift business (see Note 4). The Company attempts to limit its credit risk associated with cash equivalents by placing the Company's investments with highly rated banks and financial institutions. With respect to accounts receivable, the Company limits its credit risk by performing ongoing credit...

  • Page 152
    ... 2006, the Company announced that it entered into a 10-year license agreement for the design, production and worldwide distribution of prescription frames and sunglasses under the Polo Ralph Lauren name. The agreement commences on January 1, 2007. Based on the agreement, Luxottica Group provided for...

  • Page 153
    ...levels of sales volume. In addition, with the acquisition of Cole, the Company operates departments in various host stores paying occupancy costs solely as a percentage of sales. Certain agreements which provide for operations of departments in a major retail chain in the United States contain short...

  • Page 154
    > 154 | ANNUAL REPORT 2006 Future minimum annual rental commitments for operating leases are as follows: Year ending December 31, (Euro/000) 2007 2008 2009 2010 2011 Thereafter Total 195,490 172,421 139,002 107,300 80,559 220,664 915,436 Guarantees The United States Shoe Corporation, a wholly ...

  • Page 155
    ... points annually. Litigation Sunglass Hut shareholder lawsuit In May and June 2001, certain former stockholders of Sunglass Hut International, Inc. ("SGHI") commenced actions in the U.S. District Court for the Eastern District of New York against the Company and its acquisition subsidiary formed...

  • Page 156
    ... 5.8 million, respectively. California vision health care service plan lawsuit In March 2002, in Snow v. LensCrafters, Inc. et al. (Case. no. CGC-02-405544), an individual commenced an action in the California Superior Court for the County of San Francisco against Luxottica Group S.p.A. and certain...

  • Page 157
    ... Court granted Cole's petition for review of the portion of the appellate court's decision stating that California law prohibited defendants from providing eye examinations and other optometric services at Pearle Vision Centers. The appellate court's decision directing the trial court to enjoin...

  • Page 158
    ... appeal by an order dated December 12, 2006, directing the Company and RayBan Indian Holdings Inc. to make a public offer within 45 days of the order, using April 28, 1999 as the reference date for calculating the offer price. The Supreme Court also directed that interest be paid at the rate of 10...

  • Page 159
    ...adverse effect on the Company's consolidated financial position or results of operations. 16. SUBSEQUENT EVENTS In February 2007, the Company exercised an option included in the amendment to the term and revolving credit facility disclosed in Note 8 (d) to extend the maturity date of Tranches B and...

  • Page 160
    Mali 2006

  • Page 161
    [email protected] DEPOSITARY BANK - USA Deutsche Bank Trust Company Americas c/o Mellon Investor Services - Transfer Department - ADRs 480 Washington Boulevard - Jersey City, NJ 07310 - United States of America Toll free (in US): +1 (800) 7491873 or Toll +1 (866) 2492593 International callers: Tel: +1 (201...

  • Page 162

  • Page 163
    LUXOTTICA GROUP MAIN OPERATING COMPANIES IN THE WORLD EUROPE Luxottica Srl Agordo, Belluno - Italy Luxottica Vertriebsgesellschaft mbH Klosterneuburg - Austria Luxottica Belgium NV Deurne - Belgium Luxottica South Eastern Europe Ltd Novigrad - Croatia Oy Luxottica Finland AB Espoo - Finland ...

  • Page 164
    ... Holdings Corp. Wilmington, Delaware - USA Cole Vision Corporation Wilmington, Delaware - USA Eyemed Vision Care Llc Wilmington, Delaware - USA Pearle Vision Inc. Wilmington, Delaware - USA LensCrafters, Inc. Mason, Ohio - USA Sunglass Hut International, Inc. Plantation, Florida - USA Avant-Garde...

  • Page 165
    ...Australia OPSM Group Limited Sydney - Australia SPV Zeta Optical Trading (Beijing) Co. Ltd Beijing - China Luxottica Tristar (Dongguan) Optical Co. Dong Guan City, Guangdong - China Guangzhou Ming Long Optical Technology Co. Ltd Guangzhou City - China Luxottica Retail Hong Kong Ltd Hong Kong - China...

  • Page 166
    Pictures Pictures of Give the Gift of Sight missions at home and abroad printed in this Annual Report are by Lyons Photography, Inc. Graphic art Letizia Marino 19novanta communication partners Consultancy and co-ordination Ergon Comunicazione Printing Grafiche Antiga - Italy