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As filed with the Securities and Exchange Commission on June [30], 2004
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2003
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
1-14002
(Commission file number)
DE RIGO S.p.A.
DE RIGO S.p.A.
Italy
(Jurisdiction of incorporation or organization)
Zona Industriale Villanova,
32013 Longarone (BL), Italy
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Name of each exchange on which registered | |
American Depositary Shares | New York Stock Exchange | |
Ordinary shares with a par value of€0.26 each* | New York Stock Exchange* |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
44,714,255 ordinary shares
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ No o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17o Item 18þ
• | Not for trading, but only in connection with the registration of the American Depositary Shares. |
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TABLE OF CONTENTS
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Accounting Principles and Reporting Currency | iii | |||||||
Cautionary Statement Regarding Forward-Looking Information | iii | |||||||
PART I | 5 | |||||||
Item 1.Identity of Directors, Senior Management and Advisors | 5 | |||||||
Item 2.Offer Statistics and Expected Timetable | 5 | |||||||
Item 3.Key Information | 5 | |||||||
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Item 4.Information on the Company | 12 | |||||||
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Item 5.Operating and Financial Review and Prospects | 28 | |||||||
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Item 6.Directors, Senior Management and Employees | 47 | |||||||
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Item 7.Major Shareholders and Related Party Transactions | 51 |
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Accounting Principles and Reporting Currency
Beginning with the fiscal year ended December 31, 2001, De Rigo S.p.A. (the “Company”) has published its Consolidated Financial Statements in euros (“€” or “euro”), the official common currency of twelve Member States of the European Union (the “EU”), including Italy. In this annual report, references to “dollars,” “U.S.$” or “$” are to United States dollars and references to “lire” or “Lit.” are to Italian lire. Amounts stated in dollars, unless otherwise indicated, have been translated from euros at an assumed rate solely for convenience and should not be construed as representations that the euro amounts actually represent such dollar amounts or could be converted into dollars at the rate indicated. Unless otherwise indicated, such dollar amounts have been translated from euros at the noon buying rate in The City of New York for cable transfers in foreign currencies as announced by the Federal Reserve Bank of New York for customs purposes (the “Noon Buying Rate”) on December 31, 2003 of $1.2597 per€1.00. Such rate may differ from the actual rates used in the preparation of the Consolidated Financial Statements included in Item 18 and dollar amounts used in this annual report may differ from the actual dollar amounts that were translated into euros in the preparation of such financial statements. For information regarding recent rates of exchange between euros and dollars and between Italian lire (De Rigo’s historical reporting currency) and dollars, see “Key Information — Selected Financial Data — Exchange Rates” in Item 3.
The Consolidated Financial Statements included in Item 18 of this annual report are prepared in conformity with Italian regulations governing financial statements (“Italian GAAP”). These principles differ in certain respects from generally accepted accounting principles in the United States (“U.S. GAAP”). See Note 19 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
In addition to focusing on the Group’s Italian GAAP results, De Rigo’s management uses certain non-GAAP measures in evaluating the Group’s financial performance. These non-GAAP measures include sales results calculated on an “constant exchange rate” basis that seeks to exclude the impact of fluctuations in currency exchange rates by calculating operating results for both periods being compared on the basis of the exchange rates used for such purpose in the earlier period (i.e., calculating results for the first quarter of 2004 on the basis of the average exchange rates used to translate sales made in non-euro currencies during the first quarter of 2003 into euro). With respect to the first quarter of 2004, the Group has also calculated comparative results for 2003 that exclude the contribution of EID, its former joint venture with the Prada group, in order to illustrate the underlying trends in the businesses that continue to part of the Group following De Rigo’s sale of the controlling interest in EID in July 2003 and allowing a comparison of sales performance on a consistent consolidation basis. In both cases, management believes that these alternative, non-GAAP figures, when considered in conjunction with (but not in lieu of) other measures that are calculated in accordance with Italian GAAP, enhance an understanding of the De Rigo’s results of operations. These non-GAAP measures are also commonly used by securities analysts, credit rating agencies and investors to evaluate De Rigo’s operating performance and compare its performance to that of its competitors. The Group’s method of calculating these non-GAAP measures may differ from methods used by other companies in calculating similar measures. In each case in which such a non-GAAP measure is used in this annual report, the most directly comparable GAAP measure is presented with equal or greater prominence and a reconciliation of the non-GAAP measure to such most directly comparable GAAP measure is provided.
Cautionary Statement Regarding Forward-Looking Information
Except for the historical statements and discussions contained herein, statements contained in this annual report constitute “forward looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. Forward looking statements may include words such as “expect”, “estimate”, “project”, “anticipate”, “should”, “intend” and similar expressions or variations on such expressions. Any filing of the Company with the U.S.
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Securities and Exchange Commission may include forward looking statements. In addition, other written or oral statements which constitute forward looking statements have been made and may in the future be made by or on behalf of the Company, including statements concerning its future operating and financial performance, the Company’s share of new and existing markets, general industry and economic trends and the Company’s performance relative thereto and the Company’s expectation as to requirements for capital expenditures and regulatory matters. The Company’s outlook is predominately based on its interpretation of what it considers to be the key economic factors affecting its businesses. Forward-looking statements with regard to the Company’s businesses rely on a number of assumptions concerning future events and are subject to a number of uncertainties and other factors, many of which are outside the Company’s control, that could cause actual results to differ materially from such statements, including: the many interrelated factors that affect consumers’ confidence, including worldwide demand for sunglasses and prescription eyewear; general economic conditions in each of the Company’s markets; legislation, particularly that relating to the reimbursement of eyewear-related expenses; actions of competitors in the various industries in which the Company competes; production difficulties, including capacity and supply constraints and excess inventory levels; labor relations; interest rates and currency exchange rates; political and civil unrest; and other risks and uncertainties. The Company disclaims any obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise.
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PART I
Item 1.Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2.Offer Statistics and Expected Timetable
Not applicable.
Item 3.Key Information
THE DE RIGO GROUP
De Rigo S.p.A., together with its consolidated subsidiaries (the “Group” or “De Rigo”), is a worldwide leader in the design, manufacture and marketing of high-quality eyewear in the mid- and premium-price categories and one of the largest optical retailers in Europe through its Dollond & Aitchison (“D&A”) and General Optica retail chains.
Unless otherwise specified or required by the context, references to “we,” “us” and “our” in this annual report are to De Rigo S.p.A. and its consolidated subsidiaries.
SELECTED FINANCIAL DATA
The following selected consolidated financial data at December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003 have been derived from the audited Consolidated Financial Statements included in Item 18. Financial data at December 31, 2001, 2000 and 1999, and for each of the years in the two-year period ended December 31, 2000, have been derived from audited Consolidated Financial Statements not included herein.
The financial data at December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003, should be read in conjunction with “Operating and Financial Review and Prospects” in Item 5 of this annual report, and are qualified in their entirety by reference to the audited Consolidated Financial Statements and Notes thereto included in Item 18.
The Company’s audited consolidated financial statements, from which the selected consolidated financial data set forth below have been derived, were prepared in accordance with Italian GAAP, which differ in certain respects from U.S. GAAP. For a discussion of the principal differences between Italian GAAP and U.S. GAAP as they relate to the Company’s consolidated net income and stockholders’ equity, see Note 19 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
Beginning with the fiscal year ended December 31, 2001, the Company has published its Consolidated Financial Statements in euros. Prior to January 1, 2001, the reporting currency of De Rigo S.p.A. and its consolidated subsidiaries was Italian lire. To facilitate a comparison, all lire-denominated financial data for periods prior to January 1, 2001 included in this annual report have been restated from Italian lire to euros at the fixed rate as of December 31, 1998 established by the European Central Bank of Lit. 1,936.27 =€1.00. The comparative balances for prior years now reported in euros depict the same trends as would have been presented had the Group continued to report such amounts in Italian lire. The Consolidated Financial Statements and other financial data for periods prior to January 1, 2001 may not be comparable to that of other companies reporting in euros if those companies had restated from a reporting currency other than Italian lire.
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Year Ended at December 31, | ||||||||||||||||||||||||
(thousands | ||||||||||||||||||||||||
of dollars, | ||||||||||||||||||||||||
except per | ||||||||||||||||||||||||
Ordinary | ||||||||||||||||||||||||
Share and | ||||||||||||||||||||||||
ADS | ||||||||||||||||||||||||
(thousands of euros, except per Ordinary Share and ADS amounts) | amounts)(1) | |||||||||||||||||||||||
1999(2) | 2000(2) | 2001(2) | 2002 | 2003 | 2003 | |||||||||||||||||||
INCOME STATEMENT DATA | ||||||||||||||||||||||||
Amounts in accordance with Italian GAAP: | ||||||||||||||||||||||||
Net sales | € | 321,555 | € | 456,602 | € | 505,250 | € | 512,459 | € | 504,801 | $ | 635,898 | ||||||||||||
Cost of sales | 129,561 | 167,613 | 184,293 | 203,208 | 202,040 | 254,510 | ||||||||||||||||||
Gross profit | 191,994 | 288,989 | 320,957 | 309,251 | 302,761 | 381,388 | ||||||||||||||||||
Operating expenses | 184,617 | 265,307 | 289,897 | 292,524 | 277,907 | 350,079 | ||||||||||||||||||
Income (loss) from operations | 7,377 | 23,682 | 31,060 | 16,727 | 24,854 | 31,309 | ||||||||||||||||||
Income before income taxes | 3,699 | 21,763 | 27,200 | 9,769 | 37,838 | 47,665 | ||||||||||||||||||
Income taxes | 2,596 | 6,895 | 6,551 | 46 | 14,935 | 18,814 | ||||||||||||||||||
Net income (2) | 1,406 | 14,136 | 21,217 | 10,645 | 18,478 | 23,277 | ||||||||||||||||||
Net income per Ordinary Share and ADS (2) | € | 0.03 | € | 0.32 | € | 0.48 | € | 0.24 | € | 0.42 | $ | 0.52 | ||||||||||||
Dividends per Ordinary Share and ADS | € | 0.09 | — | € | 0.12 | € | 0.13 | — | — | |||||||||||||||
Amounts in accordance with U.S. GAAP: | ||||||||||||||||||||||||
Net sales | € | 321,555 | € | 456,602 | € | 505,250 | € | 512,459 | € | 504,801 | $ | 635,898 | ||||||||||||
Net sales from continuing operations | 321,555 | 433,161 | 473,269 | 481,314 | 485,192 | 611,196 | ||||||||||||||||||
Net income (loss) | 1,565 | 13,282 | 18,249 | 17,145 | 24,250 | 30,548 | ||||||||||||||||||
Net income (loss) from continuing operations | 1,975 | 13,305 | 18,188 | 18,382 | 16,486 | 20,767 | ||||||||||||||||||
Net income per Ordinary Share | € | 0.04 | € | 0.30 | € | 0.41 | € | 0.38 | € | 0.54 | $ | 0.68 | ||||||||||||
Basic earnings per share and per ADS from continuing operations | € | 0.04 | € | 0.30 | € | 0.41 | € | 0.41 | € | 0.37 | $ | 0.47 | ||||||||||||
Diluted earnings per share and per ADS from continuing operations | € | 0.04 | € | 0.30 | € | 0.40 | € | 0.41 | € | 0.37 | $ | 0.47 | ||||||||||||
Dividends per Ordinary Share and ADS | € | 0.09 | — | € | 0.12 | € | 0.13 | — | — | |||||||||||||||
BALANCE SHEET DATA | ||||||||||||||||||||||||
Amounts in accordance with Italian GAAP: | ||||||||||||||||||||||||
Total current assets | € | 197,831 | € | 166.211 | € | 202.373 | € | 195.483 | € | 156,349 | $ | 196,953 | ||||||||||||
Property, plant and equipment, net | 67,127 | 123,194 | 128,102 | 120,905 | 109,083 | 137,412 | ||||||||||||||||||
Total assets | 305,866 | 420,802 | 462,492 | 439,901 | 376,887 | 474,765 | ||||||||||||||||||
Total current liabilities | 105,369 | 196,344 | 220,813 | 199,586 | 123,838 | 155,999 | ||||||||||||||||||
Long-term debt, less current portion | 1,325 | 1,098 | 764 | 696 | 497 | 626 | ||||||||||||||||||
Total shareholders’ equity | 175,357 | 189,374 | 210,419 | 212,117 | 226,884 | 285,806 | ||||||||||||||||||
Amounts in accordance with U.S. GAAP: | ||||||||||||||||||||||||
Total assets | € | 306,050 | € | 420,891 | € | 459,479 | € | 450,069 | € | 392,220 | $ | 494,080 | ||||||||||||
Total current liabilities | 105,369 | 196,344 | 220,813 | 199,586 | 123,838 | 155,999 | ||||||||||||||||||
Total shareholders’ equity | 175,541 | 189,460 | 206,695 | 199,470 | 221,744 | 279,331 |
(1) | The translation of euro into dollars has been made at the rate of $1.2597 =€1.00, the Noon Buying Rate on December 31, 2003. See “Accounting Principles and Reporting Currency” preceding Part I of this annual report. | |
(2) | Certain amounts in the Company’s Consolidated Financial Statements for fiscal years ended December 31, 1999, 2000, 2001 and 2002 have been reclassified to conform with the presentation of these amounts in the Company’s Consolidated Financial Statements for the fiscal year ended December 31, 2003. See Note 2 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report. |
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EXCHANGE RATES
The following table sets forth the Noon Buying Rate for euros expressed in U.S. dollars per euro (rounded to the nearest one hundredth of a U.S. cent) for the periods indicated. Amounts for 1998 (before the adoption of the euro) have been calculated based on the Noon Buying Rates for lire, converted into euro at the official fixed conversion rate of€1= Lit. 1936.27 and expressed in U.S. dollars per euro.
Year: | High | Low | Average(1) | At Period End | ||||||||||||
1999 | — | — | 1.0588 | 1.0070 | ||||||||||||
2000 | — | — | 0.9207 | 0.9388 | ||||||||||||
2001 | — | — | 0.8909 | 0.8901 | ||||||||||||
2002 | — | — | 0.9495 | 1.0485 | ||||||||||||
2003 | — | — | 1.1411 | 1.2597 | ||||||||||||
Month ending: | ||||||||||||||||
December 31, 2003 | 1.2597 | 1.1956 | — | — | ||||||||||||
January 30, 2004 | 1.2853 | 1.2839 | — | — | ||||||||||||
February 28, 2004 | 1.2848 | 1.2426 | — | — | ||||||||||||
March 31, 2004 | 1.2431 | 1.1801 | — | — | ||||||||||||
April 30, 2004 | 1.2358 | 1.1802 | — | — | ||||||||||||
May 31, 2004 | 1.2274 | 1.1801 | — | — |
(1) | Average of the Noon Buying Rate for euro for the last business day of each month in the period. |
On June 25, 2004, the Noon Buying Rate for euros was€1.00 = $1.2145 or $1.00 =€0.8234.
The above rates are given for information only, and may differ from the rates used in the preparation of the Company’s Consolidated Financial Statements included in Item 18 of this annual report.
RISK FACTORS
Holders and prospective purchasers of the American Depositary Shares should consider carefully the factors set forth below, as well as the other information contained in this filing, in evaluating an investment in the ADSs.
Risk Factors Relating to the Eyewear Industry
The eyewear industry is very sensitive to fluctuations in consumers’ disposable income, personal preferences and season.
Our wholesale and manufacturing and retail operations are each subject to trends affecting the eyewear industry as a whole, as well as factors affecting individual sectors of the industry in which we participate, including those for sunglasses, prescription eyewear and fashion eyewear. The eyewear industry is subject to changes in general economic conditions, which affect disposable consumer income, as well as to changes in fashion, which affect consumer tastes and general demand for fashion eyewear. While eyewear has achieved widespread acceptance as a fashion accessory, and the fashion eyewear
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industry has grown significantly in recent years, there can be no assurance that this growth will continue or that consumer preferences will not change in a manner that will adversely affect the fashion eyewear sector, the eyewear industry as a whole or our business in particular. In addition, purchases of sunglasses in any given market are subject to fluctuations due to seasonality. Any event or circumstance resulting in decreased demand for eyewear generally, or for our products in particular, could adversely affect our business, operating results and financial condition.
The eyewear industry is highly competitive and we may be unable to compete successfully.
The eyewear industry is highly competitive. Some of our competitors have significantly greater financial, distribution and marketing resources, and significantly greater brand awareness, than we do in certain important markets. In addition, there can be no assurance that business developments will not encourage the entrance of other direct competitors into our markets, which may adversely affect our business, operating results and financial condition.
The development of vision correction alternatives could harm our business.
Our future success could depend to a significant extent on the availability and acceptance of vision correction alternatives to prescription eyeglasses, such as contact lenses and refractive, optical surgery. While we do not believe that contact lenses and refractive surgery or other vision correction alternatives will materially adversely impact our business at the present time, there can be no assurance that technological advances in, or reductions in the cost of, vision correction alternatives will not occur in the future, resulting in their more widespread use. Increased use of vision alternatives could result in decreased use of our prescription eyewear products, which could have a material adverse impact on our business, results of operations, financial condition and prospects.
Risk Factors Relating to De Rigo
We may not achieve the expected benefits of acquisitions, joint ventures, restructurings or other similar corporate transactions.
We have engaged in the past and are likely to engage in the future in significant corporate transactions, such as acquisitions, joint ventures and restructurings, the success of which is difficult to predict. In 1999, we acquired D&A, in 2000, we acquired General Optica and began operations at our joint venture with the Prada Group, which was subsequently terminated in July 2003. There can be no assurance that we will be able to enter into such transactions in the future or integrate our existing acquisitions and joint ventures without encountering administrative, technical, political, financial or other difficulties. There can also be no assurance that we will be able to carry out any such transactions in accordance with our plans, or that we will succeed in realizing any potential synergies, cost savings or other expected benefits.
Our ability to continue to expand our operations through acquisitions will depend upon our ability to consummate acquisitions on terms acceptable to us. We face challenges in integrating any acquisition into our businesses and may need to invest significant capital and resources in the acquired businesses. Acquisitions of businesses in new markets will also require us to hire and retain qualified personnel and expose us to uncertainties that are new to us. In addition, because we may incur additional debt to finance new acquisitions, our financial expense would increase as we pay interest on that debt.
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We may experience design and manufacturing difficulties, causing our business to suffer.
The mid- and premium-price categories of the prescription eyewear and sunglasses markets in which we compete are particularly vulnerable to changes in fashion trends and consumer preferences. Our historical success is attributable, in part, to our introduction of innovative eyewear designs which are perceived to represent an improvement over products otherwise available in the market. Our future success will depend on our continued ability to develop and introduce such innovative products.
In addition, our future success will also depend on our continued access to raw materials and manufacturing equipment and processes. Production difficulties, including capacity and supply constraints and excess inventory levels, could have a material adverse impact on our business, results of operations and financial condition. For example, production and supply chain difficulties at the lens facilities transferred to BBGR in 2001 had a negative impact on operations in the second half of 2001 and the first half of 2002. Further, any disruption in the operations in any of our facilities, whether due to technical or labor difficulties, destruction of or damage to any facility or other reasons, could have a material adverse effect on our business, results of operations and financial condition.
We may also experience production, distribution and marketing difficulties that could harm our business.
The mid- and premium-price categories of the prescription eyewear and sunglasses markets in which we operate are highly competitive. Management believes that, in addition to successfully introducing new products, responding to changes in the market environment and maintaining superior production capabilities, our ability to remain competitive is highly dependent on our success in maintaining an efficient distribution network. If we are unable to maintain an efficient distribution network, our business, results of operations and financial condition could suffer.
Further, we may be unsuccessful at channeling consumer preferences towards our products. Our business could be adversely affected by such a failure, in addition to the substantial advertising and marketing costs incurred by the failed marketing efforts.
Our future success depends, in part, on our ability to achieve and manage growth.
Our business has grown significantly in recent years, particularly as a result of our acquisition of D&A and General Optica. In order to achieve and manage our growth effectively, we will be required to increase and streamline production and implement manufacturing efficiencies where possible, while maintaining strict quality control and the ability to deliver products to our customers in a timely and efficient manner. We must also continuously develop new product designs and features, expand our information systems and operations, and train and manage an increasing number of management-level and other employees. If we are unable to manage these matters effectively, our business, results of operations and financial condition could suffer.
Our business is very dependent on our ability to negotiate and maintain favorable license arrangements.
We have entered into license agreements that enable us to manufacture and distribute prescription eyewear and sunglasses principally under the namesFendi, Etro, La Perla, Celine, Loewe, Givenchy, Fila Eyes, Onyx, Furla, Mini and others. The percentage of our sales attributable to licensed brands has increased in recent years, accounting for 55.1% of the sales of our wholesale and manufacturing segment in 2003 (54.8% in 2002). These license agreements typically have terms of between one and five years. We believe that our ability to maintain and negotiate favorable license agreements or alternative
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arrangements with leading designers in the fashion and luxury goods industries is essential to the branding of our products and, therefore, material to the success of our business. Accordingly, our inability to negotiate and maintain satisfactory license arrangements with leading designers could have a material adverse effect on our business, results of operations and financial condition.
In addition, each of these licensors has final approval over all eyeglass frames and other products bearing the licensor’s proprietary marks, and the frames must meet the licensor’s general design specifications and quality standards. Consequently, each licensor may, in the exercise of its approval rights, delay the distribution of eyeglass frames bearing its proprietary marks. Accordingly, there can be no assurance that we will not be subject to delays resulting from disagreements with, or an inability to obtain approvals from, our licensors. These delays could materially and adversely affect our business, operating results and financial condition.
Some of our licenses limit our right to market and sell products with competing brand names and/or limit the markets in which we are able to use the licensed brands. We expect that some of the future licenses we obtain will contain some limitations on competition within market segments. Our growth, therefore, will be limited to capitalizing on our existing licenses in the markets for sunglasses and prescription eyewear and to introducing eyewear in other markets. In addition, there can be no assurance that disagreements will not arise between us and our licensors regarding whether certain brand-name lines would be prohibited by the license agreements. Disagreements with licensors may adversely affect sales of our existing products or prevent us from introducing new eyewear products in market segments we believe are not being served by our existing products.
We lost certain tax benefits in September 2001 and April 2003; our effective income tax rate will therefore increase significantly
towards the statutory rate.
Historically, we derived significant benefits from an investment incentive program for the Longarone area implemented by the Italian government as part of a package of relief measures after the Vajont dam catastrophe in 1963. In particular, a substantial portion of our income before income taxes was derived from Dierre S.r.l. (prior to its merger into De Rigo S.p.A. in January 2002) and, to a much lesser extent, from Quattro Valli Italian Flair S.r.l., each of which was entitled to income tax exemptions under the Vajont Relief Program. The exemption for Dierre expired in September 2001, and that for Quattro Valli expired in April 2003. Our effective income tax rate has therefore increased significantly towards the statutory rate, reaching 39.5% in 2003. For further information, see “Operating and Financial Review and Prospects — Results of Operations — 2003 Compared to 2002 — Income Taxes” in Item 5. We do not expect new tax benefits of this type to be introduced by the Italian government for operations in the Longarone area or any other area in Italy where our facilities are currently located.
If we are unable to protect our proprietary rights, our business and financial results may be harmed.
We rely on trade secret, unfair competition, trade dress, trademark and copyright law to protect our rights to certain aspects of our products, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks, all of which we believe are important to the success of our products and our competitive position. However, pending trademark applications may not generate a registered trademark, and any trademark registration that is granted may be ineffective in thwarting competition and could be held invalid if subsequently challenged. The actions we take to protect our proprietary rights may be inadequate to prevent imitation of our products. Our proprietary information could become known to competitors, and we may not be able to meaningfully protect our rights to proprietary information. Furthermore, other companies may independently develop substantially equivalent or better products that do not infringe on our intellectual
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property rights, or they could assert rights in, and ownership of, our proprietary rights. Moreover, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States.
We devote financial and other resources to defend our proprietary rights. If the level of potentially infringing activities by others were to increase substantially, we might have to significantly increase the resources we devote to protecting our rights. Additionally, an adverse determination in any dispute involving our proprietary rights could require us to grant licenses to, or obtain licenses from, third parties, or could prevent us from manufacturing or selling our products or could subject us to substantial liability. Any of these possibilities could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our business is subject to risks relating to international sales and exposure to changing local conditions.
We currently operate in many countries and are therefore subject to various risks inherent in conducting business internationally. These risks include: exposure to local economic, political and civil conditions; export and import restrictions; currency exchange rate fluctuations and currency controls; changes in government regulations, including those relating to payments for prescription eyewear; withholding and other taxes on remittances and other payments by subsidiaries, investment restrictions or requirements; and local content laws requiring that certain products contain a specified minimum percentage of domestically-produced components. For example, the recent appreciation of the euro against the Pound Sterling has reduced the value in euro terms of the results of D&A, our British retail chain, while the recent economic crisis in Argentina led us to divest our former distribution subsidiary in that country. The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable, but may have a significant effect on our business, results of operations, financial condition and prospects.
Our future success depends, in part, on attracting and retaining qualified personnel.
Our ability to be competitive will depend, to some degree, on our ability to attract and maintain highly qualified managerial, manufacturing, sales and marketing personnel. There can be no assurance that we will be able to continue to recruit and retain such personnel. In particular, we have been dependent on certain key management personnel in the past, and the loss of any of such key personnel may have a material adverse effect on our business, results of operations and financial condition.
Since a majority of our outstanding Ordinary Shares are owned by the De Rigo brothers, they exert significant control over the
Company and its operations.
At June 25, 2004, Mr. Ennio De Rigo, the Chairman of the Board of Directors and the Chief Executive Officer of the Company, and Mr. Walter De Rigo, a Director of the Company, together owned approximately 74% of the Company’s outstanding Ordinary Shares. The De Rigo brothers will continue to control the election of the members of our Board of Directors and the outcomes of other matters submitted to a vote of the shareholders. As a result, they will be able to control the Company and its operations. Because a change of control would be difficult to achieve without the cooperation of the De Rigo brothers and our Board of Directors, the holders of the Ordinary Shares and the ADSs may be less likely to receive a premium for their shares upon a change of control of our company.
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Risk Factors Relating to the American Depositary Shares
Our share price may be volatile.
Our share price is likely to fluctuate in the future due to the volatility of the stock market in general and a variety of factors, many of which are beyond our control, including: quarterly variations in actual or anticipated results of our operations; changes in financial estimates by securities analysis; actions or announcements by our competitors; regulatory or legislative actions; market outlook for the fashion sunglasses and prescription eyewear industry generally; departures of our key personnel; and future sales of our ADSs.These broad fluctuations may adversely affect the market price of the ADSs.
Since most of our assets are located outside of the United States, you may face difficulties in bringing and enforcing suits against us.
Our executive offices and a substantial portion of our assets are located in Italy. In addition, the De Rigo brothers and all of the members of our management and Board of Directors are citizens of European countries who reside in Europe. As a result, you may not be able to effect service of process outside Italy upon the Company, our directors or other key personnel.
We may not pay dividends on the ADSs.
Although dividends may be recommended by our Board of Directors for approval by shareholders at our annual general meeting, we did not pay any dividends in respect of the fiscal year ended December 31, 2003 and have paid dividends only three times in the past seven years.
Future sales of Ordinary Shares or ADSs could depress our share price.
Sales of substantial numbers of Ordinary Shares or ADSs (including shares issued upon the exercise of stock options) in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price of the Ordinary Shares or ADSs or our ability to raise capital through a public offering of our equity securities.
Item 4.Information on the Company
HISTORY AND CORPORATE STRUCTURE
De Rigo is a worldwide leader in the design, manufacture and marketing of high-quality eyewear in the mid- and premium-price categories and one of the largest optical retailers in Europe through its D&A and General Optica retail chains. Designed in Italy, the Group’s products are distributed in about 80 countries worldwide, primarily in Europe, Asia and the Americas. The Company distributes its products under its own brand names —Police,Sting,Lozza— as well as under the licensed brandsFendi,FilaEyes, Etro,La Perla, Onyx,Celine,Loewe, Givenchy, Mini and Furla.In 2003, the Group recorded net sales of€504.8 million and generated net income of€18.5 million.
The Company was incorporated in 1978 as asocietà a responsabilità limitata, or limited liability company, in Limana, Italy. Initially, the Company operated as a third party contractor for the production of sunglasses, prescription eyeglass frames, and eyeglass components. By the beginning of the 1980’s, the Company began to produce its own lines of sunglasses, and, within a few years, established itself as one of the leading Italian producers of sunglasses in the mid- to premium-price categories, with itsPolicebrand attaining particular popularity among the younger generation.
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In 1992, the Company merged with Argosol S.r.l., another manufacturer of sunglasses and prescription eyeglass frames that was wholly owned by the De Rigo brothers. By the early 1990’s, and as a result of the acquisition of theLozzabrand in 1992, the Company began to produce sunglasses and eyeglass frames under brand names licensed by renowned fashion houses, such asFendi, and soon became one of the world leaders in the mid- to premium price categories of sunglasses.
In early 1995, the Company was converted to its present form as asocietà per azioni, or corporation limited by shares, organized under the laws of the Republic of Italy. Under its currentStatuto, or By-laws, De Rigo S.p.A. has a duration of 46 years, expiring on December 31, 2050.
In recent years, the Group’s expansion has been focused on its entry into the retail optical business through its acquisition of D&A in 1998 and General Optica in 2000 and on the growth of its designer lines, particularly through its 2001 marketing and distribution agreement with the LVMH Fashion Group. The joint venture that De Rigo formed with the Prada Group in 2000 was terminated in July 2003 by mutual agreement of the parties; as a result the Group sold its 51% interest in E.I.D. Eyewear International Distribution S.A. (“EID”) to the Prada Group.
The Company directly owns and operates the principal manufacturing plants that design and manufacture metal and plastic eyeglass frames for the Group and distributes its products both through subsidiaries and directly, as well as using independent distributors. The Group’s former manufacturing subsidiaries, Dierre S.r.l. (“Dierre”) and Quattro Valli Italian Flair S.r.l. (“Quattro Valli”) were merged into De Rigo S.p.A. in January 2002 and October 2003. The Company’s current distribution subsidiaries are Vogart Line España S.A. (“Vogart España”), De Rigo France S.a. (“De Rigo France”), De Rigo UK Ltd. (“De Rigo UK”), De Rigo Nederland B.V. (“De Rigo Nederland”), De Rigo Hellas A.E.E. (“De Rigo Hellas”), De Rigo Japan Ltd Co. (“De Rigo Japan”) and De Rigo Hong Kong Ltd. (“De Rigo HK”). The Company’s direct manufacturing and distribution operations and those of its distribution subsidiaries comprise De Rigo’s wholesale and manufacturing segment (“Wholesale and Manufacturing”). The subsidiaries noted above distribute certain of the Group’s eyewear lines in Spain, France, the United Kingdom, the Netherlands, Greece, Japan and Hong Kong, respectively, while the German market is served directly by the Company. The Group also operates as an optical retailer in the United Kingdom through its subsidiary D&A and in Spain and Portugal through its subsidiary General Optica, which together form the Group’s retail segment (the “retail segment”). See Item 5 “Operating and Financial Review and Prospects”.
Vogart España, De Rigo France, De Rigo UK, De Rigo Nederland and De Rigo Hellas are 59.3%, 100%, 80%, 100%, and 51% owned directly by the Company, respectively. The Company indirectly controls 100% of each of D&A and General Optica through European Vision and General Optica Internacional Sa, respectively; each of these companies is an intermediate holding company that is 100% owned by the Company. The Company also indirectly controls 90% of De Rigo Japan and 80% of De Rigo Hong Kong through De Rigo Nederland. Each of these companies is incorporated under the laws of its principal place of business.
Mr. Ennio De Rigo, the Chairman of the Board of Directors and Chief Executive Officer of the Company, and Mr. Walter De Rigo, a Director of the Company, own 74.0% of the Company’s outstanding Ordinary Shares (primarily through De Rigo Holding B.V. (“De Rigo Holding”).The De Rigo brothers established De Rigo Holding to hold and manage their interests in the Company and to make investments in other industrial sectors in which they participate, and also hold a small percentage of the Company’s Ordinary Shares directly. See Item 7 “Major Shareholders and Related Party Transactions” and Note 2 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
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The Company’s registered office and the Group’s principal executive offices are located at Zona Industriale Villanova, No. 12, 32013 Longarone (BL), Italy, approximately 110 kilometers north of Venice and 15 kilometers north of Belluno in the Veneto region of northeast Italy. The telephone number of the Company’s principal executive office is (39)(0437) 77 77.
BUSINESS OVERVIEW
De Rigo is a worldwide leader in the design, manufacture and marketing of high-quality eyewear in the mid- and premium-price categories and one of the largest optical retailers in Europe through its D&A and General Optica retail chains. During the three-year period ended December 31, 2003 covered by the Consolidated Financial Statements included in Item 18, the Group divided its activities into three distinct segments:
• | Wholesale and Manufacturingconsists of the design, manufacturing, marketing and distribution of high-quality eyewear to opticians in Italy and to independent distributors and opticians through the Group’s distribution subsidiaries abroad. This segment furnishes eyewear to the Group’s other business units, to which the wholesale and manufacturing segment makes sales at prices that include a markup designed to compensate the unit for its manufacturing activity. |
• | Retailconsists of the sale of prescription eyeglasses, fashion sunglasses and other optical products through the network of stores operated by the Group’s two retail chains, D&A, a leading retailer in the British optical market, and General Optica, the leading optical chain in Spain, which also has a presence in Portugal. |
• | EIDwas the segment consisting of the Group’s former joint venture with the Prada Group, which conducted product development, marketing and distribution activities related toPrada-branded eyewear, including that sold under theMiu Miu, Helmut LangandJil Sanderbrand names. This joint venture was terminated in July 2003 by mutual agreement of the parties; as a result the Group sold its 51% interest EID to the Prada Group. Accordingly, the data for the former EID segment presented in the tables below and elsewhere in this annual report includes the results of EID only for the period through the Group’s disposal of its interest as of July 23, 2003. |
The following table sets forth De Rigo’s sales by business segment for each of the years indicated.
Sales by Business Segment
(in millions of euros)
2001 | 2002 | 2003 | |||||||||||
Wholesale and Manufacturing | €133.2 | €141.1 | €136.2 | ||||||||||
Retail | 358.4 | 359.6 | 361.5 | ||||||||||
EID | 32.1 | 31.2 | 19.8 | ||||||||||
Intersegment Eliminations | (18.4 | ) | (19.4 | ) | (12.7 | ) | |||||||
Total | €505.3 | €512.5 | €504.8 |
The following table sets forth the percentage of the sales of the wholesale and manufacturing segment attributable to sales of De Rigo’s owned brands and licensed brands (includingPradaproducts marketed by EID prior to De Rigo’s disposal of its interest in EID in July 2003) for each of the years indicated.
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Sales of Owned Brands and Licensed Brands by Wholesale and Manufacturing Segment
2001 | 2002 | 2003 | ||||||||||
Owned brands | 47.9 | % | 42.1 | % | 42.0 | % | ||||||
Licensed brands | 48.9 | % | 54.8 | % | 55.1 | % | ||||||
Other | 3.2 | % | 3.1 | % | 2.9 | % | ||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % |
The following table sets forth sales of the prescription eyewear and sunglasses marketed by the Group (in units, and as a percentage of unit sales of eyewear) in each of the years indicated:
Unit Sales of Eyewear Marketed by De Rigo
(in thousands)
2001 | 2002 | 2003 | ||||||||||||||||||||||
Sunglass Unit Sales. | 3,109 | 54.6 | % | 3,040 | 55.3 | % | 2,931 | 54.3 | % | |||||||||||||||
Prescription Eyewear Unit Sales | 2,582 | 45.4 | % | 2,457 | 44.7 | % | 2,462 | 45.7 | % | |||||||||||||||
Total Unit Sales | 5,691 | 100.0 | % | 5,497 | 100.0 | % | 5,393 | 100 | % |
In 2003, sales in Europe accounted for 89.9% of the Group’s total net sales, with 2.4% of the total being attributable to sales in the Americas and the remaining 7.7% to sales in the rest of the world. The following table sets forth the Group’s net sales by geographic region during each of the periods indicated. See also Note 17 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
Net Sales by Geographic Region
(in millions of euros)
2001 | 2002 | 2003 | ||||||||||||||||||||||
Europe | €453.2 | 89.7 | % | €463.9 | 90.5 | % | €453,9 | 89.9 | % | |||||||||||||||
Americas | 17.6 | 3.5 | % | 12.0 | 2.3 | % | 11,9 | 2.4 | % | |||||||||||||||
Rest of the World | 34.5 | 6.8 | % | 36.6 | 7.2 | % | 39,00 | 7.7 | % | |||||||||||||||
Total net sales | €505.3 | 100.0 | % | €512.5 | 100.0 | % | 100.0 | % |
De Rigo maintains a presence in more than 80 countries and its products are sold in more than 40,000 stores.
The Group’s eyewear is sold by independent opticians, retail optical chains (including the Group’s own D&A and General Optica stores) and shops specializing in glasses and eyewear products, including in several markets, chain stores specializing in sunglasses such asSunglass HutandSolaris. The Group’s designer eyewear is sold in the relevant designer boutiques, and, in some cases, in well-known department stores such asHarrods,SelfridgesandHouse of Fraserin the United Kingdom andGalleries LafayetteandPrintempsin France.
COMPANY STRATEGY
Management believes that De Rigo’s position within the mid-to premium price categories of the eyewear market benefits from the following competitive strengths.
