UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(MARK ONE)
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES
EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 1-10421
LUXOTTICA GROUP S.p.A.
(Exact name of Registrant as specified in its charter)
----------
(Translation of Registrant's name into English)
REPUBLIC OF ITALY
(Jurisdiction of incorporation or organization)
VIA CANTU 2, MILAN 20123, 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 NEW YORK STOCK EXCHANGE
SHARES EACH REPRESENTING
ONE ORDINARY SHARE, PAR
VALUE EURO .06 PER SHARE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
ORDINARY SHARES, PAR VALUE
EURO .06 PER SHARE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None.
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.
ORDINARY SHARES, PAR 454,263,600
VALUE EURO .06 PER SHARE
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.
Yes /X/ No / /
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 / / Item 18 /X/
PART I......................................................................................................2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS...........................................2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.........................................................2
ITEM 3. KEY INFORMATION.................................................................................2
ITEM 4. INFORMATION ON THE COMPANY.....................................................................11
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS...................................................31
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.....................................................48
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..............................................55
ITEM 8. FINANCIAL INFORMATION..........................................................................56
ITEM 9. THE OFFER AND LISTING..........................................................................58
ITEM 10. ADDITIONAL INFORMATION.........................................................................60
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................79
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.........................................82
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES................................................82
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS...................82
ITEM 15. CONTROLS AND PROCEDURES........................................................................82
ITEM 16. [RESERVED].....................................................................................83
ITEM 17. FINANCIAL STATEMENTS...........................................................................84
ITEM 18. FINANCIAL STATEMENTS...........................................................................84
ITEM 19. EXHIBITS......................................................................................85
SIGNATURES
EXHIBIT INDEX
FORWARD-LOOKING INFORMATION
Throughout this annual report, management has made certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which are considered prospective. These statements are made based on
management's current expectations and beliefs and are identified by the use of
forward-looking words and phrases such as "plans", "estimates", "believes" or
"belief", "expects" or other similar words or phrases. These forward-looking
statements are subject to a number of risks and uncertainties that could cause
actual results to differ materially from current expectations.
Our future operations and financial condition may be materially affected by
a variety of factors, some of which may be beyond our control. These factors
include but are not limited to those discussed herein under Item 3 - "Key
Information--Risk Factors."
Our forward-looking statements represent our judgment only on the dates
such statements are made. By making any forward-looking statements, we assume no
duty to update them to reflect new, changed, or unanticipated events or
circumstances.
Throughout this annual report, when we use the terms "Luxottica", the
"Company", "we", "us" and "our", unless otherwise indicated or the context
otherwise requires, we are referring to Luxottica Group S.p.A. and its
consolidated subsidiaries.
TRADEMARKS
Our house brands and designer line prescription frames and sunglasses that
are referred to in this annual report, and certain of our other products, are
sold under names that are subject to registered trademarks held by us or, in
certain instances, our licensors. These trademarks may not be used by any person
without our prior written consent or the consent of our licensors, as
applicable.
1
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
The following tables set forth selected consolidated financial data for the
periods indicated and is qualified by reference to, and should be read in
conjunction with, our consolidated financial statements, the related notes
thereto, and "Operating and Financial Review and Prospects" contained elsewhere
herein. We prepare our financial statements in accordance with U.S. GAAP. The
selected consolidated financial information for and as of each of the five years
in the period ended December 31, 2002 is derived from our consolidated financial
statements, which have been audited by Deloitte & Touche S.p.A., independent
public accountants.
[TABLE APPEARS ON FOLLOWING PAGE]
2
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1998(8) 1999(8) 2000(8) 2001(8)(7) 2002 2002
---------- --------- -------- ----------- ---------- ---------------
(IN THOUSANDS OF EURO, EXCEPT PER SHARE AMOUNTS)(3) (IN THOUSANDS
OF U.S.$)(1)(3)
INCOME STATEMENT DATA:
Net Sales 1,538,092 1,874,137 2,416,788 3,064,907 3,132,201 3,284,113
Cost of Sales 448,645 559,182 697,301 883,961 878,003 920,586
---------- --------- --------- ----------- ---------- --------------
Gross Profit 1,089,447 1,314,955 1,719,487 2,180,946 2,254,198 2,363,527
OPERATING EXPENSES
Selling and Advertising 680,824 829,512 983,138 1,302,383 1,355,148 1,420,873
General and Administrative 182,332 247,785 324,428 369,071 297,542 311,973
---------- --------- --------- ----------- ---------- --------------
Total 863,156 1,077,297 1,307,566 1,671,454 1,652,690 1,732,846
---------- --------- --------- ----------- ---------- --------------
Income from Operations 226,291 237,658 411,921 509,492 601,508 630,681
---------- --------- --------- ----------- ---------- --------------
OTHER INCOME (EXPENSES)
Interest Income 5,960 2,201 16,562 15,060 5,036 5,280
Interest Expense (40,445) (41,361) (72,562) (91,978) (65,935) (69,133)
Other - Net (3,847) 29,561 6,098 8,737 (1,167) (1,224)
---------- --------- --------- ----------- ---------- --------------
Other Income (Expense) - Net (38,332) (9,599) (49,902) (68,181) (62,066) (65,076)
---------- --------- --------- ----------- ---------- --------------
Income Before Provision for Income
Taxes 187,960 228,060 362,019 441,311 539,442 565,605
Provision for Income Taxes 53,155 64,154 101,488 123,450 162,696 170,587
---------- --------- --------- ----------- ---------- --------------
Net Income Before Minority Interests 134,805 163,906 260,531 317,861 376,746 395,018
Minority Interests - Net 1,741 3,882 5,254 1,488 4,669 4,897
---------- --------- --------- ----------- ---------- --------------
Income Before Extraordinary Item 133,064 160,024 255,277 316,373 372,077 390,121
Extraordinary Loss on Debt
Extinguishment, Net of Income
Taxes -- (7,561) -- -- -- --
---------- --------- --------- ----------- ---------- --------------
Net Income 133,064 152,463 255,277 316,373 372,077 390,121
========== ========= ========= =========== ========== ==============
Weighted Average Shares Outstanding
(thousands)
- Basic 449,295.0 449,299.8 449,987.9 451,037.0 453,174.0
------------ ----------- ----------- ----------- ----------
- Diluted 449,295.0 450,228.5 452,920.2 453,965.5 455,353.5
------------ ----------- ----------- ----------- ----------
Basic Earnings per Share(2) .30 .34 .57 .70 .82 .86
=== === === === === ===
Diluted Earnings per Share(2) .30 .34 .56 .70 .82 .86
--- --- --- --- --- ---
Cash Dividends per Share(4)(5) .06 .07 .09 .14 .17 .18
--- --- --- --- --- ---
----------
(1) Translated for convenience at the rate of Euro 1.00 = U.S. $1.0485, based
on the Noon Buying Rate of Euro to U.S. dollar on December 31, 2002.
(2) Earnings per Share for each year have been calculated based on the
weighted-average number of shares outstanding during the respective years,
taking into effect the 1998 five-for-one stock split and the 2000
two-for-one stock split as if the splits occurred on January 1, 1998. Each
ADS represents one ordinary share.
(3) Except per Share amounts, which are in Euro and in U.S. dollars, as
applicable.
(4) Dividends per Share are expressed in gross amounts without giving effect to
applicable withholding taxes and have been restated to reflect the 1998
five-for-one stock split and the 2000 two-for-one stock split as if the
splits occurred on January 1, 1998.
3
(5) Dividends are based on our consolidated net income for each fiscal year and
are paid in the immediately following fiscal year. Dividends reported
herein were paid in the year under which they have been reported.
(6) We acquired the Global Eyewear Division of Bausch & Lomb Incorporated, or
the Ray-Ban business, in June 1999. As such, 1999 includes the operating
results of the Ray-Ban business for approximately six months.
(7) We acquired all the outstanding shares of Sunglass Hut International, Inc.,
a specialty retailer of sunglasses, watches and other accessories, in April
2001. As such, 2001 includes the operating results of Sunglass Hut
International, Inc. and its subsidiaries for approximately nine months.
(8) Certain amounts in prior years have been reclassified to conform with the
2002 presentation.
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
------------ ----------- ------------ ----------- ----------- -----------------
(IN THOUSANDS OF EURO) (IN THOUSANDS OF
U.S. $)(1)
BALANCE SHEET DATA:
Working Capital(2) (88,653) (457,606) (38,755) (872,107) 141,391 148,248
Total Assets 1,626,133 2,568,393 2,968,208 3,948,362 3,586,332 3,760,269
Long-Term Debt 276,042 356,917 506,159 132,247 855,654 897,153
Shareholders' Equity 591,864 786,292 1,049,163 1,342,843 1,417,895 1,486,662
----------
(1) Translated for convenience at the rate of Euro 1.00 = U.S. $1.0485, based
on the Noon Buying Rate of Euro to U.S. dollar on December 31, 2002.
(2) See Item 5 - "Operating and Financial Review and Prospects--Liquidity and
Capital Resources."
DIVIDENDS
We may pay an annual dividend on the ordinary shares if it is approved by a
majority of our shareholders at the annual general meeting of shareholders. We
are required to pay an annual dividend on the ordinary shares if such dividend
has been approved by a majority of shareholders at the annual general meeting.
Before a dividend may be paid with respect to the results of any year, an amount
equal to 5 percent of our net income for such year must be set aside for the
legal reserve until the reserve, including amounts set aside during prior years,
is at least equal to one fifth of the nominal value of our issued share capital.
At our annual general meeting of shareholders held on June 25, 2003, our
shareholders approved the distribution of a cash dividend in the amount of Euro
0.21 per ordinary share. Our Board of Directors proposed, and the shareholders
approved, July 3, 2003 as the date for the payment of such dividend to all
holders of record of ordinary shares on June 27, 2003, including The Bank of New
York, as depositary on behalf of holders of our American Depositary Shares, or
ADSs. Each ADS represents the right to receive one ordinary share and is
evidenced by an American Depositary Receipt, or ADR. The ADSs will be traded
ex-dividend on June 30, 2003, and dividends in respect of the ordinary shares
represented by ADSs will be paid to The Bank of New York on July 3, 2003. The
Bank of New York will convert the Euro amount of such dividend payment into U.S.
dollars on July 3, 2003. The dividend amount for each ADS holder will be paid
commencing on July 10, 2003 to all such holders of record on July 2, 2003.
Future
4
determinations as to dividends will depend upon, among other things, our
earnings, financial position and capital requirements, applicable legal
restrictions and such other factors as the Board of Directors and our
shareholders may determine.
The table below sets forth the cash dividends paid on each ordinary share
in each year indicated.
DIVIDEND PER TRANSLATED INTO U.S. $
YEAR ORDINARY SHARE (1)(2)(3) PER ORDINARY SHARE (4)
---- ------------------------ -----------------------
(EURO) (U.S. $)
2003 .210 (5) n.a.(6)
2002 .170 0.165
2001 .140 0.120
2000 .085 0.081
1999 .074 0.075
1998 .063 0.068
----------
(1) Dividends per ordinary share are expressed in gross amounts without giving
effect to applicable withholding or other deductions for taxes and have
been restated to reflect the 1998 five-for-one stock split and the 2000
two-for-one stock split as if they occurred on January 1, 1998.
(2) Each ADS represents one ordinary share.
(3) Dividend policy is based upon, among other things, our consolidated net
income for each fiscal year and the relevant dividends are paid in the
immediately following fiscal year. Dividends set forth in the table were
paid in the fiscal year opposite which they have been reported.
(4) Translated at the Noon Buying Rate on the payment date to holders of ADS.
(5) The dividend of Euro 0.21 was approved by our Board of Directors on May 5,
2003 and was voted upon and approved at the annual general meeting of
shareholders held on June 25, 2003.
(6) The dividend per share will be converted into U.S. dollars by The Bank of
New York on July 3, 2003.
5
EXCHANGE RATE INFORMATION
The following tables set forth, for each of the periods indicated, certain
information regarding the Noon Buying Rate in New York City for cable transfers
in foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York, which we refer to as the Noon Buying Rate, expressed in U.S. $
per Euro 1.00. Amounts for the year ended December 31, 1998 were previously
reported in Italian Lire and have been recalculated into Euro using the fixed
rate of Euro 1.00 = Lire 1,936.27:
END OF
PERIOD HIGH LOW AVERAGE(1) PERIOD
--------------------------------------------------------------------------------
Year Ended December 31, 2002 0.8594 1.0485 0.9450 1.0485
--------------------------------------------------------------------------------
Year Ended December 31, 2001 0.8384 0.9545 0.8957 0.8901
--------------------------------------------------------------------------------
Year Ended December 31, 2000 0.8270 1.0332 0.9209 0.9388
--------------------------------------------------------------------------------
Year Ended December 31, 1999 1.0015 1.1790 1.0642 1.0076
--------------------------------------------------------------------------------
Year Ended December 31, 1998 1.0606 1.2176 1.1171 1.1733
--------------------------------------------------------------------------------
(1) The average of the Noon Buying Rates on each business day during the
period.
MONTH HIGH LOW
--------------------------------------------------------------------------------
December 2002 0.9927 1.0485
--------------------------------------------------------------------------------
January 2003 1.0361 1.0861
--------------------------------------------------------------------------------
February 2003 1.0708 1.0875
--------------------------------------------------------------------------------
March 2003 1.0545 1.1062
--------------------------------------------------------------------------------
April 2003 1.0621 1.1180
--------------------------------------------------------------------------------
May 2003 1.1200 1.1853
--------------------------------------------------------------------------------
On June 25, 2003, the Noon Buying Rate was U.S. $1.1592 per Euro 1.00.
The introduction of the new European currency, the Euro, on January 1,
1999, resulted in two changes to the posting of certified rates by the Federal
Reserve Bank of New York, commonly referred to as the "FRBNY."
1. Effective January 4, 1999, the FRBNY commenced posting a dollar-Euro
exchange rate; and
2. After a brief courtesy period concluding January 15, 1999, the FRBNY
ceased posting dollar rates against the currencies of the eleven
countries participating in the monetary union (i.e., the Austrian
schilling, Belgium franc, Finnish markka, French franc, German mark,
Irish punt, Italian lire, Luxembourg franc, Dutch guilder, Portuguese
escudo and Spanish peseta).
Unless otherwise indicated, all convenience translations included in this
annual report of amounts expressed in Euro into U.S. dollars for the relevant
period or date have been made using the Noon Buying Rate in effect as of the end
of such period or date, as appropriate.
6
In this annual report, unless otherwise stated or the context otherwise
requires, references to "$", "U.S. $", "dollars" or "U.S. dollars" are to United
States dollars, references to "Lira", "Lire" or "Lit." are to the Italian Lira
(singular) or to Italian Lire (plural), references to "Euro" are to the Common
European Currency, the Euro, and references to "A$" are to Australian dollars.
On January 1, 2001, we began reporting our operating results and financial
position in Euro, and as such all previous years have been translated from
Italian Lire to Euro at the fixed exchange rate of Euro 1.00 = Lire 1,936.27.
RISK FACTORS
Our future operating results and financial condition may be affected by
various factors, including those set forth below.
OUR FUTURE OPERATING PERFORMANCE DEPENDS UPON OUR ABILITY TO SUCCESSFULLY
INTRODUCE NEW PRODUCTS.
The mid- and premium-price categories of the prescription frame 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 products 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.
THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE, AND OUR FAILURE TO
MAINTAIN AN EFFICIENT DISTRIBUTION NETWORK COULD HARM OUR BUSINESS.
The mid- and premium-price categories of the prescription frame and
sunglasses markets in which we operate are highly competitive. We believe 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.
OUR BUSINESS IS HIGHLY SENSITIVE TO ECONOMIC CONDITIONS AND CHANGING CONSUMER
PREFERENCES.
The fashion eyewear industry is cyclical. Downturns in general economic
conditions or uncertainties regarding future economic prospects, which affect
consumer disposable income, have historically adversely affected consumer
spending habits in our principal markets. Therefore, future economic downturns
or uncertainties could have a material adverse effect on our business, results
of operations and financial condition.
The eyewear industry is also subject to rapidly changing consumer
preferences. While eyewear has achieved widespread acceptance as a fashion
accessory, and the fashion eyewear 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 which will adversely affect the fashion
eyewear industry as a whole or Luxottica in particular. Changes in fashion could
also affect the popularity and, therefore, the value of the fashion licenses
granted to us by designers. Any event or circumstance resulting in reduced
market acceptance of one or more of these
7
designers could reduce our sales and the value of our inventory of models based
on that design. Unanticipated shifts in consumer preferences may also result in
excess inventory and underutilized manufacturing capacity. In addition, our
success depends, in large part, on our ability to anticipate and react to
changing fashion trends in a timely manner. Any sustained failure to identify
and respond to such trends would adversely affect our business, results of
operations and financial condition.
WE MAY BE UNABLE TO ACHIEVE AND MANAGE GROWTH, WHICH COULD HARM OUR BUSINESS.
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 HIGHLY 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 frames and sunglasses under certain designer names,
including CHANEL, GENNY, BYBLOS, SALVATORE FERRAGAMO, EMANUEL UNGARO, BROOKS
BROTHERS, SERGIO TACCHINI, WEB, ANNE KLEIN, BULGARI, MOSCHINO and, most
recently, VERSACE, VERSUS and VERSACE SPORT. These license agreements typically
have terms of between three and five years (with the exception of the license
agreement for the VERSACE, VERSUS and VERSACE SPORT lines which has an initial
term of ten years, renewable for an additional term of ten years), and require
us to make guaranteed and contingent royalty payments to the licensor. We
believe that our ability to maintain and negotiate favorable license agreements
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, if we are unable to negotiate and maintain satisfactory
license arrangements with leading designers, our growth prospects and financial
results could suffer. In this regard, the license agreements that enabled us to
manufacture and distribute prescription frames and sunglasses under the names
GIORGIO ARMANI and EMPORIO ARMANI expired on December 31, 2002 and were not
renewed. The wholesale sales of the GIORGIO ARMANI and EMPORIO ARMANI designer
lines collectively accounted for approximately 7.3 percent of our total net
sales in 2001 and approximately 7.2 percent of our total net sales in 2002.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THE AVAILABILITY OF VISION
CORRECTION ALTERNATIVES TO PRESCRIPTION EYEGLASSES.
Our business could be negatively impacted by the availability and
acceptance of vision correction alternatives to prescription eyeglasses, such as
contact lenses and refractive optical surgery. According to industry estimates,
approximately 25 million people wear contact lenses in the United States, and
disposable contact lenses is the fastest growing segment of the lens subsector.
In addition, the use of refractive optical surgery has grown substantially since
it was approved by the U.S. Food and Drug Administration in 1995. Increased use
of vision correction alternatives could result in decreased use of our
prescription eyewear products, which would
8
have a material adverse impact on our business, results of operations, financial
condition and prospects.
BECAUSE OUR ASSETS, LIABILITIES, SALES AND COSTS ARE DENOMINATED IN SEVERAL
CURRENCIES, WE ARE VULNERABLE TO EXCHANGE RATE FLUCTUATIONS.
Our principal manufacturing facilities are located in Italy and we maintain
sales and distribution facilities throughout the world. As a result, we are
vulnerable to foreign exchange rate fluctuations in two principal areas:
- we incur most of our manufacturing costs in Euro and receive a
significant part of our revenues in other currencies, particularly the
U.S. dollar; therefore, a strengthening of the Euro relative to other
currencies in which we receive revenues could negatively impact the
demand for our products and adversely affect our business and results
of operations; and
- a substantial portion of our assets, liabilities, revenues and costs
are denominated in various currencies other than Euro, with most of
our operating expenses in U.S. dollars; as a result, our operating
results, which are reported in Euro, are affected by currency exchange
rate fluctuations, particularly between the U.S. dollar and the Euro.
As our international operations grow, future movements of the exchange rate
of the Euro against the U.S. dollar and other currencies may negatively impact
our reported results. In this regard, the U.S. dollar has continued to weaken
considerably against the Euro in the first six months of 2003.
See Item 11 - "Quantitative and Qualitative Disclosures about Market Risk."
OUR BUSINESS IS SUBJECT TO RISKS RELATING TO INTERNATIONAL SALES AND EXPOSURE TO
CHANGING LOCAL CONDITIONS.
