LensCrafters 2007 Annual Report Download

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ANNUAL REPORT 2007

Table of contents

  • Page 1
    ANNUAL REPORT 2007

  • Page 2
    ANNUAL REPORT 2007 YEAR ENDED DECEMBER 31, 2007

  • Page 3
    All pictures in this Annual Report are from Give the Gift of Sight and are portraits of some of the over 780,000 people worldwide who received free eyecare from this Luxottica Group Foundation in 2007. Further information on the Give the Gift of Sight Foundation can be found in the section dedicated...

  • Page 4
    ...on Corporate Governance 2007 107 > Stock options plans and share buy-back plans 109 > Luxottica Group share capital information 110 110 111 Listings: 18 years on the NYSE and seven years on the MTA ADS and Ordinary share performance on the NYSE and MTA and main indexes Average Euro/US$ exchange rate...

  • Page 5
    ... > Chairman's letter to shareholders 9 > Profile of Luxottica Group 13 > Key events of 2007 14 > Financial highlights 17 > Strategy 25 > Luxottica Group in 2007 27 > The Group's brands 31 > Distribution 43 > Manufacturing 49 > Human resources 51 > Give the Gift of Sight, a Luxottica Group foundation

  • Page 6

  • Page 7

  • Page 8
    ... of our first Polo Ralph Lauren collection and Tiffany's first ever appearance on the eyewear market. We celebrated our first ten years in China, where we started up with the Tristar plant and now have new offices in Shanghai, Beijing and Hong Kong, and around 300 stores, a retail platform we intend...

  • Page 9

  • Page 10
    ... brands. House brands include Ray-Ban, the world's best-selling sun and prescription eyewear brand, Arnette, Oakley, Persol, Revo, and Vogue. License brands include Bvlgari, Burberry, Chanel, Dolce & Gabbana, Polo Ralph Lauren, Prada, Tiffany & Co., and Versace. The Group's products are designed...

  • Page 11
    ... United States and Shanghai. Enters into an agreement to open Sunglass Hut stores in the Middle East. In September, the first LensCrafters store in Beijing opens. Acquisition of Oakley, the performance eyewear company, giving rise to the new Luxottica Group. This acquisition provides the Group...

  • Page 12

  • Page 13

  • Page 14
    ...'s new Code of Self-Discipline. June Luxottica signs a definitive agreement to acquire Oakley, Inc. The agreement provides for the acquisition of all outstanding Oakley shares for US$ 29.30 per share in cash for a total price of approximately US$ 2.1 billion. August Luxottica Group mandates a group...

  • Page 15
    ... 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' Meeting on May 13, 2008. (3) Figures include results of OPSM Group operations from the acquisition date (August 1, 2003). (4) Figures include...

  • Page 16
    ... GROSS PROFIT 1,200 1,000 800 600 400 800 700 600 500 400 300 200 2003 2004 2005 2006 2007 2003 2004 2005 2006 NET SALES BY DISTRIBUTION Retail Wholesale 66% 34% 200 100 millions of Euro millions of US$ millions of Euro millions of US$ OPERATING INCOME NET INCOME 4,000 3,500 3,000...

  • Page 17

  • Page 18
    .... LensCrafters staff are focused on the customer's style and on delivering excellence in customer service. Pearle Vision Consumers have always seen this longest-standing American optical brand as a provider of "trusted eye care" offering thorough exams and products of the highest quality. Luxottica...

  • Page 19
    ... managed vision care operators in the United States providing vision insurance to more than 23 million eligible customers, including some of the largest category and corporate insurance programs in the nation. Luxottica will continue to develop exclusive relationships with American "Group Discount...

  • Page 20
    ...of other licensing agreements, Luxottica considers its work on optimizing its brand portfolio substantially completed. By combining excellent, constantly available pre- and post-sale services, the Group satisfies customer expectations and market demands in the best possible way. House brands Ray-Ban...

  • Page 21
    > 20 | ANNUAL REPORT 2007 added levels of its products. The Group is well placed to meet growing demand in the retail segment in North America, in Asia-Pacific and in business generated by recent licensing agreements. To this end, in fact, it intends to leverage the manufacturing and logistical ...

  • Page 22
    ... eye safety. Fox Racing Oakley is the exclusive worldwide licensee of Fox Racing (Fox), a leading apparel brand in the motocross industry, for sunglasses and goggles. Oakley designs, develops and manufactures optics products in cooperation with Fox and is responsible for worldwide marketing...