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• | Brand prestige.De Rigo distributes its products under brand names that management believes benefit from high customer recognition and significant prestige in its principal markets. The brand names employed by the Company include owned brand names, such asPolice,StingandLozza — which rely on innovative design, product quality and an effective marketing policy in order to build brand awareness — and highly regarded designer brand names licensed to the Group by some of the world’s best known fashion houses. | |||
• | Design originality.De Rigo particularly targets customers attentive to design and fashion trends, and believes its products are characterized by particularly original and innovative designs that are carefully tuned to consumer preferences. Management believes that the Group’s stylistic innovations have established its collections as a point of reference for the entire industry, while maintaining the specific identity of each of its brands. | |||
• | Tailored distribution.De Rigo tailors its distribution strategy to reflect local market conditions. In Italy, the Group distributes its products directly through its network of sales representatives. In most of its other principal markets, De Rigo has developed a network of distribution subsidiaries which it controls. In the United Kingdom, Spain and Portugal, the Company has also developed a wide network of retail stores. Management believes that its direct control of the distribution network in its major markets allows the Group to improve margins while enhancing the image and the prestige of the Group’s products through careful selection of points of sale and a focus on post-sale customer assistance. | |||
• | Integrated production.De Rigo’s production process is generally highly automated, though selected processes also include handicraft techniques. We have developed a long term relationship with our principal suppliers, enabling us to quickly react to changes in market demand while keeping tight control over the quality of materials and individual production steps used by outside suppliers in their manufacturing processes. |
De Rigo seeks to build on these competitive advantages in achieving management’s principal strategic objectives, which include:
• | Expansion in the mid- to premium-price eyewear categories.De Rigo plans to expand its presence in the mid- and premium-price segments of the markets for sunglasses and prescription eyeglass frames — which management believes offer the most attractive profit margins — by capitalizing on the quality of the products it markets under both the Group’s owned brand names and licensed designer brand names. To achieve this goal, the Company intends to: |
• | Strengthen its brand portfolio.De Rigo intends to strengthen its current brand portfolio by increasing the visibility of its owned brand names, especiallyPoliceandSting,principally through the use of internationally-recognized spokespersons in advertising, while at the same time consolidating its relationship with the leading fashion houses that currently license designer brand names to the Group. De Rigo also intends to enlarge its brand portfolio by entering into new licensing arrangements with other prestigious fashion houses and launching new brands of its own. | |||
• | Expand distribution.De Rigo intends to expand its distribution channels in markets that the Company believes offer the greatest demand for designer mid- and premium-price eyewear, primarily in Europe, North America, and the Far East. To do so, the Company expects to form new distribution subsidiaries in certain markets while further developing its existing subsidiaries in others. |
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• | Invest in production.In order to achieve management’s goals of increasing efficiency, reducing costs, and enhancing the technological features of its products while continuing to maintain its high standards of quality, the Company plans to continue to invest in the production process, with a particular focus on automation and the use of innovative new materials. |
• | Expansion in the retail market.De Rigo plans to continue to expand its presence in the retail eyewear sector, focusing on sales of prescription eyeglass frames and sunglasses produced by De Rigo or other manufacturers and of contact lenses. To achieve this goal, the Company intends to: |
• | Enhance its existing stores.De Rigo intends to enhance many of its existing retail stores in order to increase its penetration of local markets and better present to consumers the quality of its eyewear collections. |
• | Open new stores.De Rigo intends to continue to expand the D&A and General Optica store networks to achieve greater geographical coverage in key areas through directly managed stores or franchised stores. |
• | Pursue acquisitions.De Rigo will continue to pursue acquisitions and other strategic transactions that management believes would afford the Company attractive opportunities to continue its geographic expansion by enhancing or establishing its retail presence in those countries in which such a strategy is compatible with the Company’s current distribution network. |
PRODUCTS
The Company’s product portfolio is divided into owned brands and designer lines of prescription eyeglass frames and sunglasses. The Company’s traditional lines are produced under well-established brand names owned by De Rigo and feature conventional and fashion-conscious styles. De Rigo’s designer lines are produced under brand names used by the Company under license agreements or other arrangements and incorporate more contemporary and fashion-forward styling. The Group’s D&A and General Optica retail subsidiaries also sell traditional and designer eyewear produced by third parties.
De Rigo manufactures over 2,500 models of sunglasses and prescription eyeglass frames. Historically, De Rigo concentrated primarily on the design, production and sale of high-quality, fashionable sunglasses. Sunglasses manufactured by the Group represented 49.1% of the Group’s unit sales of eyewear in 2003, as compared with 53.3% in 2002, with Group-manufactured prescription eyewear representing 29.9% and 27.4% of unit sales, respectively. Sales of eyewear bearing brands that do not belong to the Group through the retail segment represented the remaining 21.0% and 19.3% of De Rigo’s unit sales of eyewear in 2003 and 2002. Generally, the eyewear sold under each of the Group’s brands, both its owned brands and those licensed from third parties, include collections of both sunglasses and prescription eyewear. The Group’s two core brands,PoliceandSting, represented approximately 31.6% and 32.8% of its total eyewear unit sales in 2003 and 2002, whereas De Rigo’s designer lines as a group represented approximately 38.9% and 34.2% of total unit sales.
Owned Brands
Eyewear bearing the Group’s owned brands, and conceived and realized by De Rigo, are sold in all of its principal markets. A detailed description of the Group’s most noteworthy owned brands,Police,Sting, andLozza, follows.
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Police.The first of the Group’s core brands,Police, was created with the goal of selling an entire range of sunglass models associated with a single strong brand image, introducing in Europe a product based on a depiction of an “aggressive urban” American lifestyle. In 1996, De Rigo revamped thePolice line in order to shift its target market from aggressive urban young adults to more mature adults (ages 25 to 40) with higher discretionary spending power. In recent years, the Company has continued to invest money in communicating this shift worldwide. From 1999 to 2000 and from 2001 to 2002, respectively, Bruce Willis and George Clooney served as spokespersons for thePolicebrand in all markets outside the U.S., Canada and Japan. The brand’s latest publicity campaign features David Beckham, the Real Madrid and England soccer star, who wears bothPoliceeyeglasses and sunglasses.
Sting.This brand, which also has an “aggressive” image, was conceived and designed for the youth market (ages 14 to 24). The line is characterized by a large number of models ranging from very minimalist frames and matte colors to brightly colored and elaborate shapes to suit various tastes. Together with thePolicebrand,Stingenabled De Rigo to develop the fashion-conscious teenage and young adult market, particularly in Italy. Formula One World Champion Michael Schumacher is currently featured in the latestStingadvertising campaign.
Lozza.TheLozzabrand, the oldest eyewear brand in Italy, offers a wide range of traditional and classic eyeframes. The brand targets the stylistically more conservative adult market (age 40 and older).
Licensed Brands
The Group also manufactures and sells eyewear under each of the following “designer” brands pursuant to license agreements or other arrangements covering the relevant brands and trademarks. The Group’s license agreements have terms ranging from one to five years. The following is a brief description of each of the major designer brand names currently marketed by De Rigo.
Celine.A collection that is designed to be useful, yet glamorous, based on a modern aesthetic that is embodied in luxurious detailing that is identifiable, yet subtle.
Etro.TheEtrocollections embody an innovative vision of the tradition originating in theEtrophilosophy: sophisticated details and exquisite workmanship reflected in high fashion shapes and materials. The line is aimed at demanding customers in a wide range of age groups.
Fendi.A collection of high-premium priced designer eyewear. Models are generally characterized by simplicity and clean forms.
Fila Eyes.A brand comprised primarily of sports/fashion sunglasses and sports shields.FilaEyesaims to satisfy a broad range of different tastes and needs, from lightweight, curved-wrap, metal-framed models to resistant, high-performance models.
Furla.A worldwide leading brand in the bridge market. Furla products are characterised by an essential and distinctive style. The collections reveal a careful interpretation of trends and are created paying great attention to the needs of a modern international woman.
Givenchy.A modern, yet timeless, collection for women and men, tailored for the fashion conscious and cosmopolitanGivenchycustomer.
La Perla.A collection designed for the sophisticated woman, the details of which have been conceived to reflect fascination and femininity.
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Loewe.A luxurious modern collection for women and men inspired by Mediterranean culture.
Onyx.A brand created to meet the fashion needs of teenagers. A youthful and trendy collection of well-constructed designs that can give the wearer a wide variety of looks at affordable prices.
Mini. The BMW Group’s Mini brand, which is both a trendsetter and an automotive legend, is much more than just a car; it is a thrill that stands for an individual, young and cosmopolitan lifestyle. The design and materials of the new range of Mini sunglasses are innovative, almost futuristic. Made of light, high-quality metal and plastic, the models’ appeal lies in their shape and color.
DESIGN AND MANUFACTURING
Every year, the Group introduces two new collections for each of its owned and licensed brands: one for eyeglasses launched in May in conjunction with MIDO (the major world eyewear exposition in Milan), and one for sunglasses each summer. Both collections include new models, as well as the models that enjoyed the greatest success the previous year. In 2003, new models represented roughly 65% of each collection. It takes about 10 months to develop a new collection, a process that includes design, creation of prototypes, and production.
Design
The Group believes that its competitive strengths include the variety of its models’ designs and the breadth of its prescription eyewear and sunglasses product lines. The design team responsible for this broad array of styles includes approximately 22 members, consisting of designers and prototype engineers; De Rigo’s design team also collaborates with external designers. Working very closely with the Group’s marketing team, which monitors demand for the Group’s current models as well as general style trends in eyewear, the designers devise new styles utilizing novel forms, materials, and colors. In developing new collections for the Group’s licensed brand names, the De Rigo design team works in close contact with the designer’s own creative staff, who make suggestions based on the current styles of the designer’s clothing and accessories, thus ensuring aesthetic coherence among the designer’s various collections.
The Group’s design capacity derives from the use by its design team of “computer-aided design/computer-aided manufacturing”, or “CAD/CAM”, technology in the design and prototype manufacturing phases. Although the design team, aided by the CAD/CAM system, designs and produces prototypes of many new models each month, only a selected number of new models are chosen to be added to the Group’s collections each year. Its sophisticated CAD/CAM system enables the Group to design and produce a fully working metal prototype in under 24 hours, and to produce four to five metal prototypes per day. The CAD/CAM system also streamlines the conversion from prototype to production. For example, for the production of metal sunglass or eyeglass frames, the Group makes its own detailed metal molds, which are inscribed by computer-controlled mills using the data stored in the CAD/CAM system. For the production of plastic frames, the automated plastic milling machines used by the Group are programmed by inputting the data stored on the CAD/CAM system.
Manufacturing
The primary materials utilized in the production of eyeglass frames are metal and plastic (or a combination thereof). Metal sheets and threads are the primary raw materials used to manufacture metal frames. The unpolished frames subsequently undergo galvanizing and coloring processes during which the frames assume the latest colors of the new collection. The final touches, including the mounting of the lenses, take place at the finishing center. Plastic frames can be manufactured through a pantographic
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or injection process. In the case of the former, an acetate sheet is cut, folded, and polished to form the front of the frame and the two temple pieces. In the case of the latter, granular plastic is injected into special moulds. The front of the frame and temple pieces are usually colored before being sent to the finishing center.
The Group uses high-quality raw materials in the manufacture of its products. In the manufacture of its fashion sunglasses, the Group uses high quality lenses produced by several major lens manufacturers. These lenses provide 100% protection from all ultraviolet rays, are impact resistant and are certified to be in compliance with the health and safety standards prescribed by the U.S. Food and Drug Administration (21 C.F.R. §801.410) and the European Union (Directive 89/686/CEE).
The Group’s manufacturing facilities are located primarily in the Belluno area in northeast Italy, the region in which most of Italy’s eyewear industry is based. In Limana, De Rigo operates two manufacturing facilities for the production of metal frames, while at Longarone, it owns one facility for the galvanization and coloring of metal frames and another for production of pantographic plastic frames. The facility for pantographic plastic frames at Longarone also serves as the finishing center for all of the Group’s optical products (including the products of subcontractors).
Many aspects of the manufacturing process have been automated, including the production of metal and plastic frame components and the galvanization of metal eyeglass frames. In a traditionally labor-intensive sector, De Rigo has invested in the design and creation of new proprietary robotics and machinery to automate manufacturing tasks, to increase efficiency and to maintain high quality. However, some manufacturing steps, such as coloring and finishing, are still done by hand.
De Rigo puts particular emphasis on the quality of its products, beginning with the inspection of the raw materials and components and continuing with quality control and process control procedures throughout all manufacturing stages, whether carried out internally or externally by subcontractors. At the end of the production process, all frames are individually inspected. Less than 2% of frames manufactured by the Group have even minor defects at the finishing stage. If any minor defects are detected, frames are repaired or replaced. Despite the high degree of automation of the Group’s production processes, its quality control is for the most part performed manually.
De Rigo maintains flexibility and capacity in manufacturing by using specialized subcontractors for various production functions (production of frame components and details, galvanizing and coloration, assembly, finishing and production of accessories). Typically, the Group supplies subcontractors with the primary material and components so as to optimize quality control. Moreover, Group technicians regularly visit the subcontractors’ facilities to monitor production quality and verify the promptness of deliveries. In 2003, the Group produced approximately 60% of its production requirements internally, as compared with approximately 70% in 2002. In 2004, the Group expects again to subcontract approximately 35% to 45% of its production requirements to third parties.
MARKETING AND DISTRIBUTION
Marketing
As a result of the Group’s recent expansion and its increased focus on designer brands and retail operations, management has decided to increase De Rigo’s marketing expenditures, while at the same time integrating and redefining the Group’s various marketing activities so as to meet the challenges of an increasingly competitive global market. In doing so, management is working to transform De Rigo’s marketing operation from one traditionally focused on sales support activity such as point of sale material and consumer advertising into an increasingly strategic part of the Group that is focused on brand
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management. The necessary integration of marketing activities, including the selection of the frames to be included in each brand’s collection, is followed by the development and implementation of a strategy focused on the correct positioning of each of the Group’s brands in each of the Group’s markets around the world, with differentiated distribution and pricing.
Wholesale and Manufacturing.The Group’s marketing team monitors the development of the collections, a task that includes the selection of the frames to be included in each brand’s collection, the development and implementation of a strategy focused on the correct positioning of each of the Group’s brands in each of the Group’s markets around the world, and pricing based on the nature of specific markets, including the degree of awareness of a particular brand in that market.
In Italy, De Rigo advertises its products in the principal fashion publications and magazines of national interest and sometimes on billboards and television. De Rigo also provides opticians with promotional and marketing material, including posters, show cards and displays. Outside of Italy, the Group uses similar channels and exercises a similar degree of control over its marketing message in those countries in which it operates through affiliated distribution subsidiaries. In contrast, in countries where the Group operates through independent distributors, De Rigo generally defers to the judgment of those distributors as to which of the Group’s products should be marketed in the areas they cover. In some cases, however, De Rigo takes part in planning the independent distributor’s marketing budget, and, after approving the budget, contributes towards the distributor’s marketing expenses.
Retail.D&A and General Optica’s marketing consists of national television, radio and print media in their respective home markets. The individual retail stores themselves are responsible for campaigns to attract customers to a particular retail store. In this manner, the stores generate direct contact with the client base and develop personal rapport with customers, with the ultimate goal of educating customers about new products and services and encouraging more frequent replacement of eyewear. D&A and General Optica also maintain and periodically update extensive customer databases, which currently contain information on approximately 4.5 million and 1.5 million clients, respectively.
Distribution
The Group distributes its manufactured products through its network of sales representatives in Italy and the countries in which its distribution subsidiaries are based, through independent distributors and through the D&A and General Optica retail stores in the United Kingdom, Spain and Portugal (which also sell eyewear from other manufacturers). De Rigo is present in over 80 countries and its products are sold in over 40,000 retail stores. As part of its strategy, the Group maintains strict control over its distribution network. The Group’s eyewear lines are sold through independent opticians, optical retail chains and optical specialty stores, including, in certain markets, sunglass specialty chains such asSunglass Hut and Solaris. In addition, the Group’s fashion sunglass lines are sold in certain markets through major department stores with large optical departments, such asHarrods, Selfridges andHouse of Fraserin England andGalleries LafayetteandPrintempsin France. In order to preserve the integrity of its brand images, the Group encourages sales of its eyewear exclusively through quality retail stores at suggested manufacturer’s retail prices, makes every lawful effort to prevent discounting of its products and discourages any manner of sale that would degrade its products’ brand images.
Wholesale and Manufacturing Segment
Italy.In the fragmented Italian retail eyewear market, the Group distributes its products through its network of sales representatives, who currently have an aggregate of approximately 6,000 customers selling through roughly 7,200 points of sale. As of December 31, 2003, the Group had approximately 70 sales representatives in Italy. Each sales representative is assigned to a particular territory within Italy for
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which he is the exclusive representative for certain of the Group’s eyewear lines. Customers either order eyewear from their sales representatives or directly from the Group. Each sales representative works exclusively for the Group and is paid on a commission basis for sales within their respective territories.
The Group believes that this method of distribution has been effective, particularly with respect to itsPoliceandStingbrands, and has enabled the Group to achieve a high degree of penetration of the Italian market.
Export—International Distribution Network.The Group’s international distribution network, comprised of its distribution subsidiaries and its direct distribution activities in certain markets, is a key element of its distribution strategy. The Group believes that distributing through its own direct sales network enables it to manage better the image of its brands, sales efforts and customer service activities in the relevant markets. The Group generally seeks to establish direct distribution activities only in markets where it believes that direct control would be most effective in implementing its marketing strategy. As of December 31, 2003, there were distribution networks in Germany, Spain, France, the Netherlands, the United Kingdom, Greece, Japan and Hong Kong.
The international distribution network has the exclusive right to distribute certain of the Group’s brands within a designated territory. As of December 31, 2003, the Group’s distribution network employed approximately 78 sales representatives.
Export—Independent Distributors.Outside of Italy, the United Kingdom, Spain, Portugal and countries covered by the international distribution network, the Group sells its sunglasses and prescription eyeglass frames through independent distributors in approximately 70 countries. Pursuant to distribution agreements with the Group, these distributors also have the exclusive right to sell certain of the Group’s lines in designated territories. A distributor may sell one or more of the Group’s lines within its territory, depending on the terms of the relevant distribution arrangement. The Group maintains close contact with the independent distributors in order to monitor sales in the relevant markets. Almost all orders for eyewear are given to the Group by the distributor, and the Group ships the ordered goods to the distributor, who then delivers them to the retailer. Prices of the Group’s exported products generally are fixed in euro and vary from market to market, subject to adjustment for shipping costs and customs duties.
The sales of the Group’s wholesale and manufacturing segment, including sales to the other segments, totalled€136.21 million (or 26.9% of total net sales) in 2003, as compared with sales of€141.1 million (or 27.5% of total net sales) in 2002.
EID: Prada Joint Venture
In 1999, De Rigo and the Prada Group agreed to create a joint venture for the manufacture and distribution ofPrada-brand eyeglass frames and sunglasses. Central to the joint venture was the incorporation of EID, a new company that was owned 51% by De Rigo and 49% by Prada. The venture sought to take advantage of the specialized expertise of its two parent companies: the creation of collections, positioning of products, and broad marketing strategies were the responsibility of Prada, while De Rigo was responsible for the actual production (creation of prototypes and subsequent manufacture) of the collections. Major business decisions (including adoption of a business plan) required the approval of both parties. In July 2003, Prada and De Rigo agreed to terminate the joint venture agreement and De Rigo sold its participation of 51% in EID to Prada.
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EID’s sales, including sales to the other segments, totalled€19.8 million (or 3.9% of total net sales) for the portion of 2003 prior to the Group’s sale of its interest, as compared to sales of€31.2 million (or 6.1% of total net sales) for the full year 2002.
Retail Segment
The Group’s retail segment comprises D&A, with stores throughout the United Kingdom, and General Optica, with stores in Spain and Portugal.
Dollond & Aitchison
In December 1998, the Group acquired 100% of the British optical chain Dollond & Aitchison. D&A is arguably the longest established optical chain in the world (having been founded in 1750). D&A operates a retail network throughout the United Kingdom that was comprised of 232 company-owned stores (including 23 “optical megastores”) and 146 franchised stores at June 25, 2004.
Retail sales through D&A totalled€230.8 million in 2003 and comprised 45.7% of the Group’s total net sales, as compared with sales of€236.2 million (or 46.1% of total sales) in 2002. In 2003, D&A sales of De Rigo products (almost exclusively eyeglass frames) accounted for approximately 28.9% of D&A’s total revenues from eyeglass sales, from 22.9% in 2002. In 2002, the most recent year for which market share data is available, D&A’s owned retail network had a share* of 8.2% of the British optical market based on value of products sold; its share of this market rose to 9.2% if its franchised stores were included. D&A’s market share is decreasing with the related figures for 2001 being 8.5% and 9.5%, respectively.
D&A’s service is focused on providing professional eye examinations and on assisting customers in choosing eyeglass frames and lenses. In the United Kingdom, D&A’s main competitors tend to center their marketing on one hour service or on price. Market research commissioned by D&A found (i) that customers fundamentally feel unattractive wearing spectacles and uncomfortable when buying them; (ii) that customers want honest, straight-forward advice on what suits them; and (iii) that customers want outstanding value for money in terms of pricing, quality and after-sales service. On the basis of these findings, D&A formulated a marketing strategy that focused on customer service, cultivating an exemplary level of service that has earned D&A the honor of a Royal Appointment.
In order to improve its assistance of customers in choosing eyeglasses, D&A (together with well-known consultants in the field) developed theStyleeyes andComputereyesservices.Styleeyesadapts techniques in aesthetic consulting typically used in the cosmetics industry to identify the shape and color of frames that best match the customer’s face.Computereyesallows the consumer to see on a computer screen how he or she would look wearing different eyeglass frames. The quality of service offered by D&A professionals is regularly monitored through the use of customer satisfaction forms filled out by clients. This evaluative process constitutes the base of the incentive program for company employees working at its retail stores.
Management believes that D&A’s presence throughout the United Kingdom has enabled it to earn wide recognition of its brand name and the concomitant image of quality and innovation. In order to further develop its customer relationships, D&A established theContact Lenses by Postservice, which provides periodic mail deliveries of contact lenses to D&A’s clients. This service, the only one of its kind in the United Kingdom offering a wide range of products from different suppliers, has allowed D&A to
* | All market share data in this annual report is taken from the 2003/2004 and 2002/2003 Jobson L.L.C. editions of the European Optical Industry — Economic Review Handbook. |
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increase customer loyalty significantly while at the same time providing a readily available channel for direct marketing.Contact Lenses by Posthas also enabled D&A to broaden its share of the contact lenses market by reaching consumers in the 18-40 age group, as well as consumers above the age of 40 who typically use eyeglasses. As of June 1, 2004, roughly 185,000 clients are active customers in the program, and D&A believes thatContact Lenses by Post continues to offer significant potential for growth.
D&A is engaged in an on-going strategic process of refocusing of the D&A brand; restructuring of its branch network; reorganizing the supply chain so as to optimize the efficiency of purchasing and inventory management; re-engineering D&A’s information technology system; and reviewing and repositioning of the products and services D&A offers its customers.
The refocusing of the D&A brand name — a strategy designed to enable D&A to reach a wider range of consumers with greater disposable income — is focused on improving D&A’s assistance in helping customers choose optical products within its retail stores. In working towards this goal, D&A has concentrated on building a professional and customer-sensitive culture, re-engineered its employee compensation structure to include performance-based incentives — especially for store employees — expanded training to reach all members of the D&A organization, and introduced new management techniques.
In re-organizing its supply chain, D&A divested its manufacturing facilities, selling all of the assets of its two lens laboratories to BBGR Ltd., a wholly owned subsidiary of Essilor International SA, the world’s largest lens manufacturer, and transferring all related employees to BBGR in July 2001. The agreement with BBGR also includes a long-term supply arrangement that is expected to allow the parties to develop mutual synergies along the lens supply chain — an agreement D&A believes will reduce its operating costs now that initial supply chain-related difficulties appear to have been resolved.
The underlying strategy of this comprehensive ongoing effort incorporates a focus on customers, colleagues and the way D&A does business, with the goal of achieving D&A’s mission of becoming the best optical retailer in the United Kingdom. The program focuses on changing the way D&A had traditionally operated by paying increased attention to the quality of central management, while at the same time introducing a clear mission and performance-related culture among the staff of the stores that make up the branch network. As of December 31, 2003, 2,427 individuals were employed by D&A.
General Optica
General Optica is the leading optical chain in Spain. In February 2000, General Optica became part of the De Rigo Group. See Note 3 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
At June 25, 2004, General Optica’s network of stores consists of 136 directly owned stores in Spain, 10 in Portugal and 15 stores in Spain under franchising agreements. Although the name General Optica is well known throughout Spain thanks to its tradition in the sector since the company’s foundation in 1955, its retail stores are primarily located in northern and eastern Spain, particularly Catalonia , Basque Country, Asturias and Galicia. General Optica’s recent policy expansion has increased its presence in new areas of Spain, as well as those in which it previously maintained only a minimal presence. General Optica retail stores share a common storefront and interior design, rendering
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them easily recognizable to consumers. Typically, General Optica stores are positioned in the principal shopping districts of major Spanish cities. As in the case of D&A, management believes that General Optica’s success is based on the professionalism of its staff, the quality and variety of its products and services and a comprehensive program of guarantees designed to ensure customer satisfaction. In contrast to D&A, General Optica offers service within an hour for certain styles of lenses in some of its stores.
General Optica posted sales of€130.7 million (or 25.9% of the Group’s total net sales) during 2003, as compared with sales of€123.4 million (or 24.1% of total sales) in 2002.
In recent years, General Optica has renewed and expanded its network of establishments considerably. In particular, General Optica has demonstrated its ability to adapt by introducing a new store concept that is notably more spacious and attractive than its predecessors, with a modern, bright, minimalist design that is intended to set the standard for opticians of the future. This new type of store has a more modern, open, interactive air, in which prominence is given to a large display of frames and sunglasses, providing customers with what General Optica believes they want: the opportunity to look at, try on and choose products in complete freedom. In an effort to expand its range of services and monitor the interest of its customers in laser eye correction surgery, General Optica has established a consultation service in certain of its stores in collaboration with local laser surgery clinics.
General Optica benefits from a highly qualified team of professionals who receive ongoing training, employing approximately 1,400 dedicated individuals who can offer customers excellent service.
The stores that form part of General Optica’s retail network employ management software designed to provide high levels of quality and speed in their delivery of services. This information system is capable of identifying trends in customer demand, so that the range of products on offer in the stores may be adapted to customer needs.
As a company that is expanding, General Optica plans to acquire or open additional new stores in Spain and Portugal within the next three years, seeking to further consolidate the leading position that it holds in Spain. General Optica estimates that it had a market share of approximately 10.0% in the Spanish optical market in 2002 based on value of products sold, as compared to a share of approximately 9.3% in 2001.
General Optica also has established itself as a company that is sensitive to the needs of the communities it serves. Through campaigns conducted in its network of eyecare centers, it has succeeded in increasing awareness of eye-related problems in Spain and Portugal, collecting used glasses for distribution to underprivileged groups and providing support for collaborative ophthalmology projects in developing countries, which have received recognition from important national organizations.
COMPETITION
De Rigo believes that its quality of products, its control over all aspects of production, its range of designer brand names, and its carefully selected network of distributors position the Company to compete successfully in the mid- to premium-price categories of the eyewear product market.
The eyewear industry is highly competitive and fragmented. As the Group has historically marketed its products primarily in Italy and the rest of Europe and Asia, it competes with different companies in different markets. The Group believes that its principal competitors in its major geographic markets include Luxottica (Chanel, Prada, Donna Karan, Vogue, Persol, Versace, Ray Ban,Killer Loop
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andRevobrands), Oakley (Oakleybrand), Safilo (Gucci,Diesel, Dior, ArmaniandPolobrands), Marchon (Calvin Kleinbrands) and Marcolin (Dolce & GabbanaandReplaybrands).
In the retail distribution markets of the United Kingdom, Spain, and Portugal, De Rigo competes against national and international chains as well as independent opticians. Among the chain stores, the Group believes that its principal competitors areSpecsaver,Boots the Optician, andVision Expressin the United Kingdom,Multiopticas,VisionlabandOptica 2000in Spain, andMultiopticasin Portugal.
ITALIAN GOVERNMENT INCENTIVE PROGRAM
In November 1963, the Italian Government introduced the Vajont Relief Program for the Longarone area as part of a package of relief measures enacted shortly after the Vajont dam catastrophe that devastated the area. Two of the Group’s companies, Dierre (which was merged into De Rigo S.p.A. in January 2002) and Quattro Valli, have located their registered offices and facilities in Longarone and historically benefited from the Vajont Relief Program. See “Risk Factors — We lost all tax benefits in September 2001 and in April 2003; our effective income tax rate has therefore increased significantly towards the statutory rate.”
Tax Benefits
The Vajont Relief Program provided that new businesses located in the areas affected by the Vajont dam catastrophe would receive a ten-year exemption, beginning on the date of commencement of their operations, from the national corporate income tax (Imposta sui Redditi delle Persone Giuridiche, or “IRPEG”, then levied at a rate of 36%) and the local income tax (Imposta Locale sui Redditi, or “ILOR”, then levied at a 16.2% rate). The program’s tax benefits were repealed in December 1993. However, the Italian Government specified that those companies that had already accrued the right to the tax exemptions as of January 1, 1994, which included Dierre and Quattro Valli, could continue to enjoy the tax exemptions through the expiration of their respective ten-year periods. In 1998, the Italian Government eliminated the ILOR tax along with certain other minor taxes, replacing them with the new Regional Tax on Productive Activities (Imposta Regionale sulle Attività Produttive or “IRAP”), which is currently levied at a 4.25% rate. Companies that had benefited from an exemption from ILOR continue to enjoy equivalent tax benefits with respect to the new IRAP tax. See Note 11 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
Dierre’s ten-year exemption was granted in 1992, covering income earned during the period beginning September 2, 1991 and ending September 1, 2001. Quattro Valli’s exemption was granted in 1994 and covered income earned from April 21, 1993 to April 20, 2003. The Group does not expect that new tax benefits will be introduced by the Italian Government with respect to operations in the Longarone area or the other areas where its facilities are currently located.
TRADEMARKS
The Group’s products are sold under thePolice,StingandLozzabrand names, which have been registered as trademarks of the Company in substantially all of the principal markets in which they are used by the Group. In Spain, however, thePolicename is registered to another manufacturer of sunglasses and, as a result, the Group markets itsPolicemodels in Spain under the nameVogart. Management believes that its established brand identities and trademarks are an important part of its strategy. See “— Company Strategy”.
The Group also sells products pursuant to license agreements or other arrangements under the following trademarks:Fendi,Fila Eyes, Etro, La Perla, Onyx, Celine, Loewe, Givenchy, MiniandFurla.
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De Rigo’s license agreements have terms ranging from one to five years, and some of the licenses limit De Rigo’s right to market and sell products with competing brand names and/or limit the markets in which it is able to use the licensed brands. Early termination or non-renewal of some or all of its license agreements or arrangements could have a material adverse effect on the Group’s operations, since sales of eyewear under such brand names and trademarks represent a material percentage of the Group’s net sales. See “Risk Factors — Our business is very dependent on our ability to negotiate and maintain favorable license arrangements.” in Item 3 and “— Products”.
INSURANCE
The Group maintains insurance against a number of risks. The Group insures against loss or damage to its facilities, against theft, loss or damage to its products while they are in transit to customers when transportation is the Group’s responsibility and against general liability to third parties. Although the Group does not cover 100% of these risks, management believes that the Group’s present level of insurance is adequate in light of its past experience.
SEASONALITY AND AVAILABILITY OF RAW MATERIALS
In 2003, 54.3% of the Group’s unit sales consisted of sunglasses, for which the peak sales period at the wholesale level is during the first four months of the year. Historically, this factor has tended to cause the Group to record a higher proportion of its revenues during the first half of the year. However, the increase over time in the percentage of the Group’s sales represented by prescription frames, which are not subject to seasonal peaks, has mitigated and is expected to continue to mitigate the seasonality of the Group’s sales as a whole. The seasonality of sales of sunglasses and the timing of the launch of new fashion collections has generally had the effect of increasing the Group’s marketing expenses during the second and third quarters of the year.
Generally, the raw materials and components used in the Group’s products are available in sufficient supply from a number of suppliers. However, certain products with innovative fashion content, such as lenses with innovative coatings or coloring, or unusual materials, such as special types of plastics produced only for the Group, are not generally available from a number of alternative sources. Any interruption of supply from the Group’s current sources of such products could therefore produce delays in production.
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DESCRIPTION OF PROPERTY
The general location, use and approximate size of the principal properties used by the Group as of December 31, 2003 are set forth below.
Total Area | ||||||
Location | Use | (in square meters) | ||||
Longarone (BL), Italy | Group headquarters, manufacturing facility and distribution center | 16,946 | ||||
Longarone (BL), Italy | Manufacturing facility | 1,972 | ||||
Limana (BL), Italy | Manufacturing facility | 5,878 | ||||
Limana (BL), Italy | Manufacturing facility | 850 | ||||
Barcelona, Spain | Distribution center | 650 | ||||
Barcelona, Spain | General Optica head office | 2,139 | ||||
Barcelona, Spain | General Optica warehouse | 523 | ||||
Barcelona, Spain | General Optica warehouse | 1,640 | ||||
Barcelona, Spain | General Optica warehouse | 2,612 | ||||
Barcelona, Spain | General Optica training center | 820 | ||||
Martignat, France | Distribution center | 1,144 | ||||
Hoofddorp, The Netherlands | Distribution center | 200 | ||||
Watford, United Kingdom | Distribution center | 247 | ||||
Athens, Greece | Distribution center | 300 | ||||
Birmingham, United Kingdom | D&A head office | 1,593 | ||||
Birmingham, United Kingdom | Training center | 924 | ||||
Birmingham, United Kingdom | Distribution center | 2,435 | ||||
Hong Kong, China | Distribution center | 324 | ||||
Hong Kong, China | Supply chain service center | 64 | ||||
Tokyo, Japan | Distribution center | 718 |
At June 25, 2004, the Group also owned and operated 232 retail stores with an average retail area of 95 square meters in the United Kingdom and of 136 retail stores in Spain and 10 retail stores in Portugal, which have an average retail area of 180 square meters. As of the same date, D&A owned a freehold interest in 48 of its properties and General Optica owned a freehold interest in 37 of its properties. Almost all of the Group’s other retail properties (as well as the land on which its owned stores are located) are leased. All of the listed properties located in Italy are owned by the Group, except the smaller of the two manufacturing facilities in Limana, which is leased from third parties. All of the listed properties located outside Italy and the United Kingdom are leased by the Group pursuant to long-term leases.
The Group believes that its current facilities are suitable for its needs and are well-maintained. See “— Design and Manufacturing — Manufacturing”. De Rigo completed construction of a new plant in Longarone in January 2002.
Item 5.Operating and Financial Review and Prospects
CRITICAL ACCOUNTING POLICIES
Our discussion of the Group’s results of operations and liquidity and capital resources in respect of the fiscal years ended December 31, 2001, 2002 and 2003 is based on the Company’s audited Consolidated Financial Statements and the related Notes thereto included in Item 18 of this annual report. These financial statements have been prepared in accordance with Italian GAAP, which differ in certain respects from U.S. GAAP. For a discussion of the principal differences between Italian
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GAAP and U.S. GAAP as they relate to the Group’s consolidated net income and shareholders’ equity, see Note 19 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
De Rigo’s reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements. De Rigo bases its estimates on historical experience and on various other assumptions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing De Rigo’s financial statements and the following discussion of its results of operations and liquidity and capital resources. De Rigo believes the following critical accounting policies involve the most significant judgments and estimates used in the preparation of the Consolidated Financial Statements included in Item 18 of this annual report.
Accounting for Long-lived Assets.Property, plant and equipment and purchased intangible assets other than goodwill are recorded at either historical or revaluated amounts. If such assets are acquired in a business combination, the purchase price is allocated to the estimated fair value of the acquired property, plant and equipment and intangible assets. Property, plant and equipment and intangible assets are depreciated or amortized on a straight-line basis over their estimated useful lives.
Property, plant and equipment are valued at acquisition or construction cost, less accumulated depreciation. Construction costs include directly allocable costs, an appropriate allocation of material and production overhead and interest accruing during the construction related to debt specifically associated with the related construction project.
Accounting for long-lived assets and intangible assets involves the use of estimates for determining the fair value at the acquisition date for assets acquired in a business combination, and the useful lives of the assets over which the costs of acquiring these assets are charged to the statement of operations. The useful lives of long-lived assets are subject to such variables as technological feasibility, obsolescence, changes in consumer demand and strategic management decisions.
When an impairment in the value of assets occurs, nonscheduled write-downs are made. The Company assesses the impairment of identifiable intangibles and long-lived assets whenever there is reason to believe that the carrying value may exceed the fair value and where a permanent impairment in value is anticipated. The determination of impairments of long-lived and intangible assets involves the use of estimates, which include but are not limited to the cause, the expected timing and the amount of the impairment. Impairment is based on a broad measure of factors. In evaluating assets for impairment, the Company typically considers, among other things, technological obsolescence, discontinuance of services, changes in market prices, significant negative industry or economic trends, significant underperformance relative to expected historical or project future operating results and other changes in circumstances that may indicate impairment.
For Italian GAAP purposes, property, plant and equipment and intangible assets are tested for impairment by comparing the carrying value of the intangible asset to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition and, if required, the impairment loss is measured as the amount that the carrying value of the asset exceeds the asset’s fair value if the asset is not recoverable.
To assess impairment of property, plant and equipment and amortizing intangible assets for U.S. GAAP purposes, the Company uses the guidance outlined in SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets. If, based on the analysis described above, management has concluded that impairment indicators exist, the Company will initially review for possible impairment by assessing the undiscounted cash flows expected to be derived from the asset or group of assets, comparing the lowest level of total expected undiscounted cash flow to the carrying value. If the carrying value of the asset or the group of assets exceeds the sum of the undiscounted cash flows, an impairment is considered
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to exist. An impairment charge is assessed by comparing the asset’s fair value to the carrying value. Fair value can be calculated by a number of different approaches, including discounted cash flow, comparables, market valuations or quoted market prices. The process and steps required to assess the possible impairment of assets, including the identification of possible impairment indicators, assessing undiscounted cash flows, selecting the appropriate discount rate, the calculation of the weighted average cost of capital and the discounts or premiums inherent in market prices requires a substantial amount of management discretion and judgment. If actual results differ from these estimates, or if the Company adjusts these estimates in future periods, operating results could be significantly affected.
Valuation of Goodwill.Goodwill resulting from business combinations is amortized on a straight-line basis over its estimated useful life.
The determination of goodwill is dependent on the allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed. Such allocation is often based on judgmental factors and estimates of fair values for assets that may not have a readily determinable market value. In addition, the useful life assigned to goodwill is an estimate based on the judgment of management at the time of acquisition. The estimated useful life is subject to adjustment if facts and circumstances indicate that the acquired assets’ economic life has been affected by other variables, including technological feasibility, competitive factors and contractual rights.
Nonscheduled write-downs are provided when an impairment in the value of goodwill occurs. De Rigo reviews on a regular basis the performance of its subsidiaries. When there is reason to believe that the goodwill arising from the acquisition of a business is impaired and that the impairment is of a permanent nature, the Company compares the carrying amount of that subsidiary or business to its fair value. The determination of the fair value of a subsidiary involves extensive use of estimates. Methods commonly used by the Company for valuations include discounted cash flow methods, comparable market multiples and quoted stock market prices, if available. Factors affecting estimated fair values typically include discount rates, future cash flows, growth rates, weighted average cost of capital, market prices and control premiums. These estimates, including the methodologies used, are important in determining fair value and ultimately the amount of any goodwill impairment.