We currently operate worldwide and intend to expand our operations in many
countries, including certain developing countries in Asia. Therefore, we are
subject to various risks inherent in conducting business internationally,
including the following:
- exposure to local economic and political conditions;
- export and import restrictions;
- currency exchange rate fluctuations and currency controls;
- 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.
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.
9
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, WHICH WOULD ADVERSELY AFFECT
OUR BUSINESS AND FINANCIAL RESULTS.
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 registered trademarks,
and any trademark registration that is granted may be ineffective in preventing
competition and could be held invalid if subsequently challenged. In addition,
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 property rights or 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 significant resources toward defending our proprietary rights.
However, 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 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 COULD BE ADVERSELY AFFECTED BY LEGAL PROCEEDINGS TO WHICH WE ARE,
OR MAY BECOME, A PARTY.
We are currently a party to legal proceedings arising from our acquisition
of Sunglass Hut International, Inc. In addition, in the ordinary course of our
business, we become involved in various other claims, lawsuits, investigations
and governmental and administrative proceedings, some of which are significant.
Adverse judgments or determinations in one or more of these proceedings could
have a material adverse effect on our business, results of operations and
financial condition. See Item 8 - "Financial Information--Legal Proceedings."
WE ARE SUBJECT TO REGULATION BY GOVERNMENTAL AUTHORITIES, AND OUR COMPLIANCE
WITH THESE REGULATIONS COULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Our operations are subject to regulation by governmental authorities in the
United States and other jurisdictions in which we conduct business. Governmental
regulations, both in the United States and other jurisdictions, have
historically been subject to change. New or revised requirements imposed by
governmental regulatory authorities could have an adverse affect on us,
including increased costs of compliance. We may also be adversely affected by
changes in the interpretation or enforcement of existing laws and regulations by
governmental authorities. See Item 4 - "Information on the Company--Regulatory
Matters."
10
ITEM 4. INFORMATION ON THE COMPANY
BUSINESS OVERVIEW
We are the world leader in the design, manufacture and distribution of
prescription frames and sunglasses in the mid- and premium-price categories. Our
products are primarily manufactured in Italy and are marketed under a variety of
well-known brand names. Our house brands include RAY-BAN, REVO, ARNETTE, KILLER
LOOP, PERSOL, VOGUE, LUXOTTICA and SFEROFLEX. Our designer lines include CHANEL,
GENNY, BYBLOS, SALVATORE FERRAGAMO, EMANUEL UNGARO, BROOKS BROTHERS, SERGIO
TACCHINI, WEB, ANNE KLEIN, BULGARI and MOSCHINO. Our license agreements with
Giorgio Armani S.p.A. to design, manufacture and distribute prescription frames
and sunglasses under the names GIORGIO ARMANI and EMPORIO ARMANI expired on
December 31, 2002 and were not renewed. In January 2003, we entered into a
license agreement with Gianni Versace S.p.A. for the world-wide exclusive rights
to design, market, produce and distribute VERSACE, VERSUS and VERSACE SPORT
sunglasses and prescription frames. This license agreement has an initial term
of ten years and is renewable, at our discretion, for an additional ten year
term. The new collections were launched in March 2003.
We manufactured approximately 31.7 million prescription frames and
sunglasses in 2002, compared to 31.1 million units in 2001. We operate six
production facilities in Italy. In addition, we operate a facility in China for
the production of metal frames.
We operate our business through an extensive worldwide wholesale network
and a retail distribution network based primarily in North America. In 2002,
through our wholesale and retail networks, we distributed approximately 13.3
million prescription frames and approximately 19.7 million sunglasses in more
than 2,450 models. Our products are distributed in approximately 120 countries
worldwide.
Our wholesale network is comprised of 28 wholly- or partially-owned
subsidiaries operating in principal markets, over 1,100 sales representatives
and approximately 100 independent distributors. Our primary wholesale customers
include retailers of mid- and premium- priced eyewear such as independent
opticians, optical and sunglass chains, optical superstores, sunglass specialty
stores and duty-free shops. In certain countries, and especially in North
America, wholesale customers also include optometrists and ophthalmologists,
health maintenance organizations, or HMOs, and department stores.
We also operate the largest optical retailer in North America in terms of
sales through our LensCrafters subsidiary ("LensCrafters"), which we acquired in
1995. As of December 31, 2002, LensCrafters operated 882 stores, encompassing
3.9 million square feet of space, in the United States, Canada and Puerto Rico.
LensCrafters offers a wide selection of prescription frames and sunglasses, most
of which are manufactured by us, as well as a variety of prescription frames and
sunglasses manufactured by third parties. In addition, each store has a licensed
optometrist on site and a lens grinding laboratory, which provides efficient
service to customers in about an hour.
Until 1999, we were focused primarily on the prescription frame segment of
the optical market. In June 1999, we acquired the Eyewear Division of Bausch &
Lomb Incorporated, which we refer to as our Ray-Ban business. The Ray-Ban
acquisition significantly increased our
11
presence in the sunglasses market, strengthened our house brand portfolio and
provided us with sunglass crystal lens manufacturing technology and
manufacturing facilities and equipment. Since the Ray-Ban acquisition, we have
completed an aggressive reorganization of the Ray-Ban business to integrate and
improve its operations.
In April 2001, we continued to strengthen our sunglasses business by
acquiring Sunglass Hut International, Inc. and its subsidiaries ("Sunglass
Hut"), a leading retailer of sunglasses worldwide. As of December 31, 2002,
Sunglass Hut operated an aggregate of 1,914 outlets throughout North America,
Europe and Australia. Sunglass Hut outlets are located mostly in enclosed malls
and airports with an average retail space of 526 square feet per kiosk/store.
We had net sales of Euro 2,417 million, Euro 3,065 million and Euro 3,132
million for 2000, 2001 and 2002, respectively. Net sales in our retail segment
accounted for 59.8 percent, 68.9 percent and 68.9 percent of total net sales,
respectively, for these years.
COMPANY HISTORY
In 1961, Leonardo Del Vecchio and others established our original
operations in Agordo, near Belluno, in Northeastern Italy. Since that time, we
have enjoyed significant growth in the scope and size of our operations.
Luxottica Group S.p.A. was organized as a corporation on November 23, 1981 under
the laws of the Republic of Italy.
We have developed and grown in several phases, each of which is notable for
a specific business strategy. Throughout most of the 1960's, we manufactured
molds, metal-cutting machinery, frame parts and semi-finished products for the
optical market. We progressively expanded our production capabilities to enable
us to produce a finished frame product.
In 1969, we launched our first line of Luxottica brand frames, beginning
the transformation from a third-party supplier to an independent manufacturer
with a line of branded products. In the early 1970's, we distributed our
products exclusively through wholesalers.
In 1974, with the acquisition of the distributor that had marketed the
Luxottica product line in Italy since 1971, we took our first step towards
vertical integration. During the early 1980's, we continued to pursue vertical
integration by acquiring independent optical distributors and forming wholesale
subsidiaries in strategic markets. In 1981, with our acquisition of "La
Meccanoptica Leonardo S.p.A.", the owner of the SFEROFLEX brand and the holder
of an important patent for a flexible hinge, we increased our market share in
Italy and various key European markets.
During the late 1980's, we began to expand our product lines to include the
design, manufacture and distribution of designer frames through license
agreements with major fashion designers. In 1990, our ADSs were listed on the
New York Stock Exchange. Throughout the 1990's, we continued to expand our
distribution network by forming new wholesale subsidiaries.
In 1995, we became the first frame manufacturer to enter the North American
retail market through the acquisition of LensCrafters. Throughout the 1990's, we
also expanded into the sunglasses business through various acquisitions. In
1990, we acquired Florence Line S.p.A., the owner of the "Vogue" brand. In 1995,
we acquired the medium- to high-end brand product
12
line of Persol S.p.A. Through the acquisition of the Ray-Ban business in 1999,
we significantly increased our presence in the sunglasses market, strengthened
our house brand portfolio, and gained crystal lens manufacturing technology,
know-how and capacity.
In December, 2000, our ordinary shares were approved for listing on the
"Mercato Telematico Azionario della Borsa Italiana S.p.A." (the "Italian Stock
Exchange").
In April 2001, we acquired Sunglass Hut, a leading retailer of sunglasses
worldwide. The purchase price for the acquisition was approximately U.S. $653
million (including U.S. $191 million of assumed debt, net of cash on hand). The
cash portion of the purchase price was provided through a credit facility with
Banca Intesa S.p.A. and cash on hand.
On May 31, 2001, through an indirect wholly-owned subsidiary, we acquired
all of the issued and outstanding common stock of First American Health
Concepts, Inc., a leading provider of managed vision care plans in the United
States. The purchase price for the acquisition was approximately U.S. $23.5
million, net of cash acquired.
Our principal executive office is located at Via Cantu, 2, Milan, 20123,
Italy, and our telephone number at that address is (011) 39-02-863341. Our agent
for service in the United States is CT Corporation, 111 Eighth Avenue, New York,
New York 10011, telephone (212) 894-8940. We are domiciled in Milan, Italy.
RECENT DEVELOPMENTS
THE OPSM ACQUISITION
On June 16, 2003, our wholly-owned subsidiary, Luxottica South Pacific Pty
Limited ("Luxottica South Pacific"), commenced a cash offer for the acquisition
of all of the outstanding shares and the cancellation of all the outstanding
options and performance rights (which give the holder the right to receive
shares without payment of an exercise price, provided that certain performance
tests are met) of OPSM Group Ltd ("OPSM"), the largest eyewear retailer in
Australia. The cash offer is subject to certain conditions, including, but not
limited to, approval by relevant governmental authorities and the acquisition by
Luxottica South Pacific, either alone or together with one or more affiliates,
of the full beneficial interest in at least 90 percent by value of all of the
outstanding shares and securities convertible into shares of OPSM.
Under the terms of the offer, holders of OPSM shares are entitled to
receive A$3.90 cash per share, to be adjusted for the fully franked special
dividend of A$0.10 per share declared by OPSM on June 10, 2003, resulting in our
net cash payment of A$3.80 cash (Euro 2.21 as of June 26, 2003) for each OPSM
share. Holders of OPSM performance rights are entitled to receive A$3.90 cash
(Euro 2.27 as of June 26, 2003) for each OPSM performance right, and holders of
OPSM options are entitled to receive A$3.90 cash (Euro 2.27 as of June 26, 2003)
for each OPSM option less the exercise price for the option. The Board of
Directors of OPSM has unanimously recommended that OPSM shareholders and holders
of performance rights and options accept our offer, in the absence of a superior
offer. In addition, all OPSM directors and OPSM's Managing Director have stated
that they intend to accept our offer in respect of their personal holdings of
OPSM shares, options and performance rights, in the absence of a superior
13
offer. If the offer is successful, the acquisition of OPSM is expected to close
in the third quarter of 2003. We intend to finance the aggregate purchase price
of approximately A$536 million (Euro 312 million as of June 26, 2003) with
proceeds from certain credit arrangements available to us from commercial banks.
However, there can be no assurance that the transaction will be consummated on
the terms or within the time period contemplated or at all. For additional
information regarding the offer, see the Bidder's Statement, dated June 10,
2003, from Luxottica South Pacific to the shareholders of OPSM shares filed as
an exhibit to this annual report.
OPSM has 481 stores in Australia operating under three brands, OPSM,
Laubman & Pank and Budget Eyewear. It is also the market leader in New Zealand,
with 34 stores, and has expanded into Asia, with 80 stores in Hong Kong, 12
stores in Singapore and 12 stores in Malaysia. OPSM had revenues of A$415.4
million (Euro 236.1 million as of June 28, 2002) and net profit after-tax of
A$25.7 million (Euro 14.6 million as of June 28, 2002) for its fiscal year ended
June 30, 2002 and revenues of A$231.0 million (Euro 124.1 million as of December
31, 2002) and net profit after-tax of A$9.3 million (Euro 5.0 million as of as
of December 31, 2002) for its half year ended December 31, 2002. These financial
measures have been prepared in accordance with Australian GAAP and thus may
differ from similar measures prepared under U.S. GAAP.
ORGANIZATIONAL STRUCTURE
We are a holding company, and virtually all of our operations are conducted
through our wholly-owned subsidiaries. We operate in two industry segments:
manufacturing and wholesale distribution, and retail distribution. In the retail
segment, we primarily conduct our operations through LensCrafters and Sunglass
Hut. In the manufacturing and wholesale distribution segment, we operate through
approximately 7 manufacturing subsidiaries and 28 geographically oriented
wholesale distribution subsidiaries. See "--Distribution."
Set forth below is certain information regarding our significant
subsidiaries (including holding companies) as of December 31, 2002.
PROPORTION
SUBSIDIARY COUNTRY OF OWNERSHIP
--------------------------------------------------------------------------------
Luxottica S.r.l. Italy 100%
--------------------------------------------------------------------------------
Killer Loop Eyewear S.r.l. Italy 100%
--------------------------------------------------------------------------------
Luxottica U.S. Holdings Corp. U.S.A. 100%
--------------------------------------------------------------------------------
Avant-Garde Optics, LLC U.S.A. 100%
--------------------------------------------------------------------------------
The United States Shoe Corporation U.S.A. 100%
--------------------------------------------------------------------------------
LensCrafters Inc. U.S.A. 100%
--------------------------------------------------------------------------------
Sunglass Hut International, Inc. U.S.A. 100%
--------------------------------------------------------------------------------
Sunglass Hut Trading Corporation U.S.A. 100%
--------------------------------------------------------------------------------
14
PRODUCTS AND SERVICES
Our prescription frames and sunglasses are manufactured and sold as either
house brands or designer lines. House brands consist of eyewear sold under brand
names that we own. Designer lines are produced under designer names held by us
under license agreements with third parties. Our products, for both house brands
and designer lines, fall into a variety of different styles, from conventional
to contemporary and fashion forward styling. Each brand is tailored for a
specific market segment based on characteristics such as the consumer's age,
lifestyle, and fashion consciousness.
In 2002, we produced a combined total of approximately 31.7 million
prescription frames and sunglasses. In 2001 and 2000, we produced approximately
31.1 million and 29.1 million prescription frames and sunglasses, respectively.
The following table sets forth information regarding prescription frames
and sunglasses we manufactured, expressed as a percentage between designer
brands and house brands, for the periods indicated:
YEAR ENDED DECEMBER 31,
(AS A PERCENTAGE OF TOTAL SALES)
1998 1999 2000 2001 2002
----- ---- ---- ----- ----
Designer brands 52.5 44.1 41.1 40.6 39.5
House brands 47.5 55.9 58.9 59.4 60.5
Total unit sales 100.0 100.0 100.0 100.0 100.0
The following table sets forth information regarding the percentage of
units manufactured by us by product type for the periods indicated:
YEAR ENDED DECEMBER 31,
(AS A PERCENTAGE OF TOTAL SALES)
1998 1999 2000 2001 2002
----- ---- ---- ----- ----
Prescription frames 65.2 60.8 49.6 42.8 40.3
Sunglasses 34.8 39.2 50.4 57.2 59.7
Total unit sales 100.0 100.0 100.0 100.0 100.0
The following table sets forth our net sales in thousands of Euro by
geographic market over the past three years:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF EURO)
2000 2001 2002
---- ---- ----
Italy 889,788 996,442 1,009,882
North America 1,713,660 2,283,939 2,274,390
Rest of World 563,150 622,331 675,941
Adjustment/Eliminations (749,810) (837,805) (828,012)
Total 2,416,788 3,064,907 3,132,201
15
Since 1990, sunglasses have become an increasingly significant product line
for us as we seek to capitalize on growth opportunities in the sunglasses
segment. In 1990, we acquired a distributor that supplied sunglasses under the
VOGUE brand name. In 1995, we expanded our activities in the sunglasses market
by acquiring Persol S.p.A., an Italian producer of high quality, fashionable
sunglasses and prescription frames in the premium-priced segment of the market.
In 1999, we acquired the Ray-Ban business from Bausch & Lomb Incorporated,
including the RAY-BAN, REVO, ARNETTE and KILLER LOOP brand names. As a result of
our acquisition of the Ray-Ban business, the percentage of our unit sales
represented by sunglasses manufactured by us has grown significantly. This trend
continued with the acquisition of Sunglass Hut. Thus, unit sales of sunglasses
manufactured by us and third parties in 2002, as a percentage of total unit
sales, was 59.7 percent, as compared to 50.4 percent in 2000, and 57.2 percent
in 2001.
HOUSE BRANDS
Our house brands, almost entirely designed and manufactured by us, are sold
worldwide under brand names such as LUXOTTICA, SFEROFLEX, MIRARI, VOGUE, T3,
SFEROSOL and PERSOL, and, as a result of the Ray-Ban acquisition, RAY-BAN, REVO,
KILLER LOOP and Arnette. The following is a summary description of each of our
most significant house brands:
LUXOTTICA: The first product line we created, it comprises prescription
frames and sunglasses, and targets a broad mix of consumers. In 2000, this
product line was extended to include LUXOTTICA TITANIUM, a high quality
prescription frame line made of lightweight titanium material with a minimalist
design.
PERSOL: Created in 1926 and acquired by Luxottica in 1995, the PERSOL brand
is synonymous with class, elegance, tradition, and technical precision. PERSOL
eyewear, which includes a wide range of prescription frames and sunglasses, is
marketed as a timeless fashion accessory due to the elegance and design of our
products.
VOGUE: Modern and innovative, the VOGUE brand was acquired by Luxottica in
1990. Vogue, a recognized fashion eyewear accessory, symbolizes a young and
dynamic style which stresses attention to detail and fashion.
SFEROFLEX: This product line, which in 1981 became the first brand name
acquired by Luxottica, is comprised of only prescription frames characterized by
a classic and comfortable style, because their flexible hinges allow the frame
to adapt to the unique face shape of each wearer without causing discomfort.
RAY-BAN: Created in the 1930's, RAY-BAN is the brand leader in the
sunglasses market, bringing together renowned sun lenses and a timeless style.
In March 2003, we introduced our first prescription eyewear collection for
RAY-BAN, thereby broadening the assortment of products offered under this name.
REVO: A product line targeted towards sport and leisure wearers, REVO is
known for its high quality lenses which are treated with a specialized coating
process.
16
KILLER LOOP: Created in 1989 as a sun and sports eyewear brand that
combines design and quality, this young brand has evolved throughout the years
from exclusively sports eyewear to also include leisure eyewear.
ARNETTE: Targeted to young consumers, this sports product line is
characterized by a very forward thinking design.
We currently produce about 1,050 distinct styles of frames within our house
brands. Each style is typically produced in three sizes and at least four
colors. Actual availability of product styles, colors and sizes varies among
geographic markets depending upon local demand.
DESIGNER LINES
Our designer lines are produced and distributed through license agreements
with major fashion houses. Currently, we produce 13 designer lines under the
names CHANEL, GENNY, BYBLOS, SALVATORE FERRAGAMO, EMANUEL UNGARO, BROOKS
BROTHERS, SERGIO TACCHINI, WEB, ANNE KLEIN, BULGARI, MOSCHINO, VERSACE, VERSUS
and VERSACE SPORT. The license agreements governing these designer lines are
exclusive contracts and typically have terms between three and five years, with
the exception of the recently completed license agreement with Gianni Versace
S.p.A., which has an initial term of ten years, with a ten year renewal period.
See "--Trademarks and License Agreements--License Agreements." Designer
collections are developed through the collaborative efforts of our in-house
design staff and the brand designer.
The following is a summary description of each of our designer lines:
CHANEL: In 1999, we became the first company licensed to produce CHANEL
products. The CHANEL product line, targeting the high-end consumer, reflects the
essential characteristics of the brand: style, elegance, and class.
GENNY: The GENNY line targets high-end consumers with a classic and
sophisticated design.
BYBLOS: BYBLOS is a product line for those who want a high quality product
with a modern, anticonformist style that is not overly sophisticated and
intellectual.
SALVATORE FERRAGAMO: This product line is characterized by essential and
clean design, innovation, and timeless elegance. It uses original materials and
colors and is focused on details and high quality.
EMANUEL UNGARO: This product line presents collections with different
characteristics; frames of classic and elegant form with natural colors as well
as frames of innovative design with bright and contrasting colors.