  • Page 23
    .... The Optical Shop of Aspen The Optical Shop of Aspen operates luxury optical retail stores offering fashion and luxury eyewear from a variety of designers, including many Group-owned brands. Oliver Peoples Oliver Peoples operates four luxury optical retail stores selling Oliver Peoples products.

  • Page 24

  • Page 25

  • Page 26
    ... the year, with total sales (wholesale and retail) up 6.1% (in US$) on the previous year. In 2007, Luxottica Group acquired Oakley for US$ 2.1 billion. The acquisition provides an incredible opportunity for the Group. The agreement will integrate two strong and complementary business models. It...

  • Page 27
    HOUSE BRANDS

  • Page 28
    ...-structured manufacturing systems, without compromising product quality. With its distribution capacity, direct operations in markets, marketing support and a keen understanding of the international marketplace, Luxottica is the ideal partner for brands seeking to translate their style and values...

  • Page 29
    LICENSE BRANDS

  • Page 30
    SEZIONE DI APPARTENENZA | 29

  • Page 31

  • Page 32
    ...6,400 stores mainly in the United States, Canada, Australasia, China, and the Middle East. In Europe, there are around 90 Sunglass Hut stores, mostly in the UK. | 31 < GROUP RETAIL CHAINS WORLDWIDE Geographical area Retail chain North America LensCrafters Pearle (*) Sears Optical Target Optical BJ...

  • Page 33
    ... for order management that reduces delivery times and minimizes inventory, while providing high-quality products. RETAIL Luxottica Group's retail division includes: • Ilori, LensCrafters, Pearle Vision (owned and franchise stores), Sears Optical, Target Optical, Sunglass Icon, Oakley Stores and...

  • Page 34
    ... to its North American retail business as well as EyeMed Vision Care, a leading 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 largest and best known chain in North...

  • Page 35
    ... designers such as Burberry, Dolce & Gabbana, Polo Ralph Lauren, Prada, and Versace. LensCrafters also broadened its selection of conservative and classic frames and Oakley products to meet male customer demand. Sales of prescription frames and sunglasses produced by Luxottica Group, particularly...

  • Page 36
    ... in sales on comparable basis, 2007 saw both a higher average selling price and an increasing number of customers. As a premium optical retailer, LensCrafters' positioning has become a more attractive option versus traditional optical retailers. High levels of service, eye-care programs, lenses and...

  • Page 37
    ... 477 are company owned in the United States, Canada and Puerto Rico, and 403 are franchise stores in the US and the Caribbean. In North America, Pearle Vision is the number two optical chain after LensCrafters. Although both brands address the mid- to high-end customer bracket, their positioning in...

  • Page 38
    ...338 locations in Sears, Target and BJ's Wholesale. Each of these brands offer consumers the convenience of taking care of their optical needs where they shop and has a precise market positioning. Sears, a department store with a vast and heterogeneous customer base, has further improved the services...

  • Page 39
    ... Luxottica Group manages one of the largest networks of optical manufacturing labs in North America, with eight central labs and close to 905 lens finishing labs, mainly in LensCrafters stores. All the labs use state-of-the-art processing technologies to meet growing demand, accommodate new products...

  • Page 40
    ...39 < sale and Pearle Vision stores. LensCrafters in-store labs can prepare glasses chosen by the customer in as little as an hour. MANAGED VISION CARE - EYEMED VISION CARE EyeMed Vision Care is the second biggest managed vision care operator in the United States. With a strong surge of new clients...

  • Page 41
    ... agreements, at least ten years on average, allows the Group time to develop collections and position them effectively on the market, thus maximizing their potential, each in line with its particular brand values. The launch of the Polo Ralph Lauren and Tiffany's collections in 2007 made the brand...

  • Page 42

  • Page 43

  • Page 44
    ... efforts, the Group still needed to take on temporary labor to cover production peaks in 2007. An agreement with the trade unions also made it possible to introduce "flexible days" in order to scale working days to actual production requirements (agreement dated December 22, 2006 renewing Luxottica...

  • Page 45
    ... retail client. 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 be kept under control and optimized. This has worked in step with direct...

  • Page 46
    ... project, which aims to cut the average production time for rough frames from 12 to six days. This halving of the lead time makes response to market demand considerably faster, with obvious benefits for sales and customer service. The re-organization of processes also involves a radical reduction of...

  • Page 47
    > 46 | ANNUAL REPORT 2007 Thanks to these activities, the Group has improved its capacity to plan new collection launches. The product department has precise knowledge of the engineering department's capacity to make new models for a given season and can more effectively coordinate its selection ...