As of January 1, 2002, the Company adopted the requirements of SFAS 142,Goodwill and Other Intangible Assets, and as a result the Company has ceased amortization of goodwill and indefinite-lived intangible assets for U.S. GAAP purposes. The requirements of SFAS 142 include that goodwill be tested for impairment at least annually (and between annual tests when certain triggering events occur) using a two-step methodology. The first step screens for potential impairment at the reporting unit level, while the second step measures the impairment, if any. Under U.S. GAAP, the quoted market price of an asset, if available, should be used. If not available, then other valuation techniques, including discounted cash flow, comparables, etc., are acceptable. The selection of the various assumptions that are necessary to arrive at the fair value of a reporting unit, including the assumptions used in the underlying business plans, require substantial management judgment and discretion. If actual results differ from these estimates, or if the Company adjusts these estimates in future periods, operating results could be significantly affected.
Allowance for Doubtful Accounts.The Company makes ongoing estimates relating to the collectibility of accounts receivable and maintain a reserve for estimated losses resulting from the inability of customers to make required payments. In determining the amount of the reserve, management considers the historical level of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. This ongoing evaluation considers such factors such as the overall economic climate, regional strengths and weaknesses, legal rights and historical relations, among others. Historically, losses from uncollectible accounts have not exceeded the
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reserves. Since management cannot predict future changes in the financial stability of customers, actual future losses from uncollectible accounts may differ from the estimates. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event the Company determined that a smaller or larger reserve was appropriate, a credit or a charge to selling and administrative expense would be recorded in the period in which such determination is made.
Deferred Taxes.The Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves a jurisdiction-by-jurisdiction estimation of actual current tax exposure and the assessment of the temporary differences resulting from differing treatment of items such as accruals and amortization, among others, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated balance sheet. The Company must assess in the course of its tax planning process the ability of the Company and its subsidiaries to obtain the benefit of deferred tax assets based on expected future taxable income and available tax planning strategies. If in management’s judgment, the deferred tax assets recorded will not be recovered, a valuation allowance is recorded to reduce the deferred tax asset.
Significant management judgment is required in determining the Company’s provision for income taxes, deferred tax assets, deferred tax liabilities and valuation allowances to reflect De Rigo’s potential inability to fully recover deferred tax assets. The analysis is based on the estimates of taxable income in the jurisdictions in which the Company operates and the period over which the deferred tax assets and liabilities will be recoverable. If actual results differ from these estimates, or if the Company adjusts these estimates in future periods, the Company may need to establish an additional valuation allowance that could adversely affect the Company’s financial position and results of operations.
Under U.S. GAAP, the Company assesses the recoverability of tax assets based on the criteria of “more likely than not”, that is, a probability of recoverability just over 50%. The probability assessment requires significant judgment regarding the timing of future book and tax reversals, which could be materially different from the actual results.
Inventory obsolescence.The Company has adopted uniform policies across its business to assist management in the identification, valuation and treatment of inventory that is not current or could otherwise be considered obsolete. The identification of this inventory is subject to certain judgments, such as the aging profile of the inventory, the estimated selling prices of the inventory in an other than retail environment, the estimated costs to dispose of the inventory, the overall impact on the associated brand of disposing of the inventory off retail price and the requirement of our licensing and branding agreements to maintain replacement inventory. Our ability to manage our inventory levels, and thus our overall requirements for an obsolescence reserve, are also highly dependent on several factors, some of which are not in our control, such as the overall economic environment, changes in tastes and fashion trends and of the market pressure. Management responds to these factors and others on an ongoing basis, adjusting procurement, delivery and manufacturing schedules on a continual basis in order to maintain an optimum balance between inventory, sales and forecasts. Changes to these assumptions or responses could require an increase or decrease in the inventory reserves in the future, resulting in additional expense or income being recognized in the income statement.
Other Significant Estimates.The application of Italian GAAP requires management to make other estimates and assumptions. For example, as discussed in more detail in Note 12 of the Consolidated Financial Statements included in Item 18 of this annual report, accounting for pension and other post-retirement and post-employment benefits requires estimates of future returns on plan assets and expected increases in compensation levels.
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RESULTS OF OPERATIONS
Overview
De Rigo posted net sales of€504.8 million for 2003, a 1.5% decrease as compared with last year. The overall sales results were negatively affected by the appreciation of the Euro against other currencies in which De Rigo makes sales. Cost of sales decreased by 0.6% to€202.0 million or 40.0% of total net sales, in 2003, from€203.2 million, or 39.6% of net sales, in 2002. Operating expenses decreased by 5.0% to€277.9 million, or 55.1% of total net sales, in 2003, as compared to€292.5million, or 57.1% of net sales, in 2002. Notwithstanding the decline in net sales, income from operations increased by 49.1% to€24.9 million, or 4.9% of total net sales, in 2003, from€16.7 million, or 3.3% of net sales, in 2002. The increase in the Group’s operating income was primarily attributable to the improvement in income from operations in the wholesale and manufacturing segment, both in absolute terms and as a percentage of sales, that was itself due to higher gross margins and the expense reductions discussed in more detail below. Financial and other items contributed net income of€13.0 million in 2003, as compared to net expenses of€6.9 million in 2002. Net income increased by 74.5% to€18.5 million in 2003 from€10.6 million in 2002 and represented 3.7% of net sales, as compared with 2.1% last year. Earnings per share were€0.42, an increase of 75.0% as compared with€0.24 per share in 2002. Each of these items is analyzed in more detail in the comparison of the Group’s 2002 and 2003 results appearing below.
The following table sets forth certain income statement data expressed as a percentage of the Group’s consolidated net sales for the periods indicated:
Year Ended December 31, | ||||||||||||
2001 | 2002 | 2003 | ||||||||||
Net sales | 100.0 | 100.0 | 100.0 | |||||||||
Cost of sales | 36.5 | 39.6 | 40.0 | |||||||||
Gross profit | 63.5 | 60.4 | 60.0 | |||||||||
Operating expenses | 57.4 | 57.1 | 55.1 | |||||||||
Income (loss) from operations | 6.1 | 3.3 | 4.9 | |||||||||
Income taxes | 1.3 | 0.0 | 3.0 | |||||||||
Net income | 4.2 | 2.1 | 3.7 |
Distribution Channels
Net sales consist primarily of (i) retail sales by the Group to customers of its British optical retail chain D&A and its Iberian optical retail chain General Optica; (ii) sales by the Group to opticians in Italy, and through its international distribution network located in major European markets and the Americas to retailers in those markets; (iii) export sales by the Group to independent distributors; and (iv) for the period prior to the Group’s sale of its interest in July 2003, sales by EID, the Group’s former joint venture with the Prada Group for the distribution ofPrada-branded eyewear, to opticians, independent distributors and the Prada retail network in major markets worldwide.
Retail sales made by D&A and General Optica, subsidiary sales and direct sales to opticians, due to the various markups included in such sales, generate a greater contribution to net sales than that of sales to independent distributors. Retail sales are made at prices that include the retailer markup. Subsidiary sales are made at prices that include the customary distributor markup, taking into account commissions paid to the distribution subsidiaries’ sales representatives. Sales to opticians are made at prices that include a markup that takes into account commissions paid to the Group’s sales representatives in Italy. Sales to independent distributors, however, are made at prices that exclude distributor and retailer markups. As a result, changes the relative contributions of the various distribution channels to net sales will affect the average price per unit sold by the Group. For example, an increase in the proportion
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of sales to independent distributors will result in a decrease in the average price per unit sold, while an increase in the proportion of subsidiary sales will result in an increase in the average price per unit sold. Conversely, the Group’s cost of sales per unit is unaffected by the distribution channels through which such units are sold. Consequently, changes in the relative contributions of the distribution channels to net sales will affect the Group’s gross margin. However, operating expenses are higher for retail sales, subsidiary sales and sales to opticians than for sales to independent distributors, since operating expenses include commissions, advertising and promotion expenses, other selling expenses and general and administrative expenses. Thus, while the gross margin on retail sales, subsidiary sales and sales to opticians may be significantly higher than the gross margin on sales to independent distributors, this difference in gross margin does not translate into a comparable difference in profitability. Accordingly, management believes that the Group’s operating margin, which is net of both cost of sales and operating expenses, is more indicative of the profitability of the Group’s sales.
Business Segments
During the three-year period ended December 31, 2003 covered by the Consolidated Financial Statements included in Item 18, the Group divided its activities into three distinct segments for financial reporting purposes:
• | Wholesale and Manufacturingconsists of the design, manufacturing, marketing and distribution of high-quality eyewear to opticians in Italy and to independent distributors and opticians through the Group’s distribution subsidiaries abroad. This segment furnishes eyewear to the Group’s other business units, to which the wholesale and manufacturing segment makes sales at prices that include a markup designed to compensate the unit for its manufacturing activity. | |||
• | Retailconsists of the sale of prescription eyeglasses, fashion sunglasses and other optical products through the network of stores operated by the Group’s two retail chains, D&A, a leading retailer in the British optical market, and General Optica, the leading optical chain in Spain, which also has a presence in Portugal. | |||
• | EIDwas the segment consisting of the Group’s former joint venture with the Prada Group, which conducted product development, marketing and distribution activities related toPrada-branded eyewear, including that sold under theMiu Miu, Helmut LangandJil Sanderbrand names. This joint venture was terminated in July 2003 by mutual agreement of the parties; as a result the Group sold its 51% interest EID to the Prada Group. Accordingly, the data for the former EID segment presented in the tables below and elsewhere in this annual report includes the results of EID only for the period through the Group’s disposal of its interest as of July 23, 2003. |
Tax Benefits and New Tax Laws
The Italian statutory tax rate for 2001 and 2002 was 40.25%, comprised of a 36% national corporate income tax (“IRPEG”) and a 4.25% Regional Tax on Productive Activities (“IRAP”). New tax laws enacted in 2002 and 2003 had the effect of reducing the IRPEG (now called IRES) tax rate from 36% to 34% for year 2003 and from 34% to 33% for 2004.
The Company decreased its Italian deferred tax assets and liabilities as of December 31, 2002 and 2003 to reflect these changes in tax law. In both 2002 and 2003 , the Company recognized, as a change in tax rate, deferred taxes on temporary differences of its tax exempt companies together with the effect of the reduction of IRPEG rates from 36% to 34% in 2002 and to 33% in 2003. The effect of applying the enacted tax rate in 2003 to existing temporary differences was to increase income tax expense by€0.3 million.
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The 2001 Italian investment tax incentive law was enacted in order to encourage capital investments and other expenditures in Italy. Companies were able to reduce their taxable income by up to 50% of the excess of new qualifying capital and other expenditures made during the second half of 2001 and all of 2002 in fixed assets (tangibles and specified intangibles) over the average of the investments made in such assets during the five prior years. The incentive law also applied to certain expenses incurred in connection with training of companies’ personnel. The incentive resulted in a current one time deduction and neither increased nor decreased the tax bases of the assets to compute future tax deductions for depreciation and amortization relating to the investment deductions granted. As a result, in each of 2001 and 2002, the Company recognized a benefit from the investment deductions of€0.2 million.
Pursuant to a law decree enacted in 1997 to foster the capitalization of Italian companies, the Dual Income Tax (“DIT”) was introduced. In accordance with such law decree, a portion of the Company’s taxable income subject to IRPEG taxes was taxable at the reduced rate of 19% instead of the enacted IRPEG rates reported above. Such portion of the taxable income (amounting to€4.7 million in 2001) was computed applying a specific interest rate, fixed by the Government and equal to 6%, to the net increase in the Company’s net equity over the period from December 31, 1996 to December 31, 2001. The application of DIT reduced the Company’s current taxes by€0.8 million in 2001. Deferred taxes on temporary differences at December 31, 2002 and 2001 are accounted for at the tax rate expected to occur in the year of reversal, taking into consideration the enacted IRPEG rates, the expected applicable effect of the DIT benefit and the enacted IRAP tax rate.
See Note 11 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report, “Risk Factors” in Item 3 and
“— Italian Government Investment Incentive Program — Tax Benefits” in Item 4.
Non-GAAP Measures
In addition to focusing on the Group’s Italian GAAP results, De Rigo’s management uses certain non-GAAP measures in evaluating the Group’s financial performance. These non-GAAP measures include sales results calculated on an “constant exchange rate” basis that seeks to exclude the impact of fluctuations in currency exchange rates by calculating operating results for both periods being compared on the basis of the exchange rates used for such purpose in the earlier period (i.e., calculating results for the first quarter of 2004 on the basis of the average exchange rates used to translate sales made in non-euro currencies during the first quarter of 2003 into euro). With respect to the first quarter of 2004, the Group has also calculated comparative results for 2003 that exclude the contribution of EID, in order to illustrate the underlying trends in the businesses that continue to part of the Group following De Rigo’s sale of the controlling interest in EID in July 2003 and allowing a comparison of sales performance on a consistent consolidation basis. In both cases, management believes that these alternative, non-GAAP figures, when considered in conjunction with (but not in lieu of) other measures that are calculated in accordance with Italian GAAP, enhance an understanding of the De Rigo’s results of operations. These non-GAAP measures are also commonly used by securities analysts, credit rating agencies and investors to evaluate De Rigo’s operating performance and compare its performance to that of its competitors. The Group’s method of calculating these non-GAAP measures may differ from methods used by other companies in calculating similar measures. In each case in which such a non-GAAP measure is used in this annual report, the most directly comparable GAAP measure is presented with equal or greater prominence and a reconciliation of the non-GAAP measure to such most directly comparable GAAP measure is provided.
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Unaudited First Quarter Sales Results
The Group posted net sales of€139.2 million for the first quarter of 2004, a 0.5% decrease as compared with the same period last year. These unaudited sales results, which were calculated on the basis of Italian GAAP, reflected positive trends in the Group’s current businesses, as comparisons with the prior year were affected by De Rigo’s sale of the controlling interest in EID during July 2003. As indicated in the reconciliation table appearing below, excluding EID’s net sales from the Group’s results for the first quarter of 2003 (during which EID was consolidated for the entire period), the period on period increase in consolidated net sales was 6.1% at current exchange rates and 7.0% at constant exchange rates.
The following table provides details of De Rigo’s consolidated net sales and the sales of each of its business segments for the periods presented, as well as providing reconciliations of sales calculated on both a constant exchange rate basis and on a basis that excludes sales made through EID to sales calculated in accordance with Italian GAAP.
NET SALES BY BUSINESS SEGMENT
(including reconciliations of non-GAAP measures)
(€ in millions)
1Q 2003 | 1Q 2004 | 1Q 2004* Effect of | IQ 2004 | |||||||||||||||||||||
application of | Sales at constant | |||||||||||||||||||||||
Net | Net | constant | exchange rates | % | ||||||||||||||||||||
Sales | Sales | % change | exchange rates | (Non-GAAP) | change | |||||||||||||||||||
Wholesale & Manufacturing | € | 41.5 | € | 42.3 | +1.9 | % | € | 0.3 | € | 42.6 | +2.7 | % | ||||||||||||
Retail | 94.5 | 99.9 | +5.7 | % | 0.9 | 100.8 | +6.7 | % | ||||||||||||||||
- D&A | 61.8 | 63.5 | +2.8 | % | 0.9 | 64.4 | +4.2 | % | ||||||||||||||||
- GO | 32.7 | 36.4 | +11.3 | % | 0.0 | 36.4 | +11.3 | % | ||||||||||||||||
Elimination of Intercompany Sales | (4.8 | ) | (3.0 | ) | -37.5 | % | 0.0 | (3.0 | ) | -37.5 | % | |||||||||||||
Consolidated net sales excluding net sales through EID | € | 131.2 | € | 139.2 | +6.1 | % | € | 1.2 | € | 140.4 | +7.0 | % | ||||||||||||
EID | 8.7 | 0.0 | 0.0 | 0.0 | ||||||||||||||||||||
Consolidated net sales | € | 139.9 | € | 139.2 | -0.5 | % | € | 1.2 | € | 140.4 | +0.4 | % | ||||||||||||
* The translation of foreign currencies into euro has been made using the following rates: |
Currencies | 1Q 2003 | 1Q 2004 | ||||||
US dollars per euro | 1.0731 | 1.2497 | ||||||
Pound Sterling per euro | 0.6696 | 0.6799 | ||||||
Japanese Yen per euro | 127.5857 | 133.9720 | ||||||
HK dollars per euro | 8.3695 | 9.7201 |
Consolidated net sales.The Group’s consolidated net sales of€139.2 million were broken down as follows: eyewear sales of€65.6 million, lens sales of€42.0 million, contact lens sales of€18.6 million and other sales and revenues of€13.0 million, as compared with sales of€70.9 million,€37.6 million,€18.7 million and€12.7 million, respectively, for the first quarter of 2003.
Foreign currency translation differences had a negative effect on consolidated net sales, particularly with regard to the translation into euro of sales made in Pounds Sterling, Japanese Yen and
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Hong Kong Dollars, as the average exchange rates for these currencies in the first quarter of 2004 were less favorable to the Group than those during the first quarter of 2003. As detailed in the reconciliation table above, foreign exchange rate translations had a negative effect of 0.9% on consolidated net sales.
Analyzing consolidated net sales by geographic area, net sales in Europe increased by 2.0% to€126.6 million, primarily as a result of higher net sales through the retail companies and increased wholesale sales in certain markets. Net sales in the Americas decreased to€2.5 million from€3.2 million, primarily as a result of the deconsolidation of EID. Net sales in the Rest of the World decreased to€10.1 million from€12.6 million, primarily as a result of the deconsolidation of EID and lower sales in certain Middle and Far East markets not served by distribution subsidiaries that were partially offset by the very positive results posted by the Group’s distribution subsidiaries located in the Far East region.
Net sales by business segment.Wholesale and manufacturing sales grew by 1.9% to€42.3 million from€41.5 million posted in the first quarter of 2003. Excluding net sales made by the wholesale and manufacturing business segment to EID from the first quarter of 2003 results, net sales increased by 4.4% at current exchange rates and by 5.2% at constant exchange rates, as detailed in the following reconciliation table:
Euro in millions
1Q 2004 | 1Q 2004 | |||||||||||||||||||||||
1Q 2003 | 1Q 2004 | Effect of | ||||||||||||||||||||||
application of | Sales at constant | |||||||||||||||||||||||
Net | Net | constant | exchange rates | |||||||||||||||||||||
Sales | Sales | % change | exchange rates | (Non-GAAP) | % change | |||||||||||||||||||
Wholesale & Manufacturing sales | €41.5 | €42.3 | +1.9 | % | €0.3 | €42.6 | +2.7 | % | ||||||||||||||||
- of which sales to EID | (1.0 | ) | 0.0 | 0.0 | 0.0 | |||||||||||||||||||
Wholesale & Manufacturing sales excluding net sales to EID | €40.5 | €42.3 | +4.4 | % | €0.3 | €42.6 | +5.2 | % | ||||||||||||||||
As indicated in the reconciliation table above, when calculated on a constant exchange rate basis, the business segment’s sales increased by 2.7%. The increase in wholesale and manufacturing sales was primarily due to very strong sales results posted by the Group’s in certain Far East markets, particularly Japan and Hong Kong, as well as in several European markets including France, Greece, Germany and Spain.
Sales through the retail companies increased by 5.7% to€99.9 million from€94.5 million posted in the first quarter of 2003. As indicated in the reconciliation table on the prior page, when calculated on a constant exchange rate basis, net sales through the retail companies increased by 6.7%.
The following table sets forth certain data on the sales and store network of De Rigo’s two retail chains: D&A, one of the leading retailers in the British optical market and General Optica, the leading retailer in the Spanish optical market, for the first quarter of each of 2004 and 2003 and as of March 31, 2003 and March 31, 2004.
1Q 2003 | 1Q 2004 | Mar 31, 03 | Mar 31, 04 | Mar 31, 03 | Mar 31, 04 | |||||||||||||||||||||||||||||||
Euro in | Euro in | Owned | Owned | Unit | Franchised | Franchised | Unit | |||||||||||||||||||||||||||||
millions | millions | % Change | stores | stores | change | stores | stores | change | ||||||||||||||||||||||||||||
D&A | € | 61.8 | € | 63.5 | +2.8 | % | 233 | 232 | -1 | 145 | 143 | -2 | ||||||||||||||||||||||||
General Optica | € | 32.7 | € | 36.4 | +11.3 | % | 140 | 143 | +3 | 7 | 14 | +7 | ||||||||||||||||||||||||
Total Retail | € | 94.5 | € | 99.9 | +5.7 | % | 373 | 375 | +2 | 152 | 157 | +5 | ||||||||||||||||||||||||
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Sales at D&A grew by 4.2% in Pound Sterling terms, while same store sales per working day increased by 5.1%. In Euro terms, D&A’s sales grew to€63.5 million, an increase of 2.8% as compared with sales of€61.8 million posted in the first quarter of 2003, reflecting the decline in the value of the Pound Sterling against the Euro. Sales of franchised stores during the period grew by 1.7% to€17.6 million; in Pound Sterling terms, sales of franchised stores increased by 3.5%. The increase in D&A’s sales was primarily attributable to the Company’s continuing aggressive marketing campaigns driving increased sales of higher quality products. At March 31, 2004, D&A operated a network of 232 owned shops and 143 franchised shops.
General Optica grew sales by 11.3% to€36.4 million from the€32.7 million posted in the first quarter of 2003. General Optica continued to achieve notable net sales gains as a result of a 8.4% increase in same store sales per working day, as well as the expansion of its owned and franchised store network. At March 31, GO operated a network of 143 owned shops and 14 franchised shops, having opened a net total of 3 owned shops and 7 franchised shops during the last twelve months.
2003 compared to 2002
Net sales. De Rigo posted net sales of€504.8 million for 2003, a 1.5% decrease as compared with last year. The overall sales results were negatively affected by the appreciation of the Euro against other currencies in which De Rigo makes sales. As detailed in the reconciliation table below, when calculated on a constant exchange rate basis, De Rigo’s consolidated net sales increased by 3.5%.
The following table provides details of De Rigo’s consolidated net sales and the sales of each of its business segments for the periods presented, as well as providing reconciliations of sales calculated on a constant exchange rate basis to sales calculated in accordance with Italian GAAP.
NET SALES BY BUSINESS SEGMENT
(Euro in millions)
(including reconciliations of non-GAAP measures)
2003* | 2003 | |||||||||||||||||||||||
2002 | 2003 | Effect of | ||||||||||||||||||||||
application of | Sales at constant | |||||||||||||||||||||||
Reported | Reported | constant | exchange rates | |||||||||||||||||||||
sales | sales | % change | exchange rates | (Non-GAAP) | % change | |||||||||||||||||||
Wholesale & Manufacturing | € | 141.1 | € | 136.2 | -3.5 | % | € | 2.2 | € | 138.4 | -1.9 | % | ||||||||||||
Retail | 359.6 | 361.5 | +0.5 | % | 23.2 | 384.7 | +7.0 | % | ||||||||||||||||
- D&A | 236.2 | 230.8 | -2.3 | % | 23.2 | 254.0 | +7.5 | % | ||||||||||||||||
- GO | 123.4 | 130.7 | +5.9 | % | 0.0 | 130.7 | +5.9 | % | ||||||||||||||||
EID | 31.2 | 19.8 | -36.5 | % | 0.0 | 19.8 | -36.5 | % | ||||||||||||||||
Elimination of Intercompany Sales | (19.4 | ) | (12.7 | ) | -34.5 | % | 0.0 | (12.7 | ) | -34.5 | % | |||||||||||||
Consolidated net sales | € | 512.5 | € | 504.8 | -1.5 | % | € | 25.4 | € | 530.2 | +3.5 | % | ||||||||||||
* | The translation of foreign currencies into euro has been made using the following rates: |
Currencies | 2002 | 2003 | ||||||
US dollars per euro | 0.9456 | 1.1312 | ||||||
Pound Sterling per euro | 0.6288 | 0.6920 | ||||||
Japanese Yen per euro | 118.0625 | 130.9712 | ||||||
HK dollars per euro | 7.3750 | 8.8079 |
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The Group’s consolidated net sales of€504.8 million were broken down as follows: eyewear sales of€235.8 million, lens sales of€143.7 million, contact lens sales of€74.7 million and other sales and revenues of€50.6 million, as compared with sales of€245.4 million,€138.7 million,€76.5 million and€51.9 million, respectively, for 2002.
Foreign currency translation differences had a negative effect on consolidated net sales, particularly with regard to the translation into euro of sales made in Pounds Sterling, Japanese Yen and Hong Kong Dollars, as the average exchange rates for these currencies in 2003 were less favorable to the Group than those during 2002. As detailed in the reconciliation table above, when calculated on a constant exchange rate basis, De Rigo’s consolidated net sales increased by 3.5%.
Net sales by business segment
Wholesale and manufacturingsales amounted to€136.2 million, a decrease of 3.5% as compared with€141.1 million posted in 2002. The decrease in wholesale and manufacturing sales was primarily due to lower unit sales in certain European markets, primarily in Italy, as well as to a decline in the segment’s sales to EID. As detailed in the reconciliation table above, when calculated on a constant exchange rate basis, the business segment’s sales decreased by 1.9%.
Softer sales in certain European markets and to EID were partially offset by strong growth in the Rest of the World area, where the segment posted a 18.8% increase in sales. The increase was driven by very good results in the Far East region that were primarily attributable to increased sales of both the Group’s owned brands and its licensed designer brands.
Retail. Sales through the retail companies amounted to€361.5 million, an increase of 0.5% as compared with sales of€359.6 million posted in 2002. As detailed in the reconciliation table above, when calculated on a constant exchange rate basis, net sales through the retail companies increased by 7.0%.
The following table sets forth certain data on the sales and store network of De Rigo’s two retail chains: D&A, the Group’s British retail chain, and General Optica, the Group’s Iberian retail chain, for each of 2003 and 2002 and as of December 31, 2002 and December 31, 2003.
2002 | 2003 | Dec 31, 02 | Dec 31, 03 | Dec 31, 02 | Dec 31, 03 | |||||||||||||||||||||||||||||||
Euro in | Euro in | Owned | Owned | Unit | Franchised | Franchised | Unit | |||||||||||||||||||||||||||||
millions | millions | % Change | stores | stores | change | stores | stores | change | ||||||||||||||||||||||||||||
D&A | € | 236.2 | € | 230.8 | -2.3 | % | 233 | 232 | -1 | 147 | 144 | -3 | ||||||||||||||||||||||||
GO | € | 123.4 | € | 130.7 | +5.9 | % | 140 | 142 | +2 | 5 | 14 | +9 | ||||||||||||||||||||||||
Total Retail | € | 359.6 | € | 361.5 | +0.5 | % | 373 | 374 | +1 | 152 | 158 | +6 | ||||||||||||||||||||||||
Sales at D&A grew by 7.5% in Pound Sterling terms, while same store sales per working day increased by 7.6%. In Euro terms, D&A’s sales totalled€230.8 million, a decrease of 2.3% as compared with sales of€236.2 million posted in 2002, reflecting the decline in the value of the Pound Sterling against the Euro. Sales of franchised stores during the period amounted to€62.9 million, unchanged as compared with 2002; in Pound Sterling terms, sales of franchised stores increased by 10.1%. The notable increase in D&A’s sales in Pound Sterling terms, which was achieved in a very difficult environment marked by a decline in overall demand, was primarily attributable to D&A’s aggressive marketing activity. At December 31, 2003, D&A operated a network of 232 owned shops and 144 franchised shops.
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General Optica reported sales of€130.7 million, an increase of 5.9% as compared with sales of€123.4 million posted in 2002. This 5.9% increase was achieved on top of the 11.6% sales increase posted in 2002. Same store sales per working day increased by 4.3%, on top of a 8.5% increase recorded in 2002.
EID. De Rigo sold its 51% interest in EID, the former joint venture for the marketing and distribution of Prada eyewear, to the Prada Group. As a consequence of this transaction, EID is no longer one of De Rigo’s business segments and its results for the third quarter and fourth quarter of 2003 have not been consolidated in the De Rigo Group’s results for those periods. Accordingly, the€19.8 million in sales reported for the former segment in 2003 only reflects EID’s results for the first six months of 2003, prior to the Group’s sale of its interest.
Net sales by geographic region. Net sales in Europe decreased by 2.2% to€453.8 million, primarily as a result of the appreciation of the Euro against the Pound Sterling. Net sales in the Americas remained unchanged at€12.0 million. Net sales in the Rest of the World increased by 6.6% to€39.0 million, primarily as a result of increased unit sales in the Far East, the positive effects of which were only partially offset by the unfavorable trend in Japanese Yen and Hong Kong Dollar exchange rates and by the negative effects on consumption during the first half of the year due to the impact of the SARS crisis and the war in Iraq.
Cost of sales.Cost of sales decreased by 0.6% to€202.0 million or 40.0% of total net sales, in 2003, from€203.2 million, or 39.6% of net sales, in 2002. The decrease in cost of sales was attributable to the decline in net sales, especially those of higher margin luxury/designer eyewear, as well as to the realization of manufacturing efficiencies.
Operating expenses.Operating expenses decreased by 5.0% to€277.9 million, or 54.9% of total net sales, in 2003, as compared to€292.5 million, or 57.1% of net sales, in 2002. The decline in operating expenses both in absolute terms and as a percentage of sales reflected the deconsolidation of EID following the Group’s sale of its majority interest, as well as lower operating expenses at D&A as a consequence of the weakness of the Pound Sterling against the Euro.
Commissionsdecreased by 18.3% to€13.4 million, or 2.7% of total net sales, in 2003, from€16.4 million, or 3.2% of net sales, in 2002, primarily due to a decline in commissions paid by EID to the Prada Group for sales ofPradaeyewear through the Prada Group’s network of stores during the six months of the year prior to De Rigo’s sale of its interest, as well as lower commissions paid by the wholesale segment to agents as a results of decline in sales particularly in Italy and a reduction in the level of commissions paid by D&A in Euro terms.
Advertising and promotion expensesdecreased by 6.6% to€32.6 million, or 6.5% of total net sales in 2003, from€34.9 million, or 6.8% of net sales, in 2002. The decrease was attributable to the deconsolidation of EID, as well as a decline in marketing expenses in the wholesale segment.
Other selling expensesdecreased by 3.7% to€195.5 million, or 38.7% of total net sales, in 2003, from€203.2 million, or 39.6% of net sales in 2002. The decline was primarily attributable to a reduction in the Euro value of expenses incurred at D&A.
General and administrative expensesdecreased by 5.2% to€36.3 million, or 7.2% of total net sales, in 2003, from€38.3 million, or 7.5% of net sales, in 2002. The decrease in general and administrative expenses both in absolute terms and as a percentage of sales was primarily attributable to the deconsolidation of EID, as well as a reduction in expenses at D&A as a consequence of the weakness of the Pound Sterling against the Euro.
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Income from operationsincreased by 49.1% to€24.9 million, or 4.9% of total net sales, in 2003, from€16.7 million, or 3.3% of net sales, in 2002. The increase in the Group’s operating income was primarily attributable to the improvement in the wholesale and manufacturing segment, both in absolute terms and as a percentage of sales, primarily attributable to higher gross margins deriving from efficiencies in the manufacturing and purchasing process and reflecting the cost factors discussed above.
Other income (expenses).Financial and other items contributed net income of€13.0 million in 2003, as compared to net expenses of€6.9 million in 2002. Net financial expenses in 2003 totalled€1.5 million, compared to net financial expenses of€3.4 million in 2002, reflecting the Group’s repayment of a significant volume of short-term borrowing. Net other income of€14.5 million, as compared to net other expenses of€3.6 million in 2002, accounted for the remainder of the total net result in 2003, primarily reflecting the capital gain of€11.8 million realized on the sale of Group’s interest in EID.
Income taxes.Income taxes amounted to€14.9 million in 2003, as compared with€0.1 million in 2002. The Group’s income was taxed at an effective rate of 39.5% in 2003, as compared to an effective rate of 0.5% in 2002. The increase in the effective tax rate reflected the fact that De Rigo had recognized significant deferred tax assets relating to tax relief granted to the Group in connection with the expiration of certain tax incentives in 2002, as well as to the impact of the expiration of these incentives in 2003, when nearly all of the Group’s income was subject to tax.
Net income.Net income increased by 73.6% to€18.5 million in 2003 from€10.6 million in 2002 and represented 3.7% of net sales, as compared with 2.1% last year.
Earnings per share.Earnings per share were€0.41 on a weighted average total of 44.7 million outstanding shares, an increase of 70.8% as compared with€0.24 in 2002.
2002 compared to 2001
Net sales.De Rigo posted consolidated net sales of€512.5 million in 2002, an increase of 1.4%, as compared with sales of€505.3 million in 2001. The sales results of the Group and each of its segments are summarized in the tables appearing in “Business Overview” in Item 4 “Information on the Company” above.
The increase in net sales primarily reflected strong price growth in the Group’s wholesale and manufacturing segment, particularly in the premium-priced segment of the market, and General Optica, the Iberian retail optical chain acquired by the Group in February 2000.
The Group’s consolidated net sales of€512.5 million for 2002 were broken down as follows: eyewear sales of€245.3 million, lens sales of€138.7 million, contact lens sales of€76.5 million, and other sales and revenues of€51.9 million, as compared with sales of€234.6 million,€148.3 million,€69.5 million and€52.9 million, respectively, in 2001.
Total unit sales decreased by 3.4% to 5,497,130. Unit sales of sunglasses decreased by 2.2% and accounted for 55.3% of the Group’s overall unit sales, having represented 54.6% of unit sales in 2001. Unit sales of prescription frames decreased by 4.8%, and accounted for 44.7% of the Group’s overall unit sales, having represented 45.4% of those sales in 2001.
Net sales by business segment
Wholesale and Manufacturing sales, including sales to the other segments, increased by 5.9% to€141.1 million from€133.2 million in 2001.
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The 2002 sales results of the wholesale and manufacturing segment were influenced by a difficult market environment in certain markets such as Singapore, Italy and Germany.
The negative impact of this factor was more than offset by very strong sales results in a number of other markets, including Japan, the United Kingdom, France and Korea, and by De Rigo’s continuing success in the premium-priced segment of the market, as sales of the Group’s licensed brands increased by approximately 23% as compared with last year.
Sales through retail companies, including sales to the other segments, amounted to€359.6 m, an increase of 0.3% as compared with sales of€358.4 million in the fiscal year 2001.
Sales of D&A, the Group’s British retail chain, totalled€236.3 million, a decrease of 4.6%, as compared with sales of€247.6 million in 2001. These decreases reflected a difficult retail environment for sales of optical frames in the United Kingdom and were primarily a consequence of certain disruptions and delays in service due to changes in the supply chain for lenses being implemented by Essilor’s subsidiary BBGR. BBGR purchased D&A’s assembly factories in 2001 and these changes in the supply chain are designed to ensure that D&A receives the highest quality lenses. In the last quarter of 2002, the level of service at the lens plants sold to BBGR improved significantly, reducing delivery lead-times to the Group’s customers.
Sales of franchised shops totalled€62.9 million, a decrease of approximately 1.4 % compared to 2001. At December 31, 2002, D&A operated a network of 233 owned shops and 147 franchised shops.
General Optica, the Group’s Spanish retail company, reported sales of€123.4 million, an increase of 11.6% as compared to sales of€110.6 million in 2001, reflecting a 8.5% growth in same-store sales per working day, an increase in sales of sunglasses and the contribution of new stores opened within the last year. At December 31, 2002, General Optica operated a network of 140 owned shops and 5 franchised shops, having begun to implement a new strategy of opening franchised shops in smaller Spanish cities and towns in which a direct investment in company-owned stores would not be likely to produce reliably high returns.
Total unit sales at EID continued to grow, increasing by 37.3% as compared with 2001. The increase in volumes sold reflects the effect of EID’s new distribution organization, which is primarily focused on sales agents in Europe and independent distributors outside of Europe. The implementation of this new structure resulted in a significant decline in the unit’s average prices, as the percentage of sales made through independent distributors increased. As a result, sales at EID declined by 2.8% to€31.2 million from€32.1 million in 2001.
Net sales by geographic region.Analyzing consolidated net sales by geographic area, net sales in Europe increased by 2.4% to€463.9 million, primarily reflecting increased wholesale sales in a number of European markets, including France, Greece and the United Kingdom (notwithstanding the difficult retail environment for optical frames that negatively affected the retail segment’s results in that country), as well as strong sales growth at General Optica. Net sales in the Americas decreased by 31.4% to€12.0 million, primarily due to the recent economic crisis in Argentina and lower sales at EID. Net sales in the Rest of the World increased by 6.1% to€36.6 million, primarily reflecting increased sales in the Far East region.
Cost of sales.Cost of sales increased by 10.3% to€203.2 million or 39.6% of total net sales, in 2002, from€184.3 million, or 36.5% of net sales, in 2001. The increase in cost of sales in absolute terms and as a percentage of total sales was attributable to the growth in net sales, especially those of higher
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margin luxury/designer eyewear, as well as to manufacturing inefficiencies in the launch of some new brands’ collections at the beginning of the year.
Operating expenses.Operating expenses increased by 0.9% to€292.5 million, or 57.1% of total net sales, in 2002, as compared to€289.9 million, or 57.4% of net sales, in 2001. Operating expenses increased at a lower rate than net sales primarily due to the cost-containment efforts of D&A and to the increased proportion of overall sales accounted for by the wholesale and manufacturing segment, which benefits from proportionally lower operating expenses than the Group’s other segments.
Commissionsdecreased by 1.8% to€16.4 million, or 3.2% of total net sales, in 2002, from€16.7 million, or 3.3% of net sales, in 2001, primarily due to a decline in commissions paid by EID to the Prada Group for the sales ofPradaeyewear through the Prada Group’s network of stores following the restructuring of the EID distribution system noted above. The effects of this decline on the overall result was partially offset by increased commissions paid as a result of the continuing success of the “Contact Lenses by Post” mail order program operated by D&A, for which the Company pays commissions to franchisees.
Advertising and promotion expensesdecreased by 1.7% to€34.9 million, or 6.8% of total net sales in 2002, from€35.5 million, or 7.0% of net sales, in 2001. The decrease reflected the fact that advertising expenses in the wholesale and manufacturing segment in 2001 had included those relating to the launch of certain new luxury/designer brands and the newPoliceadvertising campaign. Advertising expenses also increased at D&A, which increased its marketing activities in the last quarter of the year.
Other selling expensesincreased by 1.5% to€203.0 million, or 39.6% of total net sales, in 2002, from€200.0 million, or 39.6% of net sales, in 2001. Selling expenses increased in absolute terms at all of the Group’s business segments except at D&A, and rose in particular at General Optica as a result of its opening of new stores. The decrease at D&A reflected its on-going cost reduction efforts.
General and administrative expensesincreased by 1.6% to€38.3 million, or 7.5% of total net sales, in 2002, from€37.7 million, or 7.5% of net sales, in 2001. The increase in general and administrative expenses in absolute terms was primarily attributable to higher provisions for doubtful accounts in the wholesale and manufacturing segment following a perceived deterioration in market conditions in certain countries, as well as higher personnel costs at General Optica.