BROOKS BROTHERS: The BROOKS BROTHERS line targets the male market with a
classic style.
SERGIO TACCHINI: This is a sports and leisurewear line targeting a young
and dynamic customer who requests optimum performance at a competitive price.
17
WEB: WEB eyewear is inspired by a retro look and is distinguished by its
original design, innovative colors and form. WEB is for those who desire
timeless features with the highest quality.
ANNE KLEIN: This product line targets successful professional women who
place an emphasis on quality and image.
BULGARI: BULGARI eyewear is distinguished by the high quality of its
material, attention to detail and elegant design. This product line is targeted
towards a clientele who seek something exclusive.
MOSCHINO: This product line distinguishes itself from other Luxottica
product lines based on the originality of its models which are consistent with
the MOSCHINO brand fashion.
VERSACE, VERSUS AND VERSACE SPORT: Founded in 1978, Versace quickly rose to
become one of the world's leading names in fashion. The VERSACE line targets
individuals who seek high glamour, luxury and cutting edge design. VERSUS is
Versace's younger, street inspired collection.
Our designer lines presently feature approximately 1,400 different styles.
RETAIL OPERATIONS
The Luxottica Retail division consists of two strong names in the North
American retail market place: LensCrafters and Sunglass Hut International. In
addition to ophthalmic products and sunglasses, we also sell watches and
accessories under the store names of Watch World and Watch Station (collectively
herein referred as the "Retail Division").
LENSCRAFTERS. Through LensCrafters, we operate a major retail network which
offers a wide selection of prescription frames, sunglasses, lenses, and other
optical products in the North American market. LensCrafters' optical stores are
generally located in commercial malls and include a laboratory, which provides
efficient one-hour service to customers. Each store has an affiliated licensed
optometrist on site, allowing the customer to have an eye examination, select
from a large range of prescription eyewear, and receive the selected frame, with
prescription lenses, in about an hour.
LensCrafters' products include innovative lenses, such as FeatherWates(TM)
(lightweight, thin, and impact resistant), DURALENS(TM) (super scratch
resistant), ByeLines(TM) (bifocals without visible lines) and Invisibles(TM)
(anti-reflective).
We believe that our acquisition of LensCrafters in 1995 has allowed us to:
- obtain a significant competitive advantage over our competitors for
market share in the North American market; and
- enter a complementary segment that allows for a direct distribution
to, and closer relationship with, the end customer.
18
When we acquired LensCrafters in 1995, LensCrafters had approximately 600
stores. Immediately following the acquisition, we closed approximately 50
discount stores. Between 1995 and 1998, we opened new stores and acquired other
retail chains, reaching over 850 stores in North America by 1999. From 1999 to
2002, LensCrafters' expansion has focused primarily on the further development
of those stores opened between 1996 and 1998. However, we will continue to
evaluate potential retail expansion opportunities in North America through the
acquisition of retail chains and stores in areas where we are not already
heavily represented and in other prime locations.
Since the LensCrafters acquisition, we have improved the efficiency of
LensCrafters stores by distributing frames directly from our manufacturing
facilities to the stores. This has improved inventory levels and allowed for a
more rapid supply of styles based on daily sales and inventory data. This has
also increased the percentage of our products available in LensCrafters stores.
In addition, we have implemented a gradual reduction in promotional activities
while at the same time improving the range of our products and customer service.
We also continue to emphasize product quality, rapid and efficient customer
service and innovative lens and frame technology. In order to improve the focus
on sunglasses, we have added a section, "one third sun," devoted only to
sunglasses, in many stores. As a result of these initiatives, LensCrafters' net
sales have increased significantly since 1995.
LensCrafters is currently the largest optical retail chain in North America
in terms of sales. LensCrafters stores sell not only Luxottica products, but
also a wide range of lenses and optical products made by other suppliers.
SUNGLASS HUT INTERNATIONAL. With the acquisition of Sunglass Hut in 2001,
we became the world's leading specialty retailer of sunglasses and a world
leader in specialty retailing of popular price watches. Sunglass Hut has over
1,900 retail locations located throughout North America, Europe and Australia.
Sunglass Hut operates in-line stores and kiosks in shopping malls, as well as
stores in street centers in high traffic streets and in airports. We have
increased sales of Luxottica manufactured products in Sunglass Hut locations
from approximately 14.3 percent of total Sunglass Hut net sales in April 2001
(first month following the acquisition) to 35.1 percent in December 2002. In
addition to sunglasses manufactured by us, Sunglass Hut continues to sell a
variety of frames manufactured by third party vendors, with Oakley, Inc. being
the most significant in 2002. Oakley brands represented approximately 18.9
percent of Sunglass Hut's sales during 2002. After the acquisition of Sunglass
Hut, we implemented a plan to consolidate the administrative and certain other
functions of the Sunglass Hut business with our LensCrafters operations. The
plan was substantially completed by the fourth quarter of 2001, allowing us to
realize significant synergies between the two optical retailing companies.
We will continue to look to expand our retail operations in North America
through opening of new stores or kiosks, or strategic acquisitions when deemed
appropriate.
THE OPSM ACQUISITION
See "Recent Developments" above for a description of our pending offer to
acquire all of the outstanding securities of OPSM.
19
PRODUCTION PROCESS
OVERVIEW
We produce both metal and plastic frames. In addition to our frame
manufacturing capacity, since 1999 we have also produced crystal and
polycarbonate sunglass lenses exclusively for our sunglasses collections.
Production is principally carried out in our six Italian manufacturing
facilities. In the Far East, we produce certain low-cost private label products
distributed by LensCrafters. Each of our facilities is tailored to a specific
production technology which allows us to achieve a high level of productivity.
DESIGN AND PROTOTYPE SELECTION
We believe that an important aspect of our success has been our emphasis on
design and the continuous development of new styles. Our in-house designers work
jointly with external designers to develop new models.
For our designer line products, our design team works with licensors to
discuss the basic themes and fashion concepts for each product and then works
closely with the licensor's designers to refine such themes. In addition, our
design team works directly with our marketing and sales departments, which
monitor demand for our current models as well as general style trends in
eyewear. The data obtained from our marketing and sales departments is then used
to refine product designs and market positioning in order to react to changing
consumer preferences.
Once the product concepts have been selected and approved, we produce
prototypes that are used to evaluate the proposed design. Our prototypes are
developed using computer-aided design/ computer-aided manufacturing technology,
known as CAD/CAM, which is fully integrated with our manufacturing processes.
CAD/CAM technology allows a designer to view and modify two- and
three-dimensional images of a new frame. Because this technology is fully
integrated with the manufacturing processes, the conversion from prototype to
production is streamlined.
All prototypes are subject to review and approval by our licensors and our
designers to ensure consistency with the distinctive image of each product line.
Each year, we add approximately 750 new models to our collections. Therefore,
each collection consists of both new models and the most successful existing
models. The ability to constantly renew our product base has enabled us to meet
consumer demand in each market segment in which our brands are targeted. See
Item 3 - "Key Information--Risk Factors--Our business is highly sensitive to
economic conditions and changing consumer preferences."
SOURCING
The principal raw materials and parts purchased for our manufacturing
process include plastic resins, metals, lenses and frame parts. Historically, we
have purchased a substantial majority of our raw materials in Europe, and to a
lesser extent in Asia and the United States. In addition, we use certain
external suppliers for eyeglass cases and packaging materials. The Ray-
20
Ban acquisition provided us with know-how and sunglass crystal lens
manufacturing capabilities. We believe that our ability to produce sunglass
crystal lenses is strategically important given our expanded presence in the
sunglasses market.
We do not depend on any single source of supply for any of our principal
raw materials. Although we do not have formal, long-term contracts with
suppliers, we have not experienced any significant interruptions in supply.
Historically, prices of the principal raw materials used in our manufacturing
processes have been stable. However, there can be no assurance that this price
stability will continue.
MANUFACTURING
We have six frame manufacturing facilities in Italy. Five facilities are
located in the Northeast, the area in which most of the country's optical
industry is based, and one is located near Turin. These facilities are highly
automated, which has allowed us to maintain a high level of production without
significant capital outlay. In certain of these facilities, we also produce
sunglass crystal lenses and polycarbonate lenses. Since 1998, through our 50
percent owned joint venture with a Japanese partner, we have also operated a
manufacturer of prescription frames in China (Tristar Optical Company Ltd.)
which produces frames for distribution primarily in North America. In 2001, we
acquired the remaining 50 percent interest in this Chinese manufacturer, and now
it is one of our wholly-owned subsidiaries.
Over the past several years, we have consolidated our manufacturing
processes by tailoring each of our manufacturing facilities in Italy to a
specific production technology. This consolidation has allowed us to improve
both the productivity and quality of our operations. We produce plastic frames
in our facilities in Sedico, Pederobba and Turin, while metal frames are
produced in our facilities in Agordo and Rovereto. Frame parts are produced in
our facility in Cencenighe. In 2002, approximately 70 percent of the frames
manufactured by us were metal-based and the remainder were plastic.
The manufacturing process for both metal and plastic frames and sunglasses
begins with the fabrication of precision tooling and molds based on prototypes
developed by our in-house design and engineering staff. We believe that our
in-house capacity to engineer and produce precision tooling and molds gives us a
strong competitive advantage by enabling us to adapt quickly to market trends by
reducing the lead time for product development, containing production costs, and
responding to the varying needs of different markets by maintaining smaller and
more efficient production runs.
The manufacturing process for metal frames is comprised of approximately 70
phases, beginning with the production of basic components such as rims, temples
and bridges, which are produced through a molding process. These components are
welded together to form frames through numerous stages of detailed assembly
work. Once assembled, the metal frames are treated with various coatings to
improve their resistance and finish, and then prepared for lens fitting and
packaging.
We manufacture plastic frames using either a milling process or injection
molding, depending upon the style and color of the frame. In the milling
process, a computer-controlled
21
machine carves frames from colorized plastic sheets. This process produces rims,
temples and bridges that are then assembled, finished and packaged. In the
injection molding process, plastic resins are liquefied and injected in molds.
The plastic parts are then assembled, coated, finished and packaged.
Our efficient distribution network allows us to track sales and inventory
data on a weekly basis. As a result, we are able to:
- make and revise manufacturing plans on the basis of current sales
information;
- reallocate inventory within our wholesale subsidiaries, thereby
reducing overall inventory levels and the risk of obsolescence; and
- react quickly to changing market trends by providing rapid feedback to
our in-house design team.
The Ray-Ban acquisition brought significant changes to our manufacturing
operations. Following the acquisition, we closed all of Ray-Ban's frame
manufacturing facilities outside Italy, except initially for the Hong Kong
facility, and transferred production to our existing facilities in Italy. We
also made significant investments in new machinery, equipment and tooling to
support this transfer. Accordingly, in 2000, our manufacturing facilities in
Italy increased production by approximately 20 percent. As a result of the
integration of Ray-Ban's manufacturing operations, our profit margins on Ray-Ban
products are currently comparable to our other products. In 2001, we closed the
Hong Kong manufacturing facility and have transferred the crystal lenses
production capacity to our Lauriano plant in Italy.
We engage in research and development activities relating to our
manufacturing processes on an on-going basis. As a result of such activities, we
have invested, and will continue to invest, in automation, thus increasing
efficiency while improving quality. Much of our manufacturing process is
automated, including the production of metal and plastic frame parts and the
galvanization of metal frames.
QUALITY CONTROL
One of our key strategic objectives is ensuring the quality of our
products. In 1997, we were among the first companies in the eyewear industry to
obtain ISO 9001 certification. To ensure the high quality of our products, our
quality control and process control teams regularly inspect work-in-progress at
various stages of the production cycle. In addition, the majority of materials
that we purchase are quality tested. We also conduct inspections of, and certify
compliance with, the production processes of our main suppliers. Each of our
prescription frames and sunglasses undergoes several stages of quality
inspection. Due to the efficiency of our quality controls, the return rate for
defective merchandise manufactured by us is approximately 1 percent.
22
DISTRIBUTION
We distribute our products through wholesale and retail channels.
WHOLESALE
We currently distribute our products in approximately 120 countries and
operate 28 wholly- or partially- owned wholesale distribution subsidiaries
strategically located in major markets worldwide.
In October 2000, we completed the acquisition of a significant equity
interest in a manufacturing and wholesale distribution company in India, which
was provided for in the 1999 Ray-Ban acquisition agreement. In markets where we
do not have wholesale distribution subsidiaries, we employ approximately 100
independent distributors. Each wholesale distribution subsidiary operates its
own network of sales representatives, who are normally retained on a commission
basis. Our network of wholesale distribution subsidiaries represents a key
element of our business. We believe that control over an extensive distribution
network provides us with a competitive advantage. Distributing products through
our subsidiaries enables us to maximize our brand image, marketing efforts and
customer service activities by tailoring our operations to meet the specific
needs and peculiarities of local markets.
The following sets forth certain information regarding our wholesale
distribution subsidiaries and affiliates:
PERCENTAGE
SUBSIDIARY COUNTRY OWNERSHIP
--------------------------------------------------------------------------------------------------------
Luxottica S.r.l. Italy 100%
--------------------------------------------------------------------------------------------------------
Luxottica Fashion Brillen GmbH Germany 100%
--------------------------------------------------------------------------------------------------------
Luxottica Portugal S.A. Portugal 100%
--------------------------------------------------------------------------------------------------------
Luxottica France S.A.R.L. France 100%
--------------------------------------------------------------------------------------------------------
Luxottica Iberica S.A. Spain 100%
--------------------------------------------------------------------------------------------------------
Luxottica U.K. Ltd. United Kingdom 100%
--------------------------------------------------------------------------------------------------------
Luxottica Belgium N.V. Belgium 100%
--------------------------------------------------------------------------------------------------------
Luxottica Sweden A.B. Sweden 100%
--------------------------------------------------------------------------------------------------------
Oy Luxottica Finland A.B. Finland 100%
--------------------------------------------------------------------------------------------------------
Luxottica Vertriebsgesellschaft MbH Austria 100%
--------------------------------------------------------------------------------------------------------
Luxottica Norge A.S. Norway 100%
--------------------------------------------------------------------------------------------------------
Avant-Garde Optics, LLC U.S.A. 100%
--------------------------------------------------------------------------------------------------------
Luxottica Canada Inc. Canada 100%
--------------------------------------------------------------------------------------------------------
Luxottica Do Brasil Ltda Brazil 100%
--------------------------------------------------------------------------------------------------------
Luxottica Mexico S.A. de C.V. Mexico 100%
--------------------------------------------------------------------------------------------------------
Luxottica Argentina S.r.l. Argentina 100%
--------------------------------------------------------------------------------------------------------
Mirari Japan Ltd. Japan 83%
--------------------------------------------------------------------------------------------------------
Luxottica South Africa Pty Ltd. South Africa 100%
--------------------------------------------------------------------------------------------------------
Luxottica Gulf Llc(1) United Arab Emirates 49%
--------------------------------------------------------------------------------------------------------
23
PERCENTAGE
SUBSIDIARY COUNTRY OWNERSHIP
--------------------------------------------------------------------------------------------------------
Luxottica A.G. Switzerland 97%
--------------------------------------------------------------------------------------------------------
Luxottica Australia Pty Ltd. Australia 100%
--------------------------------------------------------------------------------------------------------
Luxottica Optics Ltd. Israel 74.9%
--------------------------------------------------------------------------------------------------------
Luxottica Hellas A.E. Greece 70%
--------------------------------------------------------------------------------------------------------
Luxottica Nederland B.V. The Netherlands 51%
--------------------------------------------------------------------------------------------------------
Luxottica Gozluk Ticaret A.S. Turkey 51%
--------------------------------------------------------------------------------------------------------
Luxottica Poland Sp. Z.o.o. Poland 75%
--------------------------------------------------------------------------------------------------------
Mirarian Marketing Ltd. Singapore 51%
--------------------------------------------------------------------------------------------------------
Ray Ban Sun Optics India Ltd.(2) India 44.2%
--------------------------------------------------------------------------------------------------------
(1) While local law prohibits a foreign company from having a majority equity
interest in a UAE limited liability company, we effectively control this
entity through agreements with the majority shareholder.
(2) Local law prohibits a foreign company from having a majority equity
interest in an Indian company. The shares of Ray Ban Sun Optics India Ltd.
are publicly traded on the BSE Stock Exchange, Mumbai. Because we do not
own a 50% equity interest or otherwise effectively control the entity, we
account for this entity under the equity method of accounting.
We maintain close contact with our distributors in order to monitor sales
and to control the quality of the points of sale that display products. We
typically enter into distribution agreements with importers and distributors
which establish minimum annual purchases and impose territorial limitations. In
addition, to the extent permitted by law, we allow for distribution only through
specifically authorized retail channels and qualified sales agents. No single
customer or group of related customers accounted for more than 2 percent of our
consolidated net sales in any of the past three years. We do not believe that
the loss of any single customer would have a material adverse effect on our
financial condition or results of operations.
Our distribution system is integrated internationally. A worldwide
computerized information network links the distribution and sales systems with
the production facilities in Italy. This network enables us to monitor worldwide
sales trends and inventory positions on a daily basis and to allocate production
resources accordingly.
We believe that one of our key competitive strengths is our ability to
promptly satisfy customer demand in a timely manner, both prior to and following
a sale. In order to further improve our customer service capabilities, we have
centralized our distribution centers in Europe (Italy), Asia (Japan) and North
America (the United States). The centralization process is complete in Europe
and Japan and is in the preliminary stages in North America. We believe that
centralizing our distribution centers has and will improve the efficiency of our
distribution operations while reducing the related costs.
RETAIL
Through our Retail Division, we operate the largest group of optical
superstores in both the United States and Canada and the largest specialty
retailer of sunglasses in the world based on 2002 revenues. We also sell watches
and accessories under the store names of Watch World and Watch Station.
24
In our LensCrafters stores, customers can choose from a large selection of
frames and lenses offering a high level of comfort and fit and can obtain a
completed pair of glasses in about one hour because of on-site lens grinding
laboratories. In our Sunglass Hut locations, customers can choose from a vast
selection of Luxottica and third party vendor manufactured sunglasses. In
addition, Sunglass Hut locations can assist customers in purchasing other
accessories to complement their sunglasses. As of December 31, 2002,
LensCrafters and Sunglass Hut operated 882 and 1,914 stores, respectively,
located primarily in shopping centers and malls in major cities.
In 2002, approximately 76.3 percent and 45.0 percent of the total sales of
frames sold by LensCrafters and Sunglass Hut, respectively, were produced by our
manufacturing facilities. The Retail Division's outlets sell not only frames
manufactured by us, but also a wide range of frames, lenses and other ophthalmic
products manufactured by other companies.
Substantially all LensCrafters stores have an affiliated independent
optometrist on site, allowing the customer to have an eye examination, select
from a large range of prescription eyewear, and receive the selected frame, with
prescription lenses, in about an hour.
See "Recent Developments" above for a description of our pending offer to
acquire all of the outstanding securities of OPSM.
COMPETITION
The prescription frame and sunglasses industry is highly competitive and
fragmented. As we market our products throughout the world, we compete with many
prescription frame and sunglasses companies in various local markets. We believe
that our principal competitor in the design, manufacture and distribution of
eyewear within the prescription frames market is Safilo Group S.p.A. ("Safilo").
We believe that our principal competitors in the sunglasses market include
Safilo, De Rigo S.A. and Oakley, Inc. Several of our most significant
competitors in the manufacture and distribution of eyewear are significant
vendors to our Retail Division. Our success in these markets will depend on,
among other things, our ability to manage an efficient distribution network and
to market our products effectively as well as on the popularity and market
acceptance of our brands. See Item 3 - "Key Information--Risk Factors--Our
future operating performance depends upon our ability to successfully introduce
new products." and "--The markets in which we compete are highly competitive,
and our failure to maintain an efficient distribution network could harm our
business."
The highly competitive optical retail market in North America includes a
large number of small independent competitors and several national and regional
chains of optical superstores. In recent years, a number of factors, including
consolidation among retail chains and the emergence of optical departments in
discount retailers, have resulted in significant competition within the optical
retailing industry. Our optical retail operations emphasize product quality,
selection, customer service and convenience. We do not compete primarily on the
basis of price.