  • Page 48
    ... with the world's main Customs authorities and the other with a number of investigation agencies in the countries where counterfeiting is particularly rife in terms of both production and large scale marketing. Brands being one of its most important assets, Luxottica Group is inevitably committed to...

  • Page 49

  • Page 50
    ..., Luxottica Group's work force numbered 61,903 worldwide, of whom 7,791 in Italy, up 25.5% on the previous year. The substantial change in the number of employees was due mainly to new internal production capacity and the integration of the Oakley organization into the Group. In 2007, human capital...

  • Page 51

  • Page 52
    ...designed to help nearly 20,000 people. Since 1991, there have been more than 135 optical missions to 32 developing countries. DOMESTIC PROGRAMS Every year, Luxottica Group employees provide free eye exams and new glasses to tens of thousands of people across North America, Australia and New Zealand...

  • Page 53
    ... PROGRAMS Each year through the Vision Voucher programs, Luxottica store associates work with local agencies to provide complete eye exams and new glasses to customers deemed in visual and financial need. To date, this program has helped over 1 million people. OUTREACH Luxottica Group employees...

  • Page 54

  • Page 55
    ...tie together Luxottica employees across the globe. Employees from Europe, Australia, New Zealand, China and North America work together, through recycling efforts and international mission teams, towards a common goal of providing clear vision to those in need. During this process, associates get to...

  • Page 56

  • Page 57
    ...on Corporate Governance 2007 107 > Stock options plans and share buy-back plans 109 > Luxottica Group share capital information 110 110 111 Listings: 18 years on the NYSE and seven years on the MTA ADS and Ordinary share performance on the NYSE and MTA and main indexes Average Euro/US$ exchange rate...

  • Page 58

  • Page 59
    15 7 9 11 10 17 16 14 6 3 13 4 12 5 8 1 2

  • Page 60
    ... 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 61

  • Page 62
    ...years ended December 31) (Euro/000) | 61 < 2007 (3) 2006 (2) 2005 (2) 2004 (1) (2) Net sales Cost of sales Gross profit Operating expenses Selling and advertising expenses General and administrative expenses Income from operations Other income (expenses... operations from the acquisition date ...

  • Page 63
    ... assets Purchase of business net of cash acquired Sale of Pearle Europe Sale of Things Remembered Other Free cash flow Dividends Exercise of Stock Options Effect of exchange adjustments to net financial position Decrease/(Increase) in net financial position Cash Bank overdraft and notes payable...

  • Page 64
    ... 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, Dolce & Gabbana, Versace and Bvlgari, and the launch of new products from our license agreements with Burberry and Ralph Lauren. These...

  • Page 65
    ... of Oakley's cost of sales for the period from the acquisition date of Euro 37.6 million. As a percentage of net sales, cost of sales decreased to 31.7% in 2007, as compared to 31.8% in 2006. In 2007, excluding the frames manufactured at our acquired Oakley facilities, the average number of frames...

  • Page 66
    ... Oakley's operating expenses for the period from the acquisition date. As a percentage of net sales, operating expenses decreased to 51.5% in 2007 from 52.0% in 2006 primarily due to the maintenance of strong cost controls in our manufacturing and wholesale segment. Selling and advertising expenses...

  • Page 67
    > 66 | ANNUAL REPORT 2007 Net income from Continuing operations Income before taxes increased by Euro 102.5 million, or 15.1%, to Euro 780.7 million in 2007 from Euro 678.2 million in 2006, despite the inclusion of Oakley's income before taxes for the period from the acquisition date of Euro (7.2) ...

  • Page 68
    ... discussed above. The Intesa OPSM Swaps exchange the floating rate of Euribor for an average fixed rate of 2.45% per annum. On June 3, 2004, as amended on March 10, 2006, the Company and U.S. Holdings entered into a credit facility with a group of banks providing for loans in the aggregate principal...

  • Page 69
    ... Tribes, Oliver Peoples and Paul Smith Spectacles, and retail chains including Bright Eyes, Oakley Stores, Sunglass Icon and The Optical Shop of Aspen, for a total purchase price of approximately US$ 2.1 billion. In accordance with the terms of the merger agreement, Oakley's outstanding shares of

  • Page 70
    ...-owned subsidiary of our Group and Oakley's shares have ceased to be traded on the New York Stock Exchange. To finance the acquisition, on October 12, 2007, we and our subsidiary U.S. Holdings entered into two credit facilities with a group of banks providing for certain term loans and a bridge loan...

