ANNUAL REPORT 2004 - Luxottica Group

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Luxottica Group S.p.A. and its subsidiaries (collectively “Luxottica Group” or the “Company”) operate in two industry segments: (1) manufacturing and wholesale distribution and (2) retail distribution. Through its manufacturing and wholesale distribution operations, Luxottica Group is engaged in the design, manufacturing, wholesale distribution and marketing of house brand and designer lines of mid to premiumpriced prescription frames and sunglasses. The Company operates in the retail segment through its retail division, consisting of LensCrafters, Inc. and other affiliated companies (“LensCrafters”), Sunglass Hut International, Inc. and its subsidiaries (“Sunglass Hut International”), OPSM Group Limited and its subsidiaries (“OPSM”) since August 2003, and Cole National Corporation and its wholly owned subsidiaries (“Cole”) since October 4, 2004. As of December 31, 2004, LensCrafters operated 888 stores throughout the United States of America and Canada; Sunglass Hut operated 1,858 stores located in North America, Europe and Australia; OPSM operated 598 stores under three brands across states and territories in Australia, New Zealand, Hong Kong, Singapore and Malaysia; and Cole National operated 2,407 owned stores and 472 franchised specialty retailers of optical products and personalized gifts located in the United States of America and Canada. Certain of the Company’s U.S. subsidiaries also are engaged as providers of managed vision care benefits and claims payment administrators whose programs provide comprehensive eyecare benefits primarily directed to large employers and health maintenance organizations. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements of Luxottica Group include the financial statements of the parent company and all wholly or majority-owned ANNUAL REPORT 2004 subsidiaries. The Company’s investments in unconsolidated subsidiaries which are at least 20% owned and where the Company exercises significant influence over operating and financial policies are accounted for using the equity method. Luxottica Group holds a 44% interest in an affiliated manufacturing and wholesale distributor, located in India, and a 50% interest in an affiliated company located in Great Britain, which are both accounted for under the equity method. The results of operations of these investments are not material to the results of the operations of the Company. Investments in other companies in which the Company has less than a 20% interest are carried at cost. All significant intercompany accounts 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”). The Company has included a variable interest entity (the “Trust”), consisting of a synthetic operating lease, for one of Cole’s facilities. The Trust is included in these consolidated financial statements since the Company is required to absorb any expected losses from, and will receive the majority of expected returns on, the activities of the Trust, and is the primary beneficiary of the Trust. The assets of Euro 1.6 million and liabilities of Euro 1.6 million have been consolidated into the financial statements as of December 31, 2004. Future operating results of the Trust are not expected to have a material effect on the Company’s financial position or operating results. The North America retail division fiscal year is a 52- or 53-week period ending on the Saturday nearest December 31. The accompanying consolidated financial statements include the operations of the North America retail division for the 53-week period ended January 3, 2004 and the 52-week period ended January 1, 2005. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS Luxottica Group accounts for its foreign currency denominated transactions and foreign operations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, Foreign Currency 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Translation. The financial statements of foreign subsidiaries are translated into Euro, which is the functional currency of the parent company and the reporting currency of the Company. Assets and liabilities of foreign subsidiaries, which use the local currency as their functional currency, are translated at year-end exchange rates. Results of operations are translated using the average exchange rates prevailing throughout the year. The resulting cumulative translation adjustments have been recorded as a separate component of accumulated other comprehensive income (loss). The Company has one subsidiary in a highly inflationary country. However, the operations of such subsidiary are currently not material to the Company’s consolidated financial statements. Transactions in foreign currencies are recorded at the exchange rate in effect at the transaction date. Gains or losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables during the year are recognized in consolidated income in such year. CASH AND CASH EQUIVALENTS Luxottica Group considers investments purchased with a remaining maturity of three months or less to be cash equivalents. BANK OVERDRAFTS Bank overdrafts represent negative cash balances held in banks and amounts borrowed under various Buildings and building improvements Machinery and equipment Aircraft Other equipment Leasehold improvements 102 unsecured short-term lines of credit (See “Credit Facilities” included in Note 14 for further discussion of the short-term lines of credit) that the Company has obtained through local financial institutions. These facilities are usually short-term in nature or may contain provisions that allow them to renew automatically with a cancellation notice period. Certain subsidiary 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 76.9% and 65.0% of total frame inventory for 2003 and 2004, respectively, are stated at the lower of cost, as determined under the weightedaverage method (which approximates the first-in, firstout method, “FIFO”), or market value. Retail inventory not manufactured by the Company or its subsidiaries are stated at the lower of cost, as determined on a retail last-in, first-out method (“LIFO”), FIFO or weighted-average cost, or market value. The LIFO reserve was not material as of December 31, 2003 and 2004. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at historical cost. Depreciation is computed principally on the straight-line method over the estimated useful lives of the related assets as follows: Estimated useful life 19 to 40 years 3 to 12 years 25 years 5 to 8 years lesser of 10 years or the remaining life of the lease
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ANNUAL REPORT 2004 PROFILE OF LUXOT
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PROFILE OF LUXOTTICA GROUP QUARTERL
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LUXOTTICA GROUP IN 2004 to have dir
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LUXOTTICA GROUP IN 2004 Luxottica G
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ANNUAL REPORT 2004
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DISTRIBUTION As for the performance
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DISTRIBUTION focused on the relatio
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DISTRIBUTION capacity, a direct pre
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ANNUAL REPORT 2004
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CHANGE YOUR VIEW
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www.vogue-eyewear.com
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Making its debut in 1926, Persol wa
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Launched in California in 1992, Arn
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The Sferoflex brand was acquired by
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DISTRIBUTION LICENSE BRANDS 39
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The Byblos brand has been licensed
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The Miu Miu brand was created in 19
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Sergio Tacchini, ever synonymous wi
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ANNUAL REPORT 2004
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DISTRIBUTION Today, Luxottica Group
Page 52 and 53: VERTICAL INTEGRATION Over the decad
Page 54 and 55: Over the years, Luxottica Group has
Page 56 and 57: WHOLESALE BRAND PORTFOLIO Luxottica
Page 58 and 59: Give the Gift of Sight is a Luxotti
Page 60 and 61: ANNUAL REPORT 2004
Page 62 and 63: In accordance with U.S.GAAP (1) 200
Page 64 and 65: MANAGEMENT’S DISCUSSION AND ANALY
Page 66 and 67: expenses, thanks to economies of sc
Page 68 and 69: This information is being provided
Page 70 and 71: The swap will expire on June 17, 20
Page 72 and 73: ANNUAL REPORT 2004
Page 74 and 75: (1) Except for earnings per share (
Page 76 and 77: (1) 1 ADS = 1 ordinary share. (2) C
Page 78 and 79: with the procedure set forth by it,
Page 80 and 81: CORPORATE GOVERNANCE Set out below
Page 82 and 83: - Sergio Erede - Sabina Grossi: Mem
Page 84 and 85: INTERNAL AUDIT COMMITTEE The commit
Page 86 and 87: 3. the Chief Financial Officer, the
Page 88 and 89: STOCK OPTIONS PLANS At the Extraord
Page 90 and 91: ANNUAL REPORT 2004 LUXOTTICA GROUP
Page 92 and 93: (1) Through 1998 the Euro/U.S. Doll
Page 94 and 95: LUXOTTICA GROUP S.P.A. We have audi
Page 96 and 97: In accordance with U.S. GAAP (1) Tr
Page 98 and 99: In accordance with U.S. GAAP In tho
Page 100 and 101: In accordance with U.S. GAAP (1) Tr
Page 104 and 105: Maintenance and repair expenses are
Page 106 and 107: customers take receipt of products
Page 108 and 109: In thousands Weighted average share
Page 110 and 111: The Company recognizes forfeitures
Page 112 and 113: 2. RELATED PARTY TRANSACTIONS FIXED
Page 114 and 115: In thousands of Euro Assets purchas
Page 116 and 117: This pro forma financial informatio
Page 118 and 119: The Company believes that the preli
Page 120 and 121: (1) Goodwill acquired in 2003 and 2
Page 122 and 123: Estimated annual amortization expen
Page 124 and 125: Since fiscal year 2004, for income
Page 126 and 127: 8. LONG-TERM DEBT Long-term debt co
Page 128 and 129: Excluding current maturities, long-
Page 130 and 131: OBLIGATIONS AND FUNDED STATUS In th
Page 132 and 133: The accumulated benefit obligations
Page 134 and 135: CONTRIBUTIONS U.S. Holdings expects
Page 136 and 137: The following table sets forth the
Page 138 and 139: STOCK INCENTIVE PLANS Luxottica Gro
Page 140 and 141: Years ended December 31 (1) Inter-s
Page 142 and 143: In thousands of Euro Years ending D
Page 144 and 145: such higher consideration to all te
Page 146 and 147: eviewed at the end of January 2004,
Page 148 and 149: ANNUAL REPORT 2004 KEY CONTACTS AND
Page 150 and 151: EUROPE LUXOTTICA S.r.l. KILLERLOOP
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MIDDLE EAST AND FAR EAST LUXOTTICA
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