We compete against several large optical retail chains in the United States
and Canada, including Pearle Vision Stores and numerous other single outlet
centers, Cole National licensed
25
locations, Wal-Mart, Vista Eyecare, Eye Care Centers of America and, in the
sunglasses area, numerous sunglasses outlet centers.
MARKETING
Our marketing and advertising activities are designed primarily to enhance
the image of Luxottica and our brand portfolio. Advertising expenses amounted to
approximately 7 percent of our net sales in each of 2001 and 2002.
The following summarizes our principal marketing strategies in our
wholesale distribution and retail businesses.
MARKETING STRATEGY FOR WHOLESALE DISTRIBUTION BUSINESS
Our marketing strategy in the wholesale distribution segment is focused on
promoting the value of our products, our extensive brand portfolio and our
corporate image. Advertising is extremely important in supporting our marketing
strategy and we therefore engage in extensive advertising activities, both at
the point-of-sale and through various media directed at the end consumer of our
products.
Our point-of-sale marketing materials consist of catalogs, posters, product
literature and displays. Many of these materials are linked to our consumer
advertising campaigns.
In our media advertising, we utilize direct media (print, radio and
television) as well as billboard advertising. The extent of our advertising
activities and the selection of different media depend upon the competitive
conditions in each particular market. In North America, we advertise in print
media, including trade journals and consumer publications, and on radio and
television. In Europe, we advertise in various media, including print,
television and billboards. In Japan and the rest of Asia, we advertise mainly in
print media. In addition, we advertise in publications targeted to independent
practitioners and other market-specific magazines.
We also benefit from brand-name advertising carried out by licensors of our
designer lines intended to promote the image of the designer line. Our
advertising and promotional efforts in respect of our licensed brands are
developed in coordination with our licensors. We contribute to the designer a
specified percentage of our sales of the designer line to be devoted to
advertising and promotion.
Finally, we participate in major industry trade fairs (including the MIDO
fair in Milan, Vision Expo in the United States, and the SILMO in Paris), where
our new collections are displayed and promoted to the market.
MARKETING STRATEGY FOR RETAIL BUSINESS
In addition to the marketing activities described above, we engage in
promotional and advertising activities through our Retail Division with both
short- and long-term objectives. Our short-term objectives are to attract
customers to our stores and promote sales. Our long-term objective is to build
the image and visibility of the LensCrafters and Sunglass Hut International
brands, encouraging customer loyalty and return purchases. We believe that
because of the
26
advantages that our Retail Division is able to offer in terms of
product quality and service, our short- and long-term objectives are closely
interrelated.
A considerable amount of our Retail Division's marketing budget is
dedicated to direct marketing activities, such as communications with customers
(mailings, catalogs, etc). This takes advantage of our database, which has over
20 million customer records. Another significant portion of the marketing budget
is spent on broadcast and print media (television, radio and magazines),
designed to reach the broad U.S. market with image building messages about our
Retail Division.
TRADEMARKS, TRADE NAMES AND LICENSE AGREEMENTS
As of December 31, 2002, our principal trademarks or trade names included
LUXOTTICA, RAY-BAN, PERSOL, VOGUE, LENSCRAFTERS and SUNGLASS HUT INTERNATIONAL.
Our principal trademarks are registered in several countries. Other than
Luxottica, Ray-Ban, LensCrafters and Sunglass Hut International, we do not
believe that any single trademark or trade name is material to our business or
results of operations. Ray-Ban products accounted for approximately 10 percent
of our net sales in 2002. See Item 8 - "Financial Information--Legal
Proceedings." Management believes that our trademarks have significant value in
marketing our products.
LensCrafters has introduced several lenses in recent years that contain
innovative technology, such as FeatherWates(TM) (light, thin and impact
resistant lenses), DURALENS(TM) (super scratch-resistant lenses), ByeLines(TM)
(no-line bifocals) and Invisibles(TM) (anti-reflective lenses) and no-line
multi-focal lenses named "MVP MAXIMUM VIEW PROGRESSIVES". LensCrafters purchases
these lenses under non-exclusive arrangements with third parties. The names of
the lenses used by LensCrafters are typically trademarked.
We do not have any patents that we believe are, individually or in the
aggregate, material to our results of operations or financial condition. See
Item 3 - "Key Information--Risk Factors--We may be unable to protect our
proprietary rights, which would adversely affect our business and financial
results."
LICENSE AGREEMENTS
We have entered into certain license agreements to manufacture and
distribute prescription frames and sunglasses with numerous designers. These
license agreements have terms expiring between 2002 and 2007. The table below
summarizes the principal terms of our most significant license agreements as of
December 31, 2002.
LICENSOR LICENSED MARKS TERRITORY EXPIRATION
----------------------------------------------------------------------------------------------------------------
Kasper ASL Ltd. - Anne Klein Worldwide exclusive license December 31, 2006
----------------------------------------------------------------------------------------------------------------
Bulgari S.p.A. - Bulgari Worldwide exclusive license December 31, 2006
----------------------------------------------------------------------------------------------------------------
Byblos S.p.A. - Byblos Worldwide exclusive license December 31, 2006
----------------------------------------------------------------------------------------------------------------
Genny S.p.A. - Genny Worldwide exclusive license December 31, 2006
----------------------------------------------------------------------------------------------------------------
Moon Shadow S.p.A. - Moschino Worldwide exclusive license to distribute December 31, 2002
to authorized retailers and distributors (Renewal under
(excluding Japan) negotiation)
----------------------------------------------------------------------------------------------------------------
27
LICENSOR LICENSED MARKS TERRITORY EXPIRATION
----------------------------------------------------------------------------------------------------------------
Salvatore Ferragamo - Salvatore Worldwide exclusive license December 31, 2003
Italia S.p.A. Ferragamo
- Ferragamo
----------------------------------------------------------------------------------------------------------------
Emanuel Ungaro S.A. - Ungaro Worldwide exclusive license December 31, 2003
- Emanuel Ungaro
----------------------------------------------------------------------------------------------------------------
Retail Brand - Brooks Brothers Worldwide exclusive license March 31, 2003
Alliance, Inc. * (Renewal under
negotiation)
----------------------------------------------------------------------------------------------------------------
Win S.r.l. - Web Those countries and states where the mark September 30, 2002
- W has been registered and any country or (Renewal under
states where the mark will be registered negotiation)
in the future
----------------------------------------------------------------------------------------------------------------
Sergio Tacchini S.p.A. - Sergio Tacchini Worldwide exclusive license (excluding December 31, 2007
- ST Japan)
----------------------------------------------------------------------------------------------------------------
Chanel SA Chanel SAS - Chanel Worldwide exclusive license December 31, 2004
Chanel UK Chanel USA
----------------------------------------------------------------------------------------------------------------
* Retail Brand Alliance, Inc. is a related party, controlled by one of our
Directors.
On January 13, 2003, we entered into a ten-year world-wide exclusive
license agreement, renewable at our discretion for an additional 10 years, for
the trademarks VERSACE, VERSACE SPORT and VERSUS.
Under these agreements, we are required to pay a royalty which generally
ranges from 5 percent to 10 percent of net sales of the relevant collection,
which may be offset by any guaranteed minimum royalty payments. The license
agreements also provide for a mandatory marketing contribution that generally
amounts to 5 percent of net sales. The particular licensor is responsible for
the manner and form of advertising for its collection. Other than the Versace
license agreement, these license agreements typically have terms ranging from
three to five years, but may be terminated early by either party for a variety
of reasons, including non-payment of royalties, failure to meet minimum sales
thresholds, product alteration and, under certain agreements, any change in the
ownership of the ordinary shares resulting in a change in control of Luxottica
Group S.p.A.
The license agreements that enabled us to manufacture and distribute
prescription frames and sunglasses under the names GIORGIO ARMANI and EMPORIO
ARMANI expired on December 31, 2002 and were not renewed.
Other than the Armani licenses, no single designer line accounted for more
than 5 percent of net sales for the year ended December 31, 2002.
Management believes that, while the early termination of one or a small
number of the current license agreements may have an adverse effect on our
results of operations in the short term, any such termination would not have a
material adverse effect on our long-term results of operations or financial
condition. Upon any early termination of an existing license agreement, we
expect that we would seek to enter into alternative arrangements with other
designers to reduce any negative impact of such a termination.
28
REGULATORY MATTERS
Our products are subject to governmental health safety regulations in most
of the countries where they are sold, including the United States. We regularly
inspect our production techniques and standards to ensure compliance with
applicable requirements. Historically, compliance with such requirements has not
had a material effect on our operations.
In addition, governments throughout the world pose import duties and
tariffs on products being imported into their countries. Although in the past we
have not experienced situations in which the duties or tariffs imposed
materially impacted our operations, we can provide no assurances that this will
be true in the future.
Our past and present operations, including owned and leased real property,
are subject to extensive and changing environmental laws and regulations
pertaining to the discharge of materials into the environment, the handling and
disposition of wastes or otherwise relating to the protection of the
environment. We believe that we are in substantial compliance with the
applicable environmental laws and regulations. However, we cannot predict with
any certainty that we will not in the future incur liability under environmental
statutes and regulations with respect to contamination of sites formerly or
currently owned or operated by us (including contamination caused by prior
owners and operators of such sites) and the off-site disposal of hazardous
substances.
Our retail operations are also subject to various state law requirements in
the United States that regulate the permitted relationships between licensed
optometrists or ophthalmologists, who primarily perform eye examinations and
prescribe corrective lenses, and opticians, who fill such prescriptions and sell
eyeglass frames.
PROPERTY, PLANTS AND EQUIPMENT
Our corporate headquarters is located at Via Cantu 2, Milan, Italy.
Information regarding the general location, use and approximate size of our
principal facilities as of December 31, 2002 is set forth below.
APPROXIMATE
OWNED/ AREA IN
LOCATION USE LEASED SQUARE FEET
----------------------------------------------------------------------------------------------------------------
Milan, Italy Corporate Headquarters Owned 16,140
----------------------------------------------------------------------------------------------------------------
Mason (Ohio), United States N.A. Retail Division Headquarters Owned 286,000
----------------------------------------------------------------------------------------------------------------
Atlanta, United States N.A. Retail Division Distribution Center Owned 88,226
----------------------------------------------------------------------------------------------------------------
Port Washington (NY), United States U.S. Offices and U.S. Wholesale Owned 140,700
Distribution Center
----------------------------------------------------------------------------------------------------------------
Agordo (Belluno), Italy Administrative Offices, Manufacturing Owned 764,498
Facility
----------------------------------------------------------------------------------------------------------------
Fukui, Japan Far East Distribution Center and Offices Owned 25,995
----------------------------------------------------------------------------------------------------------------
Tokyo, Japan Far East Sales Office Leased 7,800
----------------------------------------------------------------------------------------------------------------
Rovereto, Italy Frame Manufacturing Facility Owned 215,022
----------------------------------------------------------------------------------------------------------------
29
APPROXIMATE
OWNED/ AREA IN
LOCATION USE LEASED SQUARE FEET
----------------------------------------------------------------------------------------------------------------
Sedico, Italy Frame Manufacturing Facility and Owned 388,405
Distribution Center
----------------------------------------------------------------------------------------------------------------
Cencenighe, Italy Semi-finished Product Manufacturing Owned 59,891
Facility
----------------------------------------------------------------------------------------------------------------
Lauriano, Italy Frame and Crystal Lenses Manufacturing Owned 64,562
Facility
----------------------------------------------------------------------------------------------------------------
Pederobba, Italy Frame Manufacturing Facility Owned 84,079
----------------------------------------------------------------------------------------------------------------
Guang Dong, China Frame Manufacturing Facility Leased 71,801
----------------------------------------------------------------------------------------------------------------
Guangzhou, China Frame Manufacturing Facility Leased 7,532
----------------------------------------------------------------------------------------------------------------
Toronto, Canada Offices and Warehouse Owned 20,120
----------------------------------------------------------------------------------------------------------------
Barcelona, Spain Offices Owned 13,734
----------------------------------------------------------------------------------------------------------------
London, United Kingdom Offices Owned 10,990
----------------------------------------------------------------------------------------------------------------
Gotenbourg, Sweden Offices Owned 15,554
----------------------------------------------------------------------------------------------------------------
Munich, Germany Offices Leased 4,300
----------------------------------------------------------------------------------------------------------------
Valbonne, France(1) Offices Leased 14,251
----------------------------------------------------------------------------------------------------------------
Lisbon, Portugal Offices Owned 6,243
----------------------------------------------------------------------------------------------------------------
Deurne, Belgium Offices Leased 9,150
----------------------------------------------------------------------------------------------------------------
Sao Paulo, Brazil Offices and Warehouse Leased 22,596
----------------------------------------------------------------------------------------------------------------
Langenthal, Switzerland Offices Leased 5,382
----------------------------------------------------------------------------------------------------------------
Heemstede, The Netherlands Offices Leased 8,073
----------------------------------------------------------------------------------------------------------------
Espo, Finland Offices Leased 4,578
----------------------------------------------------------------------------------------------------------------
Klosterneuberg, Austria Offices Owned 6,136
----------------------------------------------------------------------------------------------------------------
Mexico City, Mexico Offices and Warehouse Leased 8,608
----------------------------------------------------------------------------------------------------------------
Buenos Aires, Argentina Offices and Warehouse Leased 5,110
----------------------------------------------------------------------------------------------------------------
Sydney, Australia Offices and Warehouse Leased 3,550
----------------------------------------------------------------------------------------------------------------
Athens, Greece Offices Leased 39,825
----------------------------------------------------------------------------------------------------------------
Herzelia, Israel Offices and Warehouse Leased 7,533
----------------------------------------------------------------------------------------------------------------
Midrand, South Africa Offices Leased 11,836
----------------------------------------------------------------------------------------------------------------
Kongsbers, Norway Offices Owned 2,690
----------------------------------------------------------------------------------------------------------------
Mississagua, Canada Offices and Warehouse Leased 21,875
----------------------------------------------------------------------------------------------------------------
Dubai, U.A.E. Sales Office Leased 1,614
----------------------------------------------------------------------------------------------------------------
Umurbey/Izmir, Turkey Offices and Warehouse Owned 5,810
----------------------------------------------------------------------------------------------------------------
Hong Kong Administrative Offices Leased 645
----------------------------------------------------------------------------------------------------------------
Osaka, Japan Sales Office Leased 1,958
----------------------------------------------------------------------------------------------------------------
Nagoya, Japan Sales Office Leased 1,162
----------------------------------------------------------------------------------------------------------------
Fukuoka, Japan Sales Office Leased 785
----------------------------------------------------------------------------------------------------------------
Salonika, Greece Sales Office Leased 1,797
----------------------------------------------------------------------------------------------------------------
Witcombe, Australia Distribution Center Leased 9,146
----------------------------------------------------------------------------------------------------------------
Miami, United States Sales Office Leased 1,614
----------------------------------------------------------------------------------------------------------------
Krakow, Poland Offices Leased 2,150
----------------------------------------------------------------------------------------------------------------
Phoenix, United States Offices Leased 20,247
----------------------------------------------------------------------------------------------------------------
(1) The property located in Valbonne (France) is leased (with an option to
purchase the underlying property at the end of the lease term for a nominal
price) by our wholly-owned subsidiary in France.
30
As of December 31, 2002, LensCrafters leased 882 retail store premises,
with an average area of approximately 4,400 square feet and Sunglass Hut
International leased 1,914 retail kiosks/store premises, with an average area of
approximately 526 square feet. Such leases expire between 2003 through 2015 and
are on terms that we believe are generally reasonable and reflective of market
conditions.
We believe that our current facilities are adequate to meet our present and
reasonably foreseeable needs.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OVERVIEW
We operate in two industry segments: manufacturing and wholesale
distribution, and retail distribution. Through our manufacturing and wholesale
distribution segment, we are engaged in the design, manufacture, wholesale
distribution and marketing of house and designer lines of mid- to premium-
priced prescription frames and sunglasses. During the periods discussed below,
we have operated in the retail segment through our Retail Division, comprised
principally of LensCrafters and, since April 2001, Sunglass Hut. LensCrafters
has retail distribution operations located throughout the United States, Canada
and Puerto Rico. Sunglass Hut is a leading retailer of sunglasses worldwide.
Our net sales consist of direct sales of finished products that we
manufacture to opticians and other independent retailers through our wholesale
distribution channel and sales directly to consumers through our Retail Division
retail channel. Our average retail unit selling price is significantly higher
than our average wholesale unit selling price, as our retail sales typically
include lenses as well as frames.
Demand for our products, particularly our higher-end designer lines, is
largely dependent on the discretionary spending power of the consumers in the
markets in which we operate. See Item 3 - "Key Information--Risk Factors--Our
business is highly sensitive to economic conditions and changing consumer
preferences." We have historically experienced sales volume fluctuations by
quarter due to seasonality associated with the sale of sunglasses. As a result,
our net sales are typically higher in the second quarter and lower in the fourth
quarter.
As a result of our acquisition of LensCrafters in May 1995 and the
subsequent expansion of our business activities in the United States through the
acquisition of the Ray-Ban business and Sunglass Hut, our results of operations,
which are reported in Euro, have been rendered more susceptible to currency
fluctuations between the Euro and the U.S. dollar. The U.S. dollar/Euro exchange
rate has fluctuated from an average exchange rate of Euro 1.00 = U.S. $0.9209 in
2000 to Euro 1.00 = U.S. $0.8957 in 2001 to Euro 1.00 = U.S. $0.9450 in 2002.
Although we engage in certain foreign currency hedging activities to mitigate
the impact of these fluctuations, they have impacted our reported revenues and
expenses during the periods discussed herein. See Item 11 - "Quantitative and
Qualitative Disclosures About Market Risk--Foreign Exchange Sensitivity" and
Item 3 - "Key Information--Risk Factors--Because our assets, liabilities, sales
31
and costs are denominated in several currencies, we are vulnerable to exchange
rate fluctuations."
On June 26, 1999, we acquired the Ray-Ban business for a purchase price of
U.S.$655 million (Euro 635 million, based on the exchange rate in effect at such
time) subject to post-closing adjustments. The acquisition was accounted for
under the purchase method and the results of the Ray-Ban business have been
included in our consolidated results since the date of acquisition. Since the
acquisition, we have closed Ray-Ban's frame manufacturing facilities and
integrated its manufacturing and distribution operations into our own. This
integration was substantially completed by the second quarter of 2000. In
January 2002, we settled a purchase price dispute with Bausch & Lomb
Incorporated as well as other litigation between us. The settlement resulted in
a reduction in the purchase price of approximately U.S. $42 million and,
accordingly, goodwill and a liability to Bausch & Lomb previously recorded have
been reduced at December 31, 2001. A receivable was recorded at December 31,
2001 for the final settlement amount. We received U.S. $23 million in January
2002 as the final settlement payment.
On February 20, 2001, we formed an indirect wholly-owned U.S. subsidiary,
Shade Acquisition Corp., for the purpose of making a tender offer for all the
outstanding common stock of Sunglass Hut International, Inc., a publicly traded
company on the NASDAQ National Market. The tender offer commenced on March 5,
2001 and was completed on March 30, 2001. On April 4, 2001, Shade Acquisition
Corp. was merged with and into Sunglass Hut and Sunglass Hut became an indirect
wholly-owned subsidiary of Luxottica Group S.p.A. As a result, the operations of
Sunglass Hut are included in our consolidated financial statements as of the
acquisition date. The acquisition was accounted for using the purchase method,
and accordingly, the purchase price of Euro 558 million (including approximately
Euro 33.9 million of acquisition-related expenses) was allocated to the assets
acquired and liabilities assumed based on their fair value at the date of the
acquisition. This included an independent valuation of intangibles, including
trade names. As a result of the final independent valuation, which was completed
in March 2002, the aggregate balance of goodwill and other intangibles
previously recorded at December 31, 2001 increased by approximately Euro 147.0
million. The excess of purchase price over net assets acquired has been recorded
in the accompanying consolidated balance sheets.