  • Page 71

  • Page 72
    ... Options IFRS 3 Business combination IAS 12 Income taxes IAS 19 Employee benefits IAS 38 Intangibile depreciation IAS 39 Derivatives Total IAS/IFRS adjustments 31 December IAS/IFRS 2007 4,966,054 Net sales Cost of sales Gross profit Operating expenses: Selling and advertising expenses General...

  • Page 73

  • Page 74
    ... compares with a cash dividend, distributed in 2007, of Euro 0,42 per ordinary share. If approved, Luxottica Group will pay the dividend to all holders of ordinary shares of record on May 16, 2008, and to all holders of ADSs of record on May 21, 2008. In order to be a ADS holder of record on May 21...

  • Page 75
    ... 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 dividends are...

  • Page 76
    ... to the dividends received from the Company. Such procedure customarily takes years before the reimbursement is actually made. Therefore the above-mentioned procedure, for direct application of the reduced withholding rate was established by Luxottica Group in the best interest of its shareholders.

  • Page 77

  • Page 78
    ... of 167 companies operating in Europe, the Americas, Australia and New Zealand, China, South Africa and the Middle East. The business of the Group, in terms of sales and personnel, is particularly significant in Europe, North America, Australia and China. 3. Luxottica is listed on the New York Stock...

  • Page 79
    ...internal audit system's ability to provide financial statements prepared in accordance with generally accepted accounting principles; (iv) the ability to comply with the Company Law and with the Code of Conduct promulgated by Borsa Italiana and/or trade associations with which the Group has publicly...

  • Page 80
    ...operational and business perspective, ther is no common managing interest between Delfin S.a.r.l. and Luxottica Group and any of its subsidiary companies. More details regarding these stock option plans can be found in the Group's Consolidated Financial Statements as well as on the Company's website...

  • Page 81
    ..., 2007, the Board of Directors also assesses the adequacy of the general organizational, administrative and accounting structure of the Company and of those subsidiaries having strategic relevance, through the examination of a report for each financial year prepared by the Group's Internal Auditing...

  • Page 82
    ANNUAL REPORT ON CORPORATE GOVERNANCE 2007 | 81 < the information of the managing bodies and of the Internal Control Committee, as well as regularly comparing the results achieved with the ones projected. In particular, the Board makes its assessments taking into account the information received by...

  • Page 83
    ... 1994 where he worked for ten years and was promoted to chief executive officer in 2000. Before joining the Merloni Group, Mr. Guerra was employed by Marriott Italia where he became executive general manager for the marketing department. Mr. Guerra is the chairman of Luxottica U.S. Holdings Corp. He...

  • Page 84
    ... of Directors of Luxottica S.r.l,, OPSM Group Pty Ltd, Lenscrafters, Inc. and Oakley, Inc. Roberto Chemello Mr. Chemello has a business administration degree. In 1979, Mr. Chemello joined Luxottica where he was the chief financial officer until 1985 and was the chief executive officer of Luxottica...

  • Page 85
    ... for the Sales and Logistics Department for Italy and Germany. Between 1982 and 1997, he was in charge of the business operations of the Group in the United States. He is a member of the Board of Directors of Luxottica U.S. Holdings Corp, and the Chief Executive Officer of Retail Brand Alliance, Inc...

  • Page 86
    ... only relevant appointments that count towards the maximum number are those as member of the board and/or internal auditor for publicly-listed domestic and foreign companies, banks, financial and insurance companies and other organizations with a market value equal or greater than Euro 1,000 million...

  • Page 87
    ... the Company in order to take into consideration the new structure of the Group and to better respond to the new challenges of global economic integration. The chief executive officer manages the Company, subject to the following limitations on his authority. Where any of the thresholds stated below...

  • Page 88
    ..., an objective review of operating and financial performance, an assessment of the Company's accomplishment of corporate goals and objectives, a systematic analysis of the business process and associated control for the Company and its subsidiaries. Non-Executive and Non-Independent Directors. Mr...

  • Page 89
    ... roles will receive a base wage and a variable wage. The variable wage is linked to the Company's performance. Non-executive directors' compensation packages are not linked to the Company's performance and they do not benefit from any stock, stock option, and/or other personal benefit plans.

  • Page 90
    ...and executive directors' contracts can be found in the December 31, 2007 financial statements. More details related to the Company's stock option plans can be found in the documentation pursuant to article No. 84-bis of the Regolamento Emittenti or available on the Company's website. Human Resources...

  • Page 91
    ... of the relevant corporate structures. The fiscal year 2007 has been the first year of full implementation of the Financial Risk Management Policy, approved in November 2006 by the Company's Board of Directors, and applicable to all companies that are owned by Luxottica. The policy sets forth the...