Income from operations.Income from operations decreased by 46.3% to€16.7 million, or 3.3% of total net sales, in 2002, from€31.1 million, or 6.2% of net sales, in 2001. The decrease in the Group’s operating income was primarily attributable to the lower operating results of D&A (which recorded operating profit of€1.5 million in 2002, as compared with€12.3 million in 2001, net of goodwill amortization of€1.6 million and€1.7 million, respectively), and the wholesale and manufacturing segment (which recorded operating profit of€7.2 million in 2002, as compared with€11.8 million in 2001, net of goodwill amortization of€0.3 million and€0.3 million, respectively). The decline in income from operations in the wholesale and manufacturing segment, both in absolute terms and as a percentage of sales, was primarily attributable to lower gross margins reflecting the cost factors discussed above.
Other income (expenses).Financial and other items contributed net expenses of€6.9 million in 2002, as compared to net expenses of€3.9 million in 2001. Net financial expenses in 2002 totalled€3.4 million, compared to net financial expenses of€3.2 million in 2001. Net other expenses of€3.6 million, as compared to net other expenses of€0.7 million in 2001, accounted for the remainder of the total net result in 2002 mainly due to exchange rate losses and expenses related to special corporate projects.
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Income taxes.Income taxes amounted to€0.1 million in 2002, as compared with€6.6 million in 2001. The Group’s income was taxed at an effective rate of 0.01% in 2002, as compared with an effective rate of 24.1% in 2001. The decrease in the effective tax rate was primarily due to the recognition of deferred tax assets on tax relief granted to the Group in connection with the expiration of certain tax incentives.
Net income.Net income decreased by 50.0% to€10.6 million in 2002 from€21.2 million in 2001 and represented 2.1% of net sales, as compared with 4.2% last year.
Earnings per share.Earnings per share were€0.24 on a weighted average total of 44.7 million outstanding shares, a decrease of 50.0% as compared with€0.48 in 2001.
Effect of Inflation
Management believes that the impact of inflation was not material to the Group’s net sales or income from operations in any of the years ended December 31, 2000, 2001 and 2002.
U.S. GAAP Reconciliation
The Group’s consolidated net income determined in accordance with U.S. GAAP would have been€24.3 million,€17.1 million and€18.2 million for the years ended December 31, 2003, 2002 and 2001, respectively, as compared with net income of€18.5 million,€10.6 million and€21.2 million, respectively, for the same periods, as determined under Italian GAAP. The principal difference affecting the determination of net income in 2001 related to the different treatment under U.S. GAAP of certain stock option expenses and intangible assets and deferred charges, as well as the Group’s revaluation of certain trademarks. Differences in goodwill depreciation principles under Italian GAAP and U.S. GAAP following the Group’s adoption of SFAS 144 impacted the results for 2002 and 2003. In addition under U.S. GAAP, EID is presented as a discontinued operation in accordance with the guidance of SFAS 144. Based upon this guidance, the results for all periods, including revenues and costs, of the sold businesses are removed from the consolidated statement of operations and reported after income from continuing operations.
The Group’s total assets determined in accordance with U.S. GAAP would have been€392.2 million and€450.1 million at December 31, 2003 and 2002, respectively, as compared with€376.9 million and€439.9 million, respectively, under Italian GAAP. Shareholders’ equity determined in accordance with U.S. GAAP would have been€221.7 million and€199.5 million at December 31, 2003 and 2002, respectively, as compared with€226.9 million and€212.1 million, respectively, under Italian GAAP.
For a discussion of the principal differences between Italian GAAP and U.S. GAAP as they relate to the Group’s consolidated net income and shareholders’ equity, including the effect of the adoption of new accounting principles, see Note 19 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
Liquidity and Capital Resources
De Rigo’s cash flow from operating activities increased from€22.3 million in 2002 to€50.8 million in 2003, primarily as a result of the improvement of income from operations at a group level.
The Company relies primarily on funds from operations to finance its working capital needs, including the financing of its inventories and receivables. It also maintains unsecured short-term lines of credit with Italian banks, which have no set term and are payable upon demand. At December 31, 2002 and 2003, the Group had unsecured short-term bank lines of credit aggregating approximately€167,324 and€137,103, respectively. At December 31, 2002 and 2003, approximately€82,144 and€114,534, respectively, were available for further borrowings. At December 31, 2002 and 2003, the weighted
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average interest rates for the short-term lines of credit were 3.99% and 3.48%, respectively. Amounts outstanding under these lines of credit are payable upon demand. None of these facilities contain ratings triggers or financial covenants. For more information on De Rigo’s outstanding debt, see Note 8 of the Notes to the Consolidated Financial Statements included in Item 18.
At December 31, 2003, the Company had positive net working capital (calculated as our total current assets less our current liabilities) of€32.5 million, as compared to negative€4.1 million at December 31, 2002. The increase in net working capital was primarily attributable to a sharp decline in short-term bank borrowings, which fell to€22.6 million at December 31, 2003 from€85.2 million a year earlier, as a result of repayments made possible by the strong cash flow generated by operating activities, as well as to reductions in outstanding trade accounts receivable and inventories.
In 2003, cash provided by investing activities was equal to€2.9 million, as compared to cash used of€16.7 million in 2002, reflecting the positive cash impact of the Group’s sale of its interest in EID to Prada, as well as lower capital expenditures at both General Optica, which opened fewer new stores, and D&A, which reduced its expenditures on refitting stores.
Net cash used in financing activities increased significantly, from€9.3 million in 2002 to€54.8 million in 2003, reflecting the Group’s use of cash generated by operations to repay short-term debt.
Capital expenditures in 2003 were€11.6 million, as compared to€16.1 million in 2002, and were primarily attributable to the refitting of stores by General Optica and to investments made at D&A for the refitting of shops. Capital expenditures were financed principally with funds from operations.
The Group expects to incur capital expenditures of approximately€25 million in 2004, essentially for the refitting of existing shops in Spain and the United Kingdom and the opening of new shops in Spain. The Group believes that the financial resources available to it from funds from operations, cash on hand and short-term investments held by the Group will be sufficient to meet the Group’s capital expenditure requirements in 2004.
As of December 31, 2003 and 2002, the Group’s ratio of long-term debt to shareholders’ equity was 0.2% and 0.3%, respectively. The decrease in this ratio between 2003 and 2002 reflects the increase in the level of the Group’s retained earnings.
The Group’s liquidity needs could increase in the event of an extended economic slowdown or recession that would reduce cash flow from operations and would impair the ability of the Group’s distributors and retail customers to meet their payment obligations.
In 2003, the Group again engaged in certain hedging transactions to manage risks relating to foreign currency exchange rates. See Note 19 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report and “Quantitative and Qualitative Disclosures About Market Risk” in Item 11.
Off-Balance Sheet Arrangements
De Rigo does not engage in the use of special purpose entities for off-balance sheet financing or any other purpose which results in assets or liabilities not being reflected in its consolidated financial statements, nor does it engage in any off-balance sheet financing through other means that has or is reasonably likely to have a current or future effect on the Group’s financial condition or operational results.
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Contractual Obligations
The following table sets forth the contractual obligations and commercial commitments of the Group with definitive payment terms which will require significant cash outlays in the future, as of December 31, 2003:
Payments Due by Period
(in millions of euro)
2005- | 2007- | 2009 and | ||||||||||||||||||
Total | 2004 | 2006 | 2008 | thereafter | ||||||||||||||||
Long-Term Debt | 0.7 | 0.2 | 0.2 | 0.1 | 0.2 | |||||||||||||||
Operating Leases | 165.5 | 25.8 | 44.7 | 36.0 | 59.0 | |||||||||||||||
Other Commitments | 12.5 | 6.0 | 6.5 | — | — | |||||||||||||||
Total Obligations | 178.7 | 32.0 | 51.4 | 36.1 | 59.2 |
Long-term debt.For information on our long-term debt obligations, see “— Capital Resources” above and Note 9 to the Consolidated Financial Statements included in Item 18.
Operating leases.D&A leases property, computer hardware and cars and General Optica leases property under non-cancellable operating leases. Other lease commitments relate to the rental of buildings by distribution subsidiaries. At December 31, 2003, the future lease payments under these operating leases totalled approximately€165.5 million. For additional information, see Note 16 of Notes to the Consolidated Financial Statements included in this Annual Report.
Other commitments.At December 31, 2003, these obligations comprised those arising out royalty agreements and sponsorship contracts.
Royalty agreements.These liabilities relate to royalties due and minimum advertising expenses required under De Rigo’s arrangements with certain designers for the use of their trademarks in the production of fashion eyewear eyeglasses. At December 31, 2003, the minimum future payments arising out of these agreements totalled approximately€10.9 million, of which approximately€7.6 million related to royalty arrangements and€3.3 million for advertising expenses.
Sponsorship agreements. These liabilities relate to the Group’s marketing contracts with actors and athletes serving as spokespersons for De Rigo’s products. At December 31, 2003 future payments due under these agreements totalled approximately €1.6 million.
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Concentrations of Credit Risk
Financial instruments that potentially subject the Group to concentration of credit risks consist principally of cash investments and trade accounts receivable. The Group maintains cash and cash equivalents and short-term investments with financial institutions located in Italy. The Company selects only financial institutions with high credit standards for use in its investment strategies. Concentration of credit risks and the risk of accounting loss with respect to trade receivables is generally limited due to the large number of the Company’s end customers and the diversity of the geographic areas in which the customers are located. The Company generally does not require collateral with respect to sale orders, but it may require collateral and bank guarantees with respect to certain customers.
No individual customer represented 10% or more of sales in any of the years ended December 31, 2001, 2002 and 2003.
New Accounting Standards
For a discussion of the impact of the Group’s adoption of new accounting standards on its results of operations under U.S. GAAP, see Note 19(q) of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
Process of Transition to International Accounting Standards
Following the entry into force of European Regulation No. 1606 of July 2002, EU companies whose securities are traded on regulated markets in the EU are required to adopt international financial reporting standards (“IFRS”), formerly known as IAS, in the preparation of their 2005 consolidated financial statements. Given that our securities are only traded on the NYSE, we are not subject to this requirement and intend to continue to report our financial results in accordance with Italian GAAP and to provide the required reconciliation of certain items to U.S. GAAP in our annual reports on Form 20-F.
Trend Information
The Group competes in the eyewear market as a whole, and in several individual sectors of that market, including those for sunglasses, prescription eyewear and fashion eyewear. De Rigo believes that the most significant consumer-related trends in these markets that may affect its business include the following:
• | Consumers are increasingly attracted by products with higher fashion content. | |||
• | Consumers are also increasingly attracted by eyewear incorporating more sophisticated technological features and high quality components, particularly those capable of increasing eye protection (sunglasses lenses) and great comfort (progressive lenses and multi-coated lenses). | |||
• | Products bearing brands with high customer appeal have become synonymous with technology, quality and style. Customers rely on recognized brands to simplify their purchase decision. | |||
• | The average age of the population in De Rigo’s primary markets is increasing and, as a result, the number of people wearing spectacles in those markets is increasing. | |||
• | Sunglasses and spectacles are becoming more popular, even in countries with lower average per capita spending power. |
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• | Expected increases in personal income levels could reduce the current length of the replacement cycle for eyewear in certain of the Company’s more developed markets. | |||
• | Increased use of, and exposure to, computers, televisions and similar instruments tends to have a negative effect on consumers’ vision. | |||
• | Although laser surgery vision correction procedures are becoming more common, particularly in the United Kingdom and United States, the high cost and sometimes limited effectiveness are limiting their use. |
De Rigo believes that the impact of these factors can be seen in a number of current developments in the eyewear industry, including the following:
• | Consumers are increasingly inclined toward purchasing sunglasses with higher fashion content, particularly if they bear a designer brand. Sunglasses have essentially become a fashion accessory. | |||
• | The increased attractiveness of designer-brand sunglasses incorporating high technology and high quality components, including progressive and multi-coated lenses, is resulting in an increase in the average retail price for sunglasses. | |||
• | Higher disposable income and a perceived need for security and protection are increasingly causing consumers to own more than one pair of spectacles or sunglasses. | |||
• | The desire for feeling better about one’s appearance is leading to an increased percentage of consumers owning both contact lenses and spectacles; this trend is particularly evident in the United Kingdom, Northern Europe and United States. | |||
• | The increasing importance of fashion content is reducing the length of the replacement cycle for sunglasses. | |||
• | Increased use of laser surgery techniques could reduce the need for prescription eyewear, while increasing the use of sunglasses among the same group of consumers. |
Item 6.Directors, Senior Management and Employees
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth the names of the members of the Board of Directors and the senior management of the Company and each of its principal operating companies. The term of appointment of the current directors expires upon approval by the Company’s shareholders of its financial statements for the year ending December 31, 2005. The senior management of the Company and its subsidiaries are appointed by the Board of Directors of the respective company and serve at the discretion thereof.
Name | Age | Position within Group/Company | ||||
Ennio De Rigo | 64 | Chairman of the Board of Directors and Chief Executive Officer | ||||
Emiliana De Meio De Rigo | 60 | Vice Chairman of the Board of Directors | ||||
Walter De Rigo | 72 | Director | ||||
Michele Aracri | 47 | Director and Managing Director | ||||
Maurizio Dessolis | 38 | Vice-Chairman and Chief Financial Officer (3) | ||||
Massimo De Rigo | 35 | Vice-Chairman and Head of Design Department (3) |
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Name | Age | Position within Group/Company | ||||
Luigi Arsellini | 74 | Outside Director (1) | ||||
Claudio Dematté | 61 | Outside Director (2) | ||||
Enrico Valdani | 55 | Outside Director | ||||
Adriano De Sandre | 48 | Head of Manufacturing Operations | ||||
Jordi Fontcuberta | 48 | Managing Director, General Optica | ||||
Russel Hardy | 43 | Managing Director, Dollond & Aitchison | ||||
Bruno Palmegiani | 54 | Art & Creative Director | ||||
Mario Sommavilla | 56 | Chief Administrative Officer |
(1) | Mr. Arsellini resigned from the Board in May 2003. | |
(2) | Mr. Dematté died in February 2004. | |
(3) | Mr. Dessolis and Mr. Massimo De Rigo were elected as members of the Board of Directors at the annual general meeting of shareholders in May 2004 and named Vice-Chairmen by the Board of Directors on the same day. |
Mr. Ennio De Rigo has been Chief Executive Officer of the Company since 1980. Mr. De Rigo held the title of Sole Director of the Company from 1980 until March 1995, when he became Chairman of the Board of Directors.
Mrs. Emiliana De Meio De Rigo has been Sales Manager of the Company since 1980. She became Vice Chairman of the Board of Directors in 1995.
Mr. Walter De Rigo has been a Director of the Company since 1995. He is Chairman of the Board and Chief Executive Officer of Surfrigo S.r.l., a manufacturer of commercial refrigerators wholly owned by the De Rigo brothers, and is a Director of Impresa Edile F.lli De Rigo S.r.l., a construction company wholly owned by the De Rigo brothers. From May 2000 through June 2001, he has served as President of the Associazione degli Industriali della Provincia di Belluno, the industrial association for the province of Belluno. In June 2001, Mr. De Rigo was elected to the Italian Senate.
Mr. Michele Aracri has been Managing Director of the Company since early 1995. Prior to 1995, Mr. Aracri held the position of Chief of Operations of the Company.
Mr. Luigi Arsellini was an Outside Director of the Company from September 1995 through May 2003, at which time he resigned from the Board of Directors.
Professor Claudio Dematté was an Outside Director of the Company from September 1995 until his untimely death in February 2004. He was a Full Professor of Economics of Financial Intermediaries at L. Bocconi University in Milan and from 1997 to 2002 chairman of SDA Bocconi Business School. He had been Chairman of the Board of Directors of FS-Ferrovie dello Stato, CARIME Bank, RAI-Radio Televisione Italiana and BTB, Banca di Trento e Bolzano, as well as serving on the boards of several other companies, including Winterthur Assicurazioni S.p.A. and Natuzzi S.p.A.
Professor Enrico Valdani has been an Outside Director of the Company since September 2001. He is a Full Professor of Business Administration and Strategic Marketing at L. Bocconi University in Milan and a Senior Professor at the SDA Bocconi Business School. In addition to his academic activities, Professor Valdani was a partner in a major consulting group and in 1992 founded a consulting company that is currently one of the leading firms in Italy. He is a member of the executive boards of a number of Italian companies and of the advisory boards of a number of management journals. He has attended the Graduate School of Business Administration at Harvard University and served as a Visiting Scholar at the University of Southern California, and is an appreciated author of many books and articles.
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Mr. Maurizio Dessolis has been Chief Financial Officer of the Company since March 1993 and was elected as a member of the Board of Directors and one of its Vice-Chairmen in May 2004. He is also a Managing Director of De Rigo Holding.
Mr. Massimo De Rigo has been the Head of the Design Department of the Company since October 2000 and was elected as a member of the Board of Directors and one of its Vice-Chairmen in May 2004.
Mr. Adriano De Sandre has been the Head of Manufacturing Operations of the Company since May 1999. From 1987 to 1999, he was Manufacturing Planning Manager and Operating Director of SAFILO, one of Italy’s leading optical companies.
Mr. Jordi Fontcuberta has been the Managing Director of General Optica since 2000, having previously served as the Chief Administrative Officer of General Optica. Trained as an auditor with Andersen, before joining General Optica in 1997, Mr. Fontcuberta served as Financial Manager for Bacardi-Martini Spain and Chief Financial Officer of D’Arcy Masius Benton Bowles’ Spanish operations.
Mr. Russel Hardy has been the Managing Director of Dollond & Aitchison since 1996. Before joining D&A, he was the Trading Director — Fresh Foods of Safeway Stores plc, a British consumer goods retail chain.
Mr. Bruno Palmegiani has been Art & Creative Director of the Company since 1994. From 1980 to 1994, he was a Senior Designer at the Company.
Mr. Mario Sommavilla has been Chief Administrative Officer of the Company since December 1994. From 1980 through November 1994, he was Chief Administrative Officer at Industria Elettrica Indel S.p.A., a producer of metal alloys.
Mrs. Emiliana De Meio De Rigo is the wife of Mr. Ennio De Rigo, Chairman of the Board and Chief Executive Officer of the Company. Mr. Walter De Rigo and Mr. Ennio De Rigo are brothers. Mr. Massimo De Rigo is the son of Mr. Ennio De Rigo and Mrs. Emiliana De Meio De Rigo. Mr. Maurizio Dessolis is the son-in-law of Mr. Ennio De Rigo and Mrs. Emiliana De Meio De Rigo. There are no other family relationships among the directors and senior management of the Company.
Board of Statutory Auditors
Under Italian law, in addition to electing the Board of Directors, the Company’s ordinary shareholders meeting also elects a Board of Statutory Auditors (Collegio Sindacale). The Statutory Auditors are elected for a term of three years, may be re-elected for successive terms and may be removed only for cause and with the approval of a competent court. Each member of the Board of Statutory Auditors must provide certain evidence that he is in good standing and meets certain professional standards. The Board of Statutory Auditors is required to verify that the Company (i) complies with applicable law and its By-laws, (ii) respects the principles of correct administration, (iii) maintains adequate organizational structure, internal controls and administrative and accounting systems and (iv) adequately instructs its subsidiaries to transmit information relevant to its disclosure obligations.
The following table sets forth the names of the three members of the current Board of Statutory Auditors and its alternate members and their respective positions. The current Board of Statutory Auditors was elected for a three-year term at the annual meeting of shareholders on May 24, 2004 to
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serve until the date of the annual meeting of shareholders that will approve the accounts for the fiscal year ending December 31, 2006.
Name | Title | |
Dr. Mario Bampo | Chairman | |
Dr. Fanio Fanti | Statutory Auditor | |
Dr. Dino Sesani | Statutory Auditor | |
Rag. Galeazzo Osvaldo D’Ambrosi | Alternate Statutory Auditor | |
Rag. Sergio Bonacin | Alternate Statutory Auditor |
COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT
Aggregate compensation paid by the Company and its subsidiaries to the directors and senior management named above as a group was approximately€2.1 million in 2003, excluding the accrual for termination indemnities required by Italian law. In addition, such senior managers have been granted options in respect of a total of 591.000 Ordinary Shares pursuant to the stock option plan described in Item 10. Additional Information “Options to Purchase Securities from Registrant or Subsidiaries”. The directors of the Company are not eligible to receive options under such plan.
As of June 25, 2004, the directors and senior managers listed in Item 6 as a group (other than Messrs. Ennio De Rigo, Walter De Rigo and Michele Aracri) owned significantly less than 1% of the outstanding Ordinary Shares of De Rigo S.p.A. See Item 7. “Major Shareholders” for information on the shareholdings of Messrs. De Rigo, De Rigo and Aracri.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 2003, the Group had approximately 4,800 employees worldwide, of which approximately 3,300 were sales employees (including about 2,150 at D&A and 990 at General Optica), approximately 800 were manufacturing employees and 600 were employed at central offices. The Group had approximately 4,700 employees at December 31, 2002. The majority of the Group’s sales employees are located in the United Kingdom and Spain, while the majority of its manufacturing employees are located in Italy. Substantially all of the Company’s Italian employees and certain of its manufacturing employees in the United Kingdom are covered by collective bargaining agreements. None of the Group’s facilities in Italy is operated on a “closed shop” basis. The Group believes that it has excellent relations with its employees and has not experienced any significant work stoppages.
Employment agreements in Italy are generally collectively negotiated between the national association of companies within a particular industry and the representative national union. Individual companies must enter into contracts with their employees based on the relevant collective agreement. The most recent national collective bargaining agreement covering all of the Group’s manufacturing employees in Italy was entered into as of July 1, 2000, and expired on December 31, 2003. In addition to the national collective bargaining agreement, the Group usually enters into separate local contracts with the labor unions representing its employees.
Italian law provides that, upon termination of employment, employees are entitled to receive certain indemnity payments based on their length of employment. As of December 31, 2003, the Group had accrued€6.3 million in respect of such termination indemnity liabilities, such reserves being equal to the amounts required by Italian law.
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D&A operates a defined benefit “Final Pensionable Salary Scheme” for certain of its eligible employees. The benefits are based on years of service and the employee’s compensation during a period up to the last seven years of employment. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The prepaid benefit costs will be realized through lower future contributions as differences occur between the funding and expensing of the pension plan, or as a result of a combination of these events. Contributions made by D&A to the defined contribution plan are based on a percentage of employee compensation. Pension expense recognized for the contribution plan amounted to€5.7 million in 2003. This plan was under-funded by€38.5 million at December 31, 2003. See Note 12 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
General Optica has defined benefit plans covering certain of its executives that are not currently funded. The benefits covered differ depending on the beneficiary. The present value of these benefit obligations was€2.5 million at December 31, 2003. The net decrease in the benefit obligation of€0.1 million during 2003 represents the net periodic benefit cost recognized of€0.2 million for the twelve months ended December 31, 2003 less the benefits paid during that period, which amounted to€0.3 million. See Note 12 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
Item 7.Major Shareholders and Related Party Transactions
MAJOR SHAREHOLDERS
The following table summarizes the holdings of those shareholders who hold 2% or more of the Ordinary Shares of the Company as of the dates indicated.
As of June 1, | ||||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||
No. of Shares | % of Class | No. of Shares | % of Class | No. of Shares | % of Class | |||||||||||||||||||
Ennio De Rigo and Walter De Rigo(1) | 32,922,000 | 74.0 | % | 32,922,000 | 73.6 | % | 32,801,600 | 73.4 | % | |||||||||||||||
Schroeder Investment Mgmt. Ltd(2) | 3,211,111 | 7.2 | % | n.a. | n.a. | |||||||||||||||||||
Prada | 2,225,000 | 5.0 | % | 2,225,000 | 5.0 | % | 2,225,000 | 5.0 | % | |||||||||||||||
Michele Aracri | 870,000 | 2.0 | % | 870,000 | 1.9 | % | 870,000 | 1.9 | % |
(1) | Includes shares held directly and those held through De Rigo Holding and another company controlled by Messrs. Ennio De Rigo and Walter De Rigo. At June 1, 2004, June, 1, 2003 and June 1, 2002, De Rigo Holding held 31,869,500, 31,869,500, and 31,869,500 Ordinary Shares, respectively, and the other company held 135,000, 135,000 and 78,500 Ordinary Shares, respectively; with the remainder at each date held by the De Rigo brothers directly. None of these Ordinary Shares possess any special voting rights. | |
(2) | Holding as of December 31, 2003, as reported in the Schedule 13G filed with the SEC on February 13, 2004. No more current information on this shareholding is available to the Company. |
In February 1999, De Rigo Holding (the Company’s controlling shareholder) entered into an agreement with Prada Luxembourg s.a.r.l. pursuant to which De Rigo Holding granted Prada Luxembourg s.a.r.l a series of three options with respect to a portion of De Rigo Holding’s interest in the Company’s share capital, with the maximum aggregate amount of Ordinary Shares being subject to such options being equal to approximately 15% of the Company’s share capital. See Note 19(j) of Notes to the Consolidated Financial Statements included in Item 18 of this annual report. On June 18, 2001, Prada Luxembourg s.a.r.l exercised one of the three options, and subsequently purchased 2,225,000 Ordinary Shares of De Rigo S.p.A. (equal to approximately 5% of the Company’s outstanding share capital) for total consideration of $13.4 million. The two remaining options have expired without being exercised.
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RELATED PARTY TRANSACTIONS
Certain of the Company’s facilities in Longarone and Limana were constructed in the years 1992 through 2001 by Impresa Edile F.lli De Rigo S.r.l., a construction company which is wholly owned by the De Rigo Brothers. The related construction costs through December 31, 2003, which have been capitalized as buildings, amounted to€2.4 million. For additional details on transactions by the Group with affiliated companies, including those between EID and the Prada Group prior to the Group’s sale of its interest in the EID joint venture to Prada, see Note 18 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
Item 8.Financial Information
CONSOLIDATED FINANCIAL STATEMENTS
Please refer to “Item 18. Financial Statements”.
OTHER FINANCIAL INFORMATION
Export Sales
Export sales from Italy, which totalled approximately€95.7 million in 2003, as compared with€92.1 million in 2002, represented 19.0% of the Group’s net sales (17.9% in 2002).
Legal Proceedings
The Group is involved from time to time in various claims and litigation incidental to the ordinary course of its business, including various governmental and administrative proceedings. Management does not believe that the outcome of any pending claim or proceedings is likely to have a material adverse effect on the Company.
Dividend Policy
Dividends may be recommended by the Company’s Board of Directors for approval by shareholders at the Company’s annual general meeting, which is normally held in April or May and must be held by June 30 of each year. Under Italian law and the Company’s By-laws, no interim dividends may be approved or paid.
At the annual general meeting held on May 5, 2004, the Company’s shareholders approved the recommendation of the Board of Directors that no dividend be paid in respect of the fiscal year ended December 31, 2003. The Company did also not pay dividends in respect of the fiscal years ended December 31, 1999 and 2003
For the fiscal years ended December 31, 1999, 2001 and 2002, the Company paid dividends of€0.09,€0.12 and€0.13 per Ordinary Share to holders of record as of June 4, 1999, of June 4, 2001 and June 6, 2002, respectively.
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Item 9.The Offer and Listing
TRADING MARKETS AND SHARE PRICES
De Rigo’s Ordinary Shares (in the form of American Depositary Shares (“ADSs”)) are listed on the New York Stock Exchange (the “NYSE”) under the symbol “DER”. Neither the Company’s Ordinary Shares nor its ADSs are listed on a securities exchange outside the United States. The Bank of New York is the Company’s Depositary for purposes of issuing the American Depositary Receipts (“ADRs”) evidencing ADSs. Each ADS represents one Ordinary Share.
Trading in the ADSs on the NYSE commenced on October 20, 1995. The following table sets forth, for the periods indicated, the high and low closing prices per ADS as reported by the NYSE.
Price Range of ADSs | ||||||||||||||||
High | Low | |||||||||||||||
1999: | ||||||||||||||||
First Quarter | $ | 8 | 3/8 | $ | 4 | 15/16 | ||||||||||
Second Quarter | $ | 7 | 3/8 | $ | 5 | 5/8 | ||||||||||
Third Quarter | $ | 6 | 1/4 | $ | 4 | 15/16 | ||||||||||
Fourth Quarter | $ | 6 | 1/16 | $ | 4 | 15/16 | ||||||||||
2000: | ||||||||||||||||
First Quarter | $ | 6 | 5/8 | $ | 5 | 1/8 | ||||||||||
Second Quarter | $ | 6 | 5/8 | $ | 5 | — | ||||||||||
Third Quarter | $ | 9 | — | $ | 6 | 3/8 | ||||||||||
Fourth Quarter | $ | 8 | 3/4 | $ | 6 | 7/8 | ||||||||||
2001: | ||||||||||||||||
First Quarter | $ | 9 | — | $ | 7 | 5/32 | ||||||||||
Second Quarter | $ | 8 | 13/16 | $ | 7 | 49/64 | ||||||||||
Third Quarter | $ | 8 | 21/32 | $ | 5 | 3/32 | ||||||||||
Fourth Quarter | $ | 6 | 19/32 | $ | 5 | 35/64 | ||||||||||
2002: | ||||||||||||||||
First Quarter | $7.77 | $4.55 | ||||||||||||||
Second Quarter | $7.95 | $5.60 | ||||||||||||||
Third Quarter | $5.71 | $3.45 | ||||||||||||||
Fourth Quarter | $4.95 | $3.00 | ||||||||||||||
2003: | ||||||||||||||||
First Quarter | $4.20 | $3.20 | ||||||||||||||
Second Quarter | $3.93 | $3.15 | ||||||||||||||
Third Quarter | $4.35 | $3.48 | ||||||||||||||
Fourth Quarter | $5.50 | $4.10 | ||||||||||||||
Month Ended | ||||||||||||||||
January 31, 2004. | $5.39 | $4.95 | ||||||||||||||
February 28, 2004 | $5.15 | $4.65 | ||||||||||||||
March 30, 2004 | $5.99 | $5.05 | ||||||||||||||
April 30, 2004 | $6.15 | $5.34 | ||||||||||||||
May 31, 2004 | $6.38 | $5.95 |
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As of June 25, 2004, 44,714,255 Ordinary Shares were outstanding. As of the same date, there were outstanding 9,514,195 ADSs (equivalent to the same number of Ordinary Shares) representing 21.3% of the total number of outstanding Ordinary Shares. A total of 223,200 ADSs were owned by the Company as of such date, having been repurchased as part of De Rigo’s authorized buy-back program. See “By-laws—Purchase of Shares by the Company” below.
Item 10.Additional Information
OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR ITS SUBSIDIARIES
In May 1999, the Board of Directors of De Rigo S.p.A. adopted a new stock option plan (the “1999 Option Plan”) whereby the Board was authorized to grant options to purchase up to 2,325,000 Ordinary Shares to be issued by the Company in four annual tranches as part of a capital increase that had been approved by the shareholders in connection with the adoption of the 1999 Option Plan. The options, which could have been granted to eligible executives of De Rigo S.p.A. and its Italian and foreign subsidiaries, were exercisable at a purchase price of $6.00 per Ordinary Share during the 30-day period following the annual meeting of shareholders that approved the Company’s financial statements for the year in respect of which the grant of options has been made. Between June and July 1999, the Board had approved the grant of options in respect of 2,325,000 Ordinary Shares to approximately 20 executives of the Group; a total of 250,000 of these options lapsed during 1999 due to employee resignations.
At an extraordinary shareholders’ meeting held on November 17, 2000, the shareholders approved a new stock option plan (the “2000 Option Plan”) to replace the 1999 Option Plan. Holders of options under the 1999 Option Plan all agreed to convert their grants under the 1999 Option Plan into grants under the new plan. Between January 1, 2000 and November 17, 2000, 225,000 options granted under the 1999 Option Plan lapsed due to employee resignations, leaving options in respect of 1,850,000 ordinary shares outstanding as of November 17, 2000. Under the terms of the 2000 Option Plan, a total of 851,000 options (in respect of an equivalent number of Ordinary Shares) were granted (the 1,850,000 options outstanding under the old plan were converted into options under the 2000 Option Plan at a ratio of 0.46 new options for each option held) at an exercise price of U.S$ 1.00 per share, which was less than the fair value of the stock at the grant date, and the term of the existing grants was extended by one year. On November 17, 2000, the Company’s shareholders approved a capital increase of€338,000 to allow for the issuance of up to 1,300,000 Ordinary Shares upon the exercise of options granted under the 2000 Stock Option Plan. On the same date, an additional 348,400 options were granted to approximately nine executives at an exercise price of U.S.$ 1.00 per share. The number of options that may be exercised by a holder in any given period varies according to the performance of the Company’s ADSs during the relevant period. In accordance with the 2000 Option Plan, the Company has registered all Ordinary Shares as to which such options may be exercised with the U.S. Securities and Exchange Commission, so as to facilitate resales of such Ordinary Shares in the form of ADSs.
At December 31, 2003, a total of 800,621 options were outstanding, a total of 214,255 options having been exercised and 184,524 options having been forfeited.
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For additional information on these stock options, see Note 13 of Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
BY-LAWS
The following is a summary of certain information concerning the Company’s shares and By-laws (Statuto) and of Italian law applicable to companies whose shares are not listed in a regulated market in the European Union, as in effect at the date of this annual report. The summary contains all the information that the Company considers to be material regarding the shares but does not purport to be complete and is qualified in its entirety by reference to the By-laws or Italian law, as the case may be.
In January 2003, the Italian government approved a wide-ranging reform of the corporate law provisions of the Italian Civil Code, which came into force on January 1, 2004. On May 24, 2004, our shareholders approved a number of amendments to our By-laws dictated or made possible by the 2003 corporate law reform. The following summary takes into account the 2003 corporate law reform and the consequent amendments to our By-laws.
General
As of June 25, 2004, the issued and outstanding share capital of the Company consists of 44,714,255 Ordinary Shares, par value euro 0.26 per share. The redenomination of the Ordinary Shares from lire into euro was approved by the Company’s shareholders on May 24, 2001. All the issued and outstanding shares are fully paid, non-assessable and in registered form.
The Company is registered with the Companies’ Registry of Belluno at n. 2671, with its registered office at Longarone (BL), Italy.
As set forth in Article 4 of the By-laws, the Company’s corporate purpose is the design, production, marketing and sale of eyewear, eyewear production machinery and components and/or accessories, and other activities in the eyewear or related sectors. The Company is generally authorized to take any actions necessary or useful to achieve its corporate purpose, with the exclusion of investment services and other financial activities reserved by Italian law to authorized entities.
Authorization of Shares
Additional shares may be authorized in connection with capital increases approved by the Company’s shareholders in an extraordinary meeting, but this authorization would generally be given only after recommendation by the Company’s board of directors. On November 17, 2000, the Company’s shareholders approved a capital increase of€338,000 to allow for the issuance of up to 1,300,000 Ordinary Shares upon the exercise of options granted under the 2000 Stock Option Plan. As of June 25, 2004, 214,255 of such new shares had been issued and fully paid.
Form and Transfer of Shares
Ordinary shares are transferable by endorsement of the share certificate by or on behalf of the registered holder, with such endorsement either authenticated by a notary in Italy or elsewhere or by a broker-dealer or a bank in Italy. The transferee must request the Company to enter his name in the register in order to establish his rights as a stockholder as against the Company.
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Dividend Rights
The payment by us of any annual dividend is proposed by the board of directors and is subject to the approval of the shareholders at the annual shareholders’ meeting. Before dividends may be paid out of our unconsolidated net income in any year, an amount equal to 5.0% of such net income must be allocated to our legal reserve until such reserve is at least equal to one-fifth of the par value of our issued share capital. If our capital is reduced as a result of accumulated losses, dividends may not be paid until the capital is reconstituted or reduced by the amount of such losses. The Company may pay dividends out of available retained earnings from prior years, provided that after such payment, the Company will have a legal reserve at least equal to the legally required minimum. No interim dividends may be approved or paid.
Dividends will be paid in the manner and on the date specified in the shareholders’ resolution approving their payment (usually within 30 days of the annual general meeting). Dividends which are not collected within five years of the date on which they become payable are forfeited to the benefit of the Company. Holders of ADSs will be entitled to receive payments in respect of dividends on the underlying shares through The Bank of New York, as ADR depositary, in accordance with the deposit agreement relating to the ADRs.
Voting Rights
Shareholders are entitled to one vote per Ordinary Share.
As a registered shareholder, the Depositary (or its nominee) will be entitled to vote the Ordinary Shares underlying the ADSs. The Deposit Agreement requires the Depositary (or its nominee) to accept voting instructions from holders of ADSs and to execute such instructions to the extent permitted by law. Neither Italian law nor the Company’s By-laws limit the right of non-resident or foreign owners to hold or vote the shares.
Board of Directors
Pursuant to the Company’s By-laws, the Company’s board of directors must consist of three to seven individuals. The board of directors is elected at a shareholders’ meeting for three fiscal years. In accordance with the By-laws, the directors, who may but are not required to be shareholders of the Company, may be re-appointed for no more than three terms. The board of directors has complete power of ordinary and extraordinary administration of the Company and in particular may perform all acts it deems advisable for the achievement of the Company’s corporate purposes, except for the actions reserved by applicable law or the By-laws to a vote of the shareholders at an ordinary or extraordinary shareholders’ meeting. See also “—Meetings of Shareholders”.
The board of directors must appoint a chairman (presidente) and may appoint a vice-chairman. The chairman of the board of directors and the vice-chairman and the managing directors, if any, are severally the legal representatives of the Company. The board of directors may delegate certain powers to one or more managing directors (amministratori delegati), determine the nature and scope of the delegated powers of each director and revoke such delegation at any time. Our executive directors must ensure, under the supervision of the board of directors, that our organizational and accounting structure is appropriate to our business and must report to the board of directors and to the board of statutory auditors at least every six months on the Company’s business and the main transactions carried out by us or by our subsidiaries.
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In accordance with Italian law and the By-laws, the board of directors may not delegate certain responsibilities, including the preparation and approval of the draft financial statements, the approval of merger and de-merger plans to be presented to shareholders’ meetings, increases in the amount of the Company’s share capital or the issuance of convertible debentures (if any such power has been delegated to the board of directors by vote of the extraordinary shareholders’ meeting) and the fulfillment of the formalities required when the Company’s capital would have to be reduced as a result of accumulated losses that affect the Company’s stated capital by more than one third. See also "—Meetings of Shareholders”.
The board of directors may also appoint a general manager (direttore generale) and one or more senior managers (direttori) who report directly to the board and confer powers for single acts or categories of acts to employees of the Company or persons unaffiliated with the Company.
Meetings of the board of directors are called five days in advance by registered letter or, in case of necessity, one day in advance, by fax or telegram. Meetings may be called by the chairman on his own initiative and must be called upon the request of the managing director, two directors or two statutory auditors.
Meetings may be held in person, or by audio-conference or tele-conference, in any member state of the European Union or in the United States. The quorum for meetings of the board of directors is a majority of the directors in office. Resolutions are adopted by the vote of a majority of the directors present at the meeting. In case of votes being equal, the vote of the chairman will prevail.