SIGNIFICANT ACCOUNTING POLICIES; RECENT ACCOUNTING PRONOUNCEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates are based on historical experience
and currently available information. Actual results could differ from those
estimates. The following is a discussion of what management believes are our
most critical accounting policies:
REVENUE RECOGNITION - Revenues from sales of products are recognized at the
time of shipment to or receipt by the customer. In connection with the
conditions of sale in certain countries, certain of our subsidiaries record as a
liability an amount based on an estimate of anticipated returns of merchandise
by customers in subsequent periods. Estimates are based on
32
various historical factors that may change and actual results could differ
significantly from the estimated amounts.
INCOME TAXES - Income taxes are recorded in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in our consolidated
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the consolidated
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
These estimated tax rates and the deferred tax assets, net of valuation
allowances, and liabilities recorded are based on information available at the
time of calculation. This information is subject to change due to subsequent tax
audits performed by different taxing jurisdictions, changes in corporate
structure not contemplated at the time of calculation as well as various other
factors.
INVENTORIES - Inventories consist of raw materials and packaging, work in
process, finished goods produced by us and finished goods purchased by the
Retail Division that are manufactured by third parties. At December 31, 2002,
82.5 percent of the aggregate inventory was valued at the lower of cost, as
determined under the weighted-average method (which approximates the first-in,
first-out method), or market value. Retail inventory not manufactured by us is
stated at the lower of cost, as determined on a last-in, first-out method
("LIFO"), or market value. Inventories are recorded net of various reserves,
allowances and other adjustments. These reserves are calculated using numerous
factors, which could include but are not limited to, historical information and
projections for future demand for the product. As such, actual results could
differ significantly from the estimated amounts.
INTANGIBLE ASSETS - In connection with various acquisitions, we have
recorded as intangible assets certain goodwill and trade names. At December 31,
2002, the aggregate carrying value of intangibles, including goodwill, was Euro
1.9 billion or approximately 53 percent of total assets.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangibles". The pronouncement is effective for fiscal years beginning
after December 15, 2001 and applies to all goodwill and other intangible assets
recognized in financial statements on and after that date. As a result of the
adoption of SFAS No. 142, goodwill and intangibles deemed to have an indefinite
life are no longer amortized in the same manner as under the previous standards,
but rather are tested for impairment annually and, under certain circumstances,
between annual periods. An impairment charge will be recorded if the fair value
of the intangible asset is less than the carrying value. The calculation of fair
value may be based on, among other items, estimated future cash flows if quoted
market prices in active markets are not available. Based on evaluations that we
completed in the first quarter of 2002 and in the first quarter of 2003, no
intangible other than goodwill was deemed to have an indefinite life.
Intangibles subject to amortization based on a finite useful life continue
to be amortized on a straight line basis over their useful lives. Trade names
recorded on the Consolidated
33
Balance Sheet as of January 1, 2002, were deemed to have useful lives between 20
and 25 years. The valuation of most trade names was determined by an independent
valuation firm. These intangibles will be reviewed for impairment in accordance
with SFAS No. 121.
After evaluations completed in the first quarter of 2002 and in the first
quarter of 2003, we have concluded that the carrying values of goodwill and
other intangible assets included in the Consolidated Balance Sheet as of
December 31, 2001 and December 31, 2002, respectively, did not exceed their
respective fair market value, and as a result, we did not record an asset
impairment charge for the adoption of SFAS No. 142.
Prior to January 1, 2002, goodwill was amortized on a straight-line basis
over periods ranging from 10 to 25 years. Total intangible and goodwill
amortization were Euro 88.8 million and Euro 111 million, in 2000 and 2001,
respectively.
BUSINESS COMBINATIONS - We will account for business combinations initiated
after July 1, 2001 in accordance with SFAS 141, ACCOUNTING FOR BUSINESS
COMBINATIONS. This requires all business combinations to be accounted for by the
purchase method. We have grown substantially over the past several years through
acquisitions and those acquisitions were accounted for using the purchase
method.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS - We account for our foreign
currency denominated transactions and foreign operations in accordance with SFAS
No. 52 ("Foreign Currency Translation"). The financial statements of foreign
subsidiaries are translated into Euro, which is a functional and the reporting
currency. Assets and liabilities of foreign subsidiaries are translated at
year-end exchange rates. Results of operations are translated using the average
exchange rates prevailing throughout the year. The resulting cumulative
translation adjustments have been recorded as a separate component of
accumulated other comprehensive income. Transactions in foreign currencies are
recorded at the exchange rate in effect at the transaction date.
We have one subsidiary in a high inflationary country. However these
operations are currently not material to our consolidated financial statements.
All operations have been remeasured using the historical exchange rate and the
result of the remeasurement has been accounted for in the current year earnings.
34
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentage of
net sales represented by certain items included in our statements of
consolidated income:
YEAR ENDED DECEMBER 31,
2000* 2001* 2002
----- ----- -----
Net Sales............................................... 100.0% 100.0% 100.0%
Cost of Sales........................................... 28.9 28.8 28.0
----- ----- -----
Gross Profit............................................ 71.1 71.2 72.0
Operating Expenses:
Selling and advertising 40.7 42.5 43.3
General and administrative......................... 13.4 12.0 9.5
----- ----- -----
Total................................................... 54.1 54.5 52.8
----- ----- -----
Income From Operations.................................. 17.0 16.6 19.2
Other (Expense) Income - Net............................ (2.1) (2.2) (2.0)
Provision For Income Taxes.............................. (4.2) (4.0) (5.2)
Minority Interests...................................... (0.2) - (0.1)
----- ----- -----
Net Income.............................................. 10.6 10.3 11.9
===== ===== =====
* Certain amounts in prior years have been reclassified to conform with
the 2002 presentation.
For additional financial information by operating segment and geographic
region, see Note 12 to our Consolidated Financial Statements included in this
annual report.
CERTAIN NON-GAAP FINANCIAL MEASURES USED TO DESCRIBE RESULTS OF OPERATIONS
CONSOLIDATED ADJUSTED SALES AND OPERATING INCOME
The results of operations for the year ended December 31, 2002 included two
significant changes from 2001. These changes were (i) the inclusion of the
operations of Sunglass Hut, which was acquired in April 2001 and thus not
included in the first quarter of 2001 statement of operations and (ii) the
effect of the adoption of SFAS No. 142, "Goodwill and Other Intangibles Assets,"
whereby goodwill and other intangibles which are deemed to have an indefinite
life are no longer amortized on a straight line basis as required by the
previous standard but will be tested periodically for impairment.
Because of these two significant changes, we have included the following
table of consolidated adjusted sales and operating income for the year ended
December 31, 2001. The table also includes the consolidated sales and operating
income for the year ended December 31, 2001, as reported under U.S. GAAP. We
believe that the adjusted amounts may be of assistance in comparing our
operating performance between the 2001 and 2002 periods. However, adjusted
financial information is not meant to be considered in isolation or as a
substitute for results prepared in accordance with U.S. GAAP, or as a measure of
profitability or liquidity. The adjusted financial measures should be used only
as a supplement to U.S. GAAP results to assist the reader in better
understanding our relative operating performance between 2001 and 2002.
35
The following table reflects our consolidated net sales and income from
operations for the year ended December 31, 2001 as reported and as adjusted:
Elimination of Elimination of
Consolidation of Wholesale Goodwill amort.
Thousands of Euro 2001 As Reported Sunglass Hut 1Q Sales to Sunglass (SFAS 142) 2001 as adjusted
---------------- -------------------- ------------------ --------------- ----------------
2001 Hut
---- ---
Net Sales 3,064,907 146,714 (6,725) 0 3,204,896
Income (loss) from 509,492 (12,767) 0 70,133 566,858
Operations
The consolidated adjusted amounts in the table reflect the following
adjustments:
1. the consolidated results of Sunglass Hut for the three month period ended
March 31, 2001, prior to the acquisition, are included in the adjusted
amounts and were reclassified for the elimination of a one time
restructuring charge recorded in the period of approximately U.S.$ 30
million and the elimination of goodwill amortization as contemplated by the
adoption of SFAS No. 142;
2. the elimination of wholesale sales to Sunglass Hut from our subsidiaries
for the three month period ended March 31, 2001; and
3. the elimination of goodwill amortization for the year ended December 31,
2001 of Luxottica, as contemplated by the adoption of SFAS No. 142.
This information is being provided for comparison purposes only and does
not purport to be indicative of the actual results that would have been achieved
had the Sunglass Hut acquisition been completed and SFAS No. 142 been effective
as of January 1, 2001.
FINANCIAL MEASURES EXCLUDING THE IMPACT OF FLUCTUATIONS IN CURRENCY
EXCHANGE RATES
In addition, we use certain measures of financial performance that exclude
the impact of fluctuations in currency exchange rates in the translation of
operating results into Euro. We believe that these adjusted financial measures
provide useful information to both management and investors by allowing a
comparison of core operating performance on a consistent basis. In addition,
since we have historically reported such adjusted financial measures to the
investment community, we believe that their inclusion provides consistency in
our financial reporting. Further, these adjusted financial measures are one of
the primary indicators management uses for planning and forecasting in future
periods. See "Impact of Fluctuations in Currency Exchange Rates Currency
Exchange Rates" below for a description of these adjusted financial measures and
a reconciliation of such measures to their most directly comparable U.S. GAAP
financial measures.
36
2002 COMPARED TO 2001
NET SALES. Net sales increased 2.2 percent to Euro 3,132.2 million during 2002,
as compared to Euro 3,064.9 million for 2001. During the year ended December 31,
2002, net sales in the retail segment accounted for approximately 68.9 percent
of total net sales, which is consistent with 2001.
On a consolidated adjusted basis, as reflected in the above table, our net
sales would have decreased by 2.3 percent in 2002 compared to 2001, as adjusted.
This net decrease was substantially due to the weakening of the U.S. dollar
against the Euro. At constant exchange rates between the periods, net sales
would have increased by 2.8 percent compared to 2001, as adjusted.
Net sales in the retail segment, through LensCrafters and Sunglass Hut,
increased 2.2 percent to Euro 2,158.4 million for the year ended December 31,
2002 from Euro 2,112.6 million in 2001. Comparable store sales in constant U.S.
Dollars for the year decreased 0.6 percent.
On a consolidated adjusted basis, net sales of the retail segment, in Euro,
would have decreased by 4.5 percent in 2002 compared to 2001, as adjusted. This
decrease was primarily due to the weakening of the U.S. dollar against the Euro.
Using constant exchange rates between the periods, adjusted net retail sales
would have increased 0.8 percent during 2002. This increase was primarily
attributable to the increase in the number of LensCrafters stores from 868 to
882, offset by the closing of certain under-performing Sunglass Hut stores and a
decrease in comparable store sales mentioned above.
Net sales to third parties in the manufacturing and wholesale segment were
Euro 973.8 million for 2002 compared to Euro 952.3 million in 2001. Excluding
wholesale sales to Sunglass Hut during both periods, adjusted net sales to third
parties in the segment would have increased by 3.0 percent. Assuming constant
exchange rates and excluding wholesale sales to Sunglass Hut, wholesale sales to
third parties for 2002 would have increased by 6.7 percent compared to 2001. The
majority of this increase is attributable to additional sales of our Ray-Ban
lines and to the successful development of the CHANEL brand.
On a geographic basis, the United States and Canada operations had net
sales of Euro 2,273.0 million in 2002, comprising 72.6 percent of total net
sales, a decrease of Euro 14.1 million from 2001. This decrease was
substantially due to the weakening of the U.S. dollar against the Euro. In U.S.
dollars, the United States and Canada operations had an increase of U.S. $99.5
million in net sales compared to 2001. Net sales for the rest of the world
accounted for the remaining Euro 859.2 million of net sales during 2002, which
represented a 10.5 percent increase as compared to 2001. This increase was
largely due to the inclusion of Sunglass Hut's UK and Australian operations for
the entire 2002 period, as opposed to only the post-acquisition period in 2001.
COST OF SALES. Cost of sales decreased 0.7 percent to Euro 878.0 million in
2002, from Euro 884.0 million in 2001, and decreased as a percentage of net
sales to 28.0 percent from 28.8 percent, respectively. This decrease as a
percentage of net sales was mainly attributable to the increase in sales by
Sunglass Hut of Luxottica manufactured products together with the benefits of
more favorable terms from Sunglass Hut vendors. Manufacturing labor costs
increased 2.8 percent to
37
Euro 261.2 million in 2002, from Euro 254.0 million in 2001. As a percentage of
net sales, cost of labor remained constant at 8.3 percent. For each of 2001 and
2002, the average number of frames produced daily in our facilities was
approximately 124,000.
GROSS PROFIT. For the reasons outlined above, gross profit increased 3.4
percent to Euro 2,254.2 million in 2002, from Euro 2,180.9 million in 2001. As a
percentage of net sales, gross profit increased to 72.0 percent in 2002 from
71.2 percent in 2001.
OPERATING EXPENSES. Total operating expenses decreased 1.1 percent to Euro
1,652.7 million in 2002, from Euro 1,671.4 million in 2001. As a percentage of
net sales, operating expenses decreased to 52.8 percent in 2002 from 54.5
percent in 2001.
Selling, royalty and advertising expenses increased 4.1 percent to Euro
1,355.1 million during 2002, from Euro 1,302.4 million in 2001. As a percentage
of net sales, these expenses increased to 43.3 percent from 42.5 percent. This
increase is primarily attributable to the inclusion for the full period of the
operations of Sunglass Hut, which, as a retailer, incurs higher selling expenses
as a percentage of sales than our wholesale operations. In addition to the
additional selling, royalty and advertising expenses of Sunglass Hut for the
first quarter of 2002 of Euro 82.2 million, the increase is attributable to an
increase in royalties from higher designer-line sales.
General and administrative expenses, including intangible asset
amortization, decreased 19.4 percent to Euro 297.5 million in 2002 from Euro
369.1 million in 2001. This decrease was primarily due to the benefit realized
from the elimination of amortization expenses associated with goodwill due to
the adoption of SFAS No. 142 of Euro 71.1 million.
As a percentage of net sales, general and administrative expenses decreased
to 9.5 percent from 12.0 percent. This decrease as a percentage of net sales was
primarily attributable to the reduction in amortization expense discussed above
in addition to the integration of many of the Sunglass Hut corporate and other
functions with those of LensCrafters. These cost savings were partially offset
by the amortization expense associated with the acquired Sunglass Hut trade
name.
INCOME FROM OPERATIONS. Income from operations for 2002 increased 18.1 percent
to Euro 601.5 million, from Euro 509.5 million in 2001. As a percentage of net
sales, income from operations increased to 19.2 percent from 16.6 percent.
On a consolidated adjusted basis, as reflected in the above table, the
increase in income from operations in 2002 would have been 6.1 percent, compared
to 2001, as adjusted. Income from operations, as adjusted, represented 17.7
percent of consolidated adjusted net sales for 2001.
Operating margin in the manufacturing and wholesale distribution segment
increased to 25.5 percent in 2002, from 25.1 percent in 2001, largely due to the
benefit received from the elimination of goodwill amortization expense for the
year ended December 31, 2002.
Operating margin in the retail segment decreased to 14.8 percent in 2002
from 15.2 percent in 2001. On a consolidated adjusted basis, operating margin of
the retail segment would have been 13.9 percent of retail adjusted net sales, in
2001. The improvement in operating margin for the year
38
ended December 31, 2002 as compared to the same period of 2001, as adjusted, is
primarily due to: i) improved gross profit from more favorable purchase terms
that we were able to renegotiate with Sunglass Hut vendors, and ii) the cost
savings achieved from improved efficiencies in the retail division's corporate
structure.
INTEREST AND OTHER EXPENSES. Net interest and other expense was Euro 62.1
million in 2002 compared to Euro 68.2 million in 2001. This decrease was
attributable primarily to lower interest expense in the current period due to
the reduction of debt balances and interest rates partially offset by realized
and unrealized foreign exchange transaction and remeasurement losses, net
recognized in 2002, compared to a net gain on similar items in 2001.
NET INCOME. Income before taxes increased 22.2 percent to Euro 539.4 million
in 2002, from Euro 441.3 million in 2001. As a percentage of net sales, income
before taxes increased to 17.2 percent from 14.4 percent. Minority interest of
Euro (4.7) million in 2002 decreased from Euro (1.5) million in 2001. Our
effective tax rate increased to 30.2 percent from 28.0 percent in 2001. Net
income increased 17.6 percent to Euro 372.1 million in 2002 from Euro 316.4
million in 2001. Net income as a percentage of net sales increased to 11.9
percent from 10.3 percent in 2001.
Basic earnings per share and diluted earnings per share for 2002 was Euro
0.82, increasing from Euro 0.70 for 2001.
2001 COMPARED TO 2000
NET SALES. Consolidated net sales for 2001 rose by 26.8 percent to Euro
3,064.9 million, from Euro 2,416.8 million in 2000. This increase was the result
of both additional sales from Sunglass Hut, which was acquired on March 31,
2001, and the growth of our wholesale and retail operations. Excluding the net
effect of the Sunglass Hut acquisition, our consolidated net sales would have
increased by approximately 7.5 percent.
Net sales in 2001 for our retail segment rose by 46.2 percent to Euro
2,112.6 million, from Euro 1,444.5 million in 2000, primarily as a result of the
consolidation of Sunglass Hut since its acquisition on March 31, 2001. In
addition, net sales of LensCrafters increased as a result of an improvement in
same store sales of 2.3 percent (measured in U.S. dollars), and the
strengthening of the U.S. dollar against the Euro. Additionally, as of December
31, 2001, LensCrafters operated 868 stores, compared to 864 stores as of
December 31, 2000. At December 31, 2001 Sunglass Hut operated 1,944 stores, in
the United States, Europe and Australia.
Net sales to third parties in our manufacturing and wholesale segment
decreased 2.0 percent to Euro 952.3 million from Euro 972.3 million. Excluding
wholesale sales in 2001 and 2000 to Sunglass Hut, which was a third party prior
to March 31, 2001, our manufacturing and wholesale sales would have increased
1.5 percent, or 3.0 percent, assuming a constant exchange rate. In 2001, we sold
31.6 million frames, compared with 28.3 million in 2000.
On a geographic basis, our operations in the United States and Canada had
net sales in 2001 of Euro 2,284 million, comprising 74.6 percent of total net
sales, which represented a 33.3
39
percent increase as compared to 2000. Substantially all of this increase was due
to an increase in sales of our retail segment as described above. Net sales for
the rest of the world accounted for our remaining net sales of Euro 781.0
million during 2001, which represented a 11.1 percent increase as compared to
2000.
COST OF SALES. Cost of sales for 2001 increased by 26.8 percent to Euro
884.0 million, from Euro 697.3 million in 2000. As a percentage of net sales,
cost of sales remained constant between the periods despite the consolidation of
the operating results of Sunglass Hut whose cost of sales, during 2001, was
higher than ours on a consolidated basis. As a result, gross profit for the year
rose by 26.8 percent to Euro 2,180.9 million, from Euro 1,719.5 million in 2000.
Gross margin for 2001 remained stable at 71.2 percent, compared to 71.1 percent
for the previous year.
OPERATING EXPENSES. Operating expenses for 2001 increased to Euro 1,671.5
million, from Euro 1,307.6 million in 2000. As a percentage of net sales,
operating expenses increased to 54.5 percent, from 54.1 percent in 2000.
Selling, royalty and advertising expenses increased 32.5 percent to Euro
1,302.4 million in 2001 from Euro 983.1 million for 2000, primarily as a result
of the increase in selling expenses attributable to the inclusion of Sunglass
Hut's results from the date of acquisition. As a percentage of net sales, these
expenses increased by approximately 1.8 percent. Selling expenses as a
percentage of net sales in the retail segment are generally higher than the
manufacturing and wholesale segment.
General and administrative expenses, including goodwill amortization,
increased 13.8 percent to Euro 369.1 million in 2001 from Euro 324.4 million in
2000. The increase in general and administrative expenses was primarily the
result of the strengthening of the U.S. dollar combined with an increase in
amortization relating to acquired trademarks and goodwill recorded in connection
with the acquisition of Sunglass Hut, in addition to the general and
administrative costs of Sunglass Hut following the acquisition. However, general
and administrative expenses as a percentage of net sales decreased to 12.0
percent in 2001 from 13.4 percent in 2000. The decrease as a percentage of sales
is attributable to benefits associated with the restructuring of Sunglass Hut
and consolidating many of the functions into the LensCrafters corporate
structure.