  • Page 92
    ... 2007, an Internal Control Committee quarterly report required to describe the debt exposure and the hedging transactions has been implemented in order to minimize the "exchange" and "interest rate" risks. The Credit Policy, applicable to all the wholesale companies of Luxottica Group and the retail...

  • Page 93
    ...fiscal year 2007, the Person in Charge has carried out his duties by implementing a plan of activities and verifications related to the Company and its main subsidiaries. These actions, for which the Person in Charge provided regular informational reports to the Chairman, the Chief Executive Officer...

  • Page 94
    ...2008, the Board of Directors allocated specific budgets in order to provide to the Supervisory Body adequate financial resources to perform its duties throughout fiscal year 2008. An equivalent resolution was made for fiscal year 2007. Please see Section III of this Report for more details. Sarbanes...

  • Page 95
    ...of the financial statements is designed to ensure the reliability of the financial information, in compliance with applicable accounting principles. The internal control system structure was defined consistently with the model provided by the COSO report - the most well-known international model for...

  • Page 96
    ... structure with respect to areas of responsibility, the system of internal control and the administrative accounting system, and the reliability of this system to correctly report facts to the management, and verifies the implementation of the Company management regulations provided by the Code...

  • Page 97
    ...(ii) the confidential or anonymous information from employees concerning dubious accounting or auditing matters. • evaluates the requests to make use of the company charged with the auditing of the balance sheet for permitted non-audit services and reports to the Board of Directors in such respect...

  • Page 98
    ANNUAL REPORT ON CORPORATE GOVERNANCE 2007 | 97 < Giorgio Silva Born in 1945. Graduated with a degree in Business Economics from Università Cattolica del Sacro Cuore in Milan, he enrolled in the Register of the Chartered Accountants of Busto Arsizio on 04/07/1975 and in the Varese Register on 03/...

  • Page 99
    ....luxottica.com. Manager charged with preparing a company's financial reports. The Board of Directors, by resolution of July 26, 2007, effective as of August 1, 2007, according to the provisions of art. 154 bis of TUF and art. 19 of the by-laws, has appointed the Chief Financial Officer of the Group...

  • Page 100
    ANNUAL REPORT ON CORPORATE GOVERNANCE 2007 | 99 < Code of Ethics. Luxottica Group's Code of Ethics identifies the values underlying all of the Group's business activities and is continuously reviewed and updated to take into account any necessary amendments, particularly those relating to U.S. ...

  • Page 101
    ... two managers with strategic functions (art. 152-sexies letter c2) will notify the Company, CONSOB and the public of any transactions involving the purchase, sale, subscription or exchange of shares or financial instruments related to them whose total value is at least equal to Euro 5,000 per year...

  • Page 102
    ... others: (i) directors; (ii) statutory auditors; (iii) all those in charge of executive activities within Luxottica and the companies in the Group; and (iv) any other employees of Luxottica and the companies in the Group who, because of their function or position, become aware of any information and...

  • Page 103
    ... year 2007. V. 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 financial analysts, the media and the market. There is a section on the Company website...

  • Page 104
    ... and by the Internal Control Committee Report; g) reviewed the management structure in order to bring it into line with the changes in the Company and therefore make it more appropriate for new operational needs by increasing the power given to the Chief Executive Officer and formulating a proposal...

  • Page 105
    > 104 | ANNUAL REPORT 2007 TABLE 1. STRUCTURE OF BOARD OF DIRECTORS AND COMMITTEE Board of Directors Position Members Executive Non-Executive Independent *** Number of position in other relevant companies * Internal Control Committee ** *** Human Resources Committee ** **** Chairman Deputy ...

  • Page 106
    ...downloaded? Internal Control Has the Company appointed the persons in charge of the internal control? The persons in charge are independent from the persons in charge of the operational services? Organisational unit meant for the internal control (pursuant to art. 9.3 of the Code) Investor relations...

  • Page 107

  • Page 108
    ... June 14, 2006 resolved to increase the capital stock in one or more times, up to a maximum amount of Euro 1,200,000, through the issuance of new ordinary shares reserved for grants to officers and key employees of the Group according to a Stock Option Plan approved by the same Shareholders' Meeting...

  • Page 109

  • Page 110
    LUXOTTICA GROUP SHARE CAPITAL INFORMATION Luxottica Group S.p.A. listed on the NYSE on January 23, 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$ ...