Directors having any interest in a proposed transaction must disclose their interest to the board, even if such interest is not in conflict with the interest of the Company in the same transaction. The interested director is not required to abstain from voting on the resolution approving the transaction, but the resolution must state explicitly the reasons for, and the benefit to the Company of, the approved transaction. In the event that these provisions are not complied with, or that the transaction would not have been approved without the vote of the interested director, the resolution may be challenged by a director or by the board of statutory auditors if the approved transaction may be prejudicial to the Company. A managing director having any such interest in a proposed transaction within the scope of his powers must solicit prior board approval of such transaction. The interested director may be held liable for damages to us resulting from a resolution adopted in breach of the above rules. Finally, directors may be held liable for damages to the Company if they illicitly profit from insider information or corporate opportunities.
Under Italian law, directors may be removed from office at any time by the vote of shareholders at an ordinary shareholders’ meeting although, if removed in circumstances where there was no just cause, such directors may have a claim for indemnification against the Company. Directors may resign at any time by written notice to the board of directors and to the chairman of the board of statutory auditors. The board of directors must appoint substitute directors to fill vacancies arising from removals or resignations, subject to the approval of the board of statutory auditors, to serve until the next ordinary shareholders’ meeting. If at any time more than half of the members of the board of directors resign or otherwise cease to be directors, the remaining members of the board of directors (or the board of statutory auditors if all the members of the board of directors have resigned or ceased to be directors) must promptly call an ordinary shareholders’ meeting to appoint the new directors.
The remuneration of directors is determined by shareholders at ordinary shareholders’ meetings. The board of directors, after consultation with the board of statutory auditors, may determine the remuneration of directors that perform management or other special services for the Company, such as the
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managing director. Directors are entitled to reimbursement for expenses reasonably incurred in connection with their functions.
With effect from January 1, 2004, an Italian stock corporation may adopt one of two different models of corporate governance structure, as an alternative to the current model based on a board of directors and a board of statutory auditors. Stock corporations may opt for (i) a one-tier model with a single board of directors, including an audit committee composed of independent non-executive directors, or (ii) a two-tier model, including a management board, which is entrusted with management responsibilities, and a supervisory board which is entrusted mainly with control and supervisory responsibilities and, among other functions, appoints and removes the members of the management board and approves the company’s annual financial statements. The adoption of one of the new corporate governance models requires an extraordinary shareholders meeting resolution. The amended By-laws approved by our shareholders on May 24, 2004, do not provide for a change in our governance structure.
Statutory Auditors
In addition to electing the board of directors, the Company’s shareholders elect a board of statutory auditors (Collegio Sindacale) from individuals qualified to act in such capacity under Italian law. At ordinary shareholders’ meetings of the Company, the statutory auditors are elected for a term of three fiscal years, may be re-elected for successive terms and may be removed only for cause and with the approval of a competent court. Each member of the board of statutory auditors must provide certain evidence that he is in good standing and meets certain professional standards.
The Company’s By-laws currently provide that the board of statutory auditors shall consist of three statutory auditors and two alternate statutory auditors (who are automatically substituted for a statutory auditor who resigns or is otherwise unable to serve). If the shares of the Company are ever listed on a regulated market of a Member State of the European Union (no such listing currently exists), statutory auditors are to be elected through a list voting mechanism.
The Company’s board of statutory auditors is required, among other things, to verify that the Company (i) complies with applicable laws and its By-laws, (ii) respects principles of good governance, and (iii) maintains adequate organizational structure, internal controls and administrative and accounting systems.
The Company’s board of statutory auditors is required to meet at least once each ninety days. In addition, the statutory auditors of the Company must be present at meetings of the Company’s board of directors and shareholders’ meetings. The statutory auditors may decide to call a meeting of the shareholders, the board of directors, ask information on the management of the Company to the directors, carry out inspections and verifications at the Company and exchange information with the Company’s external auditors. Any shareholder may submit a complaint to the board of statutory auditors regarding facts that such shareholder believes should be subject to scrutiny by the board of statutory auditors, which must take any complaint into account in its report to the shareholders’ meeting. If shareholders collectively representing 5% of the Company’s share capital submit such a complaint, the board of statutory auditors must promptly undertake an investigation and present its findings and any recommendations to a shareholders’ meeting (which must be convened immediately if the complaint appears to have a reasonable basis and there is an urgent need to take action). The board of statutory auditors may report to the competent court serious breaches of directors’ duties.
As mentioned in the preceding section, starting from January 1, 2004, Italian stock corporations may depart from the traditional Italian model of corporate governance structure and opt for two
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alternative models, neither of which includes a board of statutory auditors. The amended By-laws approved by our shareholders on May 24, 2004, do not provide for a change in our governance structure.
External Auditor
The 2003 reform requires companies to appoint an external auditor or a firm of external auditors, each of them qualified to act in such capacity under Italian law, that shall verify (i) during the fiscal year, that the company’s accounting records are correctly kept and accurately reflect the company’s activities, and (ii) that the financial statements correspond to the accounting records and the verifications conducted by the external auditors and comply with applicable rules. The external auditor or the firm of external auditors express their opinion on the financial statements in a report that may be consulted by the shareholders prior to the annual shareholders’ meeting.
The external auditor or the firm of external auditors are appointed for a three-year term by the ordinary shareholders’ meeting, having consulted the board of statutory auditors, and may be removed only for cause and with the approval of a competent court.
On May 24, 2004, our shareholders appointed Reconta Ernst & Young, with legal offices at Padua, Italy, as our external auditors for three-year term expiring at the time of the annual shareholders meeting to approve the consolidated financial statements for 2006.
Meetings of Shareholders
Shareholders are entitled to attend and vote at ordinary and extraordinary shareholder’s meetings. Votes may be cast personally or by proxy. Shareholders’ meeting may be called by the Company’s board of directors (or the board of statutory auditors) and must be called if requested by holders of at least 10% of the issued shares. Shareholders are not entitled to request that a meeting of shareholders be convened to resolve upon matters which as a matter of law shall be resolved upon the matters which as a matter of law shall be resolved upon on the basis of a proposal, plan or report by our board of directors. If the shareholders’ meeting is not called despite the request by shareholders and such refusal is unjustified, the competent court may call the meeting.
The Company may hold general meetings of shareholders at its registered office in Longarone (BL), or elsewhere within Italy following publication of notice of the meeting in the“Gazzetta Ufficiale della Repubblica Italiana”at least 15 days before the date fixed for the meeting. The Depositary will mail to all record holders of ADSs a notice containing a summary of all information contained in any notice of a shareholders’ meeting received by the Depositary.
Shareholders’ meetings must be convened at least once a year. Our annual stand-alone financial statements are prepared by our board of directors and submitted for approval to the ordinary shareholders’ meeting which must be convened within 120 days after the end of the fiscal year to which such financial statements relate. This term may be extended to up to 180 days after the end of the fiscal year, as long as we are bound by law to draw up consolidated financial statements or if particular circumstances concerning our structure or our purposes so require. At ordinary shareholders’ meetings, shareholders also appoint the external auditors, approve the distribution of dividends, appoint the board of directors and statutory auditors, determine their remuneration and vote on any business matter the resolution or authorization of which is entrusted to them by law.
Extraordinary shareholders’ meetings may be called to pass upon split-ups, dissolutions, appointment of receivers and similar extraordinary actions. Extraordinary shareholders’ meetings may also be called to resolve upon proposed amendments to the By-laws, issuance of convertible debentures,
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mergers and de-mergers, capital increases and reductions, where such resolutions may not be taken by our board of directors. In particular, our board of directors may transfer our registered office within Italy or resolve upon other amendments to our By-laws when these amendments are required by law, resolve upon mergers by absorption into us of our subsidiaries in which we hold at least 90% of the issued share capital and reductions of our share capital in case of withdrawal of a shareholder. Our board of directors may also resolve upon the issuance of shares or convertible debentures if such powers have been previously delegated to the board of directors by vote of the extraordinary shareholders’ meeting.
The notice of a shareholders’ meeting may specify up to two meeting dates for an ordinary or extraordinary shareholders’ meeting; such meeting dates are generally referred to as “calls”. The extraordinary meeting may be convened on third call through a new notice if the quorum required for shareholder action on second call is not reached.
The quorum for an ordinary meeting of shareholders is 50% of the Ordinary Shares, and resolutions are carried by the majority of Ordinary Shares present or represented. At an adjourned ordinary meeting, no quorum is required, and the resolutions are carried by the majority of Ordinary Shares present or represented. Certain matters, such as amendments to the By-laws, the issuance of shares, the issuance of debentures and mergers and de-mergers may only be effected at an Extraordinary General Meeting, at which special voting rules apply. Resolutions at an extraordinary meeting of the Company are carried by a majority of the Ordinary Shares. An adjourned extraordinary meeting is validly held with a quorum of one-third of the issued shares and its resolutions are carried by a majority of at least two-thirds of the holders of shares present or represented at such meeting. In addition, certain matters (such as a change in purpose or form of the company, the transfer of its registered office outside Italy, its liquidation prior to the date set forth in its By-laws and the issuance of preferred shares) must be carried by the holders of more than one-third of the Ordinary Shares, provided that there is no dissenting vote by holders of more than one-third of the shares present and represented at such meeting).
To attend any meeting, shareholders must, at least five days prior to the date fixed for the meeting, lodge their share certificates at the offices of the Company or with such banks as may be specified in the notice of meeting, in exchange for an admission ticket for the meetings. Owners of ADRs may make special arrangements with the Depositary for the beneficial owners of such ADRs to attend shareholders’ meetings, but not to vote at or formally address such meetings. The procedures for making such arrangements will be specified in the notice of such meeting to be mailed by the Depositary to the owners of ADRs.
Shareholders may appoint proxies by delivering in writing an appropriate instrument of appointment to the Company. Directors, auditors and employees of the Company or of any of its subsidiaries may not be proxies and any one proxy cannot represent more than 20 shareholders. A separate proxy must be provided for each meeting. Share certificates may be retrieved following the meeting.
Preemptive Rights
Pursuant to Italian law, holders of Ordinary Shares are entitled to subscribe for issuance of shares, debentures convertible into shares and rights to subscribe for shares in proportion to their holdings, unless such issues are for non cash considerations or preemptive rights are waived or limited by an extraordinary resolution adopted by the affirmative vote of holders of more than 50% of the Ordinary Shares (whether at an extraordinary or adjourned extraordinary meeting) and such waiver or limitation is required in the interest of the Company. There can be no assurance that the holders of ADSs may be able to exercise fully any preemptive rights.
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Preference Shares; Other Securities
Italian companies are permitted in accordance with Italian law to issue preference shares with limited voting rights, to issue other classes of equity securities with different economic and voting rights, to issue so-called participation certificates with limited voting rights, as well as so-called tracking stock, if their by-laws permit such issuances. The Company’s By-laws currently do not provide for any of such issuances and would need to be amended at an extraordinary shareholders’ meeting to allow us to issue the abovementioned shares and/or securities.
The power to issue debt securities not convertible into our shares in vested in our board of directors.
Segregation of Assets and Proceeds
Pursuant to the 2003 corporate law reform, effective January 1, 2004, the board of directors of an Italian company may resolve to segregate assets of the company into one or more separate pools. Such pools of assets may have an aggregate value not exceeding 10% of the shareholders’ equity of the company. Each pool of assets must be used exclusively for the carrying out of a specific business and may not be attached by the general creditors of the company. Similarly, creditors with respect to such specific business may only attach those assets of the company that are included in the corresponding pool. Tort creditors, on the other hand, may always attach any assets of the Company. The board of directors may issue securities carrying economic and administrative rights relating to a pool. In addition, financing agreements relating to the funding of a specific business may provide that the proceeds of such business be used exclusively to repay the financing. Such proceeds may be attached only by the financing party and such financing party would have no recourse against other assets of the company.
We have no present intention to enter into any such transaction and none is currently in effect.
Liquidation Rights
Pursuant to Italian law and subject to the satisfaction of the claims of all other creditors, shareholders are entitled to a distribution in liquidation that is equal to the nominal value of their shares (to the extent available out of the net assets of the Company). Holders of preferred shares, if any such shares are issued in the future by the Company, would be entitled to a priority right to any such distribution from liquidation up to their par value. Thereafter, all shareholders would rank equally in their claims to the distribution or surplus assets, if any. Shares rank pari passu among themselves in liquidation.
Purchase of Shares by the Company
We are permitted to purchase shares, subject to certain conditions and limitations provided for by Italian law. Shares may only be purchased out of profits available for dividends or out of distributable reserves, in each case as appearing on the latest shareholder-approved stand-alone financial statements. Further, we may only repurchase fully paid-in shares. Such purchases must be authorized by an ordinary shareholders’ meeting. The number of shares to be acquired, together with any shares previously acquired by us or any of our subsidiaries may not (except in limited circumstances) exceed in aggregate 10% of the total number of shares then issued and the aggregate purchase price of such shares may not exceed the earnings reserve specifically approved by shareholders. Shares held in excess of such 10% limit must be sold within one year of the date of purchase. Similar limitations apply with respect to purchases of our shares by our subsidiaries.
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A corresponding reserve equal to the purchase price of such shares must be created in the balance sheet, and such reserve is not available for distribution, unless such shares are sold or cancelled. Shares purchased and held by us may be resold only pursuant to a resolution of our shareholders adopted at an ordinary shareholders’ meeting. The voting rights attaching to the shares held by us or our subsidiaries cannot be exercised, but the shares can be counted for quorum purposes in shareholders’ meetings. Dividends and other rights, including pre-emptive rights, attaching to such shares will accrue to the benefit of other shareholders.
There is currently an authorization from the shareholders for the Company to purchase up to 10% of the outstanding shares in the form of Ordinary Shares or ADSs, which is valid until May 2005. As of June 25, 2004, the Company had repurchased a total of 223,200 ADSs pursuant to this authorization.
Notification of the Acquisition of Shares
In accordance with Italian antitrust laws, the Italian Antitrust Authority is required to prohibit the acquisition of control in a company which would thereby create or strengthen a dominant position in the domestic market or a significant part thereof and which would result in the elimination or substantial reduction, on a lasting basis, of competition, provided that certain turnover thresholds are exceeded. However, if the turnover of the acquiring party and the company to be acquired exceed certain other monetary thresholds, the antitrust review of the acquisition falls within the exclusive jurisdiction of the European Commission.
Minority Shareholders’ Rights; Withdrawal Rights
Shareholders’ resolutions which are not adopted in conformity with applicable law or our By-laws may be challenged (with certain limitations and exceptions) within ninety days by absent, dissenting or abstaining shareholders representing individually or in the aggregate at least 5% of Company’s share capital (as well as by our board of directors or our board of statutory auditors). Shareholders not reaching this threshold or shareholders not entitled to vote at Company’s meetings may only claim damages deriving from the resolution.
Dissenting or absent shareholders may require the Company to buy back their shares as a result of shareholders’ resolutions approving, among others things, material modifications of the Company’s purpose or of the voting rights of our shares, the transformation of the Company from a stock corporation into a different legal entity, the transfer of our registered seat outside Italy. According to the reform, the buy-back would occur at a price established by directors, upon consultation with the board of statutory auditors and the Company’s external auditor, having regard to the net assets value of the company, its prospective earnings and the market value of its shares, if any. The 2003 reform would permit the Company’s By-laws to set forth different criteria for the consideration to be paid to dissenting shareholders in such buy-backs.
Each shareholder may bring to the attention of the board of statutory auditors facts or acts which are deemed wrongful. If such shareholders represent more than 5% of the share capital of the Company, the board of statutory auditors must investigate without delay and report its findings and recommendations to the shareholders’ meeting. Shareholders representing more than 10% of our share capital have the right to report to the competent court serious breaches of the duties of the directors which may be prejudicial to us or to our subsidiaries. In addition, shareholders representing at least 20% of our share capital may commence derivative suits before the competent court against our directors, statutory auditors and general managers. We may waive or settle the suit unless shareholders holding at least 20%
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of the shares vote against such waiver or settlement. We will reimburse the legal costs of such action in the event that the claim of such shareholders is successful and the court does not award such costs against the relevant directors, statutory auditors or general managers.
Liability for Mismanagement of Subsidiaries
Pursuant to the 2003 corporate law reform, companies and other entities that, acting in their own interest or the interest of third parties, mismanage a company subject to their direction and coordination powers are liable to such company’s shareholders and creditors for ensuing damages. Said liability is excluded if (i) the ensuing damage is fully eliminated, including through subsequent transactions, or (ii) the damage is effectively offset by the global benefits deriving in general to the company from the continuing exercise of such direction and coordination powers. Direction and coordination powers are presumed to exist, among other things, with respect to consolidated subsidiaries.
SIGNIFICANT DIFFERENCES IN CORPORATE GOVERNANCE PRACTICES FOR PURPOSES OF
SECTION 303A.11 OF THE NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL
(THE “NYSE MANUAL”)
Overview
Corporate governance rules for Italian stock corporations (società per azioni) like us whose shares are not listed on a regulated market in the European Union are set forth in the Italian Civil Code (the “Civil Code”). As described in more detail below, the Italian corporate governance rules set forth in the Civil Code differ in a number of ways from those applicable to U.S. domestic companies under NYSE listing standards, as set forth in the NYSE Manual.
As a general rule, our main corporate bodies are governed by the Civil Code and are assigned specific powers and duties that are legally binding and cannot be derogated from.
We follow the traditional Italian corporate governance system, which provides for two main corporate bodies — the board of directors and the board of statutory auditors. This system contrasts with the unitary system envisaged for U.S: domestic companies by the NYSE listing standards, which contemplates the board of directors serving as the sole governing body. See “By-laws — Board of Directors” and “By-laws — Statutory Auditors” above for a description of the powers and duties of our board of directors and our board of statutory auditors, respectively. The members of our board of directors and board of statutory auditors, as well as our external auditors, are directly and separately appointed by resolutions approved by our shareholders at a general shareholders’ meeting.
We have set out in the following summary the significant differences between Italian corporate governance rules and practices, as we have implemented them, and those applicable to U.S. issuers under NYSE listing standards.
Independent Directors
NYSE domestic company standards.The NYSE listing standards applicable to U.S. companies provide that “independent” directors must comprise a majority of the board. In order for a director to be considered “independent”, the board of directors must affirmatively determine that the director has no “material” direct or indirect relationship with the company. These relationships “can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationship (among others)”. More specifically, a director is not independent if such director or his/her immediate family members, has certain specified relationships with the company, its parent, its consolidated subsidiaries, their internal or
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external auditors, or companies that have significant business relationships with the company, its parent or its consolidated subsidiaries. Ownership of a significant amount of stock is not aper sebar to independence. In addition, a three-year “cooling off” period following the termination of any relationship that compromised a director’s independence must lapse before that director can again be considered independent.
Our practice.The presence of a prescribed number of independent directors on our board is neither mandated by Italian law nor required by our By-laws. However, Italian law sets forth certain independence requirements applicable to our statutory auditors. Statutory auditors’ independence is assessed on the basis of a few general principles, rather than detailed rules. In particular, a person who (i) is a director, or the spouse or a close relative of a director, of our company or any of our affiliates, or (ii) has an employment or a regular consulting or similar relationship with our company or any of our affiliates, or (iii) has an economic relationship with us or any of our affiliates which might compromise his/her independence, cannot be appointed to our board of statutory auditors. Although there is no formal cooling-off requirement, statutory auditors who are registered chartered accountants and have had a regular or material consulting relationship with us or our affiliates within two years prior to the appointment, or have been employed by, or directors of, us or our affiliates, within three years prior to the appointment, may be suspended or cancelled from the register of chartered public accountants.
Executive Sessions
NYSE domestic company standards. Non-executive directors (i.e., not members of senior management) of U.S. companies listed on the NYSE must meet regularly in executive sessions, and independent directors should meet alone in an executive session at least once a year.
Our practice.In Italy, neither non-executive directors nor independent directors are required to meet in executive sessions. The members of our board of statutory auditors are required to meet at least every 90 days.
Audit Committee and Internal Audit Function
NYSE domestic company standards. U.S. companies listed on the NYSE are required to establish an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act and certain additional requirements set by the NYSE. In particular, all members of this committee must be independent and the committee must adopt a written charter. The committee’s prescribed responsibilities include (i) the appointment, compensation, retention and oversight of the external auditors; (ii) establishing procedures for the handling of “whistle blower” complaints; (iii) discussion of financial reporting and internal control issues and critical accounting policies (including through executive sessions with the external auditors); (iv) the approval of audit and non-audit services performed by the external auditors and (v) the adoption of an annual performance evaluation. A company must also have an internal audit function, which may be out-sourced, except to the independent auditor.
Our practice.Rule 10A-3 under the Exchange Act provides that foreign private issuers with a board of statutory auditors established in accordance with local law or listing requirements and meeting specified requirements with regard to independence and responsibilities (including the performance of most of the specific tasks assigned to audit committees by the rule, to the extent permitted by local law), (the “Statutory Auditor Requirements”) are exempt from the audit committee requirements established by the rule. As a foreign private issuer, we must comply with these requirements or qualify for a valid exemption by July 31, 2005. Our board of directors has determined that our board of statutory auditors meets the Statutory Auditor Requirements and therefore will qualify for the exemption noted above. We
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do not have a dedicated internal audit function at the current time, nor have we out-sourced any such activities.
Compensation Committee
NYSE domestic company standards.Under NYSE standards, the compensation of the CEO of U.S. domestic companies must be approved by a compensation committee (or equivalent) comprised solely of independent directors. The compensation committee must also make recommendations to the board of directors with regard to the compensation of other officers, incentive compensation plans and equity-based plans. Disclosure of individual management compensation information for these companies is mandated by the Exchange Act’s proxy rules, from which foreign private issuers are generally exempt.
Our practice.We have not established a compensation committee. Compensation of our directors vested with particular offices (including our CEO) is either determined by our board of directors, in consultation with our board of statutory auditors, or, according to our By-laws, by a resolution approved by our shareholders at a general shareholders’ meeting. Compensation of our executive officers is determined by our CEO. We do not produce a compensation report. However, we disclose aggregate compensation of all of our directors (including our CEO) in our annual financial statements prepared in accordance with Italian GAAP and in item 6 of our annual reports on Form 20-F.
Nominating Committee
NYSE domestic company standards.Under NYSE standards, a domestic company must have a nominating committee (or equivalent) comprised solely of independent directors, which is responsible for nominating directors.
Our practice.We have not established a nominating committee. Directors may be nominated by any of our shareholders or our board of directors.
Corporate Governance/Code of Ethics
NYSE domestic company standards.Under NYSE standards, a company must adopt governance guidelines and a code of business conduct and ethics for directors, officers and employees. A company must also publish these items on its website and provide printed copies on request. Section 406 of the Sarbanes-Oxley Act requires a company to disclose whether it has adopted a code of ethics for its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and if not, the reasons why it has not done so. The NYSE listing standards applicable to U.S. companies provide that codes of conduct and ethics should address, at a minimum, conflicts of interest; corporate opportunities; confidentiality; fair dealing; protection and use of company assets; legal compliance; and reporting of illegal and unethical behavior. Corporate governance guidelines must address, at a minimum, directors’ qualifications, responsibilities and compensation; access to management and independent advisers; management succession; director orientation and continuing education; and annual performance evaluation of the board.
Our practice.We are in the process of adopting certain corporate governance guidelines (including with respect to our internal control system, significant transactions, transactions with related parties, and internal dealing), a compliance program to prevent certain criminal offenses and a code of conduct for our directors, employees and others acting on our behalf. As noted in Item 16B of this annual report, we have also adopted a code of ethics for our senior executive and financial officers meeting the requirements of Section 406 of the Sarbanes-Oxley Act.
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We believe that our codes of conduct and ethics will address the relevant issues contemplated by the NYSE standards applicable to U.S. companies noted above. Our corporate governance guidelines, on the other hand, do not address all of the issues contemplated by the NYSE standards.
Certifications as to Violations of NYSE Standards
NYSE domestic company standards.Under NYSE listing standards, the CEO of a U.S. company must certify annually that he or she is unaware of any violation by the company of the NYSE corporate governance standards. This certification must be included in the company’s annual report to shareholders (or, if no annual report is prepared, its Form 10-K). The CEO must also notify the NYSE in writing if any executive officer becomes aware of any material non-compliance with the NYSE corporate governance standards.
Our practice.The NYSE does not apply the first of the two domestic certification standards to foreign private issuers. Accordingly, our CEO must only notify the NYSE in writing if any executive officer becomes aware of any material non-compliance with NYSE corporate governance standards.
Shareholder Approval of Adoption and Modification of Equity Compensation Plans
NYSE domestic company standards.Shareholders of a U.S. company listed on the NYSE must approve the adoption of and any material revision to the company’s equity compensation plans, with certain exceptions.
Our practice.Although our shareholders must authorize (i) the issuance of additional shares in connection with capital increases, and (ii) the buy-back of our own shares, the adoption of equity compensation plans does notper se require prior shareholders’ approval.
MATERIAL CONTRACTS
The Company has not entered into any material contract, other than contracts entered into in the ordinary course of business, during the two years immediately preceding the publication of this annual report.
EXCHANGE CONTROLS
Currently, there are no Italian exchange controls that would affect the payment of dividends or other remittances to holders of the ADSs or Ordinary Shares who reside outside Italy. The Company is not aware of any plans by the Italian government to institute any exchange controls that would affect the payment of dividends or other remittances to holders of ADSs or Ordinary Shares who reside outside Italy. Neither Italian law nor the Company’s By-laws limit the right of nonresident or foreign owners to hold or vote the Ordinary Shares or the ADSs.
TAXATION
The following is a summary of certain U.S. federal income and Italian tax matters. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase or hold Ordinary Shares or ADSs. In particular, the summary deals only with beneficial owners who will hold Ordinary Shares or ADSs as capital assets and does not address the tax treatment of a beneficial owner who owns 10% or more of the voting shares of the Company. The summary does not discuss the treatment of Ordinary Shares or ADSs that are held in connection with a
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permanent establishment or fixed base through which a non-resident beneficial owner carries on business or performs personal services in Italy.
The summary is based upon tax laws and practice of the United States and Italy as in effect on the date of this annual report, which are subject to change. Investors and prospective investors in Ordinary Shares or ADSs should consult their own advisors as to the U.S., Italian or other tax consequences of the purchase, beneficial ownership and disposition of ADSs, including, in particular, the effect of any state, local or other national tax laws.
For purposes of the summary, beneficial owners of ADSs who are considered residents of the United States for purposes of the current income tax convention between the United States and Italy (the “Income Tax Convention”), and are not subject to an anti-treaty shopping provision that applies in limited circumstances, are referred to as “U.S. owners”. Beneficial owners who are citizens or residents of the United States, corporations organized under U.S. law, and U.S. partnerships, estates or trusts (to the extent their income is subject to U.S. tax either directly or in the hands of partners or beneficiaries) generally will be considered to be residents of the United States under the Income Tax Convention. Special rules apply to U.S. owners that are also residents of Italy. A new tax treaty to replace the current Income Tax Convention was signed on August 25, 1999, but has not yet been ratified. The new treaty would not change significantly the provisions of the current Income Tax Convention that are discussed below (except that it would clarify the availability of benefits to certain tax-exempt organizations). These laws are subject to change, possibly on a retroactive basis.
For purposes of the Income Tax Convention and the United States Internal Revenue Code of 1986, beneficial owners of ADRs evidencing ADSs will be treated as the beneficial owners of the Ordinary Shares represented by those ADSs.
Taxation of Dividends
Italian Tax Considerations.Italian law provides for the withholding of income tax at a 27% rate on dividends paid by Italian companies to shareholders who are not residents of Italy for tax purposes. Reduced rates (normally 15%) may apply to non-resident shareholders who are entitled to, and comply with procedures for claiming, benefits under an income tax convention.
Under the Income Tax Convention, dividends derived and beneficially owned by U.S. owners are subject to Italian tax at a reduced rate of 15%. However, the amount initially made available to the Depositary for payment to U.S. owners will reflect withholding at the 27% rate. U.S. owners who comply with the certification procedures described below may then claim an additional payment of 12% of the dividend (representing the difference between the 27% rate and the 15% rate, and referred to herein as a “treaty refund”). The certification procedure will require U.S. owners (i) to obtain from the U.S. Internal Revenue Service a form of certification required by the Italian tax authorities with respect to each dividend payment (Form 6166) unless a previously filed certification will be effective on the dividend payment date (such certificates are effective until March 31 of the year following submission); (ii) to produce a statement whereby the U.S. owner represents to be a U.S. resident individual or corporation and does not maintain a permanent establishment in Italy; and (iii) to set forth other required information. The time for processing requests for certification by the U.S. Internal Revenue Service normally is six to eight weeks. Accordingly, in order to be eligible for the procedure described below, U.S. owners should begin the process of obtaining certificates as soon as possible after receiving instructions from the Depositary on how to claim a treaty refund.
The Depositary’s instructions will specify certain deadlines for delivering to the Depositary the documentation required to obtain a treaty refund, including the certification that the U.S. owners must
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obtain from the U.S. Internal Revenue Service. In the case of ADSs held by U.S. owners through a broker or other financial intermediary, the required documentation should be delivered to such financial intermediary for transmission to the Depositary. In all other cases, the U.S. owners should deliver the required documentation directly to the Depositary.
The Company and the Depositary have agreed that if the required documentation is received by the Company on or within 30 days after the dividend payment date (“the First Delivery Date”) and, in the reasonable judgment of the Company, such documentation satisfies the requirements for a refund by the Company of Italian withholding tax under the Income Tax Convention and applicable law, the Company will within 45 days thereafter pay the treaty refund to the Depositary for the benefit of the U.S. owners entitled thereto. If the Company does not receive a U.S. owner’s documentation within 30 days after the dividend payment date, such U.S. owner may for a period of 15 days continue to claim a treaty refund by delivering the required documentation to the Depositary. The Depositary will deliver such documentation within 15 days of the First Delivery Date (“the Final Delivery Date”), but the Company will not necessarily pay the treaty refund to the Depositary within 45 days of the First Delivery Date. If the Company does not receive the required documentation during this additional period, or if in the Company’s judgment the documentation fails to satisfy the requirements of Italian law for any reason, U.S. owners will not be entitled to receive any amounts from the Company and instead must claim the treaty refund directly from the Italian tax authorities. U.S. residents seeking refunds from the Italian tax authorities have encountered extensive delays and incurred related expenses. The procedures described in this paragraph may be modified or withdrawn if the Company determines that its participation in the refund practice is no longer lawful or practical.
Italian law provides an alternative mechanism under which non-resident shareholders can claim a refund of up to four-ninths of Italian withholding taxes on dividend income, by proving to the Italian tax authorities that the dividend income was subject to income tax in the jurisdiction of residence of such holder in an amount at least equal to the total refund claimed. U.S. owners should consult their own tax advisers with respect to the availability of these refunds, which traditionally have been paid only after extensive delays.
Distributions of profits in kind will be subject to withholding tax. In that case, prior to receiving the distribution, the owner will be required to provide the Company with the funds to pay the relevant withholding tax. Distribution of additional shares issued upon capitalization of reserves to beneficial owners with respect to their ADSs that are made as part of a pro rata distribution to all shareholders of the Company generally will not be subject to Italian tax. However, such additional shares will reduce the tax basis of each single share for the calculation of the capital gains tax.
United States Tax Considerations.The gross amount of any dividends (that is, the amount before reduction for Italian withholding tax) paid to a U.S. owner generally will be subject to U.S. federal income taxation as foreign source dividend income, regardless of whether the tax refund is obtained, and will not be eligible for the dividends received deduction allowed to domestic corporations. Dividends paid in euros will be includible in the income of such U.S. owners in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day the dividends are received by the Depositary or the custodian. If the Depositary or the custodian converts the euros into dollars on the day it receives them, U.S. owners generally should not realize foreign currency gain or loss in respect of the dividend income. U.S. owners who receive a treaty refund may be required to recognize foreign currency gain or loss, which will be treated as ordinary gain or loss, to the extent the amount of the treaty refund (in dollars) received by the U.S. owner differs from the U.S. dollar equivalent of the euro amount of the treaty refund on the date the dividends were received by the Depositary or the custodian. Italian withholding tax at the 15% rate will be treated as a foreign income tax which U.S. owners may elect to deduct in computing their taxable income or, subject to the limitations on foreign tax credits generally, credit against their
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United States federal income tax liability. Dividends will generally constitute foreign-source “passive income” or “financial services income” for U.S. tax purposes. Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual in respect of our shares or ADSs after December 31, 2002 and before January 1, 2009 is subject to taxation at a maximum rate of 15%. You should consult your own tax adviser regarding the availability of the reduced dividend tax rate in the light of your own particular circumstances.
Foreign tax credits may not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities or in respect of arrangements in which a U.S. owner’s expected economic profit is insubstantial. U.S. owners should consult their own advisers concerning the implications of these rules in light of their particular circumstances.
Distributions of additional shares to U.S. owners with respect to their ADSs that are made as part of a pro rata distribution to all shareholders of the Company generally will not be subject to U.S. federal income tax.
A beneficial owner of Ordinary Shares or ADSs that is, with respect to the United States, a foreign corporation or a nonresident alien individual generally will not be subject to U.S. federal income tax on dividends received on Ordinary Shares or ADSs, unless such income is effectively connected with the conduct by the beneficial owner of a trade or business in the United States.
Taxation of Capital Gains
Italian Tax Considerations.As of January 1, 2004, capital gains realized by non-resident shareholders on the disposal of a “qualified” shareholding held as a capital asset and not in connection with a permanent establishment or fixed base through which such shareholders carry on or perform business services in Italy are no longer subject to Italian capital gain tax (“CGT”) but to personal or corporate income tax, for an amount equal to 40% of the overall gain. Losses can be offset against taxable gains for a corresponding amount and, if in excess, can be carried forward for up to four years. A “qualified” shareholding is constituted by ordinary shares or ADSs and/or rights representing more than 5% of a listed company’s total share capital or more than 2% of its share capital voting at an ordinary shareholders meeting. A disposal of a “qualified” shareholding occurs if in any 12-month period immediately following the date when a shareholding meets one of the thresholds illustrated above, the shareholder engages in disposals of shares or ADSs that, individually or in aggregate, constitute a “qualified” shareholding. The taxable gain realized by a non-resident shareholder who is an individual would be subject to progressive personal income tax rates (currently, the marginal tax rate is equal to 45%, plus a surcharge of up to 1.4%, depending on the municipality in which the shareholder resides). The taxable gain realized by a non-resident corporate shareholder would be subject to corporate income tax, currently levied at a rate of 33%.
Generally, CGT, levied at a rate of 12.5%, is imposed on gains realized upon the transfer or sale of “non-qualified” shareholdings whether held within or outside Italy. A “non-qualified” shareholding is constituted by an interest in De Rigo which does not reach the thresholds described above. However, under domestic law, an exemption applies to gains realized on the disposal of “non-qualified” shareholdings in an Italian company the shares of which are listed on a regulated market, such as De Rigo, even when such shareholdings are held in Italy.
Furthermore, pursuant to the Income Tax Convention, a U.S. owner will not be subject to Italian CGT unless such U.S. owner has a permanent establishment or fixed base in Italy to which Ordinary Shares or ADSs are effectively connected. To this end, U.S. residents that sell Ordinary Shares or ADSs and claim benefits under the Income Tax Convention may be required to produce appropriate
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documentation establishing that the above mentioned conditions of non-taxability of the capital gains pursuant to the Convention have been satisfied. Other countries have executed income tax conventions with Italy providing for similar treatment of Italian CGT. No CGT will be imposed on the deposit or withdrawal of Ordinary Shares in return for ADSs.
United States Tax Considerations.Gain or loss realized by a U.S. owner on the sale or other disposition of Ordinary Shares or ADSs will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the U.S. owner’s adjusted basis in the Ordinary Shares or the ADSs and the amount realized on the disposition (or its dollar equivalent, determined at the spot rate on the date of disposition, if the amount realized is denominated in a foreign currency). Such gain or loss will generally be long term capital gain or loss if the U.S. owner holds the Ordinary Shares or ADSs for more than one year. The net amount of long-term capital gain recognized by an individual holder after May 5, 2003 and before January 1, 2009 generally is subject to taxation at a maximum rate of 15%. The net long-term capital gain recognized by an individual holder before May 6, 2003 generally is subject to taxation at a maximum rate of 20%. Deposits and withdrawals of Ordinary Shares by U.S. owners in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
A beneficial owner of Ordinary Shares or ADSs that is, with respect to the United States, a foreign corporation or a nonresident alien individual will not be subject to U.S. federal income tax on gain realized on the sale of Ordinary Shares or ADSs, unless (i) such gain is effectively connected with the conduct by the beneficial owner of a trade or business in the United States or (ii) in the case of gain realized by an individual beneficial owner, the beneficial owner is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
Other Italian Taxes
Estate and Gift Tax. As of October 25, 2001, the Italian estate and gift tax has been abolished and consequently any transfer of shares or ADSs occurring by reason of death or gift as of that date is no longer subject to any Italian estate and gift tax.
However, should a gift of Ordinary Shares or ADSs for a value exceeding€180,759.91 (the “Threshold”) occur and the relationship between the donor and the beneficiary not qualify for the exemption regime applicable to gifts made in favor of certain family members (e.g., spouse, parents, children, grandchildren), a registration tax of€129.11 would be due insofar as the gift agreement is either executed or registered in Italy. The materiality threshold is increased to€516,456.91 in case the beneficiary is either underage (i.e., younger than 18) or a person with a handicap recognized pursuant to applicable law.
Transfer Tax.An Italian transfer tax is normally payable on the transfer of shares in an Italian company. The transfer tax will not be payable with respect to any transfer of Ordinary Shares or ADSs involving non-Italian residents concluded either on a regulated market or with the intervention of a bank or an investment services company.
DOCUMENTS ON DISPLAY
Copies of De Rigo S.p.A.’sStatutomay be examined at its registered office at Zona Industriale Villanova, No. 12, 32013 Longarone (BL), Italy.