INCOME FROM OPERATIONS. Income from operations for 2001 rose by 23.7
percent to Euro 509.5 million, while operating margin for the period declined to
16.6 percent, from 17.0 percent in 2000. This decrease in operating margin was
due to the higher proportion of net sales and expenses in the retail segment,
where operating margins are lower than in the manufacturing and wholesale
distribution segment. Higher net sales and expenses in the retail segment was a
result of the Sunglass Hut acquisition. In 2001, our retail segment's operating
margin increased to 15.2 percent, from 14.0 in 2000, primarily as a result of
stricter cost controls, improvements in personnel productivity, and further
integration of the retail segment's operations into our central structure.
INTEREST EXPENSE. As a result of the Sunglass Hut acquisition, net
outstanding debt as of December 31, 2001, increased by Euro 561.7 million to
Euro 1,469.9 million, compared to Euro 908.2 as of December 31, 2000. As a
consequence, net interest expense for the year rose to Euro 76.9 million, from
Euro 56.0 million in 2000.
40
NET INCOME. Income before taxes for the year rose by 21.9 percent to Euro
441.3 million, while our tax rate for the period was unchanged at 28.0 percent.
Net income for the year rose by 23.9 percent to Euro 316.4 million, from Euro
255.3 million in 2000. Earnings per share for the year were Euro 0.70, compared
with Euro 0.57 in 2000. In U.S. dollars, earnings per share for 2001 were U.S.
$0.63, compared with U.S. $0.52 in 2000. In 2001, the average Euro to U.S.
Dollar exchange rate was Euro 1.00 = U.S.$0.8957, compared with Euro 1.00 =
U.S.$0.9209 in 2000.
IMPACT OF FLUCTUATIONS IN CURRENCY EXCHANGE RATES
We use certain measures of financial performance that exclude the impact of
fluctuations in currency exchange rates in the translation of operating results
into Euro. We believe that these adjusted financial measures provide useful
information to both management and investors by allowing a comparison of core
operating performance on a consistent basis. In addition, since we have
historically reported such adjusted financial measures to the investment
community, we believe that their inclusion provides consistency in our financial
reporting. Operating measures that assume constant exchange rates between the
fiscal year ended December 31, 2002 and the fiscal year ended December 31, 2001
are calculated using for each currency the average exchange rate in effect for
the preceding year.
Operating measures that exclude the impact of fluctuations in currency
exchange rates are not measures of performance under U.S. GAAP. These non-U.S.
GAAP measures are not meant to be considered in isolation or as a substitute for
financial measures prepared in accordance with U.S. GAAP, or as a measure of
profitability or liquidity. See the table below for a reconciliation of the
operating measures excluding the impact of fluctuations in currency exchange
rates to their most directly comparable U.S. GAAP financial measures. The
adjusted financial measures should be used as a supplement to U.S. GAAP results
to assist the reader in better understanding our operational performance.
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, Adjustment December 31,
2001 Adjustment 2001 2002 for constant 2002
Millions of Euro US GAAP for Sunglass Adjusted results US GAAP Exchange rates Adjusted results
results Hut(1) results
-----------------------------------------------------------------------------------------------------------------------------------
Consolidated net sales 3,064.9 140.0 3,204.9 3,132.2 161.3 3,293.5
Manufacturing/Wholesale
net sales 1,146.6 0.0 1.146.6 1,128.7 43.4 1,172.1
less: Inter-company sales (194.3) (6.7) (201.0) (154.8) (8.5) (163.3)
Wholesale sales to third
parties 952.3 (6.7) 945.6 973.9 34.9 1,008.8
Retail net sales 2,112.6 146.7 2,259.3 2,158.3 118.8 2,277.1
(1) Reflects adjustments relating to the acquisition of Sunglass Hut in April
2001. See "Results of Operations - Certain Non-GAAP Financial Measures Used to
Describe Results of Operations" for additional information.
41
TAXES
Our effective tax rates for the years ended December 31, 2002 and 2001 were
approximately 30.2 percent and 28.0 percent, respectively. The effective tax
rates were less than the statutory tax rate due to permanent differences between
our income for financial reporting and tax purposes which reflect the net loss
carryforward caused by the prior funding of subsidiary losses through capital
contributions that are deductible for income tax purposes under Italian law, and
the reduction in certain investments in subsidiaries. Such subsidiary losses
were primarily attributable to the amortization of certain intangible assets
associated with our acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
We have relied primarily upon internally generated funds, trade credit and
bank borrowings to finance our operations and expansion. As set forth in the
table below, as of December 31, 2002, our consolidated net financial position,
defined as financial debt less cash balances, was Euro (1,254.3) million
compared to Euro (1,469.9) million as of December 31, 2001. This improvement is
attributable to the cash generated by operating activities during the year 2002,
only a portion of which was used in investing activities.
Set forth below is certain information regarding our net financial position
as of December 31 of the years indicated:
2001 2002
------------- -------------
(THOUSANDS OF EURO)
Cash 412,709 151,418
Bank overdrafts (411,193) (371,729)
Current portion of long-term debt (1,339,131) (178,335)
Long-term debt (132,247) (855,654)
------------- -------------
Net Financial Position (1,469,861) (1,254,299)
------------- -------------
"Net financial position" is not a financial measure in accordance with U.S.
GAAP and is presented for informational purposes only. We believe that this
measure is useful to investors as a measure of credit availability, leverage
capacity and liquidity. Net financial position is not, and should not be
considered as, a substitute for our total long-term debt, total liabilities or
any other financial measures presented in accordance with U.S. GAAP. The term
"net financial position" may differ from similarly titled financial measures
used by other companies.
THE U.S. $350 MILLION CREDIT FACILITY WITH UNICREDITO ITALIANO AND THE
CONVERTIBLE SWAP STEP-UP
In June 1999, we received the proceeds of a Euro 350 million eurobond
offering by one of our wholly-owned subsidiaries, which was used to repay
indebtedness under a prior credit agreement. Luxottica Group S.p.A. had
guaranteed the subsidiary's obligations under the eurobonds, which were repaid
in full in June 2002. To refinance the eurobonds, in June 2002, Luxottica U.S.
Holdings Corp. ("U.S. Holdings"), a U.S. subsidiary, entered into a U.S. $350
million credit facility with a group of four Italian banks led by UniCredito
Italiano S.p.A. The
42
new credit facility is guaranteed by Luxottica Group S.p.A. and matures in June
2005. The term loan portion of the credit facility provides U.S.$ 200 million of
borrowing and requires equal quarterly principal installments beginning in March
2003. The revolving loan portion of the credit facility allows for maximum
borrowings of U.S. $150 million; the revolving loan was fully drawn as of
December 31, 2002. Interest accrues under the credit facility at LIBOR (as
defined in the agreement) plus 0.5 percent (1.9050 percent on December 31, 2002)
and the credit facility allows us to select interest periods of one, two, or
three months. The credit facility contains certain financial and operating
covenants.
In July 2002, U.S. Holdings entered into a Convertible Swap Step-Up ("2002
Swap"). The beginning and maximum notional amount of 2002 Swap is U.S. $275
million, which will decrease by U.S. $20 million quarterly, beginning with the
quarter commencing on March 17, 2003. 2002 Swap, which will expire on June 17,
2005, was entered into to convert the floating rate credit agreement referred to
in the preceding paragraph to a mixed position rate agreement. 2002 Swap allows
U.S. Holdings to pay a fixed rate of interest if LIBOR remains under certain
defined thresholds and for U.S. Holdings to receive an interest payment of the
three month LIBOR rate as defined in the agreement. These amounts are settled
net every three months. This derivative does not qualify for hedge accounting
under Statement of Financial Accounting Standards No. 133 and, as such, is
marked to market with the gains or losses from the change in value reflected in
current operations.
THE EURO 500 MILLION CREDIT FACILITY WITH UNICREDITO ITALIANO
In June 1999, we acquired the Ray-Ban business from Bausch & Lomb for a
purchase price of U.S. $655 million (Euro 635 million based on the exchange rate
in effect at such time), subject to post-closing adjustments. The purchase price
was paid with the proceeds of a U.S. $650 million (Euro 630 million based on the
exchange rate in effect at such time) credit facility with UniCredito Italiano
S.p.A. The interest rate applicable to amounts provided to us under the credit
facility was Euribor plus 0.5 percent. In June 2000, we refinanced this
short-term credit facility with a new credit facility with several financial
institutions which provided for total maximum borrowings of Euro 500 million.
The new credit facility was repaid in June 2003.
THE EURO 256 MILLION CREDIT FACILITY WITH SAN PAOLO IMI
In December 2000, we entered into a new credit facility providing for
maximum borrowing of Euro 256 million from San Paolo IMI S.p.A. Bank. This
credit facility matured in June 2002, and the amount outstanding at that time
was repaid in full.
THE EURO 650 MILLION CREDIT FACILITY WITH BANCA INTESA AND THE INTESA SWAPS
In March 2001, we entered into a new credit facility with Banca Intesa
S.p.A. to finance the acquisition of Sunglass Hut. The credit facility was
unsecured and scheduled to expire in September 2002. In September 2002, we
agreed with Banca Intesa S.p.A. to extend the credit facility until December
2002, on the same terms and conditions. On December 27, 2002 the amount
outstanding at that time of Euro 500 million was repaid in full.
In December 2002, we entered into a new unsecured credit facility with
Banca Intesa S.p.A. The new unsecured credit facility provides borrowing
availability up to Euro 650 million,
43
of which Euro 575 million was outstanding as of December 31, 2002. The
facility includes a Euro 500 million term loan, which will require a balloon
payment of Euro 200 million in June 2004 and equal quarterly installments of
principal of Euro 50 million subsequent to that date. Interest accrues on the
term loan at Euribor (as defined in the agreement) plus 0.45 percent (3.317
percent on December 31, 2002). The revolving loan portion provides borrowing
availability of up to Euro 150 million, and amounts borrowed under the
revolver portion may be borrowed and repaid until final maturity. Interest
accrues on the revolving loan at Euribor (as defined in the agreement) plus
0.45 percent (3.400 percent on December 31, 2002 for the relevant interest
period). The final maturity of the credit facility is December 27, 2005. We
may select interest periods of one, two, three or six months. The credit
facility contains certain financial and operating covenants.
In December 2002, we entered into two interest rate swap transactions (the
"Intesa Swaps") beginning with an aggregate maximum notional amount of Euro 250
million, which will decrease by Euro 100 million on June 27, 2004 and by Euro 25
million during each subsequent 3-month period. These Intesa Swaps will expire on
December 27, 2005. The Intesa Swaps were entered into as a cash flow hedge of a
portion of the Banca Intesa Euro 650 million unsecured credit facility discussed
above. The Intesa Swaps exchange the floating rate based on Euribor to a fixed
rate of 2.985 percent.
THE 5.25% CONVERTIBLE SUBORDINATED NOTES AND THE 8.625% SUBORDINATED NOTES
In March 2002, Sunglass Hut redeemed its outstanding 5.25% convertible
subordinated notes at 101.5% of their aggregate principal amount, plus accrued
and unpaid interest to the date of redemption, as provided in the indenture
under which such notes were issued. The net loss on the extinguishment of the
debt evidenced by the notes was immaterial to our consolidated financial
statements.
In October 2002, The United States Shoe Corporation, one of our wholly
owned subsidiaries, repaid in full the entire outstanding principal balance of
U.S. $75 million of its 8.625% subordinated notes due October 1, 2002, together
with the accrued and unpaid interest balances.
THE OPSM ACQUISITION
See Item 4--"Information on the Company--Recent Developments" for a
description of our pending offer to acquire all of the outstanding securities
of OPSM. If the offer is successful, the acquisition of OPSM is expected to
close in the third quarter of 2003. We intend to finance the aggregate
purchase price of approximately A$536 million (Euro 312 million as of June
26, 2003) with proceeds from certain credit arrangements available to us from
commercial banks. However, there can be no assurance that the transaction
will be consummated on the terms or within the time period contemplated or at
all.
44
Set forth below is certain information regarding our Working Capital (total
current assets minus total current liabilities) and Adjusted Working Capital (as
defined below) for the last three fiscal years:
AS OF DECEMBER 31,
2000 2001 2002
------------ ------------ ------------
(THOUSANDS OF EURO)
Current Assets 1,102,937 1,427,392 1,140,113
- Current Liabilities (1,141,692) (2,299,499) (998,723)
Working Capital (38,755) (872,107) 141,390
Adjustments:
- Cash and Cash equivalents (85,392) (199,202) (151,418)
- Restricted Cash (244,994) (213,507) 0
- Bank overdrafts 152,110 411,193 371,729
- Current portion of long-term debt 580,315 1,339,131 178,335
------------ ------------ ------------
Adjusted Working Capital 363,284 465,508 540,036
------------ ------------ ------------
"Adjusted Working Capital" is defined as Working Capital excluding cash,
cash equivalents, restricted cash, bank overdrafts and the current portion of
long-term debt. Adjusted Working Capital is not a financial measure in
accordance with U.S. GAAP and is presented for informational purposes only.
Adjusted Working Capital is presented because management believes that this
measure better reflects the short-term cash absorption/generation related to the
operating performance of the business, regardless of the long or short term
nature of our credit facilities. This non-U.S. GAAP financial measure is not,
and should not be considered as, a substitute for financial information
presented in accordance with U.S. GAAP, and may differ from similarly titled
financial measures used by other companies. A reconciliation of Adjusted Working
Capital to Working Capital is included in the table above.
Cash flows provided by operating activities were Euro 339.6 million, Euro
436.0 million and Euro 440.2 million for the years ended December 31, 2000, 2001
and 2002, respectively. Cash flows from operating activities have consisted
primarily of income from operations and depreciation and amortization, partially
offset by increases in accounts receivable and the cash outlay in connection
with Ray-Ban restructuring expenses previously accrued.
Cash flows used in investing activities for the years ended December 31,
2000, 2001 and 2002 were Euro 65.3 million, Euro 711.1 million and Euro 190.4
million, respectively, resulting primarily from additions of property, plant and
equipment, as well as the acquisition of Sunglass Hut in 2001.
Cash flows (used in)/from financing activities for December 31, 2000, 2001
and 2002 were Euro (223.1) million, Euro 142.7 million and Euro (274.1) million,
respectively, consisting primarily of proceeds from the incurrence of
indebtedness in connection with the 1999 acquisition of Ray-Ban and the 2001
acquisition of Sunglass Hut, offset by repayments of debt and dividends.
45
We believe that the financial resources available to us will be sufficient
to meet our foreseeable working capital and capital expenditure requirements. We
do not believe that the relatively moderate rates of inflation which have been
experienced in the geographic markets where we compete have had a significant
effect on our net sales or profitability. In the past, we have been able to
offset cost increases by increasing prices, although we can give no assurance
that we will be able to do so in the future.
On September 25, 2002, we announced that our subsidiary U.S. Holdings had
authorized the purchase of up to 11,500,000 of our ADRs (one ADR represents one
ordinary share), representing 2.5 percent of the authorized and issued capital
of Luxottica Group S.p.A., over the 18 month period commencing on September 25,
2002. On March 20, 2003, we announced that U.S. Holdings had resolved to
purchase up to an additional 10,000,000 of the our ADRs, representing 2.2
percent of the authorized and issued share capital of Luxottica Group S.p.A.,
over the 18 month period commencing on March 20, 2003. The actual amount and
timing of ADR purchases will depend on market conditions and other factors.
Through March 31, 2003, U.S. Holdings had repurchased 6,434,786 ADRs at an
aggregate purchase price of approximately Euro 70.0 million.
We had no off-balance sheet arrangements with special purpose entities at
December 31, 2002.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We are party to numerous contractual arrangements consisting of, among
other things, royalty agreements with designers, leases for retail store, plant,
warehouse and office facilities, as well as certain data processing and
automotive equipment, and outstanding borrowings under credit agreements and
facilities with financial institutions to finance our operations. These
contractual arrangements may contain minimum annual commitments or guarantees. A
more complete discussion of the obligations and commitments is included in Notes
8 and 14 of the Consolidated Financial Statements included in this annual
report.
The following table summarizes the scheduled maturities of our long-term debt,
minimum lease commitments under noncancellable operating leases, foreign
currency forward contracts and minimum payments under noncancellable royalty
arrangements as of December 31, 2002.
Thousands of Euro Payments due by period
------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS AND
COMMERCIAL COMMITMENTS 2003 2004 to 2005 2006 to 2007 After 2007 Total
------------------------------------------------------------------------------------------------------------------------
Long Term Debt and Current Maturities 178,335 836,152 3,146 16,356 1,033,989
------------------------------------------------------------------------------------------------------------------------
Operating Leases 145,986 254,200 177,387 118,907 696,480
------------------------------------------------------------------------------------------------------------------------
Foreign Currency Forward Contracts -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------
Minimum Royalty Arrangements 18,441 17,608 2,305 -- 38,354
------------------------------------------------------------------------------------------------------------------------
Total 342,762 1,107,960 182,838 135,263 1,768,823
------------------------------------------------------------------------------------------------------------------------
46
At December 31, 2002, we had available funds under unused short-term lines
of credit of approximately Euro 308.1 million.
During 2002, we spent Euro 173.3 million on capital improvements and
replacements. We constructed new corporate headquarters for our Retail Division
in Mason, Ohio U.S.A. for approximately U.S. $36.3 million (including land and
office furniture) and also purchased and renovated new corporate headquarters in
Milan for Euro 42 million.
Capital expenditures were Euro 173.3 million through December 31, 2002 and
Euro 10.4million through March 31, 2003. It is our expectation that 2003 annual
capital expenditures will be less than Euro 100 million.
See Item 18 - "Financial Statements--Notes to Consolidated Financial
Statements."
EURO CONVERSION
As part of the European Economic and Monetary Union (EMU), a single
currency, the Euro, has replaced the national currencies of most of the European
countries in which we conduct business. The conversion rates between the Euro
and the participating nations' currencies have been fixed irrevocably as of
January 1, 1999, with the participating nations' currencies removed from
circulation between January 1 and February 28, 2002 and replaced by Euro notes
and coinage. During the transition period from January 1, 1999 through December
31, 2001, public and private entities, as well as individuals, could pay for
goods and services using either checks, drafts or wire transfers denominated in
Euros or in the participating country's national currency. Under the regulations
governing the transition to a single currency, there was a "no compulsion, no
prohibition" rule which stated that no one is obliged to utilize the Euro until
the notes and coinage have been introduced on January 1, 2002. As of January 1,
1999, we became Euro "compliant", that is, able to receive Euro denominated
payments and able to invoice in Euro as requested by vendors and suppliers,
respectively. As of January 1, 2001, we completed the conversion of our
financial statement procedures in all affected countries (except Greece). Full
conversion of all affected country operations (other than financial statement
procedures) to Euro was completed by the time national currencies were removed
from circulation. The costs of software and business process conversion were not
material.
FORWARD LOOKING STATEMENTS
Throughout this annual report, including in the discussion set forth above,
we have made certain forward looking statements concerning future events. Our
future operations and results may be materially affected by a variety of
factors, including those referred to in Item 3 - "Key Information--Risk
Factors." See also "Forward-Looking Information" appearing in the forepart of
this annual report.
47
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
Set forth below is certain information regarding the directors and senior
management of Luxottica Group S.p.A. as of December 31, 2002, except as
otherwise specified:
OFFICER
OR
DIRECTOR
NAME AGE(1) SINCE(2) POSITION(3)
---- ------ --------- -----------
Leonardo Del Vecchio 67 1961 Chairman of the Board of Directors
Luigi Francavilla 65 1969 Deputy Chairman
Claudio Del Vecchio 45 1976 Director
Roberto Chemello 48 1979 Chief Executive Officer
Lucio Rondelli 78 1990 Director
Tancredi Bianchi 74 1990 Director
Giorgio Armani (4) 68 2000 Director
Mario Cattaneo (5) 72 2003 Director
Enrico Cavatorta (6) 41 1999/2003 Chief Financial Officer and Director
Sabina Grossi (7) 37 1996/2003 Head of Investor Relations and Director
Kerry Bradley 46 1988 Chief Operating Officer of Retail N.A.