  • Page 111
    > 110 | ANNUAL REPORT 2007 LISTINGS: 18 YEARS ON THE NYSE AND SEVEN YEARS ON THE MTA NYSE ADS (By quarter - In US$ (1)) 1990 Low High Close Low 1991 High Close Low 1992 High Close Low 1993 High Close Low 1994 High Close First Second Third Fourth Year 0.95 0.96 0.99 0.79 0.79 1.06 1.38 1.46 ...

  • Page 112
    LUXOTTICA GROUP SHARE CAPITAL INFORMATION | 111 < 1995 Low High Close Low 1996 High Close Low 1997 High Close Low 1998 High Close Low 1999 High Close First Second Third Fourth Year 3.13 3.43 3.70 4.54 3.13 3.96 3.83 4.92 5.95 5.95 3.60 3.71 4.89 5.85 5.63 6.91 6.51 5.21 5.21 7.83 8.10 7....

  • Page 113
    ... 120 122 Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows 125 > Notes to Consolidated Financial Statements 171 > Key contacts and addresses 173 > Luxottica Group main operating companies in the world

  • Page 114

  • Page 115

  • Page 116
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 115

  • Page 117
    > 116 | ANNUAL REPORT 2007

  • Page 118
    ... INCOME FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (*) 2007 (US$/000) (1) CONSOLIDATED STATEMENTS OF INCOME | 117 < 2007 2006 (Euro/000) 2005 NET SALES COST OF SALES GROSS PROFIT OPERATING EXPENSES Selling and advertising expenses General and administrative expenses Total INCOME FROM...

  • Page 119
    > 118 | ANNUAL REPORT 2007 CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2007 AND 2006 (*) ASSETS 2007 (US$/000) (1) 2007 (Euro/000) 2006 CURRENT ASSETS Cash and cash equivalents Marketable securities Accounts receivable - net (Less allowance for doubtful accounts: Euro 25.5 million (US$ 37.3 ...

  • Page 120
    ... related • Customers' right of return • Other Income taxes payable Total current liabilities LONG-TERM DEBT LIABILITY FOR TERMINATION INDEMNITIES DEFERRED TAX LIABILITIES, NET OTHER LONG-TERM LIABILITIES MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES SHAREHOLDERS' EQUITY Capital stock par value...

  • Page 121
    ... available-for-sale securities, net of taxes of Euro 0.5 million Diluted gain on business combinations Excess tax benefit on stock options Change in fair value of derivative instruments, net of taxes of Euro 1.8 million Dividends declared (Euro 0.29 per share) Net income (Continuing operations) Loss...

  • Page 122
    ...of taxes of Euro 0.9 million Excess tax benefit on stock options Change in fair value of derivative instruments, net of taxes of Euro 4.6 million Dividends declared (Euro 0.42 per share) Net income (Continuing operations) Comprehensive income BALANCES, DECEMBER 31, 2007 Comprehensive income (US$/000...

  • Page 123
    ...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 124
    ... CASH INCLUDED IN ASSETS OF DISCONTINUED OPERATIONS AT END OF PERIOD SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the year for interest Cash paid during the year for income taxes Acquisition of businesses: Fair value of assets acquired 796,052 106,897 663,067 (243,253) 412,214...

  • Page 125

  • Page 126
    ... our retail operations by geographic region and significant trade names were as follows: | 125 < North America Europe Middle East Australia New Zealand South Africa China Hong Kong Others Total LensCrafters Sunglass Hut Pearle and Licensed brands OPSM Group Oakley Others Franchised locations...

  • Page 127
    ... and transactions are eliminated in consolidation. Luxottica Group prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). In accordance with Financial Accounting Standard Board ("FASB") Statement of...

  • Page 128
    ..., Retail North America, Retail Asia Pacific and Retail Other, as required by the provisions of SFAS 142. For the fiscal years 2007, 2006 and 2005 the Company has not recorded a goodwill impairment charge. Trade names and other intangibles. In connection with various acquisitions, Luxottica Group has...

  • Page 129
    ... material. Store opening and closing costs. Store opening costs are charged to operations as incurred in accordance with Statement of Position No. 98-5, Accounting for the Cost of Start-up Activities. The costs associated with closing stores or facilities are recorded at fair value as such costs are...

  • Page 130
    ... (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 to franchisees along with other...

  • Page 131
    ... offer are recorded in cost of 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...

  • Page 132
    ... 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 15. The fair values of letters of credit are not disclosed as it is not...

  • Page 133
    .... 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 134
    ... earnings. Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money cost associated with the passage of time. Certain events, such as changes in employee base, plan amendments and changes in actuarial...

  • Page 135
    ... the Company participates in business combinations, in the future the Company believes this statement after the adoption date could have a significant effect on future operations. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities...