De Rigo S.p.A. also files reports, including annual reports on Form 20-F, periodic reports on Form 6-K and other information with the Securities and Exchange Commission pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed
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with the SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20459. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also read and copy any materials we file with the SEC at the regional offices of the SEC located at 233 Broadway, New York, New York, 10279, and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Item 11.Quantitative and Qualitative Disclosures about Market Risk
The De Rigo Group is exposed to market risks from fluctuations in foreign currency exchange and interest rates. The exposure to foreign currency risk arises principally in connection with the geographical distribution of the Group’s sales and retail activities, which generally results in the Group generating revenues from its operations and sales outside of the euro zone in currencies other than the euro that are in excess of its costs denominated in such currencies, which are primarily incurred with respect to its operations located in such countries, and, to a lesser extent, with respect to non-euro denominated inputs used by its operations in the euro zone. As a result, the depreciation of the euro relative to other currencies generally has a positive effect on net sales and operating income, while the appreciation of the euro has adverse effects on net sales and operating income. Similarly, changes in interest rates affect the Group’s net income by increasing or decreasing borrowing costs and investment income. Prior to the acquisition of D&A in December 1998, substantially all of the Group’s costs and revenues were denominated in lire or other currencies of countries participating in the third stage of European Monetary Union, as almost all of its production facilities were in Italy or other participating Member States and its prices were generally denominated in lire (except for sales to its distribution subsidiaries), so the average price per unit and operating margins were not significantly affected by foreign currency exchange rate fluctuations. Since December 1998, the Group’s exposure to non-euro currencies increased, due to the fact that D&A’s costs and revenues are almost exclusively denominated in Pounds Sterling. The Group’s acquisition of General Optica in February 2000 did not have a similar impact on its risk profile, as both Spain and Portugal are participating in the euro. The Group also makes significant purchases of raw materials and components denominated in U.S. dollars, and therefore is exposed to fluctuations in the exchange rate between the U.S. dollar and the euro.
The Group regularly assesses its exposure and generally seeks to manage these market risks, principally through the use of forward exchange contracts and foreign currency options to hedge certain firm sales/purchases commitments, anticipated but not yet committed sales/purchases and investments in debt securities denominated in currencies other than the euro. The Group has adopted a series of guidelines regarding the management of exchange rate and interest rate exposure. De Rigo’s policy allows derivative instruments to be used only for managing exchange and interest rates risks connected to monetary flows and assets and liabilities, and not for speculative purposes.
The Group’s consolidated statements of income recognized net foreign exchange losses of€0.5 million for 2002 and net foreign exchange gains of€0.5 million for 2003. For additional information on the Group’s financial instruments, see Note 19 to Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
Risk Analysis
The De Rigo Group monitors foreign exchange risk, interest rate risk and related hedge positions using a variety of analytical techniques including market value and sensitivity analysis. The following analyses assume instantaneous parallel shifts in exchange rates and interest rate yield curves. For options which are instruments with non-linear returns, sensitivity analysis models considering the year-end market volatility are employed.
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Exchange Rate Risk
At December 31, 2003, the potential loss in fair value of the financial instruments with exposure to exchange rate risk with regard to non-euro currencies, principally those relating to the Pound Sterling and U.S. dollar, primarily financial assets and liabilities denominated in such currencies and derivative instruments such as foreign forward exchange contracts and currency options, resulting from a hypothetical 10% change in relevant foreign currency exchange rates would be approximately€1.2 million. This sensitivity analysis assumes an unfavorable and instantaneous 10% fluctuation in the relevant exchange rates and is generally based on rates at the end of the year for the relevant currencies against the euro, the Group’s reporting currency.
As consistently and simultaneously unfavorable movements in all relevant exchange rates are unlikely, these assumptions may overstate the impact of exchange rate fluctuations on such financial instruments. In addition, this calculation does not include trade receivables and trade payables and anticipated cash flows related to the underlying business transactions. Management believes that it is reasonable to expect that the above movement in foreign exchange rates would produce an opposite economic impact on the underlying business transactions for which such financial instruments are used.
Interest Rate Risk
Although the Group uses derivative instruments to manage its interest rate risk exposure, it does not attempt to hedge its interest rate risks completely. As a result, the Group’s results could be affected with regard to changes in interest rates relates to the changes in the values of its floating rate assets and liabilities. The potential loss in fair value of such assets and liabilities held at December 31, 2003, resulting from a hypothetical, instantaneous and unfavorable change of 10% in interest rate levels applicable to such financial assets and liabilities would be approximately€0.1 million.
Despite the Group’s program to manage exchange rate and interest rate risk, there can be no assurance that exchange rate or interest rate fluctuations will not adversely affect the Group’s results of operations, cash flows, financial conditions or relative price competitiveness in the future. Moreover, as with all hedging instruments, there are risks associated with the use of derivative instruments and other risk management tools. Although the use of such hedging instruments provides a certain degree of protection from certain fluctuations in currency exchange and interest rates, the Group may potentially lose benefits resulting from other fluctuations in currency exchange and interest rates as a result of using such instruments.
Changes in Market Risk Exposure Compared to 2002
The Group’s policy on financial risk management has not changed from the preceding year. However, the characteristics and the mix of the Group’s financial instruments with exposure to interest rate and foreign exchange rate risk at December 31, 2003 have changed substantially from the preceding year. See Note 19 to Notes to the Consolidated Financial Statements included in Item 18 of this annual report.
Item 12.Description of Securities Other than Equity Securities
Not applicable.
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PART II
Item 13.Defaults, Dividend Arrearages and Delinquencies
None.
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15.Controls and Procedures
As of December 31, 2003, the Company carried out an evaluation under the supervision and with the participation of its management, including its chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of the Company’s evaluation, the chief executive officer and chief financial officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports the Company file and submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as and when required. There has been no change in the Company’s internal control over financial reporting during 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 16.[Reserved]
Item 16A.Audit Committee Financial Expert
The Company has determined that, because of the existence and nature of its board of statutory auditors, it will qualify for an exemption provided by Exchange Act Rule 10A-3(c)(3) from many of the Rule 10A-3 audit committee requirements, which become applicable to foreign private issuers on July 31, 2005. See “Significant Differences In Corporate Governance Practices For Purposes of Section 303a.11 of the New York Stock Exchange Listed Company Manual—Audit Committee and Internal Audit Function” in Item 10. The board of statutory auditors has determined that each of the members qualifies as an “audit committee financial expert” within the meaning of this Item 16A..
Item 16B.Code of Ethics
The Company has adopted code of ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended, that is applicable to the Company’s chief executive officer, chief financial officer, chief accounting officer and controller, as well as to persons performing similar functions to any of the foregoing in each relevant group’s subsidiary. Copies of this code of ethics are available upon request by writing to us at the address on the cover page of this annual report; we also expect to post the code of ethics on our website at www.derigo.com. Material appearing on this website is not incorporated by reference into this annual report. If the Company amends the provisions of this code of ethics, or if the Company grants any waiver of such provisions, it will disclose such amendment or waiver on its website at the same address.
Item 16C.Principal Accountant Fees and Services
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Audit and Non-Audit Fees
The following table sets forth the fees billed to the Company by its independent auditors, Reconta Ernst & Young, during the fiscal years ended December 31, 2002 and 2003:
Year ended December 31, | ||||||||
2003 | 2002 | |||||||
(in thousands of euro) | ||||||||
Audit fees | € | 473 | € | 481 | ||||
Audit-related fees. | 0 | 0 | ||||||
Tax fees | 225 | 663 | ||||||
All other fees | 4 | 0 | ||||||
Total fees | € | 702 | € | 1,144 |
Audit fees in the above table are the aggregate fees billed by Reconta Ernst & Young or other Ernst & Young audit entities in connection with the audit of the Company’s annual financial statements and include the annual financial statement audit (including required semi-annual reviews), subsidiary audits, equity investment audits and other procedures required to be performed by the independent auditor to be able to form an opinion on the Company’s consolidated financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit.
Audit-related fees in the above table are the aggregate fees billed by Reconta Ernst & Young or other Ernst & Young audit entities for accounting due diligence services pertaining to potential business acquisitions or dispositions, as well as internal control reviews and assistance with internal control reporting requirements.
Tax fees in the above table are fees billed by Studio Legale Tributario associato Ernst & Young, (an affiliate of Reconta Ernst & Young) for tax compliance services and advice on specific changes in tax regulations.
All other fees in the above table are fees billed by Ernst & Young primarily related to tax audits.
Audit Committee Pre-Approval Policies and Procedures
All audit and non-audit services provided by our independent auditors must be pre-approved by our board of statutory auditors, which serves as the Company’s “audit committee” for purposes of applicable rules and regulations under the U.S. securities laws and the NYSE listing standards. De Rigo’s pre-approval policies provide that such services can either be pre-approved on the basis of an annual approval of particular types of services within identified categories (“general pre-approval”); or require the specific pre-approval of the board of statutory auditors (“specific pre-approval”). Any such general pre-approval is based on a detailed description of the particular types of services to be provided and incorporates limits on the related fees that can be incurred without triggering a need for a specific pre-approval; the board of statutory auditors is also informed about each service performed pursuant to a general pre-approval.
Unless a service has received general pre-approval, it requires specific pre-approval by the board of statutory auditors if it is to be provided by the independent auditor. Any proposed services of a
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particular type having received general pre-approval, but exceeding the cost levels or budgeted amounts set forth in such general pre-approval also require specific pre-approval by the board of statutory auditors.
For both types of pre-approval, the board of statutory auditors considers whether such services are consistent with the Securities and Exchange Commission’s rules on auditor independence. The board of statutory auditors also considers whether the independent auditor is best positioned to provide the most effective and efficient service, for reasons such as its familiarity with the Company’s business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance the Company’s ability to manage or control risk or improve audit quality. All such factors are considered as a whole, and no one factor should necessarily be determinative.
The board of statutory auditors is also mindful of the relationship between fees for audit and non-audit services in deciding whether to pre-approve any such services and may determine, for each fiscal year, the appropriate ratio between the total amount of fees for audit, audit-related and tax services and the total amount of fees for certain permissible non-audit services classified as all other services.
PART III
Item 17.Financial Statements
Not applicable.
Item 18.Financial Statements
Index to Financial Statements and Schedule filed with this Report
Page | ||||
Report of Independent Auditors | F-1 | |||
Consolidated Balance Sheets as of December 31, 2002 and 2003 | F-2 | |||
Consolidated Statements of Income for the Years Ended December 31, 2001, 2002 and 2003 | F-4 | |||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003 | F-5 | |||
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2001, 2002 and 2003 | F-6 | |||
Notes to the Consolidated Financial Statements | F-7 |
Item 19.Exhibits
Index to Exhibits filed with this Report
1.1 | Bylaws of De Rigo S.p.A. | |
1.2 | The total amount of long-term debt securities of De Rigo S.p.A. authorized under any instrument does not exceed 10% of the total assets of the Group on a consolidated basis. De Rigo S.p.A. hereby agrees to furnish to the Securities and Exchange Commission upon request a copy of any instrument defining the rights of holders of long-term debt of the registrant or of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. |
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8.1 | List of subsidiaries of the registrant. | |
12.1 | CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
12.2 | CFO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
13.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
De Rigo S.p.A.
We have audited the accompanying consolidated balance sheets of De Rigo S.p.A. and subsidiaries as of December 31, 2002 and 2003, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of De Rigo S.p.A. and subsidiaries at December 31, 2002 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in Italy, which differ in certain respects from accounting principles generally accepted in the United States of America (see Note 19 of the Notes to Consolidated Financial Statements).
Padua, Italy
April 9, 2004
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DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of Euro (€), unless otherwise noted)
December 31, | ||||||||||||
2002 | 2003 | |||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | 21,028 | 19,634 | ||||||||||
Investment in debt securities | 1,907 | — | ||||||||||
Accounts receivable, trade, net of allowances for doubtful accounts of€ 6,976 in 2002 and€ 7,383 in 2003 | 80,414 | 61,938 | ||||||||||
Inventories(Note 4) | 59,338 | 49,366 | ||||||||||
Deferred income taxes(Note 11) | 12,332 | 13,018 | ||||||||||
Prepaid expenses and other current assets(Note 5) | 20,464 | 12,393 | ||||||||||
Total current assets | 195,483 | 156,349 | ||||||||||
Property, plant and equipment(Note 9): | ||||||||||||
Land | 17,877 | 16,848 | ||||||||||
Buildings | 56,513 | 54,587 | ||||||||||
Machinery and equipment | 24,739 | 25,491 | ||||||||||
Office furniture and equipment | 84,442 | 82,800 | ||||||||||
Construction in progress | 280 | — | ||||||||||
183,851 | 179,726 | |||||||||||
Less: Accumulated depreciation | (62,946 | ) | (70,643 | ) | ||||||||
Property, plant and equipment, net | 120,905 | 109,083 | ||||||||||
Goodwill and intangible assets(Note 6) | 114,707 | 103,891 | ||||||||||
Other non current assets(Note 7) | 8,806 | 7,564 | ||||||||||
TOTAL ASSETS | 439,901 | 376,887 | ||||||||||
See accompanying notes
F-2
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DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of Euro (€), unless otherwise noted)
December 31, | ||||||||||||
2002 | 2003 | |||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Short-term bank borrowings(Note 8) | 85,180 | 22,569 | ||||||||||
Current portion of long-term debt(Note 9) | 218 | 166 | ||||||||||
Accounts payable, trade | 76,323 | 66,141 | ||||||||||
Commissions payable | 1,553 | 895 | ||||||||||
Income taxes payable | 3,334 | 5,452 | ||||||||||
Deferred income taxes(Note 11) | 1,005 | 1,392 | ||||||||||
Accrued expenses and other current liabilities(Note 10) | 31,973 | 27,223 | ||||||||||
Total current liabilities | 199,586 | 123,838 | ||||||||||
Termination indemnities and other employee benefits(Note12) | 8,926 | 9,755 | ||||||||||
Deferred income taxes(Note 11) | 10,068 | 8,670 | ||||||||||
Long-term debt, less current portion(Note 9) | 696 | 497 | ||||||||||
Other non-current liabilities (Note 14) | 8,508 | 7,243 | ||||||||||
Shareholders’ equity(Note 15): | ||||||||||||
Capital stock,€ 0.26 par value, 45,800,000 and 45,800,000 shares authorized; 44,714,255 and 44,714,255 issued; 44,714,255 and 44,491,055 outstanding at December 31, 2002 and 2003 | 11,626 | 11,626 | ||||||||||
Additional paid-in capital | 54,490 | 54,490 | ||||||||||
Retained earnings | 142,935 | 161,413 | ||||||||||
Foreign currency translation adjustments | (1,971 | ) | (5,682 | ) | ||||||||
Revaluation reserve | 5,037 | 5,037 | ||||||||||
Total shareholders’ equity | 212,117 | 226,884 | ||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 439,901 | 376,887 | ||||||||||
See accompanying notes
F-3
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DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of Euro (€), unless otherwise noted)
For the years ended December 31, | ||||||||||||
2001 | 2002 | 2003 | ||||||||||
NET SALES(Note 17) | 505,250 | 512,459 | 504,801 | |||||||||
COST OF SALES | 184,293 | 203,208 | 202,040 | |||||||||
GROSS PROFIT | 320,957 | 309,251 | 302,761 | |||||||||
COSTS AND EXPENSES | ||||||||||||
Commissions | 16,724 | 16,381 | 13,432 | |||||||||
Advertising and promotion expenses | 35,479 | 34,854 | 32,644 | |||||||||
Other selling expenses | 199,956 | 203,011 | 195,532 | |||||||||
General and administrative expenses | 37,738 | 38,278 | 36,299 | |||||||||
289,897 | 292,524 | 277,907 | ||||||||||
INCOME FROM OPERATIONS | 31,060 | 16,727 | 24,854 | |||||||||
OTHER (INCOME) EXPENSES | ||||||||||||
Interest expense | 4,182 | 4,025 | 2,217 | |||||||||
Interest income | (982 | ) | (633 | ) | (718 | ) | ||||||
Other (income) expenses, net | 660 | 3,566 | (14,483 | ) | ||||||||
3,860 | 6,958 | (12,984 | ) | |||||||||
INCOME BEFORE INCOME TAXES | 27,200 | 9,769 | 37,838 | |||||||||
INCOME TAXES(Note 11) | 6,551 | 46 | 14,935 | |||||||||
INCOME BEFORE MINORITY INTERESTS | 20,649 | 9,723 | 22,903 | |||||||||
MINORITY INTERESTS(Note 18) | (568 | ) | (922 | ) | 4,425 | |||||||
NET INCOME | 21,217 | 10,645 | 18,478 | |||||||||
See accompanying notes
F-4
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DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Euro (€), unless otherwise noted)
2001 | 2002 | 2003 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | 21,217 | 10,645 | 18,478 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Depreciation | 18,829 | 18,339 | 17,735 | |||||||||
Amortization | 9,009 | 9,213 | 9,216 | |||||||||
Provision for doubtful accounts | 851 | 2,821 | 2,545 | |||||||||
Provision for inventory obsolescence | 4,223 | 4,480 | 5,325 | |||||||||
Gain on sale of investments in debt securities | (86 | ) | (111 | ) | (86 | ) | ||||||
Deferred income taxes | (3,320 | ) | (8,479 | ) | (1,969 | ) | ||||||
Gain on disposal of EID | — | — | (11,751 | ) | ||||||||
Other, non-cash items | (36 | ) | 622 | 489 | ||||||||
Provision for termination indemnities and pension costs | 5,655 | 8,103 | 8,467 | |||||||||
Minority interest in income | (568 | ) | (922 | ) | 4,425 | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (14,518 | ) | (14,945 | ) | (2,986 | ) | ||||||
Inventories | (24,669 | ) | 6,698 | (3,582 | ) | |||||||
Accounts payable | 22,518 | (3,451 | ) | 6,333 | ||||||||
Income taxes payable | (4,320 | ) | (6,666 | ) | 2,829 | |||||||
Value added tax | (1,113 | ) | 1,799 | 126 | ||||||||
Other — net | (7,519 | ) | (150 | ) | 201 | |||||||
Payments of termination of indemnities and pension contributions | (5,750 | ) | (5,656 | ) | (4,965 | ) | ||||||
Net cash provided by operating activities | 20,403 | 22,340 | 50,830 | |||||||||
Cash flows from investing activities | ||||||||||||
Net proceeds from sale of EID(Note 3) | — | — | 12,341 | |||||||||
Acquisition of minority interests in Dierre, De Rigo France and De Rigo Deutschland | (3,678 | ) | (304 | ) | — | |||||||
Net proceeds from sale of Ranieri Argentina and Vogart S.r.l. | — | 386 | — | |||||||||
Dividends to holders of minority interests | — | — | (4,429 | ) | ||||||||
Additions to property, plant and equipment | (24,989 | ) | (16,075 | ) | (11,548 | ) | ||||||
Proceeds from disposal of equipment and other assets | 2,127 | 1,354 | 1,870 | |||||||||
Additions to intangible assets | (3,343 | ) | (2,086 | ) | (1,009 | ) | ||||||
Purchase of own shares | — | — | (753 | ) | ||||||||
Proceeds from sale of investments in debt securities | 3,544 | — | 1,993 | |||||||||
Net cash used in investing activities | (26,339 | ) | (16,725 | ) | (1,535 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Net change in short-term borrowings from lines of credit | 38,867 | (3,241 | ) | (50,169 | ) | |||||||
Proceeds from short-term borrowings under credit facilities | 36,592 | — | — | |||||||||
Repayments of short-term borrowings under credit facilities and obligations to sellers of acquired companies | (64,817 | ) | — | — | ||||||||
Capital contribution(s) by minority interest(s) | 733 | — | — | |||||||||
(Repayments) of borrowings from related parties | (735 | ) | — | — | ||||||||
Proceeds from long-term debt | — | 151 | — | |||||||||
Repayment of long-term debt and non current liability | (287 | ) | (494 | ) | (251 | ) | ||||||
Share capital increase | 174 | 68 | — | |||||||||
Payment of dividends | (5,179 | ) | (5,805 | ) | — | |||||||
Net cash provided (used) by financing activities | 5,348 | (9,321 | ) | (50,420 | ) | |||||||
Effect of exchange rate changes on cash | 93 | (241 | ) | (269 | ) | |||||||
Decrease in cash and cash equivalents | (495 | ) | (3,947 | ) | (1,394 | ) | ||||||
Cash and cash equivalents at beginning of the year | 25,470 | 24,975 | 21,028 | |||||||||
Cash and cash equivalents at end of the year | 24,975 | 21,028 | 19,634 | |||||||||
Supplemental disclosures: | ||||||||||||
Interest paid | 4,038 | 3,871 | 2,430 | |||||||||
Income taxes paid | 14,930 | 18,147 | 9,701 | |||||||||
See accompanying notes
F-5
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DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2000, 2001 and 2002
(In thousands of Euro (€), unless otherwise noted)
Foreign | ||||||||||||||||||||||||
Additional | currency | |||||||||||||||||||||||
Share | paid-in | Retained | translation | Revaluation | ||||||||||||||||||||
Capital | capital | earnings | adjustments | reserve | Total | |||||||||||||||||||
Balance at December 31, 2000 | 11,491 | 54,305 | 122,135 | 491 | 952 | 189,374 | ||||||||||||||||||
Foreign currency translation adjustments | 748 | 748 | ||||||||||||||||||||||
Share capital increase | ||||||||||||||||||||||||
- exercise of 151,403 stock options | 40 | 134 | 174 | |||||||||||||||||||||
- translation of share capital into Euro | 78 | (78 | ) | — | ||||||||||||||||||||
Revaluation of trademarks, net of tax of€ 958 | 4,085 | 4,085 | ||||||||||||||||||||||
Net income for 2001 | 21,217 | 21,217 | ||||||||||||||||||||||
Dividends paid | (5,179 | ) | (5,179 | ) | ||||||||||||||||||||
Balance at December 31, 2001 | 11,609 | 54,439 | 138,095 | 1,239 | 5,037 | 210,419 | ||||||||||||||||||
Foreign currency translation adjustments | (3,210 | ) | (3,210 | ) | ||||||||||||||||||||
Share capital increase | ||||||||||||||||||||||||
- exercise of 2,736 stock options | 17 | 51 | 68 | |||||||||||||||||||||
Net income for 2002 | 10,645 | 10,645 | ||||||||||||||||||||||
Dividends paid | (5,805 | ) | (5,805 | ) | ||||||||||||||||||||
�� | ||||||||||||||||||||||||
Balance at December 31, 2002 | 11,626 | 54,490 | 142,935 | (1,971 | ) | 5,037 | 212,117 | |||||||||||||||||
Foreign currency translation adjustments | (3,711 | ) | (3,711 | ) | ||||||||||||||||||||
Net income for 2003 | 18,478 | 18,478 | ||||||||||||||||||||||
Balance at December 31, 2003 | 11,626 | 54,490 | 161,413 | (5,682 | ) | 5,037 | 226,884 | |||||||||||||||||
See accompanying notes
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
1. BACKGROUND AND ORGANIZATION
De Rigo S.p.A. is incorporated in Italy, and on December 31, 2002 and 2003, respectively, was 73.6% and 74.0% owned by the De Rigo brothers. On December 31, 2003, a portion of the De Rigo brothers’ interest equal to 71.9% of the Company was indirectly owned through De Rigo Holding B.V. and another related company, with the remaining 2.1% being directly owned by the De Rigo brothers. The remaining 26.0% of the Company was owned as follows:
Managing Director | 2.0 | % | ||
Prada | 5.0 | % | ||
Publicly owned | 19.0 | % | ||
26.0 | % | |||
A total of 21% of the shares are listed on the New York Stock Exchange (“NYSE”) in the form of American Depositary Shares (each American Depositary (Share represents one Ordinary Share) under the symbol “DER”. This is comprised of the 19% publicly owned shares with the other 2% being owned directly and indirectly by the Managing Director and the De Rigo brothers
The principal activities of the De Rigo S.p.A. and its subsidiaries (the “Company” or the “Group”) include the design, manufacture, distribution, marketing and retailing of premium-priced fashion sunglasses and prescription eyeglass frames and the sale of eyeglass lenses. Information on the Group’s operations by business segment and the expiration dates of its tax exemption grants are disclosed in Notes 17 and 11, respectively.
Effective January 1, 2002 the Company changed its reporting currency from Italian Lire to Euro. All financial data for prior periods have been restated in Euro at the official fixed exchange rate of Lit. 1,936.27 =€ 1.00.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
All majority-owned subsidiaries are consolidated.
The financial statements used for the consolidation are those prepared for approval by the shareholders of the respective companies forming part of the De Rigo Group. Such financial statements are adjusted, where necessary, to conform with the Company’s accounting policies that are in conformity with the accounting principles established by the National Councils of the Italian Accounting Profession (“Italian GAAP”).
All significant intercompany transactions and balances are eliminated. Unrealized intercompany profits and the gains and losses arising from transactions between Group companies are also eliminated.
Use of estimates
F-7
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Foreign currency translation
The financial statements of foreign subsidiaries expressed in foreign currencies are translated into Euro using the year-end exchange rate for balance sheet items and the average exchange rate for the year for statement of income items. The translation differences resulting from the changes in exchange rates from year to year have been reported separately as a component of shareholders’ equity.
Foreign currency transactions
Monetary assets and liabilities denominated in foreign currencies have been recorded at the exchange rate in effect at the date of the transaction; such assets and liabilities denominated in foreign currencies are remeasured at the prevailing rate at the balance sheet date, taking into consideration relevant hedging contracts, and any resulting unrealized losses are charged to income and unrealized gains are credited to income, except those unrealized gains related to the remeasurement of non current assets and liabilities. Such unrealized gains are deferred until realized.
Cash equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Investments in debt securities
The Company’s financial investments in debt securities are stated at the lower of cost or market.
Accounts receivable
Accounts receivable are carried at their net realizable value. The allowance for doubtful accounts is estimated based on the aging of accounts receivable balances and historical write-off experience. Accounts receivable are written-off when they are considered finally uncollectible and collection efforts have ceased.
Inventories
Inventories are carried at the lower of cost or market using the weighted average cost method.
Property, plant and equipment
Property, plant and equipment is recorded at either historical cost or revalued amounts. The Company revalued certain assets in years prior to 1992 to fair value, in accordance with Italian law. The applicable revaluation laws contained provisions limiting the amount of any such revaluation to the fair value of the respective assets. The adjustments resulting from these reevaluations have been recorded as a component of shareholders’ equity.
Depreciation of property, plant and equipment is computed on the historical cost or revalued basis of the relevant asset, using the straight-line method over the estimated useful lives of the related assets, as follows:
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Buildings | 33-50 years | |||
Machinery and equipment | 4-10 years | |||
Office, furniture and equipment | 4-8 years | |||
Leasehold improvements | lesser of useful life or lease term |
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value assigned to tangible and identifiable intangible assets less the fair value assigned to liabilities assumed. Amortization is provided on a straight line basis over 5 to 20 years, the estimated future periods to be benefited. On an annual basis, management evaluates recorded goodwill for potential impairment. The Company measures impairment by comparing the fair value of a reporting unit with its carrying value, including goodwill. The fair value of a reporting unit is measured based on the present value of future cash flows and the result is compared to the fair value based on other valuation techniques (multiples of earnings before interest, taxes, depreciation and amortization, trading multiple and comparable transaction) to assess the overall reasonableness of the valuation range.
Intangible assets
Intangible assets are recorded at either historical cost or revalued amounts and are amortized, using the straight-line method, over 5 to 10 years. In 2001 the Company revalued certain trademarks to fair value, in accordance with Italian law. The applicable revaluation laws contain provisions limiting the amount of any such revaluation to the fair value of the respective assets. The adjustments resulting from these revaluations have been recorded as a revaluation reserve that is reported as a separate component of shareholders’ equity. The taxes payable on these revaluations were charged to the revaluation reserve. Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the net carrying amount may not be recoverable. When such events occur, the Company measures impairment by comparing the carrying value of the intangible asset to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition and, if required, the impairment loss is measured as the amount that the carrying value of the asset exceeds the asset’s fair value if the asset is not recoverable.
Income taxes
Income taxes are provided for by each entity included in the consolidation in accordance with applicable local laws. Deferred income taxes are accounted for under the liability method and reflect the tax effects of all significant temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements and tax loss carry forwards (“NOLs”). Valuation allowances are provided against deferred tax assets for amounts that are not expected to be realized. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances. However, if the Company were to determine that it would be able to realize its deferred tax assets in the future in amounts in excess of their net recorded values, an adjustment to the deferred tax assets would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of the net recorded value of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged against income in the period such determination was made.
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Investment tax credits and tax deductions
Investment tax credits and investment tax deductions are accounted for as a reduction in current income taxes in the year in which the credit arises or the deduction is taken.
Revenue recognition
Revenues from the sale of products are recorded upon shipment, which is generally when title passes. It is not the Company’s policy to accept returns; however in specific cases returns are accepted. The Company records an accrual based on an estimate of anticipated returns of merchandise by customers in subsequent periods. For the Company’s retail operations revenues are recognized upon consummation of sales to customers. Revenues from services are recognized as soon as services are provided.
Shipping and handling costs
Shipping and handling costs are included in cost of sales.
Derivative products
The Company uses derivative products to manage its exposure to fluctuations in interest rates and in foreign currency exchange rates relating to certain receivables and payables. The derivative products used by the Company are primarily interest rate swaps, foreign currency forward contracts and foreign currency option contracts.
If a derivative is designated as a fair value hedge, changes in the fair value of the derivative and the related change in the hedged item are recognized in other income or expenses. If a derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in other income or expenses when the hedged item effects operations. Changes in fair value of derivatives that do not qualify as a hedge are recognized in other income or expenses. Unrealized gains related to the remeasurement at fair value of long-term derivative contracts are deferred until realized.
Advertising and promotion
Advertising costs are charged to earnings the first time the advertisement appears. Media (TV and print advertisement) placement costs are charged to earnings in the month the advertisement first appears. The Company has sponsorship agreements with certain movie stars and athletes that are generally cancelable only for cause. The Company’s accounting for these sponsorship contracts is based upon the specific contract provisions. Generally, sponsorship payments are expensed uniformly over the term of the agreement, provided that certain future performance obligations exist.
Statements of cash flows
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Short-term borrowings arise primarily under the Group’s short-term lines of credit with its banks. These short-term obligations are payable on demand. The cash flows from these items are included under the caption “Net change in short-term borrowings” in the Consolidated Statements of Cash Flows.
Reclassifications
Certain amounts in the financial statements in 2001 and 2002 have been reclassified to conform with the 2003 presentation.
3. BUSINESS ACQUISITIONS AND DISPOSALS
2001 Acquisitions
On January 31, 2001, September 11, 2001 and June 30, 2001 the Group acquired the outstanding 45% and 2% minority interests in its subsidiaries De Rigo France and Dierre and a 10% minority interest in De Rigo Deutschland for cash consideration of€ 1,223,€ 2,503 and€ 256, respectively. The acquisitions have been accounted for under the purchase method. Prior to the acquisitions of these outstanding minority interests the Company was fully consolidating the results of each of these entities. The excess of the purchase prices paid over the corresponding portion of the fair values assigned to tangible and identifiable intangible assets less the fair value assigned to liabilities assumed, amounted to€ 640,€ 218 and€ 278, respectively, and has been allocated to goodwill, which is being amortized over 5 years on a straight-line basis.
2002 Acquisitions and disposals
On June 25, 2002, the Group sold its 51% interest in Ranieri Argentina for cash consideration of€ 367 realizing a gain of€ 78. The recent economic crisis in Argentina led the Group to divest its former distribution subsidiary in that country.
On July 24, 2002, the Group acquired the outstanding 40% minority interest in its subsidiary De Rigo Deutschland for cash consideration of€ 51. The acquisition has been accounted for under the purchase method. Prior to the acquisition of this outstanding minority interest, the Company held 60% of the outstanding shares and was fully consolidating De Rigo Deutschland’s results. The excess of the purchase price paid over the corresponding portion of the fair values assigned to tangible and identifiable intangible assets less the fair value assigned to liabilities assumed has been allocated to goodwill, which is being amortized over 5 years on a straight-line basis.
2003 Disposals
On July 23, 2003, the joint venture that the Group formed with the Prada Group in 2000 was terminated under a mutual agreement between the parties and as a result the Group sold its 51% interest in EID to the Prada Group for cash consideration of€ 12,341 realizing a gain of€ 11,751 which is included in other (income) expenses.
4. INVENTORIES
Inventories consisted of the following:
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
December 31, | ||||||||
2002 | 2003 | |||||||
Raw materials and supplies | 11,586 | 5,068 | ||||||
Semi-finished goods | 3,577 | 5,077 | ||||||
Finished goods | 44,175 | 39,221 | ||||||
59,338 | 49,366 | |||||||
Inventories are net of allowances for obsolete and slow moving items of€ 21,927 and€ 24,355 at December 31, 2002 and 2003, respectively.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
December 31, | ||||||||
2002 | 2003 | |||||||
Prepaid shop rentals | 4,855 | 4,509 | ||||||
Prepaid pension benefit costs(Note 12) | 2,152 | 1,883 | ||||||
Value added tax receivable | 3,799 | 1,630 | ||||||
Income tax receivable | 5,251 | 251 | ||||||
Advances to suppliers and agents | 1,076 | 390 | ||||||
Franchise prepayments | 846 | 868 | ||||||
Prepaid taxes | 638 | 600 | ||||||
Other | 1,847 | 2,262 | ||||||
20,464 | 12,393 | |||||||
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consisted of the following:
December 31, | ||||||||
2002 | 2003 | |||||||
Goodwill, net of accumulated amortization of€ 20,241 in 2002 and€ 26,508 in 2003 | 103,253 | 94,532 | ||||||
Trademarks, net of accumulated amortization of€ 1,808 in 2002 and€ 2,420 in 2003 | 4,918 | 4,368 | ||||||
Other intangibles, net of accumulated amortization of€ 11,661 in 2002 and€ 12,373 in 2003 | 6,536 | 4,991 | ||||||
114,707 | 103,891 | |||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
In accordance with Italian tax law n. 448 dated December 28, 2001, at the end of 2001, the Company revalued certain of its trademarks from€ 436 to€ 5,479. This revaluation was subject to a tax in the amount of€ 958, which is payable over three years. The carrying value of the trademark assets was adjusted to the revalued amount of€ 5,479; the amount of the revaluation was credited to a separate component of shareholders’ equity (revaluation reserve) net of the tax liability attributable to the revaluation reserve. No provision has been made for the tax to be paid upon distribution of the revaluation reserve because management does not intend to distribute the revaluation reserve arising from this revaluation.
7. OTHER NON CURRENT ASSETS
Other non-current assets consisted of the following:
December 31, | ||||||||
2002 | 2003 | |||||||
Prepaid pension benefit costs(Note 12) | 2,644 | — | ||||||
Advance payment of withholding tax on termination indemnities | 123 | 71 | ||||||
Income tax receivable | 3,435 | 4,154 | ||||||
Deferred income taxes | 1,382 | 1,407 | ||||||
Long-term deposits | 1,094 | 1,154 | ||||||
Treasury shares | — | 753 | ||||||
Other | 128 | 25 | ||||||
8,806 | 7,564 | |||||||
8. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings consisted of:
December 31, | ||||||||
2002 | 2003 | |||||||
Borrowings under lines of credit payable on demand | 85,180 | 22,569 | ||||||
Borrowings under lines of credit payable on demand
At December 31, 2002 and 2003, the Group had unsecured short-term bank lines of credit aggregating approximately€ 167,324 and€ 137,103, respectively. At December 31, 2002 and 2003, approximately€ 82,144 and€ 114,534, respectively, were available for further borrowings. At December 31, 2002 and 2003, the weighted average interest rates for the short-term lines of credit were 3.99% and 3.48%, respectively. Amounts outstanding under these lines of credit are payable upon demand.
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
9. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, | ||||||||
2002 | 2003 | |||||||
Subsidized by the Italian Government: | ||||||||
• Mortgage loan payable to bank, bearing interest at an effective annual rate of 1.0875% for first three years and 2.61% for remaining 10 years, payable yearly from 2003 through 2012 | 386 | 351 | ||||||
Subsidized by the European Investment Bank: | ||||||||
• Mortgage loan payable to bank, bearing variable interest at 3 month Euribor rate plus 1.00% margin payable yearly from 1998 through 2005 (3.88% and 3.11% at December 31, 2002 and 2003, respectively) | 290 | 194 | ||||||
Mortgage loans payable to banks bearing interest at annual rates of 5% to 6%, due in installments to 2004 | 87 | — | ||||||
Mortgage loan payable to banks bearing interest at annual rate of 5.20%, due in installments to 2004 | 151 | 118 | ||||||
Total long-term debt | 914 | 663 | ||||||
Less: current portion | (218 | ) | (166 | ) | ||||
696 | 497 | |||||||
The interest paid by the Italian Government and European Investment Bank amounted to€ 45,€ 26 and€ 5 in 2001, 2002 and 2003, respectively. The subsidy on the European Investment Bank loan eliminates the 75 percentage points of the margin, reducing the effective interest rate to the 3 month Euribor rate plus 0.25%.
The mortgage loans are secured by liens on property, plant and equipment that have a carrying value of approximately€ 3,764 at December 31, 2003. The maturities of long-term debt over the next five years as at December 31, 2003 are as follows:
2004 | 166 | |||
2005 | 165 | |||
2006 | 71 | |||
2007 | 53 | |||
2008 | 39 | |||
Thereafter | 169 | |||
Total | 663 | |||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2000, 2001 and 2002
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
December 31, | ||||||||
2002 | 2003 | |||||||
Salaries payable and related social security contributions | 12,965 | 12,601 | ||||||
Employee taxes withheld | 3,493 | 3,545 | ||||||
Customer advances | 2,744 | 2,255 | ||||||
Property expense accruals | 1,093 | 853 | ||||||
VAT taxes payable | 2,515 | 3,083 | ||||||
Warranty provision | 952 | 1,685 | ||||||
Taxes on revaluation reserve | 330 | — | ||||||
Other accrued expenses | 7,881 | 3,201 | ||||||
31,973 | 27,223 | |||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2000, 2001 and 2002
11. INCOME TAXES
Income before income taxes and the provision for income taxes consist of the following:
2001 | 2002 | 2003 | ||||||||||
Income before income taxes: | ||||||||||||
Italy | 8,958 | 1,299 | 21,227 | |||||||||
United Kingdom | 13,167 | 2,072 | 1,968 | |||||||||
Spain | 7,079 | 8,864 | 9,087 | |||||||||
Other | (2,004 | ) | (2,466 | ) | 5,556 | |||||||
Total | 27,200 | 9,769 | 37,838 | |||||||||
Provision for income taxes: | ||||||||||||
Current: | ||||||||||||
Italy | (599 | ) | 1,749 | 9,314 | ||||||||
United Kingdom | 3,622 | 1,764 | 2,224 | |||||||||
Spain | 6,437 | 4,459 | 4,489 | |||||||||
Other | 411 | 553 | 877 | |||||||||
Total | 9,871 | 8,525 | 16,904 | |||||||||
Deferred: | ||||||||||||
Italy | (1,670 | ) | (8,014 | ) | (820 | ) | ||||||
United Kingdom | 1,294 | (153 | ) | (999 | ) | |||||||
Spain | (3,099 | ) | (311 | ) | 210 | |||||||
Other | 155 | (1 | ) | (360 | ) | |||||||
Total | (3,320 | ) | (8,479 | ) | (1,969 | ) | ||||||
Total tax provision | 6,551 | 46 | 14,935 | |||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2000, 2001 and 2002
A reconciliation between the Italian statutory tax rates and the consolidated effective tax rates is as follows:
2001 | 2002 | 2003 | ||||||||||
Tax @ Italian statutory rate of 40.25% in 2001 and 2002 and 38.25% in 2003 | 10,948 | 3,932 | 14,473 | |||||||||
Tax savings from Italian subsidiaries operating in a tax exempt area | (3,816 | ) | (1 | ) | — | |||||||
Investment tax credit and deductions | (209 | ) | (245 | ) | — | |||||||
Gains on business disposal | — | (123 | ) | 3,926 | ||||||||
Effect of a change in tax rate: | ||||||||||||
- In Italy | — | (7,042 | ) | 303 | ||||||||
- Italian Dual Income Tax | (801 | ) | — | — | ||||||||
- Other countries | — | 16 | (9 | ) | ||||||||
Effect of different tax rates of foreign jurisdictions | (2,202 | ) | (785 | ) | (808 | ) | ||||||
Tax benefit of NOLs of subsidiaries not recognized | 1,348 | 1,026 | (168 | ) | ||||||||
Amortization of goodwill | 2,380 | 2,384 | 2,435 | |||||||||
Effect of tax provision on distribution of dividend from foreign subsidiaries | 218 | — | — | |||||||||
Other permanent differences: | ||||||||||||
- Italy | ||||||||||||
IRPEG | (1,953 | ) | (459 | ) | 1,325 | |||||||
IRAP – (primarily payroll and interest) | 915 | 1,413 | 981 | |||||||||
- Other countries | (277 | ) | (70 | ) | 329 | |||||||
Provision for income taxes | 6,551 | 46 | 14,935 | |||||||||
Effective consolidated tax rate | 24.1 | % | 0.5 | % | 39.5 | % | ||||||
The Italian statutory tax rate for 2001 and 2002 was 40.25%, comprised of a 36% national corporate income tax (“IRPEG”) and a 4.25% Regional Tax on Productive Activities (“IRAP”). A new tax law was enacted in December 2002 to be effective January 1, 2003 with the effect of reducing the IRPEG tax rate from 36% to 34% for the year 2003. A further tax law was enacted in December 2003 to be effective January 1, 2004 with the effect of reducing the IRPEG (now called IRES) tax rate from 34% to 33%.