Enzo Damin 45 1997 Head of Human Resources
Jack Dennis 57 1982 C.F.O. and C.A.O. of Retail N.A.
Andrea Fiabane 40 1998 Executive Vice President, North America
Andrea Gallina 47 1998 Head of Manufacturing
Valerio Giacobbi 38 1991 Executive Vice President, North America
Giuseppe La Boria 44 2001 Head of Sales - Wholesale Division
Paolo Mollo 39 1993 Head of Production and Logistics
Claudio Renon 50 1968 Head of Product Development
Umberto Soccal 52 1988 Chief Information Technology Officer
(1) Except as otherwise specified, all ages and positions are as of
December 31, 2002.
(2) Reflects period of affiliation with Luxottica Group S.p.A. or any of our
predecessors and affiliates.
(3) Unless otherwise indicated, positions shown are with Luxottica Group
S.p.A. or Luxottica S.r.l., our principal operating subsidiary in Italy.
(4) Mr. Armani was not re-elected as a Director at the Company's annual
meeting of shareholders held on June 25, 2003.
(5) Mr. Cattaneo was elected as a Director at the Company's annual meeting of
shareholders held on June 25, 2003.
(6) Mr. Cavatorta was elected as a Director at the Company's annual meeting
of shareholders held on June 25, 2003.
(7) Ms. Grossi was elected as a Director at the Company's annual meeting of
shareholders held on June 25, 2003.
48
Messrs. Leonardo Del Vecchio, Luigi Francavilla, Roberto Chemello and Lucio
Rondelli are also members of the Executive Committee of the Board of Directors.
Directors serve for a term of three years and were most recently elected on
June 25, 2003. Executive officers serve at the discretion of the Board of
Directors. Except for Messrs. Rondelli, Bianchi and Cattaneo, all of the members
of the Board of Directors are full-time executives of Luxottica Group S.p.A. or
certain of its subsidiaries.
Pursuant to Italian law, we also maintain a Board of Statutory Auditors
composed of three individuals who are required to have no other affiliation with
Luxottica Group S.p.A. and who must satisfy certain professional and other
standards. The Board of Statutory Auditors is required to verify that we: (i)
comply with applicable law and our bylaws; (ii) respect the principles of
correct administration; (iii) maintain adequate organizational structure,
internal controls and administrative and accounting systems; and (iv) adequately
instruct our subsidiaries to transmit to us information relevant to our
disclosure obligations. Although members of the Board of Statutory Auditors are
required to attend the meetings of the Board of Directors, the Executive
Committee and the shareholders, they do not vote on matters submitted to such
meetings. Currently the members of the Board of Statutory Auditors are Giancarlo
Tomasin, Chairman, Mario Medici and Walter Pison.
LEONARDO DEL VECCHIO, is the founder of our operations and has been
Chairman of the Board since Luxottica Group S.p.A. was formed in 1961. Mr. Del
Vecchio also serves as Chairman of the Board of several of our subsidiaries. In
1986 the President of the Republic of Italy conferred on Mr. Del Vecchio the
honor of Cavaliere dell'Ordine al "Merito del Lavoro" (Knight of the Order for
Labor Merit). Mr. Del Vecchio is currently a member of the Board of Directors of
Gianni Versace S.p.A. and Chairman of Beni Stabili S.p.A. In May 1995, he
received an honorary degree in Business Administration from the Venice Ca'
Foscari University. In 1999 he received a Master "honoris causa" in
International Business from MIB- Management School in Trieste and in 2002 he
received an honorary degree in Managerial Engineering from the University of
Udine.
LUIGI FRANCAVILLA joined Luxottica Group S.p.A. in 1968 and has been Deputy
Chairman since 1981 and a Managing Director of Luxottica S.r.l., our principal
operating subsidiary, since 1977. He also serves as a Director of several of our
subsidiaries. From 1972 to 1977, Mr. Francavilla was General Manager of
Luxottica S.r.l. and, from 1969 to 1971, he served as Technical General Manager
of Luxottica S.r.l. In April 2000, he received an honorary degree in Business
Administration from Constantinian University.
CLAUDIO DEL VECCHIO, a son of Leonardo Del Vecchio, joined Luxottica Group
S.p.A. in 1978 and has been a Director since 1981. From 1979 to 1982, he managed
our Italian and German distribution operations. He also serves as a Director of
several of our subsidiaries. Claudio Del Vecchio is Chairman and Chief Executive
Officer of Retail Brand Alliance, Inc., the owner of Brooks Brothers Inc. and
other clothing apparel companies.
ROBERTO CHEMELLO joined Luxottica Group S.p.A. in 1979 and has been Chief
Executive Officer since 1985. He also serves as Chairman or as a Director of
several of our subsidiaries.
49
Prior to 1985, Mr. Chemello was our Chief Financial Officer. Mr. Chemello
graduated with a degree in Business Administration and Economics from the Ca'
Foscari University in Venice.
LUCIO RONDELLI has been a Director since 1990. Mr. Rondelli was the
Chairman of UniCredito Italiano S.p.A. until 2001, having held various positions
with the bank continuously from 1947. Mr. Rondelli is currently a member of the
Board of Directors of RAS S.p.A. and IVECO International N.V. In 1976 he
received the honor of Cavaliere di Gran Croce dell'Ordine (Knight of the Great
Cross Order) for merit to the Republic of Italy and in 1988 the President of the
Republic of Italy conferred on him the honor of Cavaliere dell'Ordine al "Merito
del Lavoro" (Knight of the Order for Labor Merit).
TANCREDI BIANCHI has been a Director since 1990 and has been Professor of
Credit and Banking at the Bocconi University in Milan since 1978. In 1959, he
qualified for University teaching and began teaching Banking Technique at the
Venice University, as well as the Pisa and Rome Universities. In recent years he
joined the Board of Directors of Montedison and until 1989 was a member of the
Board of Directors of Credito Bergamasco. Until 1998, Mr. Bianchi was Chairman
of the Italian Banking Association. He is currently Chairman of Centrobanca and
of Fondo Immobiliare Polis and a member of the Board of Directors of Credito
Emiliano.
GIORGIO ARMANI became a Director in 2000, but was not re-elected as a
Director at the Company's annual meeting of shareholders held on June 25, 2003.
Mr. Armani is the Chairman of the Board and the sole shareholder of Giorgio
Armani S.p.A., founded in Milan in 1975. In 1979, he founded the Giorgio Armani
Corporation in the United States. The Giorgio Armani Group is one of the leading
fashion and design houses in the world today. It designs, manufactures and sells
fashion products under a range of lifestyle brand names, including: Giorgio
Armani, Armani Collezioni, Emporio Armani and Armani Jeans. Giorgio Armani's
retail network currently comprises approximately 300 stores throughout the
world.
MARIO CATTANEO was elected as a Director at the Company's annual meeting of
shareholders held on June 25, 2003. Mr. Cattaneo is professor of Corporate
Finance at the Catholic University of Milan. From 1991 to 1999 he was Statutory
Auditor of the Bank of Italy. He is a member of the Board of Directors of Eni
S.p.A., UniCredito Italiano S.p.A. and Banca Lombarda e Piemontese S.p.A.
ENRICO CAVATORTA has been Chief Financial Officer since he joined Luxottica
Group S.p.A. in 1999 and was elected as a Director at the Company's annual
meeting of shareholders held on June 25, 2003. Prior to joining Luxottica Group
S.p.A., Mr. Cavatorta was with Piaggio S.p.A., most recently as Group
Controller, Director, responsible for planning and control. From 1993 to 1996,
Mr. Cavatorta was a consultant with McKinsey & Co., having joined the firm from
Procter & Gamble Italy, where he worked from 1985 to 1993, most recently as
Controller. Mr. Cavatorta, who is a C.P.A. in Italy, graduated with the highest
honors from the LUISS University in Rome with a bachelor's degree in Business
Administration.
SABINA GROSSI joined Luxottica Group S.p.A. in 1996, is currently Head of
Investor Relations and was elected as a Director at the Company's annual meeting
of shareholders held on June 25, 2003. Prior to joining Luxottica Group S.p.A.,
she was a financial analyst with Caboto Sim S.p.A. From 1991 to 1993, Ms. Grossi
was an associate professor in the school of
50
engineering of the La Sapienza University in Rome, where she taught
undergraduate courses as well as published papers on mathematics and statistics.
Ms. Grossi, who is a C.P.A. in Italy, graduated with the highest honors from the
LUISS University in Rome with a bachelor's degree in Business Administration and
Economics.
KERRY BRADLEY has been Chief Operating Officer of Retail North America
since 2002, prior to which he served as Executive Vice President of LensCrafters
since June of 1998. Mr. Bradley is responsible for all LensCrafters, Sunglass
Hut and EyeMed sales, marketing and operations. Mr. Bradley has held various
other senior executive roles since joining LensCrafters in 1988. Mr. Bradley has
a Masters degree in Business from the University of Edinburgh, Scotland and a
B.S. degree in Business from Auburn University in Alabama.
ENZO DAMIN has been Head of Human Resources since 1997. Prior to joining
Luxottica Group S.p.A., he was a Junior Consultant for Associazione Industriali
Bresciana, Human Resources Manager for various divisions of La Rinascente
Department Stores Group and for BIC Italy. Mr. Damin graduated with a degree in
Law from Parma University.
JACK DENNIS has been Chief Financial Officer and Chief Administrative
Officer of Retail North America since 2001, prior to which time he served as
Chief Financial Officer of LensCrafters since 1992 and Chief Administrative
Officer since 1999. Prior to 1992, he was Controller of LensCrafters, Vice
President of Finance in several divisions of U.S. Shoe, and a Senior Audit
Manager with Arthur Andersen & Co. Mr. Dennis graduated with a degree in
Accounting from the University of Kentucky.
ANDREA FIABANE has been Executive Vice President North America since 2001.
Prior to assuming his current position, he was Country Manager since 1990 and
then Regional Manager. Mr. Fiabane graduated with a degree in Business
Administration from the Venice Ca' Foscari University.
ANDREA GALLINA has been with Luxottica Group S.p.A. since 1998. Before
joining Luxottica Group S.p.A., he was the Manufacturing Director of Aprilia, a
world leader in motorcycle production. He is currently operating as Head of
Manufacturing for our Italian production facilities.
VALERIO GIACOBBI has been Executive Vice President North America since
2001. Prior to 2001, he was General Affairs Manager of Luxottica Group S.p.A.
since 1991. Mr. Giacobbi graduated with a degree in Business Administration and
Economics from the Venice Ca' Foscari University.
GIUSEPPE LA BORIA joined Luxottica Group S.p.A. in 2001 as Head of Sales
for the Wholesale Distribution Division. Prior to joining Luxottica Group
S.p.A., Mr. La Boria worked in Safilo S.p.A. as Sales Manager for Italy, during
which period he was also responsible for all the commercial and marketing
aspects of the Diesel Shades launch.
PAOLO MOLLO joined Luxottica Group S.p.A. in 1990 as a member of our
finance department. Mr. Mollo has been Production Planning Manager since 1993
and Logistics
51
Manager since 2000. Mr. Mollo graduated with a degree in Business Administration
and Economics from Venice Ca' Foscari University.
CLAUDIO RENON has been Head of Product Development since 1990. Before that
time, Mr. Renon served in various capacities for Luxottica Group S.p.A. since
1968.
UMBERTO SOCCAL joined Luxottica Group S.p.A. in 1988 as Chief Information
Technology Officer. As we expanded our distribution network, he became
responsible for the computer systems of all of our European subsidiaries. Mr.
Soccal previously worked as a software programmer and chief of the data
processing center for the Provincial Industry Association.
COMPENSATION
Set forth below is information regarding total cash compensation paid to
the members of our Board of Directors and our Board of Statutory Auditors for
services rendered to Luxottica Group S.p.A. and its subsidiaries during 2002:
OTHER TOTAL CASH
BASE COMPENSATION COMPENSATION COMPENSATION
NAME (EURO) (EURO) (EURO)
-------------------------------------------------------------------------------------------------
Leonardo Del Vecchio, 130,798 474,494 605,292
CHAIRMAN OF THE BOARD OF DIRECTORS
-------------------------------------------------------------------------------------------------
Luigi Francavilla, 130,147 666,205 796,352
DEPUTY CHAIRMAN
-------------------------------------------------------------------------------------------------
Roberto Chemello, 85,246 543,487 628,733
CHIEF EXECUTIVE OFFICER
-------------------------------------------------------------------------------------------------
Lucio Rondelli, 85,246 -- 85,246
DIRECTOR
-------------------------------------------------------------------------------------------------
Tancredi Bianchi, 63,121 -- 63,121
DIRECTOR
-------------------------------------------------------------------------------------------------
Giorgio Armani, 63,121 -- 63,121
DIRECTOR
-------------------------------------------------------------------------------------------------
Claudio Del Vecchio, 85,246 415,873 501,119
DIRECTOR
-------------------------------------------------------------------------------------------------
Giancarlo Tomasin, 59,173 -- 59,173
CHAIRMAN OF THE BOARD OF STATUTORY AUDITORS
-------------------------------------------------------------------------------------------------
Mario Medici, 45,764 6,324 52,088
MEMBER OF THE BOARD OF STATUTORY AUDITORS
-------------------------------------------------------------------------------------------------
Walter Pison, 41,468 43,911 85,379
MEMBER OF THE BOARD OF STATUTORY AUDITORS
-------------------------------------------------------------------------------------------------
52
Aggregate compensation paid by us to our senior management (excluding
directors) as a group (12 people) was approximately Euro 4.1 million in 2002, of
which approximately Euro 0.7 million represented provision for termination
indemnities and social security charges required by Italian law. Members of this
group were also granted in 2002 options to purchase an aggregate of 819,200 of
our ordinary shares at an exercise price of U.S. $17.80 or U.S. $16.06 per
share, depending on the Plan. These options expire on January 31, 2010 or 2011,
depending on the Plan.
EMPLOYEES
As of December 31, 2002, we employed approximately 34,700 employees
worldwide, of whom approximately 25,600 were employed in the United States and
5,700 were employed in Italy. As of such date, 130 employees were in management
positions, 8,144 were employed in our manufacturing and wholesale segment and
26,465 were employed in our retail segment. Substantially all of our employees
in Italy are covered by collective bargaining agreements. None of our employees
in the United States are covered by collective bargaining agreements. We have
enjoyed generally good relations with our employees.
Employment agreements in Italy are generally collectively negotiated
between the national association of companies within a particular industry and
the respective national unions. Individual companies must enter into contracts
with their employees based on the relevant collective agreement. The agreement
for optical workers, which is part of the national textile agreement, covers
approximately 5,270 of our employees. This agreement expires in 2004 and
provides for average wage increases of 2 percent per year. The agreement for
mechanical workers, which covers approximately 240 of our employees, was
renegotiated in 2002. On September 30, 2000, we entered into an agreement with
the trade unions representing our employees who are covered by the collective
bargaining agreement for mechanical workers, which provides economic incentives
for employees who agree to join the collective agreement for optical workers.
Subsequently to the above agreement, 225 employees, covered by the agreement for
mechanical workers, agreed to join the optical workers as of January 2003.
In addition to the national collective bargaining agreement for workers, we
typically enter into separate, local contracts with labor unions representing
our employees. On December 2002, we renewed a local agreement with optical
workers, supplementing the terms of the national textile contract. This new
agreement, covers approximately 5,270 employees and provides for a variable wage
related to our financial results, instead of an increasing wage base. Moreover,
considering the high number of women employed by us, we have decided to increase
the number of part-time positions. We have also recently established a regular
long-term training program which is aimed at a large number of employees.
Italian law provides that, upon termination of employment, employees are
entitled to receive certain compulsory separation payments based on their
compensation levels and length of employment. As of December 31, 2002, we had
reserved Euro 48.9 million for such separation payments in our consolidated
financial statements.
53
SHARE OWNERSHIP
Set forth below is certain information concerning the beneficial ownership
of our ordinary shares as of June 25, 2003, by each of our directors and
executive officers who own in excess of 1 percent of our outstanding ordinary
shares.
SHARES OWNED AT PERCENTAGE
SHAREHOLDER ISSUER JUNE 25, 2003 OWNERSHIP
------------------------------------------------------------------------------------------
Leonardo Del Vecchio Luxottica Group S.p.A. 314,464,552(1) 70.21%
------------------------------------------------------------------------------------------
Giorgio Armani Luxottica Group S.p.A. 22,724,000(2) 5.07%
------------------------------------------------------------------------------------------
(1) Includes 78,839,690 shares held of record by Delfin S.r.l., 65,214,862
shares held of record by La Leonardo Finanziaria S.r.l., and 170,410,000
shares held of record by Leoinvest Luxembourg Sarl. Delfin S.r.l., La
Leonardo Finanziaria S.r.l. and Leoinvest Luxembourg Sarl are entities
established and controlled by Mr. Del Vecchio, and Mr. Del Vecchio holds
voting and investment power over the shares held by such entities.
(2) Includes 13,514,000 ordinary shares represented by ADRs and 200,000
ordinary shares held by Giorgio Armani S.p.A.
Except as otherwise indicated above, each of our directors and our
executive officers owns less than 1 percent of our outstanding ordinary shares.
In March of 1998, we adopted an employee stock option plan providing for
the issuance of options covering up to 12,250,000 ordinary shares of nominal
value Euro .06 each. As a result of the change in the par value of our ordinary
shares from Lire to Euro, which was approved by our shareholders at the annual
meeting held on June 26, 2001, the number of ordinary shares available for
issuance under the plan was reduced to 10,798,642. Our Board of Directors
administers the stock option plan. The purpose of the plan is to provide
additional incentives to our key employees. Grants under the stock option plan
may be of non-qualified options and/or incentive stock options. Under the plan,
the Board of Directors may not grant an option for a term of more than 9 years
from the date of grant, or for a term that expires after March 31, 2011. The
exercise price of these options is equal to the market value of the underlying
ordinary shares on the date of grant, defined as the higher of (i) the closing
market price of our ADRs on the business day immediately preceding the date of
the grant, and (ii) the average of the closing market prices for each business
day during the 30 day period ending on the date of the grant. Options granted
under the plan generally become exercisable in three equal installments
beginning one year after the date of grant and expire nine years after the date
of grant.
In September 2001, we adopted an additional employee stock option plan
providing for the issuance of options covering up to 11,000,000 ordinary shares
of nominal value Euro .06 each. The purpose and administration of the 2001 stock
option plan is similar to the 1998 stock option plan, with the only significant
difference being that the latest option termination date is March 31, 2017.
54
As of December 31, 2002, there had been six separate grants under the
option plans described above, detailed as follows:
1998 1999 2000 2001 2002 2002
GRANT GRANT GRANT GRANT GRANT INCENTIVE
-----------------------------------------------------------------------------------------------------------------------------
NUMBER OF ORDINARY SHARES 3,380,400 3,679,200 2,142,200 2,079,300 1,170,000 2,241,300
UNDERLYING OPTIONS GRANTED(1)
-----------------------------------------------------------------------------------------------------------------------------
Exercise Price(1) Euro 7.38 Euro 4.38 Euro 9.52 U.S. $15.20 U.S. $16.06 U.S. $17.80
-----------------------------------------------------------------------------------------------------------------------------
Expiration Date January 31, January January January January 31, January 31,
2007 31, 2008 31, 2009 31, 2010 2010 2011
-----------------------------------------------------------------------------------------------------------------------------
Options held by officers(1)(2) 118,800 167,200 232,600 214,200 590,000 229,200
-----------------------------------------------------------------------------------------------------------------------------
(1) As restated to reflect the June 2000 two-for-one stock split.
(2) As restated to reflect changes among our officers during 2000 and 2002.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
The following table sets forth, as of June 25, 2003, the beneficial
ownership of ordinary shares by (1) each person (or group within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934) known by us to own more
than 5 percent of the outstanding ordinary shares (including ordinary shares
represented by ADSs); and (2) all directors and executive officers as a group.
Identity of Amount of Percent of
Person or Group Shares Owned Class
--------------- ------------ ----------
Leonardo Del Vecchio 314,464,552(1) 70.21%
Giorgio Armani 22,724,000(2) 5.07%
Directors and Executive Officers
as a Group 345,272,902(3) 77.09%
----------
(1) Includes ordinary shares held by entities controlled by Mr. Del Vecchio and
ordinary shares represented by ADSs over which Mr. Del Vecchio controls the
power to vote. See Item 6 - "Directors, Senior Management and
Employees--Share Ownership."