  • Page 136
    ... its discretion, terminates the agreement as of such date or any subsequent expiration date. The annual lease payment is approximately Euro 0.1 million and the Company bears all costs and expenses of operating and maintaining the aircraft. Oakley entered into time sharing agreements with the former...

  • Page 137
    ... The TR business operated solely in the United States and was included in the retail segment of the Company's operations as of December 31, 2004 and 2005. In the consolidated statements of income, for 2005 and 2006, the Company has reclassified sales, cost of sales and other expenses associated with...

  • Page 138
    ... was made as a result of the Company's strategy to strengthen its performance sunglass wholesale and retail businesses worldwide. The purchase price (including acquisition-related expenses) has been allocated based upon the fair value of the assets acquired and liabilities assumed as follows: (Euro...

  • Page 139
    ...in the Midwest United States of America for approximately Euro 83.7 million (US$ 110.2 million) in cash. The Company expects to convert the stores acquired to the current operating names, "LensCrafters" and "Pearle". The purchase price, including direct acquisition-related expenses, was allocated to...

  • Page 140
    ... Optical operates a total of 278 locations in two of 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...

  • Page 141
    ... Company's strategy to continue expansion of its wholesale business in Turkey, in particular in the prescription frames market. • 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...

  • Page 142
    ... Change in exchange rates (b) Balance as of December 31, 2007 904,148 3,054 907,202 1,694,614 999,780 (15,678) (76,876) 2,601,840 a) Goodwill acquired in 2006 consisted primarily of the acquisition in Turkey in the Wholesale segment, and of minor acquisitions in Retail segment. Goodwill acquired...

  • Page 143
    ... LensCrafters, Sunglass Hut International, OPSM, Cole and Oakley 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...

  • Page 144
    ... of Italian restructuring Aggregate effect of change in tax law in Italy Effect of non-deductible stock-based compensation Aggregate other effects Effective rate (5.3%) 2.1% 1.1% 1.5% 35.0% 5.5% 0.7% 35.2% 3.0% (0.9%) 37.0% In 2005, the Company elected, under newly established tax regulations...

  • Page 145
    ...| ANNUAL REPORT 2007 The 2007 tax benefit of 5.3%, relates to the business reorganization of certain Italian companies which results in the release of deferred tax liabilities and is partially offset by the increase by 2.1% in the 2007 tax charge due to the change in the Italian statutory tax rates...

  • Page 146
    ... following changes in ownership. None of the net operating losses expired in 2007 or 2006. As of December 31, 2007, a US subsidiary of the Company had various state net operating loss carryforwards, associated with individual states within the United States of America (SNOLs) totalling approximately...

  • Page 147
    ... 2003, the Company acquired its ownership interest of OPSM and more than 90% of the performance rights and options of OPSM for an aggregate of AUD 442.7 million (Euro 253.7 million), including acquisition expenses. The purchase price was paid for with the proceeds of a credit facility with Banca...

  • Page 148
    ... 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, 2007. In December 2005, US Holdings terminated the fair value interest rate swap agreement described...

  • Page 149
    > 148 | ANNUAL REPORT 2007 (c) On June 3, 2004, as amended on March 10, 2006, the Company and US Holdings entered into a credit facility with a group of banks providing for loans in the aggregate principal amount of Euro 1,130 million and US$ 325 million. The five-year facility consists of three ...

  • Page 150
    ... the merger with Oakley for a total purchase price of approximately US$ 2.1 billion. In order to finance the acquisition of Oakley, on October 12, 2007 the Company and its subsidiary U.S. Holdings entered into two credit facilities with a group of banks providing for certain term loans and a bridge...

  • Page 151
    ... benefits are accrued based on length of service and annual compensation under a cash balance formula. This pension plan was amended effective January 1, 2006 granting eligibility to U.S. Associates who work in the Cole Vision stores, field management, and the related labs and distribution centers...

  • Page 152
    ...pension plans and SERP . The Company uses a September 30 measurement date for these plans. Obligations and Funded Status: (Euro/000) Pension plans 2007 2006 SERP 2007 2006 Change in benefit obligations: Benefit obligation - beginning of period Service cost Interest cost Actuarial (gain)/loss Plan...

  • Page 153
    ... and 2006, were as follows: Pension Plans 2007 2006 Accumulated benefit obligations Components of net periodic benefit cost and other amounts recognized in other comprehensive income Net periodic benefit cost Service cost Interest cost Expected return on plan assets Amortization of actuarial loss...