The Company decreased its Italian deferred tax assets and liabilities as of December 31, 2002 and 2003 to reflect the changes in the tax law enacted in December 2002 and 2003. In 2002, the Company recognized, as a change in tax rate, deferred taxes on temporary differences of the tax exempt companies together with the effect of IRPEG reduced tax rate from 36% to 34%. The effect of applying the enacted tax rate in 2003 to existing temporary differences was to increase income tax expense by€ 303.
The 2001 Italian investment tax incentive law was enacted in order to encourage capital investments and other expenditures in Italy. Companies were able to reduce their taxable income by up to 50% of the excess of new qualifying capital and other expenditures made in the second half of 2001 and in the year 2002 in fixed assets (tangibles and specified intangibles) over the average of the investments made in such assets during the five prior years. The incentive law also applied to certain expenses incurred in connection with the training of the companies’
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
personnel. The incentive resulted in a current one-time deduction and neither increases nor decreases the tax bases of the assets to compute future tax deductions for depreciation and amortization relating to investment deductions granted. As a result, in 2001 and 2002 the Company recognized a benefit from the investment deductions of€ 209 and€ 245, respectively.
In accordance with a law decree enacted in 1997 to foster the capitalization of Italian companies, the Dual Income Tax (“DIT”) was introduced. In accordance with such law decree, a portion of the Company’s taxable income subject to IRPEG taxes was taxable at the reduced rate of 19% instead of the enacted IRPEG rates reported above. Such portion of the taxable income (amounting to€ 4,711 in the year 2001) was computed applying a specific interest rate, fixed by the Government and equal to 6%, to the net increase in the Company’s net equity over the period from December 31, 1996 to December 31, 2001. The application of DIT reduced the Company’s current taxes by€ 801 in 2001. Deferred taxes on temporary differences at December 31, 2002 and 2001 are accounted for at the tax rate expected to occur in the year of reversal, taking into consideration the enacted IRPEG rates, the expected applicable effect of the DIT benefit and the enacted IRAP tax rate.
Two subsidiaries of the Company that operate in the Longarone area were entitled to income tax exemptions from both national corporate income taxes and local income taxes under the Vajont Relief Program that the Italian Government implemented under an incentive program for the Longarone area as part of a package of relief measures after the Vajont dam catastrophe in 1963. These exemptions expired in September 2001 and in April 2003.
Tax years for the constituent companies in the Group are open from 1997 and are subject to review by the pertinent tax authorities. Management and its legal advisors do not believe that any significant liabilities will arise from future tax reviews.
12. EMPLOYEE BENEFITS
Italian companies in the Group recognized employee benefit costs in accordance with Italian severance pay statutes and certain foreign subsidiaries recognized pension costs related to their pension plans. The total expense for employee benefits recognized for each of the three years in the period ended December 31, 2003 are summarized as follows:
2001 | 2002 | 2003 | ||||||||||
Italian termination indemnities | 1,323 | 1,437 | 1,441 | |||||||||
Defined benefit plan of Vantios/D&A | 2,733 | 5,407 | 5,686 | |||||||||
Defined benefit plans of GO | 437 | 257 | 151 | |||||||||
Defined benefit plans in other countries | 358 | 197 | 309 | |||||||||
Defined contribution plans of Vantios/D&A and GO | 804 | 805 | 880 | |||||||||
5,655 | 8,103 | 8,467 | ||||||||||
The liabilities reported in the balance sheet at December 31, 2002 and 2003 pertaining to these employee benefits are summarized as follows:
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
2002 | 2003 | |||||||
Italian termination indemnities | 5,681 | 6,315 | ||||||
Defined benefit plans of GO | 2,653 | 2,547 | ||||||
Defined benefit plans in other countries | 592 | 893 | ||||||
8,926 | 9,755 | |||||||
Additional information with respect to Italian termination indemnities and the pension plans of companies within the Group is provided below:
Liabilities for Italian Termination Indemnities
The liability for termination indemnities relates to the Company’s employees at its Italian operations. In accordance with the Italian severance pay statutes, an employee benefit is accrued for service to date and is payable immediately upon separation. The termination indemnity liability is calculated in accordance with local civil and labor laws based on each employee’s length of service, employment category and remuneration. The termination liability is adjusted annually by a cost of living index provided by the Italian Government. There is no funding requirement associated with the liability. The liability recorded in the balance sheet is the amount that the employee would be entitled to if the employee were to separate immediately. The provisions charged to earnings for 2001, 2002 and 2003 were€ 1,323,€ 1,437 and€ 1,441, respectively.
Defined Benefit and Pension plans
Vantios/D&A, an entity acquired on December 2, 1998, has a defined benefit pension plan covering substantially all of its employees that is funded. The benefits are based on years of service and the employee’s compensation during a period up to the last seven years of employment. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. At the date of acquisition the projected benefit obligation for service rendered to date and the value of the plan assets were stated at fair value and the amount of plan assets in excess of the projected benefit obligation was recorded as a prepaid pension cost.
The following tables summarize the components of net benefit expense recognized in the consolidated income statement for the years ended December 31, 2001, 2002 and 2003 and the funded status and amounts recognized in the consolidated balance sheets at December 31, 2002 and 2003.
Components of net periodic benefit cost for years ended December 31, are as follows:
2001 | 2002 | 2003 | ||||||||||
Service benefit-cost: benefits earned during the year | 4,824 | 5,089 | 2,890 | |||||||||
Interest cost on projected benefit obligation | 8,522 | 9,383 | 8,526 | |||||||||
Expected return on plan assets | (10,613 | ) | (9,860 | ) | (7,659 | ) | ||||||
Amortization of unrecognized gain/loss | — | 795 | 1,929 | |||||||||
Net periodic benefit cost | 2,733 | 5,407 | 5,686 | |||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
The cost of providing benefits under the plan is determined using the projected unit credit actuarial valuation method. The principal weighted average assumptions used in making the actuarial valuations are as follows:
2001 | 2002 | 2003 | ||||||||||
Discount rate | 6.00 | % | 5.75 | % | 5.50 | % | ||||||
Expected long-term return on plan assets | 7.00 | % | 6.50 | % | 6.25 | % | ||||||
Rate of compensation increase | 3.50 | % | 3.30 | % | 3.25 | % |
Funded status of the pension plan is as presented in the tables below:
December 31, | |||||||||
2002 | 2003 | ||||||||
Accumulated benefit obligation | 141,122 | 145,148 | |||||||
Fair value of plan assets | 123,751 | 127,412 | |||||||
Excess (deficit) of fair value of plan assets over accumulated benefit obligation | (17,371 | ) | (17,736 | ) | |||||
Changes in projected benefit obligation | |||||||||
At beginning of year | 162,366 | 159,723 | |||||||
Service cost | 5,089 | 2,890 | |||||||
Interest cost | 9,383 | 8,526 | |||||||
Plan participants’ contributions | 1,574 | 1,749 | |||||||
Actuarial (gain) loss | (4,071 | ) | 9,104 | ||||||
Benefits paid | (3,865 | ) | (3,483 | ) | |||||
Foreign currency translation adjustment | (10,753 | ) | (12,646 | ) | |||||
Benefits obligation at the end of year | 159,723 | 165,863 | |||||||
Change in plan assets
(invested primarily in United Kingdom stocks and bonds)
2002 | 2003 | |||||||
Fair value of plan assets at beginning of year | 144,782 | 123,751 | ||||||
Actual returns on assets — gain (loss) | (12,961 | ) | 12,096 | |||||
Company’s contributions | 3,165 | 3,078 | ||||||
Plan participants’ contributions | 1,574 | 1,749 | ||||||
Benefits paid | (3,865 | ) | (3,483 | ) | ||||
Foreign currency translation adjustments | (8,944 | ) | (9,779 | ) | ||||
Fair value of plan assets at end of year | 123,751 | 127,412 | ||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Funded status of the plan over-funded (under-funded) | (35,972 | ) | (38,451 | ) | ||||
Unrecognized actuarial (gain) loss on return on plan assets | 44,735 | 31,356 | ||||||
Unrecognized actuarial (gain) loss in benefit obligations | (3,935 | ) | 8,939 | |||||
Foreign currency translation adjustments | (32 | ) | 39 | |||||
Prepaid benefit cost | 4,796 | 1,883 | ||||||
The amount of the prepaid benefit cost has been classified in the consolidated balance sheets at December 31, 2002 and 2003 as a prepaid current asset of€ 2,152 and€ 1,883, respectively, and a non-current asset of€ 2,644 at December 31, 2002. The prepaid benefit costs will be realized through lower future contributions as differences occur between the funding and expensing of the pension plan, or as a result of a combination of these events.
The following table summarizes, by asset category, the percentage of the fair value of total plan assets held:
December 31, | ||||||||
2002 | 2003 | |||||||
Equity securities | 47.1 | % | 51.0 | % | ||||
Debt securities | 52.7 | % | 48.9 | % | ||||
Other (Cash) | 0.2 | % | 0.1 | % | ||||
Total | 100.0 | % | 100.0 | % | ||||
The trustee has set the investment policy with regard to the pension plan’s liabilities and funding level. At December 31, 2003 there were two fund managers with benchmark asset allocations as follows:
Deutsche Asset Management | Legal & General Index Tracker | |||||||
(38% of the fund) | (62% of the fund) | |||||||
Equity securities | 100.0 | % | 20.0 | % | ||||
Debt securities | — | % | 80.0 | % |
The investment policy broadly matches pensions already in payment with debt securities (which include fixed interest and index-linked government bonds), and aims to meet the projected liabilities for non-pensioners by using an appropriate combination of debt and equity securities. Overall, about 50% of the plan’s assets are invested in equity securities. The trustee monitors closely the risk/return profile of the plan’s investments and has an arrangement in place that could lead to a request for additional contributions from the Company if the risk/return profile exceeds a pre-determined level.
The Legal and General mandate is to track relevant indices. The Deutsche Asset Management mandate is to outperform the relevant market indices by 1% per annum. There are control ranges in place to ensure that the fund managers do not depart significantly from the trustee’s overall benchmark, and therefore to reduce the risk of over-concentration in one area.
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
The trustee reviews the fund managers’ performance and reviews its own investment policy regularly, using independent professional advice. The trustee’s investment powers are set out in the Scheme’s Trust Deed and Rules.
The Company expects to contribute GBP Sterling 2.1 million (€ 3.0 million) to its defined benefit pension plan in 2004.
The following benefit payments from the pension fund are expected to be paid in the periods indicated on the basis of the membership profile at March 31, 2002, the date of the last actuarial valuation. This projection allows for members to take tax-free cash sums on retirement, assuming all members retire at age 60, and also allows for future service of current active members:
2004 | 3,973 | |||
2005 | 4,115 | |||
2006 | 4,824 | |||
2007 | 4,682 | |||
2008 | 5,392 | |||
Years 2009-2013 | 33,484 |
GO has defined benefit plans covering certain executives that are not funded at December 31, 2002 and 2003. The present value of the benefit obligations at December 31, 2002 and 2003 was€ 2,653 and€ 2,547, respectively. The net benefit costs accrued in 2002 and 2003 were€ 257 and€ 151, respectively and the benefits paid in 2002 and 2003 were€ 1,079 and€ 257, respectively. The principal weighted average assumptions used in making the actuarial valuations at December 31, 2002 and 2003 were a discount rate of 5.0% and a rate of compensation increase of 2.5% and 3.0%, respectively.
Defined Contribution Plans
Vantios/D&A and GO make contributions to defined contribution plans that are based on a percentage of employee compensation. The amounts of pension expense recognized for those plans in 2001, 2002, and 2003 were€ 804,€ 805 and€ 880, respectively.
13. STOCK OPTIONS
At an extraordinary shareholders’ meeting held on May 4, 1999 the Board of Directors was authorized to grant stock options for 2,325,000 shares to certain key employees, and the Board was also authorized to increase the Company’s authorized and issued share capital by up to 2,600,000 shares in the event such options were exercised. During 1999 the Board granted options for 2,325,000 shares with an exercise price of U.S.$ 6.00 per share, which was slightly more than the fair market price of the shares on the date of the grant of the options. During 1999, options for 250,000 shares lapsed due to employee resignations. At December 31, 1999 the 2,075,000 options granted and outstanding were exercisable from 2000 through 2003.
At an extraordinary shareholder’s meeting held on November 17, 2000 a new stock option plan was approved to replace the plan implemented in 1999. The option holders in that plan all accepted conversion to the plan approved in the year 2000. Between January 1, 2000 and November 17, 2000, 225,000 options lapsed due to employee resignations, leaving options for 1,850,000 shares outstanding as of November 17, 2000. Under the terms of the
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
new plan 851,000 options were granted (the 1,850,000 existing options were converted in the ratio of .46 new options for each option held) at an exercise price of U.S$ 1.00 per share, which was less than the fair value of the stock at the grant date, and the life of the awards was extended by one year. Also, on November 17, 2000, an additional 348,400 options were granted at an exercise price of U.S.$ 1.00 per share. At the same shareholders’ meeting the authorized share capital increase was reduced to 1,300,000 shares. In 2003 no additional options were granted and 46,000 options were forfeited. At December 31, 2003 there were 800,621 options outstanding, which expire at the end of the year 2004.
The maximum number of options set forth above may be exercised if the price of the Company’s ADRs on the NYSE reaches more than U.S.$ 10.00. If the ADR price during the exercise period falls between $ 6.25 and $ 10.00 per share 20% to 90% may be exercised; none of the options may be exercised in the event the share price is below U.S.$ 6.25 throughout the period. The average price of the Company’s ADRs on the NYSE in 2003 was U.S.$ 4.02. Any options not exercised in any year may be carried forward and exercised in a subsequent year providing the ADR price reaches the set targets. All options expire at the end of the year 2004.
14. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consisted of the following:
December 31, | ||||||||
2002 | 2003 | |||||||
Minority interests | 1,329 | 1,619 | ||||||
Accrual for expected losses on contractual obligation for shops of a subsidiary that are closed and non-operating | 3,058 | 2,281 | ||||||
Tax on revaluation of trademarks reserve | 330 | — | ||||||
Agents termination indemnity | 1,322 | 1,131 | ||||||
Other | 2,469 | 2,212 | ||||||
8,508 | 7,243 | |||||||
15. SHAREHOLDERS’ EQUITY
Italian law requires that 5% of a company’s net income be retained as a legal reserve, until such reserve equals 20% of share capital. Included in retained earnings are legal reserves of€ 2,391 and€ 2.325 at December 31, 2002 and 2003, respectively, pertaining to the Group’s Italian companies. This reserve is not available for distribution.
Retained earnings which could be available for distribution to shareholders are those recorded by the Group’s constituent companies in their individual financial statements. Such retained earnings amount in aggregate to€ 288,703 and€ 310,624 at December 31, 2002 and 2003, respectively.
No provision has been made in 2002 and 2003 for income taxes on the following components of shareholders’ equity:
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
a. | Revaluation reserve not affected by the equalization tax amounting to€ 952 that would be subject to taxes of€ 343, since no provision is required under current Italian GAAP. | |||
b. | Undistributed earnings of Spanish subsidiaries, amounting to€ 15,906 and€ 6,649 in 2002 and 2003, respectively, would be subject to taxes of€ 625 and€ 467 in 2002 and 2003, respectively, in case of distribution and undistributed earnings of British subsidiaries, amounting to€ 57,841 and€ 49,298 in 2002 and 2003, respectively, would be subject to taxes of€ 983 and€ 813 in 2002 and 2003, respectively, in case of distribution. |
16. COMMITMENTS AND CONTINGENCIES
Lease commitments
Vantios/D&A leases property, computer hardware and cars and GO leases property under non-cancellable operating leases. Other lease commitments relate to the rental of buildings by distribution subsidiaries. Rental expense for the years 2001, 2002 and 2003 amounted to approximately€ 25,610,€ 26,316 and€ 26,596, respectively. At December 31, 2003 the future lease payments under such operating leases are as follows:
Year | Vantios/D&A | GO | Other | Total | ||||||||||||
2004 | 21,431 | 3,834 | 515 | 25,780 | ||||||||||||
2005 | 19,651 | 3,335 | 428 | 23,414 | ||||||||||||
2006 | 18,338 | 2,633 | 338 | 21,309 | ||||||||||||
2007 | 16,705 | 2,012 | 116 | 18,833 | ||||||||||||
2008 | 15,534 | 1,547 | — | 17,081 | ||||||||||||
Thereafter | 57,443 | 1,592 | — | 59,035 | ||||||||||||
Total | 149,102 | 14,953 | 1,397 | 165,452 | ||||||||||||
Royalty Agreements
The Group has agreements with certain designers for the use of their trademarks in the production of fashion eyewear. Such agreements require the Company to pay royalties at various percentages of net sales and in one case a flat fee. Certain royalty agreements expire in 2004, 2005 and 2006. Others are renewable at the option of either party.
Royalty expenses were€ 6,838,€ 7,410 and€ 7,052 in 2001, 2002 and 2003, respectively.
The future minimum payments for royalties and advertising expenses required under existing royalty contracts are the following:
Year | Royalties | Advertising | ||||||
2004 | 4,018 | 1,441 | ||||||
2005 | 2,567 | 1,456 | ||||||
2006 | 1,033 | 376 | ||||||
Total | 7,618 | 3,273 | ||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Sponsorship agreements
The Group has a sponsorship agreements with a soccer player, expiring in 2006, and a similar agreement with a racing driver expiring in 2004. The future minimum payments on these contracts are the following:
Year | ||||||||
2004 | 525 | |||||||
2005 | 600 | |||||||
2006 | 500 | |||||||
Total | 1,625 | |||||||
Litigation
The Company is involved in legal proceedings arising in the normal course of business. Management believes that, based on advice of legal counsel, the outcome of these proceedings will not have any material adverse effect on the Company’s financial statements.
17. SEGMENT INFORMATION
The Company’s business consists of designing, manufacturing, distributing and selling premium price sunglasses and prescription eyeglass frames and lenses.
Management utilizes more than one measurement and multiple types of data to measure segment performance and to allocate resources to business divisions. However, the most heavily relied upon measurements are consistent with the Company’s consolidated financial statements and, accordingly, are reported on the same basis herein. Management evaluates the performance of its segments and allocates resources to them based primarily on actual and expected operating profitability. Intersegment sales are generally accounted for at prices comparable to those for sales to unaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies described in Note 2.
Certain items relate to the Company’s headquarters operations and are not allocated to the segments. These primarily include the net cost of the Company’s interest expense and other items. Management views interest income and expense as corporate financing costs and not as a cost of a particular business segment. In addition, income taxes are not viewed internally on a segment basis but rather as a cost of the taxing jurisdiction in which the relevant individual companies operate.
Wholesale and Manufacturing:the Company distributes its manufactured products through its network of sales representatives in Italy and the countries in which its distribution subsidiaries are based, through independent distributors, and through the D&A and General Optica retail stores in the United Kingdom, Spain and Portugal.
Retailing:the Company’s retailing segment consists of the optical chains D&A and General Optica, which are located in the United Kingdom and Spain and Portugal, respectively.
EID:The Company’s EID segment distributed Prada-branded eyewear exclusively through a network of joint venture subsidiaries with Prada. EID was sold on July 23, 2003. The segment’s results through the date of disposal are shown in the tables below.
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Wholesale and | ||||||||||||||||
2001 | Manufacturing | Retailing | EID | Total | ||||||||||||
Sales to third parties | 114,920 | 358,349 | 31,981 | 505,250 | ||||||||||||
Intersegment sales | 18,267 | 16 | 137 | 18,420 | ||||||||||||
Income from operations before depreciation and amortization | 16,008 | 40,846 | 2,044 | 58,898 | ||||||||||||
Depreciation | 3,339 | 14,042 | 1,448 | 18,829 | ||||||||||||
Amortization of goodwill | 261 | 6,156 | — | 6,417 | ||||||||||||
Amortization of other intangibles | 598 | 1,789 | 205 | 2,592 | ||||||||||||
Income (loss) from operations | 11,810 | 18,859 | 391 | 31,060 | ||||||||||||
Identifiable long-lived assets | 27,984 | 229,341 | 2,794 | 260,119 | ||||||||||||
Total assets | 158,233 | 285,580 | 18,679 | 462,492 | ||||||||||||
Capital expenditures and acquisitions | 11,281 | 18,874 | 1,855 | 32,010 | ||||||||||||
Wholesale and | ||||||||||||||||
2002 | Manufacturing | Retailing | EID | Total | ||||||||||||
Sales to third parties | 121,709 | 359,605 | 31,145 | 512,459 | ||||||||||||
Intersegment sales | 19,390 | 2 | 96 | 19,488 | ||||||||||||
Income from operations before depreciation and amortization | 11,472 | 32,237 | 570 | 44,279 | ||||||||||||
Depreciation | 2,992 | 14,135 | 1,212 | 18,339 | ||||||||||||
Amortization of goodwill | 273 | 6,134 | — | 6,407 | ||||||||||||
Amortization of other intangibles | 1,020 | 1,522 | 264 | 2,806 | ||||||||||||
Income (loss) from operations | 7,187 | 10,446 | (906 | ) | 16,727 | |||||||||||
Identifiable long-lived assets | 26,758 | 215,746 | 1,914 | 244,418 | ||||||||||||
Total assets | 152,468 | 256,772 | 30,661 | 439,901 | ||||||||||||
Capital expenditures and acquisitions | 3,384 | 13,525 | 1,170 | 18,079 | ||||||||||||
Wholesale and | ||||||||||||||||
2003 | Manufacturing | Retailing | EID | Total | ||||||||||||
Sales to third parties | 123,693 | 361,499 | 19,609 | 504,801 | ||||||||||||
Intersegment sales | 12,533 | 2 | 212 | 12,747 | ||||||||||||
Income from operations before depreciation and amortization | 18,423 | 31,153 | 2,230 | 51,806 | ||||||||||||
Depreciation | 3,005 | 14,321 | 409 | 17,735 | ||||||||||||
Amortization of goodwill | 815 | 5,985 | — | 6,800 | ||||||||||||
Amortization of other intangibles | 1,022 | 1,265 | 130 | 2,417 | ||||||||||||
Income (loss) from operations | 13,581 | 9,582 | 1,691 | 24,854 | ||||||||||||
Identifiable long-lived assets | 25,245 | 195,293 | — | 220,538 | ||||||||||||
Total assets | 141,974 | 234,913 | — | 376,887 | ||||||||||||
Capital expenditures and acquisitions | 3,069 | 9,323 | 165 | 12,557 | ||||||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
An analysis of sales and long-lived assets by both geographic area and segment is the following:
Wholesale and | ||||||||||||||||
2001 | Manufacturing | Retailing | EID | Total | ||||||||||||
Sales to third parties by geographic area | ||||||||||||||||
Italy and other European countries | 75,761 | 358,349 | 19,096 | 453,206 | ||||||||||||
Americas | 13,039 | — | 4,495 | 17,534 | ||||||||||||
Rest of the world | 26,120 | — | 8,390 | 34,510 | ||||||||||||
Total | 114,920 | 358,349 | 31,981 | 505,250 | ||||||||||||
Long-lived assets based on a physical location | ||||||||||||||||
Italy and other European countries | 26.319 | 229,341 | 2,544 | 258,204 | ||||||||||||
Americas | 515 | — | 250 | 765 | ||||||||||||
Rest of the world | 1,150 | — | — | 1,150 | ||||||||||||
Total | 27,984 | 229,341 | 2,794 | 260,119 | ||||||||||||
Retailing includes sales to third parties amounting to€ 110,630 and€ 247,719 in Spain and the UK, respectively. Long-lived assets for retailing amount to€ 146,192 and€ 80,345 in Spain and the UK, respectively.
Wholesale and | ||||||||||||||||
2002 | Manufacturing | Retailing | EID | Total | ||||||||||||
Sales to third parties by geographic area | ||||||||||||||||
Italy and other European countries | 82,590 | 359,605 | 21,679 | 463,874 | ||||||||||||
Americas | 9,343 | — | 2,622 | 11,965 | ||||||||||||
Rest of the world | 29,776 | — | 6,844 | 36,620 | ||||||||||||
Total | 121,709 | 359,605 | 31,145 | 512,459 | ||||||||||||
Long-lived assets based on a physical location | ||||||||||||||||
Italy and other European countries | 26,369 | 215,746 | 1,914 | 244,029 | ||||||||||||
Americas | — | — | — | — | ||||||||||||
Rest of the world | 389 | — | — | 389 | ||||||||||||
Total | 26,758 | 215,746 | 1,914 | 244,418 | ||||||||||||
Retailing includes sales to third parties amounting to€ 123,366 and€ 236,239 in Spain and the UK, respectively. Long-lived assets for retailing amount to€ 141,743 and€ 73,157 in Spain and the UK, respectively.
Wholesale and | ||||||||||||||||
2003 | Manufacturing | Retailing | EID | Total | ||||||||||||
Sales to third parties by geographic area | ||||||||||||||||
Italy and other European countries | 80,255 | 361,499 | 12,129 | 453,883 | ||||||||||||
Americas | 8,204 | — | 3,747 | 11,951 | ||||||||||||
Rest of the world | 35,234 | — | 3,733 | 38,967 | ||||||||||||
Total | 123,693 | 361,499 | 19,609 | 504,801 | ||||||||||||
Long-lived assets based on a physical location | ||||||||||||||||
Italy and other European countries | 24,926 | 195,293 | — | 220,219 | ||||||||||||
Americas | — | — | — | — | ||||||||||||
Rest of the world | 319 | — | — | 319 | ||||||||||||
Total | 25,245 | 195,293 | — | 220,538 | ||||||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Retailing includes sales to third parties amounting to€ 130,690 and€ 230,809 in Spain and the UK, respectively. Long-lived assets for retailing amount to€ 136,632 and€ 58,661 in Spain and the UK, respectively.
18. RELATED PARTY TRANSACTIONS AND MINORITY INTERESTS
Related Party Transactions— Certain of the Company’s facilities in Longarone and Limana were constructed in the years 1992 through 2002 by Impresa Edile F.lli De Rigo S.r.l., a construction company which is wholly owned by the De Rigo Brothers. The related construction costs through December 31, 2003, which have been capitalized as buildings amounted to€ 2,418.
In the year 2000, Eyewear International Distribution (EID), a 51% owned subsidiary that distributed sunglasses and eyeglasses under the Prada name, started operations. The Prada Group owned the remaining 49% interest in EID. During the years 2001, 2002 and 2003, EID had commercial transactions with companies within the Prada Group. These transactions were represented by sales amounting to€ 5,862,€ 2,787 and€ 1,210, and paid management fees, royalties and commissions amounting to€ 7,857,€ 4,089 and€ 2,307 in 2001, 2002 and 2003, respectively. Interest paid by EID on a loan from the Prada Group amounted in 2001 to€ 19. In addition, in 2002 and 2003, EID accounted for€ 119 and€ 60, respectively, in rental expenses relating to the rental of a building in Longarone from Surfrigo, a company owned by the De Rigo brothers. As described in Note 3, the company sold its 51% interest in EID to the Prada Group on July 23, 2003 realizing a gain of € 11,751.
The amounts due to related parties reported in the consolidated balance sheet at December 31, 2002 and 2003 are:
2002 | 2003 | |||||||
Rental payables to Surfrigo — included in accounts payable | 25 | — | ||||||
Trade payables to Prada — included in accounts payable, trade | 3,940 | — | ||||||
Trade receivables from Prada — included in accounts receivable trade | 2,771 | — | ||||||
In December 2003, the Company sold a building to an entity controlled by the De Rigo brothers. The disposal was made at book value.
Minority Interests- The charge to income in 2003 of€ 4,425 primarily arises in relation to profits at EID (through the date of its disposal) and De Rigo Hellas attributable to holders of minority interests in those companies.
19. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA
The Company’s accounting policies are in accordance with Italian GAAP, which differs in certain respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). Differences that have a significant effect on consolidated net income and shareholders’ equity are as follows:
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
(a) | Sale of the Company’s shares to the Managing Director— In October 1994, the De Rigo brothers granted an option offering 3% of the Ordinary Shares they held in the Company to its Managing Director.Under Italian GAAP, this transaction was considered a transaction between shareholders and therefore not reported in the consolidated financial statements.Under U.S. GAAP, the benefit (measured by the difference between the fair value of the stock, to which the option refers, and the exercise price) received of€ 9,554 by the Managing Director from the transaction was required to be reported as a charge to 1994 income. Consequently, in the reconciliations of shareholders’ equity as at December 31, 2001, 2002 and 2003 the amount of€ 9,554 was recorded as a charge to retained earnings with an offsetting credit of€ 9,554 to additional paid in capital. | |||
(b) | Revaluation of assets prior to 1992— Certain assets were revalued by the Company and two of its Italian subsidiaries to amounts in excess of historical cost. These revaluations, which were either authorized or required by Italian law, are permissibleunder Italian GAAP. | |||
Assets revalued underItalian GAAPare depreciated over their remaining useful lives based on their revalued basis.U.S. GAAPdoes not permit the revaluation of such assets. Accordingly, the increases in shareholders’ equity and the related increase in depreciation expense occurring as a result of such revaluations have been reversed in the accompanying reconciliation for all periods presented. | ||||
No deferred tax liabilities have been provided for on the revaluation reserve mentioned in Note 15 point (a), as such liabilities are not required to be provided for in accordancewith U.S. GAAP, because these revaluations were all made prior to December 15, 1992, the effective date for applying existing U.S. accounting standards with respect to accounting for income taxes. | ||||
(c) | Revaluation of trademarks in 2001—Under Italian GAAPit is permitted to recognize the revaluation of assets for financial accounting purposes as well as for tax purposes and to recognize as a charge to revaluation reserve the amount of the tax liability recorded that is to be paid over 3 years.Under U.S. GAAPsuch revaluations are not recognized in the financial statements and the tax charge is not recorded as a charge to retained earnings, but the tax effects of the revaluation are recognized. Accordingly, in the U.S. GAAP reconciliation adjustments have been made to: (a) reverse the revaluation of trademarks made in 2001 against trademarks and the revaluation reserve; and (b) recognize the tax effects of the revaluation by (i) reclassifying the charge to revaluation reserve for tax payable on the revaluation to the current tax provision, (ii) recognizing a deferred tax asset and a credit to the deferred tax provision to record the tax effects of the temporary difference between the Italian tax basis and the U.S. book basis of the trademarks that was created by the revaluation; (iii) recognizing a deferred tax liability and a charge to the deferred tax provision to record the tax to be paid upon distribution of the revaluation reserve recorded in the Italian financial statements and (iv) reverse the amortization of trademarks revaluation. The net tax benefit resulting from the revaluation permitted by the applicable tax law was recognized in the income statement for 2001, the year in which the revaluation was made. | |||
(d) | Goodwill amortization— Italian GAAP requires that goodwill related to assets be amortized over the asset’s estimated economic life. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. SFAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach based on the supposition that goodwill is not a “wasting asset” that requires periodic cost allocation. Thus, amortization of goodwill, including goodwill recorded in past business combinations and amortization of intangibles with an indefinite life, ceased upon adoption of SFAS No. 142. The Company adopted the provisions of SFAS |
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
No. 142 effective January 1, 2002. All goodwill is assigned to the reporting unit that benefits from the synergies arising from each business combination. | ||||
The Company completed the SFAS No. 142 transitional impairment test during the second quarter of 2002 and concluded that there was no impairment of goodwill at that time, as the fair value of its reporting units exceeded their carrying amounts as of January 1, 2002. Therefore, the second step of the transitional impairment test required under SFAS No. 142 was not necessary. | ||||
As required under SFAS No. 142, the Company performed the required annual impairment test as of December 31, 2003. Based on that assessment, it was determined that no impairment existed in the reporting units identified. | ||||
The Company’s 2001 results of operations do not reflect the provisions of SFAS No. 142. Had the Group adopted SFAS No. 142 as of January 1, 2001, its U.S. GAAP net income and basic and diluted net income per share would have been the adjusted pro forma amounts indicated below: |
2001 | ||||
(thousands of Euro, except | ||||
per share amounts | ||||
Net income for the year under U.S. GAAP | 18,249 | |||
Adjustment for amortization of goodwill, net of tax | 6,407 | |||
Adjusted net income | 24,656 | |||
Reported Basic EPS per share and ADS | 0.41 | |||
Reported Diluted EPS per share and ADS | 0.40 | |||
Adjusted Basic EPS per share and ADS | 0.55 | |||
Adjusted Diluted EPS per share and ADS | 0.55 |
The estimated aggregate amortization expense of Trademarks and Other intangible assets for each of the five succeeding fiscal years is indicated below: |
Year | ||||
2004 | 1,715 | |||
2005 | 1,189 | |||
2006 | 820 | |||
2007 | 613 | |||
2008 | 565 |
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
The weighted-average amortization period of Trademarks and Other intangible assets is three years. | ||||
(e) | Public offering expenses— The expenses incurred in connection with the public offering of October 1995 were capitalized under Italian GAAP and are being amortized over a five year period. Under U.S. GAAP, such expenses are deducted from additional paid-in capital, net of the estimated tax benefits to be received. | |||
(f) | Stock Options —Under Italian GAAP, the Company’s stock option plan does not result in recognizing compensation expense in the Company’s statement of income at either at the date of the grant to employees or at the date when such options are exercised. Under U.S. GAAP, the Company has elected to continue to account for its compensation expense for its stock based compensation plan using the intrinsic value method in accordance with the provisions of Accounting Practice Bulletin (“APB”) No. 25, “Accounting for Stock Issued to Employees”. Under FASB Interpretation (“FIN”) 44, “Accounting for Certain Transactions Involving Stock Compensation”, the modifications made in the plan in the year 2000 to reduce the exercise price to an amount less than fair value at date of grant and to modify the terms for exercising the options require that the awards be accounted for as a variable plan under APB No. 25, which requires remeasurement of the intrinsic value of the award from the date of the modification to the date the award is exercised, is forfeited, or expires unexercised.Compensation expenses are recognized using the accelerated method allowed under FIN 44. | |||
The Company has adopted the disclosure requirements of FASB No. 123, “Accounting for Stock-based Compensation”as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosures” (“SFAS 148”). When compensation expense has been recorded in accordance with APB No. 25, SFAS No. 148 requires pro-forma disclosure of what net income and earnings per share would have been had the Company also adopted SFAS 148 for recording compensation expense. | ||||
(g) | Call and put arrangements for sale by De Rigo B.V. to Prada of unregistered shares in the Company— In connection with establishing in July 1999 a subsidiary that uses the Prada trademarks, the Company entered into an agreement with Prada whereby (i) Prada had an option to acquire, at any time between April 30, 2001 to June 30, 2001, 5% of the unregistered shares that De Rigo B.V. owns in the Company at an agreed upon price per share and (ii) De Rigo B.V. had a put arrangement that gives it the right to require Prada to buy the same number of shares in the Company at the agreed upon price per share within the same time frame. Under Italian GAAP the fair value of the options granted to Prada is considered a transaction between shareholders and therefore is not reported in the financial statements. Under U. S. GAAP,the fair value of the options granted is required to be accounted for as an intangible asset by the Company. Consequently, in the reconciliation of shareholders’ equity as at December 31, 1999 and net income for the year then ended, the fair value of the options granted in the amount of€ 465 was recorded as an intangible asset with an offsetting credit to additional paid in capital, and amortization of the intangible asset (which is being amortized over five years). Arrangements whereby Prada could have acquired an additional 10% of the Company’s unregistered capital stock were contingent upon Prada renewing the existing licensing agreements with the Company’s subsidiary, EID for an additional stipulated number of years, and expired due to the disposal of EID July 23, 2003.Under U.S. GAAP, the fair value of the options granted should be recognized as an intangible asset to be amortized over the period of the licensing agreement when such license agreements are renewed. |
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
(h) | Deferred charges— In 2002 the Group deferred certain consulting expenses related to production activity and will amortize these amounts over three years under Italian GAAP. Under U.S. GAAP, these expenses would have been charged to income when incurred. The accompanying reconciliation reflects the adjustment to expense these amounts. | |||
(i) | Additional deferred taxeswere provided on U.S. GAAP adjustments (b), (e), (g), (h), (j) and (n). | |||
(j) | Pensions— The Group maintains a defined benefit pension plan for substantially all U.K. employees of Vantios/D&A. Under Group accounting policies the recognition of a minimum pension liability is not required. Under SFAS 87 it is a requirement that companies must recognize as a minimum liability for any unfunded accumulated benefit obligation. The impact of this minimum pension liability is to increase long-term obligations and decrease shareholders’ equity. No adjustment was necessary in 2001, as the plan did not have an unfunded accumulated benefit obligation. | |||
(k) | Earnings per Share —Italian GAAP does not require disclosure of earnings per share. Under U.S. GAAP,earnings per share are calculated and presented in accordance with FASB No. 128 “Earnings Per Share” (“FASB 128”). FASB No. 128 requires dual presentation of basic and diluted earnings per share for all periods presented. Basic earnings per share is computed by dividing the net income of the entity by the weighted average number of ordinary shares outstanding for the period. Basic earnings per share excludes shares held in treasury or any shares held in escrow pending release upon the occurrence of specified economic events. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares or resulted in the issuance of ordinary shares that then shared in the earnings of the entity. At December 31, 2001, 2002 and 2003, unexercised stock options to purchase 983,137, 846,621 and 800,621 shares, respectively were outstanding. These securities could potentially dilute basic earnings per share in the future and the number of incremental shares computed by the treasury stock method were considered in the computation of diluted earnings per share and per ADS for the years 2001, 2002 and 2003. | |||
(l) | Comprehensive income —Italian GAAP does not require the presentation of comprehensive income. Under U.S. GAAP, FASB No. 130“Comprehensive Income: Financial Statement Presentation”,which was adopted by the Company in December 1998,requires disclosure of comprehensive income, which is defined as the change in net assets of a business enterprise during a period from transactions and events and circumstances from non owner sources. | |||
(m) | Unrealized foreign exchange gains —Under Italian GAAP, unrealized gains arising from re-measurement of non current assets and liabilities denominated in foreign currency are deferred until realized. Under U.S. GAAP, such unrealized gains or losses are recognized in income currently. No U.S. GAAP adjustments were required in 2001, 2002 or 2003. | |||
(n) | Marketable securities —Under Italian GAAP, marketable securities are carried at the lower of cost or market value. If securities are written-down, the original value of these investments is reinstated in future accounting periods should the reasons for such writedowns no longer apply. For U.S. GAAP purposes, the Company has applied the provisions of SFAS No. 115, “Accounting for Certain Investment in Debt and Equity Securities” (“SFAS 115”). Under SFAS 115, the Company classifies its marketable securities as available for sale. Unrealized gains and losses for securities classified as available for sale are included in shareholders’ equity until the securities are sold or otherwise considered to be other than temporary impaired. The effects of SFAS 115 on net income and shareholders’ equity have been reflected in the reconciliation. The |
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
fair value of marketable securities as of December 31, 2002 is€ 1,907. No marketable securities existed at December 31, 2003. | ||||
No adjustments were made for U.S. GAAP financial reporting purposes at December 31, 2001 because the fair values of such securities approximated their carrying basis on an Italian GAAP basis. | ||||
(o) | Treasury stock —In 2003 De Rigo purchased 223,200 of its own ordinary shares. Under Italian GAAP, these ordinary shares have been recorded at historical cost within long-term assets, while under U.S. GAAP, the cost of the acquired shares is shown as a deduction from shareholders’ equity. | |||
(p) | Impairment of Long-Lived Assets —Prior to 2002 the Company applied SFAS No. 121“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”(“SFAS 121”),to all long-lived assets, including goodwill.That statement required impairment losses to be recorded on long-lived assets used in operations when indicators of impairment were present and the future undiscounted cash flows estimated to be generated by those assets were less than the assets’ carrying amount. Impairment was the amount by which the carrying value exceeds its fair value. No indicators of impairment were present in the year 2001. | |||
Effective January 1, 2002, the Company changed its method of accounting for the impairment of long-lived assets. | ||||
In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment of Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Statement applies to certain long-lived assets, including those reported as discontinued operations, and develops one accounting model for long-lived assets to be disposed of by sale. SFAS 144 supersedes SFAS No. 121 “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of ”, and APB No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment. The Company adopted the provisions of SFAS 144 effective January 1, 2002. | ||||
SFAS 144 requires that long-lived assets to be disposed of by sale be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The Statement also changes the measurement criteria for discontinued operations. SFAS 144 broadens the reporting of discontinued operations to include the disposal of a component of an entity, provided that the operations and cash flows of the component will be eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component. The Statement does not apply to investments in equity investees. No write-downs of long-lived assets were recorded under SFAS 144 in 2002 or 2003. | ||||
(q) | Derivative financial instruments —Under ItalianGAAP, if a derivative is designated as a fair value hedge, changes in the fair value of the derivative and the related change in the hedged item are recognized in the income statement. If a derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in the income statement when the hedged item effects operations. Changes in fair value of derivatives that do not qualify as a hedge are recognized in the income statement. Unrealized gains related to the remeasurement at fair value of long-term derivative contracts are deferred until realized. Effective January 1, 2001, the Group adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and the corresponding amendments and interpretations to this Statement. The Statement requires that all derivative financial instruments be |
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
recognized in the financial statements and are to be measured at fair value regardless of the purpose or intent of holding them. If the derivative is designated as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net earnings (loss). If the derivative is designated as a cash flow hedge, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income (“OCI”) and are recognized in net earnings (loss) when the hedged item affects operations. Ineffective portions of changes in the fair value of cash flow hedges are recognized in net earnings (loss) prior to the contract’s expiration. If the derivative used in an economic hedging relationship is not designated in an accounting hedging relationship, changes in the fair value of the derivative are recognized in the statement of operations through the life of the contract. | ||||
The Company’s derivative financial instruments at December 31, 2000 consisted of foreign currency forward exchange contracts that would have qualified as hedges. However, since the Company did not formally designate their hedging relationships anew and document their risk management strategies, such derivatives did not qualify as hedges as of January 1, 2001, and accordingly under the provisions of SFAS 133, all changes in the fair value of such derivative instruments subsequent to January 1, 2001 were recognized in the current income for the year. In implementing SFAS 133 the Company did not record any transition adjustment. | ||||
The Company did not formally designate derivative contracts entered into during the year ended December 31, 2001, 2002 and 2003 as fair value or cash flow hedges. Accordingly, as required by SFAS 133, the fair value of such contracts have been recorded on the balance sheet until the contracts are settled, and all changes in fair value of the derivative instruments since the date of the derivative contracts have been recognized in the current income for the year. Since under Italian GAAP all derivatives outstanding at December 31, 2001, 2002 and 2003 were accounted for as ineffective hedges, no adjustment was required to comply with the requirements of FASB No. 133. | ||||
(r) | Consolidation of Ranieri Argentina S.A.— The Company sold its 51% interest in Ranieri Argentina S.A. in June 2002. For Italian GAAP purposes, the sale was effective retroactive to January 1, 2002. Therefore, the results of operations through the date of sale were not consolidated in the consolidated statement of operations of the Company. U.S. GAAP requires that the results of operations be consolidated through the date of sale. The Company has reviewed the impact on the U.S. GAAP figures that would result from consolidation and determined that the impact on sales, cost of sales, other operating costs, and other non-operating costs is not significant. | |||
(s) | As described in Note 3, the Company sold its 51% interest in EID to the Prada Group on July 23, 2003. Under U.S. GAAP, EID is presented as a discontinued operation in accordance with the guidance of SFAS 144. Based upon this guidance, the results for all periods, including revenues and costs, of the sold businesses are removed from the consolidated statements of operations and reported after income from continuing operations. The accompanying reconciliation includes, in the “discontinued operations” line, the effect of all line items associated with the disposed EID business. | |||
At the time of its sale on July 23, 2003, EID’s net assets consisted of: |
Current assets | 27,168 | |||
Fixed assets, net | 962 | |||
Other intangibles, net | 583 | |||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Total assets disposed of | 28,713 | |||
Total liabilities disposed of | 28,123 | |||
Net assets disposed of | 590 | |||
The following table summarizes the results from continuing operations and the results from discontinued operations for the years ended 2001, 2002 and 2003:
Year ended December 31, | 2001 | 2002 | 2003 | |||||||||
Net sales from continuing operations | 473,269 | 481,314 | 485,192 | |||||||||
Gross profit from continuing operations | 302,543 | 294,002 | 293,409 | |||||||||
Income from continuing operations | 27,439 | 24,379 | 29,357 | |||||||||
Other (income) expenses from continuing operations | 4,212 | 5,765 | (1,951 | ) | ||||||||
Income from continuing operations before income taxes and minority interests | 23,227 | 18,614 | 31,308 | |||||||||
Income taxes | 5,971 | 247 | 14,422 | |||||||||
Income from continuing operations before minority interests | 17,256 | 18,367 | 16,886 | |||||||||
Minority interests | (931 | ) | (16 | ) | 400 | |||||||
Net income from continuing operations | 18,187 | 18,383 | 16,486 | |||||||||
Discontinued operations | ||||||||||||
Net sales from discontinued operations | 31,981 | 31,145 | 19,609 | |||||||||
Gross profit from discontinued operations | 18,427 | 15,084 | 9,424 | |||||||||
Income (loss) from discontinued operations | 294 | (1,003 | ) | 1,614 | ||||||||
Other (income) expenses from discontinued operations (including gain on disposal of€ 11,751 in 2003) | (352 | ) | 1,304 | (11,144 | ) | |||||||
Income (loss) from discontinued operations before income taxes and minority interests | 646 | (2,307 | ) | 12,758 | ||||||||
Income taxes | 221 | (163 | ) | 969 | ||||||||
Income (loss) from discontinued operations before minority interests | 425 | (2,144 | ) | 11,789 | ||||||||
Minority interests | 363 | (906 | ) | 4,025 | ||||||||
Net income (loss) from discontinued operations | 62 | (1,238 | ) | 7,764 | ||||||||
Net income in accordance with U.S. GAAP | 18,249 | 17,145 | 24,250 | |||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
(t) | New accounting standards —In future periods the Company will be obliged to adopt certain new standards and interpretations of U.S. GAAP. The following paragraphs discuss those statements that are applicable to the business of the Company and that could have an impact on future results and financial position. | |||
In November 2002, the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on EITF 00-21, “Accounting for Revenue Arrangements with Multiple Element Deliverables”. On December 17, 2003, the SEC issued SEC Staff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition” (“SAB 104”) which has effectively codified EITF 00-21 to a higher level of GAAP. SAB 104 and EITF 00-21 address how to account for arrangements that may involve the delivery or performance of multiple products, services and / or rights to use assets. Revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be divided into separate units of accounting based on their relative fair values. The Issue also supersedes certain guidance set forth in SAB 101. The Group is required to adopt the provision of EITF 00-21 for revenue arrangements entered into on or after January 1, 2004. Additionally, companies are permitted to apply the consensus guidance to all existing arrangements as a cumulative effect of a change in accounting principle. | ||||
In January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51(“FIN 46”). FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity (“variable interest entities” or “VIE’s”). Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity. The Company adopted the recognition requirements of FIN 46 for all new variable interest entities entered into after January 31, 2003. The Company must adopt the provision of FIN 46 for all existing VIE’s on December 31, 2004. |
The following tables summarize those adjustments to consolidated net income and shareholders’ equity that would be required if U.S. GAAP had been applied instead of Italian GAAP.
NET INCOME for the years ended December 31,
2001 | 2002 | 2003 | ||||||||||||
Net income as reported per the consolidated statements of income | 21,217 | 10,645 | 18,478 | |||||||||||
Adjustments required for U.S. GAAP reporting purposes: | ||||||||||||||
(b) Elimination of depreciation relating to revaluation of certain assets prior to 1992 | 13 | 13 | 13 | |||||||||||
(c) Recognize tax effects on reversal of trademark revaluation at end of 2001 | ||||||||||||||
(i) charge substitute tax to current tax provision rather than revaluation reserve | (958 | ) | — | — | ||||||||||
(ii) recognize deferred tax asset on trademark revaluation | 2,030 | (294 | ) | (233 | ) |
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
(iii) recognize deferred tax liability on revaluation reserve on Italian basis | (857 | ) | — | — | ||||||||||
(iv) reversal of amortization of trademarks revaluation | — | 504 | 504 | |||||||||||
(d) Reversal of goodwill amortization | — | 6,407 | 6,419 | |||||||||||
(f) Recognize stock compensation expense in accordance with APB No. 25, net of credit of€ 492,€ 351 and€ 47 in 2001, 2002 and 2003 respectively for the reversal of stock option expense recorded in prior periods on options forfeited by the employees that left the Company in that year | (3,243 | ) | — | (801 | ) | |||||||||
(h) Deferred charges | — | (178 | ) | 59 | ||||||||||
(n) Marketable securities available for sale | (111 | ) | 111 | |||||||||||
(i) Deferred income taxes on (b), (h) and above after considering change in tax rate on deferred tax for (c) in 2002 and 2003 | 127 | 239 | (236 | ) | ||||||||||
Net income in accordance with U.S. GAAP before reconciliation effects of discontinued operations | 18,329 | 17,225 | 24,314 | |||||||||||
Total effect of the reconciling differences on discontinued operations — EID | ||||||||||||||
(g) Amortization of intangible asset in respect of Prada’s 5% options | (97 | ) | (97 | ) | (77 | ) | ||||||||
(i) Deferred income taxes on (g) above | 17 | 17 | 13 | |||||||||||
Total effect discontinued operations — EID | (80 | ) | (80 | ) | (64 | ) | ||||||||
Net income in accordance with U.S. GAAP | 18,249 | 17,145 | 24,250 | |||||||||||
Earnings per share and per ADS: | ||||||||||||||
Numerator for the basic and diluted per-share and per ADS computations for income from continuing operations: | ||||||||||||||
Net income from continuing operations (in Euro thousands) | 18,187 | 18,383 | 16,486 | |||||||||||
Denominator | ||||||||||||||
Denominator for basic per-share and per ADS computations for net income from continuing operations — weighted average shares and ADS shares | 44,590,060 | 44,688,415 | 44,618,230 | |||||||||||
Effects of dilutive employee stock options | 952,129 | 701,097 | 605,369 | |||||||||||
Denominator for diluted per-share and per ADS computations for net income from continuing operations — adjusted weighted average shares and ADS | 45,542,189 | 45,389,512 | 45,223,599 | |||||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Basic earnings per share and per ADS before discontinued operations | 0.41 Euro | 0.41 Euro | 0.37 Euro | |||||||||||
Diluted earnings per share and per ADS before discontinued operations | 0.40 Euro | 0.41 Euro | 0.37 Euro | |||||||||||
Basic earnings per share and per ADS from discontinued operations | 0.00 Euro | (0.03) Euro | 0.17 Euro | |||||||||||
Diluted earnings per share and per ADS from discontinued operations | 0.00 Euro | (0.03) Euro | 0.17 Euro | |||||||||||
Basic earnings per share and per ADS | 0.41 Euro | 0.38 Euro | 0.54 Euro | |||||||||||
Diluted earnings per share and per ADS | 0.40 Euro | 0.38 Euro | 0.54 Euro | |||||||||||
Dividends per share and per ADS | 0.12 Euro | 0.13 Euro | Nil | |||||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
SHAREHOLDERS’ EQUITY at December 31,
2001 | 2002 | 2003 | |||||||||||
Balance as reported in the consolidated financial statements | 210,419 | 212,117 | 226,884 | ||||||||||
Adjustments required for U.S. GAAP reporting purposes: | |||||||||||||
(a) | Decrease in retained earnings as a result of the charge to income for additional compensation paid in 1994 by shareholders to Managing Director | (9,554 | ) | (9,554 | ) | (9,554 | ) | ||||||
and concurrent increase in additional paid-in capital | 9,554 | 9,554 | 9,554 | ||||||||||
(b) | Elimination of revaluations of certain assets prior to 1992, net of accumulated depreciation of€ 652,€ 665 and€ 678 in 2001, 2002, and 2003 respectively. | (287 | ) | (274 | ) | (261 | ) | ||||||
(c) | Elimination of revaluation of trademarks in 2001, net of accumulated amortization of€ 0,€ 504 and€ 1,008 in 2001, 2002 and 2003, respectively. | (5,043 | ) | (4,539 | ) | (4,035 | ) | ||||||
(d) | Reversal of goodwill amortization | — | 6,407 | 12,826 | |||||||||
(e) | Elimination of amortization of offering expenses, deferred for Italian purposes | 2,128 | 2,128 | 2,128 | |||||||||
(e) | Offering expenses less estimated tax benefits of€ 1,030 in 2001, 2002 and 2003 charged to paid in capital | (1,098 | ) | (1,098 | ) | (1,098 | ) | ||||||
(f) | Reduce retained earnings for amount of stock compensation | (3,999 | ) | (3,999 | ) | (4,800 | ) | ||||||
(f) | Increase additional paid in capital for accretion resulting from stock compensation expense | 3,999 | 3,999 | 4,800 | |||||||||
(g) | Increase in additional paid in capital as a result of recording the fair value of Prada’s 5% options on the total outstanding share capital | 465 | 465 | 465 | |||||||||
(g) | Decrease in retained earnings as a result of the charge to income for amortization of the intangible asset arising on the valuation of Prada’s 5% options | (291 | ) | (388 | ) | (465 | ) | ||||||
(h) | Deferred charges | — | (178 | ) | (119 | ) | |||||||
(j) | Recognition of minimum pension liability | — | (22,137 | ) | (19,623 | ) | |||||||
(n) | (Reduce)/Increase retained earnings for marketable securities | — | (111 | ) | 111 | ||||||||
(n) | Increase/(Reduce) Other Comprehensive Income related to unrealized gains on marketable securities | — | 111 | (111 | ) | ||||||||
(o) | Treasury stock | — | — | (753 | ) |
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
(i) | Recognition of deferred income taxes on (b), (e), (g), (h) and (j) above | (771 | ) | 5,987 | 4,998 | ||||||||
(c) | Tax effect on elimination of trademarks revaluation in 2001 (c) above, after considering change in tax rate in 2002 to | ||||||||||||
(i) recognize deferred tax asset on revalued assets | 2,030 | 1,736 | 1,503 | ||||||||||
(ii) recognize deferred tax liability on revaluation reserve on Italian basis | (857 | ) | (756 | ) | (706 | ) | |||||||
Balance at December 31, in accordance with U.S. GAAP | 206,695 | 199,470 | 221,744 | ||||||||||
Shareholders’ Equity
Due to operating losses incurred by a subsidiary through December 31, 1993, the Company, pursuant to Italian legal requirements, has eliminated losses reported for Italian GAAP purposes amounting to€ 2,195 against additional paid in capital by the former shareholders of the subsidiary. For U.S. GAAP financial reporting purposes, such operating losses would be reflected as a reduction of consolidated retained earnings, and the amount of capital used to eliminate such losses would be reflected as additional paid-in capital.
The components of shareholders’ equity at December 31, 2002 and 2003 are as follows:
Italian | U.S. | |||||||||||||||
2002 | GAAP | Adjustments | GAAP | |||||||||||||
Share capital | 11,626 | — | 11,626 | |||||||||||||
Additional paid-in-capital | 54,490 | 12,920 | 67,410 | |||||||||||||
Retained earnings | 142,935 | (5,107 | ) | 137,828 | ||||||||||||
Other comprehensive income | (1,971 | ) | (15,423 | ) | (17,394 | ) | ||||||||||
Revaluation reserves | 5,037 | (5,037 | ) | — | ||||||||||||
212,117 | (12,647 | ) | 199,470 | |||||||||||||
Italian | U.S. | |||||||||||||||
2003 | GAAP | Adjustments | GAAP | |||||||||||||
Share capital | 11,626 | — | 11,626 | |||||||||||||
Treasury Shares | — | 753 | 753 | |||||||||||||
Additional paid-in-capital | 54,490 | 13,721 | 68,211 | |||||||||||||
Retained earnings | 161,413 | 665 | 162,078 | |||||||||||||
Other comprehensive income | (5,682 | ) | (13,736 | ) | (19,418 | ) | ||||||||||
Revaluation reserves | 5,037 | (5,037 | ) | — | ||||||||||||
226,884 | (5,140 | ) | 221,744 | |||||||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Pro-forma Information Regarding Net Income and Earnings Per Share and Per ADS required by FASB No. 123
FASB 123 requires that when APB 25 is applied in computing compensation cost for stock based compensation that pro forma information as to net income and earnings per share be presented as if the Company had accounted for its employee stock based compensation in accordance with FASB 123.
The fair value of each stock option granted is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:
Employee stock options | 2000 Plan | |||
Expected life of option | 4 years | |||
Risk free interest rates | 4.5% | |||
Volatility | .20% | |||
Dividend yield | 0% |
The weighted average estimated fair value of the options granted during fiscal 2000 amounted to€ 8,971. As disclosed in Note 13 the options granted in 1999 were cancelled in connection with adoption of the stock option plan approved in 2000.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the option’s vesting period.
Had compensation costs related to the options granted in 2001, 2002 and 2003 been based on the fair value at the grant dates, consistent with the provision of FASB 123, the Company’s net earnings and earnings per share would have decreased to the pro-forma amounts indicated below for the years ended December 31, 2001, 2002 and 2003.
2001 | 2002 | 2003 | ||||||||||
Net income from continuing operations applicable to ordinary shareholders: | ||||||||||||
As reported on a U.S. GAAP basis | 18,187 | 18,383 | 16,486 | |||||||||
Add: Stock based compensation expense recognized under intrinsic value method | 3,243 | — | 801 | |||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based for all awards | (3,773 | ) | (1,719 | ) | (1,048 | ) | ||||||
Pro-forma on a U.S. GAAP basis | 17,657 | 16,664 | 16,239 | |||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Basic and diluted income per share and per ADS before discontinued operations:
2001 | 2002 | 2003 | |||||||||||
Basic earnings per share and per ADS before discontinued operations | |||||||||||||
As reported | 0.41 Euro | 0.41 Euro | 0.37 Euro | ||||||||||
Pro-forma | 0.40 Euro | 0.37 Euro | 0.36 Euro | ||||||||||
Diluted earnings per share and per ADS before discontinued operations | |||||||||||||
As reported | 0.40 Euro | 0.41 Euro | 0.36 Euro | ||||||||||
Pro-forma | 0.39 Euro | 0.37 Euro | 0.36 Euro |
2001 | 2002 | 2003 | ||||||||||
Net income applicable to ordinary shareholders: | ||||||||||||
As reported on a U.S. GAAP basis | 18,249 | 17,145 | 24,250 | |||||||||
Add: Stock based compensation expense recognized under intrinsic value method | 3,243 | — | 801 | |||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based for all awards | (3,773 | ) | (1,719 | ) | (1,048 | ) | ||||||
Pro-forma on a U.S. GAAP basis | 17,719 | 15,426 | 24,003 | |||||||||
Basic and diluted income per share and per ADS: |
2001 | 2002 | 2003 | ||||||||||
Basic earnings per share and per ADS | ||||||||||||
As reported | 0.41 Euro | 0.38 Euro | 0.54 Euro | |||||||||
Pro-forma | 0.40 Euro | 0.35 Euro | 0.54 Euro | |||||||||
Diluted earnings per share and per ADS | ||||||||||||
As reported | 0.40 Euro | 0.38 Euro | 0.54 Euro | |||||||||
Pro-forma | 0.39 Euro | 0.34 Euro | 0.53 Euro |
The effects of applying SFAS No. 123 in this pro forma disclosure should not be interpreted as being indicative of future effects.
Transactions in stock options, including the modification of the plan in the year 2000, are presented in the following summary of the Company’s stock option activity during the years ended December 31, 2001, 2002 and 2003:
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Weighted average | ||||||||
Shares under Options | Exercise Price | |||||||
Outstanding at January 1, 2001 | 1,199,400 | U.S. $1.00 | ||||||
Options granted | — | |||||||
Options exercised | (151,403 | ) | U.S. $1.00 | |||||
Options forfeited | (64,860 | ) | U.S. $1.00 | |||||
Outstanding at December 31, 2001 | 983,137 | U.S. $1.00 | ||||||
Options granted | — | |||||||
Options exercised | (62,852 | ) | U.S. $1.00 | |||||
Options forfeited | (73,664 | ) | U.S. $1.00 | |||||
Outstanding at December 31, 2002 | 846,621 | U.S. $1.00 | ||||||
Options exercised | — | U.S. $1.00 | ||||||
Options forfeited | (46,000 | ) | U.S. $1.00 | |||||
Outstanding at December 31, 2003 | 800,621 | U.S. $1.00 | ||||||
Exercisable at December 31, 2003 | 590,957 | U.S. $1.00 | ||||||
Investments in debt securities
All debt securities are classified as available-for-sale and U.S GAAP adjustments were made in 2002 to adjust the carrying basis to their fair values. No U.S GAAP adjustments were required at December 31, 2001 because the carrying basis on an Italian GAAP basis approximated the fair value of the assets. No marketable securities existed at December 31, 2003.
Comprehensive Income
The components of accumulated other comprehensive income for a U.S. GAAP financial statements presentation as of December 31, 2001, 2002 and 2003 are as follows:
Currency Translation Adjustments per financial statements | Pension minimum liability | Unrealized Gains on Available-for-Sale Securities per U.S. GAAP adjustments | Total | |||||||||||||
Balance at December 31, 2000 | 491 | — | — | 491 | ||||||||||||
Currency translation adjustment | 748 | — | — | 748 | ||||||||||||
Balance at December 31, 2001 | 1,239 | — | — | 1,239 | ||||||||||||
Currency translation adjustment | (3,210 | ) | (3,210 | ) | ||||||||||||
Unrealized gains on securities | — | 111 | 111 | |||||||||||||
Recognition of pension minimum liability | (22,137 | ) | (22,137 | ) | ||||||||||||
Deferred taxes on pension minimum liability and unrealized gains on securities | — | 6,641 | (38 | ) | 6,603 | |||||||||||
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Currency Translation Adjustments per financial statements | Pension minimum liability | Unrealized Gains on Available-for-Sale Securities per U.S. GAAP adjustments | Total | |||||||||||||
Balance at December 31, 2002 | (1,971 | ) | (15,496 | ) | 73 | (17,394 | ) | |||||||||
Currency translation adjustment | (3,711 | ) | (3,711 | ) | ||||||||||||
Unrealized gains on securities | (111 | ) | (111 | ) | ||||||||||||
Recognition of pension minimum liability | 2,514 | 2,514 | ||||||||||||||
Deferred taxes on pension minimum liability and unrealized gains on securities | (754 | ) | 38 | (716 | ) | |||||||||||
Balance at December 31, 2003 | (5,682 | ) | (13,736 | ) | — | (19,418 | ) | |||||||||
Comprehensive income for each of the three years in the period ended December 31, 2003 is as follows:
2001 | 2002 | 2003 | ||||||||||
Net income per U.S. GAAP reconciliation | 18,249 | 17,145 | 24,250 | |||||||||
Change in currency translation adjustment | 748 | (3,210 | ) | (3,711 | ) | |||||||
Unrealized gains on securities | — | 111 | (111 | ) | ||||||||
Minimum pension liability | — | (22,137 | ) | 2,514 | ||||||||
Deferred taxes on minimum pension liability and unrealized gains on | — | |||||||||||
securities | — | 6,603 | (716 | ) | ||||||||
Comprehensive income | 18,997 | (1,488 | ) | 22,226 | ||||||||
Income Taxes
Components of deferred income tax assets and liabilities were:
December 31, | ||||||||
2002 | 2003 | |||||||
Total deferred tax assets | 22,468 | 21,956 | ||||||
Total deferred tax liabilities | (11,830 | ) | (10,768 | ) | ||||
Net assets (liabilities) | 10,638 | 11,188 | ||||||
Of which: | ||||||||
Current deferred tax assets | 12,603 | 13,063 | ||||||
Non-current deferred tax assets | 9,865 | 8,893 | ||||||
Current deferred tax liabilities | (1,006 | ) | (1,392 | ) |
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
December 31, | ||||||||
2002 | 2003 | |||||||
Non-current deferred tax liabilities | (10,824 | ) | (9,376 | ) | ||||
Detailed as follows: | ||||||||
Italian GAAP financial statements | 2,641 | 4,363 | ||||||
U.S. GAAP adjustments | 7,997 | 6,825 | ||||||
Net assets (liabilities) | 10,638 | 11,188 | ||||||
Principal items comprising net deferred income tax assets were as follows:
December 31, | ||||||||
2002 | 2003 | |||||||
Equalization tax on dividends | (210 | ) | (475 | ) | ||||
Tax revaluation on certain assets, net of accumulated depreciation | 298 | 285 | ||||||
Allowance for doubtful accounts | 1,293 | 1,939 | ||||||
Inventory obsolescence | 6,691 | 8,041 | ||||||
Intercompany profits in inventory | 1,952 | 1,531 | ||||||
Accumulated accelerated depreciation | (495 | ) | (291 | ) | ||||
Pension asset | (1,286 | ) | (380 | ) | ||||
Property cost accruals | 150 | 46 | ||||||
Book revaluation of certain assets | (8,844 | ) | (8,431 | ) | ||||
Trademark revaluation of assets | 1,736 | 1,503 | ||||||
Tax on revaluation reserve for trademark revaluation | (756 | ) | (706 | ) | ||||
Net operating loss carry forwards (NOL) | 5,484 | 3,977 | ||||||
Pension minimum liability | 6,641 | 5,887 | ||||||
Agents termination indemnity | 501 | 421 | ||||||
Investments devaluation | 282 | 340 | ||||||
Other | 2,563 | 1,443 | ||||||
Net deferred tax assets (liabilities) | 16,000 | 15,130 | ||||||
Less: | ||||||||
Valuation allowance on NOLs | (5,362 | ) | (3,942 | ) | ||||
Net deferred tax assets (liabilities) | 10,638 | 11,188 | ||||||
At December 31, 2003, the Company’s subsidiary in the United States had a net operating loss carryforward (“NOL”) of€ 7,845, which will expire from 2010 thru 2017. Utilization of that NOL is limited to future earnings of the U.S. subsidiary. For financial reporting purposes, a valuation allowance has been recognized for the full amount of this NOL. NOLs of other foreign subsidiaries amounted to€ 3,587 at December 31, 2003, which will expire from 2004. A valuation allowance of€ 1,197 has been provided against this amount.
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Tax savings resulting from income derived from operations in Italian tax-exempt areas generated a per share benefit of 0.09 Euro in the year 2001. Tax savings resulting from income derived from operations in Italian tax exempt areas generated a per share benefit of less than 0.01 Euro in the year 2002.
A reconciliation between the Italian statutory tax rates and the consolidated effective tax rates for income from continuing operations is as follows:
2001 | 2002 | 2003 | ||||||||||
Tax @ Italian statutory rate of 40.25% in 2001 and 2002 and 38.25% in 2003 | 9,349 | 7,492 | 11,975 | |||||||||
Tax savings from Italian subsidiaries operating in a tax exempt area | (3,816 | ) | (1 | ) | — | |||||||
Investment tax credit and deductions | (209 | ) | (245 | ) | — | |||||||
Gains on business disposal | — | (123 | ) | — | ||||||||
Effect of a change in tax rate: | ||||||||||||
• In Italy | — | (7,384 | ) | 469 | ||||||||
• Italian Dual Income Tax | (801 | ) | — | — | ||||||||
• Other countries | — | — | (9 | ) | ||||||||
Effect of different tax rates of foreign jurisdictions | (1,818 | ) | (661 | ) | (559 | ) | ||||||
Tax benefit of NOLs of subsidiaries not recognized | 1,058 | 641 | (110 | ) | ||||||||
Amortization of goodwill | 2,380 | — | — | |||||||||
Effect of tax provision on distribution of dividend from foreign subsidiaries | 218 | — | — | |||||||||
Other permanent differences: | ||||||||||||
• Italy | ||||||||||||
IRPEG | (1,001 | ) | (459 | ) | 1,597 | |||||||
IRAP — (primarily payroll and interest) | 1,053 | 1,387 | 978 | |||||||||
• Other countries | (442 | ) | (400 | ) | 81 | |||||||
Provision for income taxes | 5,971 | 247 | 14,422 | |||||||||
Effective consolidated tax rate | 25.7 | % | 1.3 | % | 46.1 | % | ||||||
Financial instruments
Derivative products
At December 31, 2002, the Company had outstanding forward exchange contracts to buy US$ 1,070,000 (€ 1,020) for GBP Sterling 704,547; none of the foreign exchange contracts have maturities that exceed one year.
At December 31, 2003, the Company had outstanding forward exchange contracts to buy€ 2,689 (US$ 1,150,000 for GBP Sterling 693,000, US$ 1,500,000 for€ 1,264,159 and€ 450,000 for GBP Sterling 311,231); in addition, the Company sold foreign currency “call” options to sell Japanese Yen 1,260,000 and GBP Sterling 1,650,000 for a total of€ 11,671,000 and purchased “put” options to buy Japanese Yen 900,000,000 and GBP Sterling 1,100,000 for a total of€ 8,225,000.
At December 31, 2002 and 2003, the Company had an interest rate swap agreement to convert the variable interest rate on bank borrowings totaling€ 20,000 to a fixed interest rate of 3.3%. This interest rate swap agreement will expire in January 2005.
None of the foreign exchange contracts or foreign currency options have maturities that exceed one year.
As of December 31, 2002 and 2003, total unrealized gain (loss) on these derivatives amounted to€ (343) and€ 132, respectively, and has been included in the consolidated statements of income as the derivatives were considered ineffective hedges.
Foreign exchange gains and losses
The net foreign exchange gains and (losses) recognized in the consolidated statement of income for 2001, 2002 and 2003 amounted to€ (79),€ (656) and€ 448, respectively.
Concentration of Credit Risks
Financial instruments that potentially subject the Group to concentration of credit risks consist principally of cash investments and trade accounts receivable. The Group maintains cash and cash equivalents and short-term investments with financial institutions located in Italy. The Company selects only financial institutions with high credit standards for use in its investment strategies. Concentration of credit risks and the risk of accounting loss with respect to trade receivables is generally limited due to the large number of the Company’s end customers and the diversity of the geographic areas in which the customers are located. The Company generally does not require collateral with respect to sale orders, but it may require collateral and bank guarantees with respect to certain customers.
No individual customer represented 10% or more of sales in any of the years ended December 31, 2001, 2002 and 2003.
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments.
Cash and cash equivalents — The carrying amount of cash and cash equivalents reported in the balance sheet approximates their fair value due to the short duration of these investments.
Investment in debt securities — The carrying amount of investments in debt securities is based on the lower of cost or market and approximates their fair value as these were valued based on quoted prices.
Accounts receivable and payable — The carrying amount of receivables and payables approximates their fair value because of the short maturity of these instruments.
Short-term debt — The carrying amount of the Company’s borrowings under its short-term credit arrangements approximates their fair value because of the short maturity of these instruments.
Long-term debt — Certain of the Group’s long-term loans are subsidized by government entities in Italy and the European Investment Bank. The government entities pay a portion of these entities’ interest charges thereby reducing the Company’s interest rate to a below market level. The fair value of these loans have been determined as being equal to the carrying amount of the loans, as all companies with investments in the same region where the Company has its investments are entitled to such benefits.
Foreign currency exchange contracts and options — The carrying value approximates fair value based on exchange rates at December 31, 2002 and 2003.
Interest rate swap agreements — The carrying value approximates fair value based on interest rates at December 31, 2002 and 2003.
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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (€), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003
Valuation and Qualifying Accounts
The following table summarizes the changes in accounts receivable, inventory allowances and deferred tax assets for each of the three years in the period ended December 31, 2003:
Charged to | ||||||||||||||||||||
Balance at | costs and | Acquisitions | Balance at end of | |||||||||||||||||
Description | beginning of period | expenses | (disposals) | Deduction | period | |||||||||||||||
Year ended December 31, 2001 | ||||||||||||||||||||
Deducted from asset accounts: | ||||||||||||||||||||
Allowance for doubtful accounts | 6,154 | 851 | — | (1,504 | ) | 5,501 | ||||||||||||||
Allowance for returns | 505 | 60 | — | — | 565 | |||||||||||||||
Reserve for inventory obsolescence | 15,141 | 4,223 | — | (455 | ) | 18,909 | ||||||||||||||
Valuation allowance on NOLs | 4,267 | 964 | — | — | 5,231 | |||||||||||||||
Total | 26,067 | 6,098 | — | (1,959 | ) | 30,206 | ||||||||||||||
Year ended December 31, 2002 | ||||||||||||||||||||
Deducted from asset accounts: | ||||||||||||||||||||
Allowance for doubtful accounts | 5,501 | 2,821 | (151 | ) | (1,195 | ) | 6,976 | |||||||||||||
Allowance for returns | 565 | 455 | — | — | 1,020 | |||||||||||||||
Reserve for inventory obsolescence | 18,909 | 4,480 | (164 | ) | (1,298 | ) | 21,927 | |||||||||||||
Valuation allowance on NOLs | 5,231 | 131 | — | — | 5,362 | |||||||||||||||
Total | 30,206 | 7,887 | (315 | ) | (2,493 | ) | 35,285 | |||||||||||||
Year ended December 31, 2003 | ||||||||||||||||||||
Deducted from asset accounts: | ||||||||||||||||||||
Allowance for doubtful accounts | 6,976 | 2,545 | (285 | ) | (1,853 | ) | 7,383 | |||||||||||||
Allowance for returns | 1,020 | 584 | (120 | ) | (83 | ) | 1,401 | |||||||||||||
Reserve for inventory obsolescence | 21,927 | 5,325 | (1,967 | ) | (930 | ) | 24,355 | |||||||||||||
Valuation allowance on NOLs | 5,362 | — | — | (1,420 | ) | 3,942 | ||||||||||||||
Total | 35,285 | 8,454 | (2,372 | ) | (4,286 | ) | 37,081 | |||||||||||||
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Exhibit 8.1
List of Subsidiaries of De Rigo S.p.A.
Name | Country of Incorporation | |
Vogart Line España S.a. | Spain | |
De Rigo (UK) Ltd. | United Kingdom | |
De Rigo Hellas A.E.E. | Greece | |
De Rigo Deutschland Gmbh. | Germany | |
Atair Opt. Geräte GesmbH. | Austria | |
De Rigo France S.a. | France | |
De Rigo Nederland B.V. | The Netherlands | |
De Rigo Asia Ltd. | Hong Kong | |
De Rigo Hong Kong Ltd. | Hong Kong | |
De Rigo Japan Co., Ltd. | Japan | |
De Rigo Singapore Pte Ltd. | Singapore | |
De Rigo U.S.A. , INC. | United States | |
European Vision Ltd. | United Kingdom | |
Vantios Group Ltd. | United Kingdom | |
Dollond & Aitchison Ltd. | United Kingdom | |
D&A Contact Lenses Ltd. | Jersey | |
D&A Eyewear Ltd. | United Kingdom | |
D&A Professional Services Ltd. | United Kingdom | |
Vantios Ltd. | United Kingdom | |
Bindi Investment Ltd. | Jersey | |
General Optica Internacional S.a. | Spain | |
General Optica Ltd. | United Kingdom | |
General Optica S.a. | Spain |
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements of filing on Form 20-F and has duly caused and authorized the undersigned to sign this annual report on its behalf.
De Rigo S.p.A. | ||
(Registrant) | ||
/s/ Ennio De Rigo | ||
Ennio De Rigo | ||
Chairman of the Board and Chief Executive Officer | ||
Date: June 30, 2004 |