  • Page 154
    ... used to determine benefit obligations Discount rate Rate of compensation increase 6.50% 6%/5%/4% 6.00% 4.50% 6.50% 6%/5%/4% 6.00% 4.50% Weighted-average assumption used to determine net periodic benefit cost for years ended December 31, 2007 and 2006 Discount rate Expected long-term return on plan...

  • Page 155
    ... | ANNUAL REPORT 2007 The actual allocation percentages at any given time may vary from the targeted amounts due to changes in stock and bond valuations as well as timing of contributions to and benefit payments from the pension plan trusts. With the merger of the Cole Plan into the U.S. Associates...

  • Page 156
    ... on legislated rates and annual compensation. Certain employees of the Company located outside the United States are covered by state sponsored post-employment benefit plans. These plans are generally funded in conformity with the applicable local government regulations and amounts are expensed as...

  • Page 157
    ... average discount rate used in determining the net periodic benefit cost was 6.0% for 2007 and 5.75% for 2006. Implementation of SFAS No. 158. In the fourth quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension...

  • Page 158
    ... the older plans the stock options were granted at a price that was equal to or greater then market value of the shares at the date of grant. Under the 2005 and 2006 plans, options were granted at the greater of (i) either the previous 30 day average stock price immediately before the date of grant...

  • Page 159
    ... 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 Exchange was US Dollar 25.31 per...

  • Page 160
    ..., at that time, 2.11% (or 9.6 million shares) of the Company's currently authorized and issued share capital, to a stock option plan 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...

  • Page 161
    ... the weighted - average assumptions used in the valuation and the resulting weighted average fair value per option granted: 2007 Plan I (a) Dividend yield Risk-free interest rate Expected option life (years) Expected volatility Weighted average fair value (Euro) (a) Stock Performance Plan issued in...

  • Page 162
    ... the exchange rate at the time of the transactions). In connection with the repurchase, an amount of Euro 70.0 million is classified as treasury shares in the Company's consolidated financial statements. The market value of the stock based on the share price as listed on the Milan Stock Exchange at...

  • Page 163
    ... 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 Group Limited and Cole National Corporation. For 2007 Oakley...

  • Page 164
    ...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 evaluations. As of December 31, 2006 and 2007, no single customer...

  • Page 165
    ..., 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 commenced on January 1, 2007. Based on the agreement, Luxottica Group provided for an...

  • Page 166
    ..., 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-term cancellation clauses. Total rental expense under operating...

  • Page 167
    ... December 31, 2002, using an expected present value calculation. Such amount is immaterial to the consolidated financial statements as of December 31, 2007 and 2006. Credit facilities As of December 31, 2007 and 2006, Luxottica Group had unused short-term lines of credit of approximately Euro 291...

  • Page 168
    ... foreign vendors and are generally outstanding for a period that is less than six months. Substantially all the fees associated with maintaining the letters of credit fall within the range of 50 to 100 basis points annually. Litigation California Vision Health Care Service Plan Lawsuit In March 2002...

  • Page 169
    ... | ANNUAL REPORT 2007 and Pearle Vision Care, Inc. The claims alleged various statutory violations related to the operation of Pearle Vision Centers in California, including violations of California laws governing relationships among opticians, optical retailers, manufacturers of frames and lenses...

  • Page 170
    ... of products at Oakley retail stores during a limited period of time. The aggregate retail value of the vouchers would depend on how many purported class members submit valid claims. The settlement contemplated by the Memorandum of Understanding also provides for the payment of attorneys' fees and...

  • Page 171

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    [email protected] DEPOSITARY BANK - USA Deutsche Bank Shareholder Services c/o American Stock Transfer & Trust Company (ADR Depositary Bank) Peck Slip Station - P .O. Box 2050 - New York, NY 10272-2050 - USA Telephone Toll free number: 800 7491873 (From USA only) International callers: +1 718 9218137...

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

  • Page 175
    ... Vision Corporation Wilmington, Delaware - USA Eyemed Vision Care Llc Wilmington, Delaware - USA Pearle Vision, Inc. Wilmington, Delaware - USA LensCrafters, Inc. Mason, Ohio - USA Oakley, Inc. Foothill Ranch, California - USA Sunglass Hut Trading, Llc Wilmington, Delaware - USA Avant-Garde Optics...

  • Page 176
    ...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 177
    Pictures Pictures of Give the Gift of Sight missions at home and abroad printed in this Annual Report are by Lyons Photography, Inc. Graphic Letizia Marino 19novanta communication partners Consultancy and co-ordination Ergon Comunicazione Printing Grafiche Antiga - Italy

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