(2) Includes ordinary shares represented by ADSs owned by Mr. Armani and
ordinary shares held by Giorgio Armani S.p.A.
(3) Includes ordinary shares represented by ADSs owned by directors and members
of senior management.
The ordinary shares held by Mr. Del Vecchio, Mr. Armani and our other
directors and executive officers have the same voting rights as the shares held
by other shareholders.
Mr. Del Vecchio beneficially owns approximately 70.21 percent of our
outstanding ordinary shares (including any shares represented by ADSs) and
serves as Chairman of our Board of Directors. We are not otherwise directly or
indirectly owned or controlled by another corporation or by any foreign
government.
55
To the best of our knowledge, to date there are no arrangements which may
result in a change of control of Luxottica Group S.p.A.
RELATED PARTY TRANSACTIONS
PURCHASE OF NEW CORPORATE HEADQUARTERS
In January 2002, we acquired a building located in Milan, Italy, for a
total purchase price of Euro 28 million, including the expenses for renovation,
from "Partimmo S.a.S.", an entity affiliated with Leonardo Del Vecchio, our
Chairman. We believe that the purchase price of the building represented its
market value as of the acquisition date. The building is being used as our new
corporate headquarters. Subsequent to the purchase, we invested additional Euro
14 million to complete the building renovation. In connection with the purchase
of the building, we entered into an agreement with our Chairman who has leased
for Euro 0.5 million annually a portion of this building. The lease expires in
2010.
RETAIL BRAND ALLIANCE, INC.
Certain expenses of approximately Euro 5.84 million for 1999 and Euro 5.49
million for 2000 were due to Retail Brand Alliance, Inc. (formerly known as
Casual Corner Group, Inc.) ("RBA"), for costs that RBA paid on our behalf. RBA
is controlled by Claudio Del Vecchio, a director of Luxottica Group S.p.A. and a
son of Leonardo Del Vecchio, our Chairman. The outstanding balance at December
31, 2000 was settled during 2001.
We have manufactured and distributed prescription frames and sunglasses
under the designer name BROOKS BROTHERS under license agreements since 1993. In
2001, RBA purchased Brooks Brothers, Inc., and we subsequently entered into a
royalty and distribution agreement with RBA for the use of the BROOKS BROTHERS
designer name. The BROOKS BROTHERS designer line accounted for approximately 1.9
percent of our total net sales in 2002 and approximately 1.7 percent of our net
sales in our manufacturing and wholesale distribution segment. During the year
ended December 31, 2002, we paid approximately Euro 1.4 million in royalties to
RBA.
ITEM 8. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
See Item 18 - "Financial Statements."
LEGAL PROCEEDINGS
We and certain of our subsidiaries were named as defendants in an action
filed in the U.S. District Court for the Central District of California for
patent infringement and related claims originally commenced by Oakley, Inc.
("Oakley") in 1998 against Bausch & Lomb Incorporated and certain of its
subsidiaries for alleged infringement of certain patents owned by Oakley. We and
certain of our subsidiaries were named as defendants because, in connection with
our acquisition of the Ray-Ban business in 1999, Luxottica Group S.p.A. assumed
certain of Bausch & Lomb's liabilities, including the potential liability for
the alleged patent infringement. In
56
November 2001, Oakley filed a second action in the same court naming Luxottica
Group S.p.A. and certain of its subsidiaries as defendants, alleging that the
defendants purportedly misappropriated what Oakley claimed are certain of its
trade dress, allegedly consisting of sunglasses that feature coordinated colored
lenses, frames and ear stems. The complaint also asserted that two colors of
lens coatings used in manufacturing by us and our subsidiaries infringe on an
Oakley patent that is also involved in the first action. In November 2001, the
Court granted a preliminary injunction that prohibits the defendants from
offering, selling and importing sunglasses featuring the lenses having the
coating. In December 2002, the defendants filed an answer and counterclaims,
denying the allegations in Oakley's complaint in all material respects. In April
2003, the parties entered into a settlement agreement, pursuant to which both
cases and the counterclaims described above were dismissed and the preliminary
injunction described above was dissolved.
In November 1999, Lantis Eyewear, Inc. ("Lantis"), a former distributor of
Bausch & Lomb, filed a complaint against Luxottica Group S.p.A. and one of its
subsidiaries claiming that, in terminating their distribution agreement with
Lantis, they allegedly breached the agreement. In December 2002, the parties
entered into a mutual release and settlement agreement and the case was
dismissed with prejudice. This settlement did not have a material impact on our
2002 results of operations and financial condition.
In May 2001, certain former stockholders of Sunglass Hut International,
Inc. commenced an action in the U.S. District Court for the Eastern District of
New York against Luxottica Group S.p.A., its acquisition subsidiary formed to
acquire Sunglass Hut International and certain other defendants, on behalf of a
purported class of former Sunglass Hut International stockholders, alleging in
the original and in the amended complaint filed later, among other claims, that
the defendants violated certain provisions of U.S. securities, laws and rules
thereunder, including Rule 14d-10 under the Securities Exchange Act of 1934, in
connection with the acquisition of Sunglass Hut International in a tender offer
and second-step merger, by reason of entering into a consulting, non-disclosure
and non-competition agreement prior to the commencement of the tender offer,
with the former chairman of Sunglass Hut International, which purportedly
involved paying consideration to such person for his Sunglass Hut International
shares and his support of the tender offer that was higher than that paid to
Sunglass Hut International's stockholders in the tender offer. The plaintiffs
are seeking, among other remedies, the payment of such higher consideration to
all tendering shareholders, other than Luxottica Group S.p.A. and its
affiliates. We and the other defendants have filed a motion to dismiss the
complaint in its entirety, and such motion is pending. We intend to defend
against such claims vigorously and believes that its defenses are meritorious,
but can provide no assurance as to the outcome of the case.
In March 2002, an individual plaintiff commenced an action in the
California Superior Court for the County of San Francisco against LensCrafters,
our subsidiary that operates as a licensed California vision health care service
plan, certain of our other subsidiaries and Luxottica Group S.p.A., alleging
that the relationships between those companies violate certain California
statutes governing optometrists and opticians and constitute unlawful or unfair
business practices. The plaintiffs named in the second amended complaint seek
certification of the case as a class action, and remedies including an
injunction against the allegedly unlawful practices, disgorgement and
restitution of allegedly unjustly obtained sums, and unspecified compensatory
57
and punitive damages. The defendants intend to defend against such claims
vigorously.
In May 2002, an individual plaintiff and Consumer Cause, Inc. commenced an
action in the California Superior Court for Los Angeles County purporting to be
a representative action against LensCrafters and our subsidiary that operates as
a licensed California vision health care service plan. The complaint alleged
that fees are illegally charged for dilation services provided by the
subsidiary's optometrists and that LensCrafters and the subsidiary have engaged
in unlawful or unfair business practices. Plaintiffs sought injunctive and
unspecified restitutionary relief. This action was dismissed with prejudice on
November 7, 2002.
In late 2002, we were informed that the Attorney General of the State of
New York is conducting an investigation into our pricing and distribution
practices relating to sunglasses under applicable state and federal antitrust
laws. We intend to fully cooperate with this investigation by providing
documents and other information to the New York Attorney General. Although we do
not believe that we have violated any applicable antitrust laws, we are unable
at this time to predict the outcome or timing of this investigation.
In addition to the foregoing, Luxottica Group S.p.A. and its subsidiaries
are, and in the future may become, defendants in various lawsuits arising in the
ordinary course of business. It is the opinion of management that the outcome of
existing claims against Luxottica Group S.p.A. and its subsidiaries will not
have a material adverse effect on our consolidated financial position or results
of operations. However, the outcome of litigation is inherently uncertain, and
no assurances can be given that Luxottica Group S.p.A. and its subsidiaries will
not be subject to material claims, judgments or proceedings in the future. See
Item 3 - "Key Information--Risk Factors--Our business could be adversely
affected by legal proceedings to which we are, or may become, a party."
DIVIDEND DISTRIBUTIONS
See Item 3 - "Key Information--Dividends" and Item 10 - "Additional
Information."
SIGNIFICANT CHANGES
Except as otherwise indicated above, no significant changes have occurred
since the date of our annual financial statements included in this Form 20-F.
ITEM 9. THE OFFER AND LISTING
Our ordinary shares were approved for trading on the Italian Stock Exchange
on December 4, 2000. Our ADSs were admitted for trading on the New York Stock
Exchange on January 24, 1990. Our ADSs are evidenced by ADRs issuable by The
Bank of New York, as depositary, pursuant to a Deposit Agreement.
58
The table below sets forth the quarterly high and low closing prices of the
ADSs on the New York Stock Exchange during 2001 and 2002:
HIGH (U.S. $) LOW (U.S. $)
--------------------------------------------------------------
2002
--------------------------------------------------------------
First Quarter 19.82 15.90
--------------------------------------------------------------
Second Quarter 20.85 17.85
--------------------------------------------------------------
Third Quarter 18.70 11.82
--------------------------------------------------------------
Fourth Quarter 15.51 12.00
--------------------------------------------------------------
2001
--------------------------------------------------------------
First Quarter 16.09 13.13
--------------------------------------------------------------
Second Quarter 16.00 13.25
--------------------------------------------------------------
Third Quarter 17.99 12.15
--------------------------------------------------------------
Fourth Quarter 17.21 13.45
--------------------------------------------------------------
The table below sets forth the annual high and low closing prices of the
ADSs on the New York Stock Exchange during the five most recently completed
calendar years (all amounts are adjusted to reflect the two-for-one stock split
which occurred in 2000 and the five-for-one stock split which occurred in 1998):
YEAR HIGH (U.S. $) LOW (U.S. $)
------------------------------------------------
2002 20.85 11.82
------------------------------------------------
2001 17.99 12.15
------------------------------------------------
2000 17.00 7.97
------------------------------------------------
1999 10.31 5.00
------------------------------------------------
1998 9.49 3.88
------------------------------------------------
The table below sets forth the high and low closing prices of the ADSs on
the New York Stock Exchange and ordinary shares on the Italian Stock Exchange
for the most recent six months:
ADSs ON ORDINARY SHARES
THE NEW YORK ON THE ITALIAN
STOCK EXCHANGE STOCK EXCHANGE
(IN U.S. $) (IN EURO)
---------------------------------------------------------------------------
YEAR MONTH HIGH LOW HIGH LOW
---------------------------------------------------------------------------
2002 December 13.65 12.63 13.42 12.51
---------------------------------------------------------------------------
2003 January 14.05 11.88 13.48 10.99
---------------------------------------------------------------------------
2003 February 12.07 11.20 12.26 10.46
---------------------------------------------------------------------------
2003 March 11.40 10.23 10.86 9.25
---------------------------------------------------------------------------
2003 April 11.28 10.69 10.55 9.85
---------------------------------------------------------------------------
2003 May 12.73 11.30 11.27 10.04
---------------------------------------------------------------------------
59
The high and low closing prices of the ADSs on the New York Stock Exchange
for the first quarter of 2003 were U.S. $ 14.05 and U.S. $10.23, respectively.
The high and low closing prices of the ordinary shares on the Italian Stock
Exchange for the first quarter of 2003 were Euro 13.48 and Euro 9.25,
respectively.
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
COMPANY OBJECTIVES
Our Articles of Association provide that Luxottica Group S.p.A.'s principal
objectives are, among other things, (i) the ownership and management in other
companies or entities both in Italy and abroad, (ii) financing and managerial
coordination of the owned companies and entities and (iii) providing credit
support for our subsidiaries. These objectives are set out in full in Article 3
of our Articles of Association. The discussion of our Articles of Association
contained in this Item 10 is not complete and should be read in conjunction with
the Articles of Association. Our Articles of Association contain, among other
things, provisions to the following effect:
DIRECTORS
Other than as provided below, a director may not vote in respect of any
arrangement in which he has a material interest other than by virtue of his
interest in the ordinary shares of Luxottica Group S.p.A. Compensation of the
directors is determined by our Board of Directors and approved by the ordinary
shareholders at the annual meeting of shareholders.
Directors are not required to hold ordinary shares of Luxottica Group
S.p.A. as a qualification for office.
RIGHTS ATTACHING TO ORDINARY SHARES
DIVIDENDS
We are required to pay an annual dividend on the ordinary shares if
approved by a majority of shareholders at the annual general meeting that must
be held by April 30 or, under certain circumstances, June 30 of each year.
Before dividends may be paid with respect to the results of any year, an amount
equal to 5 percent of our net income for such year must be set aside to the
legal reserve until the reserve, including amounts set aside during prior years,
is at least equal to one-fifth of the nominal value of our issued share capital.
See Item 3 - "Key Information--Dividends."
Future determinations as to dividends will depend upon, among other things,
our earnings, financial position and capital requirements, applicable legal
restrictions and such other factors as the Board of Directors and shareholders
may determine. Dividends are usually paid in accordance with the dates set
annually by Borsa Italiana S.p.A. Dividends which are not collected within five
years of the date on which they become payable are forfeited. Dividends
60
are paid to those persons who hold the ordinary shares through an intermediary
on a dividend payment date declared at the shareholders' meeting. The
intermediary, upon request by the shareholder, issues a certified statement of
account allowing the shareholder to collect the dividends.
If dividends are not distributed and an appropriate reserve is created, the
shareholders can adopt a resolution, at an extraordinary meeting, to convert
such reserve into capital. In this case, the shares resulting from the increase
are attributable to the shareholders in proportion to their ownership before the
increase.
NOTIFICATION OF THE ACQUISITION OF SHARES AND VOTING RIGHTS
Pursuant to Italian securities laws, including the Unified Financial Act
and CONSOB implementing regulations thereof, the most recent being CONSOB
Regulation No. 11971 dated May 14, 1999 and subsequent amendments ("CONSOB
Regulation 11971/99"), any person acquiring any interest in excess of 2 percent
in the voting shares of a listed company, must give notice to CONSOB (the
Italian securities regulatory authority) and the company whose shares are
acquired. The voting rights attributable to the shares in respect of which such
notification has not been made may not be exercised. Any resolution taken in
violation of the foregoing may be annulled if the resolution would not have been
passed in the absence of such votes.
In addition, any person whose aggregate shareholding in a listed company
exceeds or falls below 2 percent, 5 percent, 7.5 percent, 10 percent and
successive percentage multiples of 5, respectively, of the listed company's
voting share capital, is obligated to notify CONSOB and the listed company whose
shares are acquired or disposed. For the purpose of calculating these ownership
thresholds, shares owned by any person, irrespective of whether the relative
voting rights are exercisable by such person or by a third party, are taken into
consideration and, except in certain circumstances, account should also be taken
of shares held through, or shares the voting right of which are exercisable by,
subsidiaries, fiduciaries or intermediaries. For the purpose of calculating the
ownership thresholds of 5 percent, 10 percent, 25 percent, 50 percent and 75
percent, shares which: (i) a person may, directly or indirectly, acquire or
sell; and (ii) a person may acquire pursuant to the exercise of a warrant or
conversion right which is exercisable within 60 days, should also be taken into
account. The notification obligation is to be repeated when such person, upon
the exercise of the right referred to in (i) or (ii) above, acquires or disposes
of shares which causes his aggregate ownership in the listed company to exceed
or fall below the relevant thresholds. Notification should be made (except in
certain circumstances) within five trading days of the event which gives rise to
the notification obligation.
Cross ownership between listed companies may not exceed 2 percent of their
respective voting shares and cross ownership between a listed company and an
unlisted company may not exceed 2 percent of the voting shares of the listed
company and 10 percent of the voting shares of the unlisted company. If the
relative threshold is exceeded, the company which is the latter to exceed such
threshold may not exercise the voting rights attributable to the shares in
excess of the threshold and must sell the excess shares within a period of
twelve months. If the company does not sell the excess shares, it may not
exercise the voting rights in respect of its entire shareholding. If it is not
possible to ascertain which is the later company to exceed the threshold,
subject to any different agreement between the two companies, the limitation on
voting rights
61
and the obligation to sell the excess shares will apply to both of
the companies concerned. The 2 percent limit for cross ownership is increased to
5 percent on the condition that such limit is only exceeded by the two companies
concerned following an agreement authorized in advance by an ordinary
shareholders' meeting of each of the two companies. Furthermore, if a party
holds an interest in excess of 2 percent of a listed company's share capital,
such listed company or the party which controls the listed company may not
purchase an interest above 2 percent in a listed company controlled by the first
party. In case of non-compliance, voting rights attributable to the shares held
in excess may not be exercised. If it is not possible to ascertain which is the
later party to exceed the limit, the limitation on voting rights will, subject
to different agreement between the two parties, apply to both. Any shareholders'
resolution taken in violation of the limitation on voting rights may be annulled
by the relevant court if the resolution would not have been passed in the
absence of such votes. The foregoing provisions in relation to cross ownership
do not apply when the thresholds are exceeded following a public tender offer
aimed at acquiring at least 60 percent of the company's shares.
The validity of any agreement which governs the voting rights of the shares
of a listed company or of its parent company is conditioned on the notification
of such agreement to CONSOB, the publication of a summary of such agreement in
the press and the filing of the agreement with the Register of Enterprises, in
each case, within 5 days, 10 days and 15 days, respectively, of the agreement's
stipulation. Failure to comply with the foregoing requirements will render the
agreement null and void and the voting rights of the relative shares cannot be
exercised.
The agreements subject to the above include those which: (i) regulate the
exercise of, or prior consultation for the exercise of voting rights in, a
listed company or its controlling company; (ii) contain limitations on the
transfer of shares or securities which grant the right to purchase or subscribe
for shares; (iii) provide for the purchase of shares or securities mentioned in
(ii); or (iv) have as their object or effect the exercise (including joint
exercise) of a dominant influence over the company.
Any agreement of the nature described above can have a legal maximum term
of three years (and may be renewed for an additional three-year term at its
expiration), and if executed for an unlimited term shall otherwise expire three
years after its execution. Any such agreement executed for an unlimited term can
be terminated by a party upon six months' prior notice. In the case of a public
tender offer, shareholders who intend to participate in the tender offer may
withdraw from the agreement without notice. CONSOB Regulation 11971/99 contains
provisions which govern the method and content of the notification and
publication of the agreements as well as any subsequent amendments thereto.
GENERAL MEETINGS
Meetings of the shareholders may be held at our executive offices in Italy,
in any country in the European Union and in the U.S., following publication of
notice of the meeting including the agenda in the "Gazzetta Ufficiale" at least
30 days before the date fixed for the meeting. The Bank of New York will mail to
all record holders of ADRs a notice containing a summary of the information
contained in any notice of a shareholders' meeting received by The Bank of New
York. See "--Documents on Display."
62
Meetings of shareholders may be either ordinary meetings or extraordinary
meetings. Shareholders meetings may be called by the Board of Directors or the
Board of Statutory Auditors. In the case of a listed company in Italy, Decree n.
58/98 provides that shareholders meetings must be convened upon the request of
holders of 10 percent of the issued and outstanding share capital within 30 days
following receipt of such a request, provided that the request contains a
summary of the matters to be discussed. The Board of Directors may, however,
resolve not to convene a meeting if the interest of Luxottica so requires. In
this case, the Court of Milan, on appeal by the shareholders who have asked for
such meeting, can order by decree, after having conferred with the Board of
Directors and the Board of Statutory Auditors, that such meeting be convened.
Holders of ordinary shares are entitled to attend and vote at ordinary and
extraordinary shareholders' meetings. Each holder is entitled to cast one vote
for each ordinary share held. Votes may be cast personally or by proxy, in
accordance with applicable Italian regulation. However, the voting rights of
ordinary shares held in breach of applicable law may in some cases not be
exercised.
Ordinary shareholders' meetings must be convened at least once a year to
approve the annual financial statements of Luxottica Group S.p.A., which meeting
must be convened within four months (or, under certain circumstances, six
months) after the end of the financial year to which such financial statements
relate. At ordinary shareholders' meetings, shareholders resolve upon dividend
distribution, if any, appoint the Directors, Statutory Auditors and external
auditors, determine their remuneration and vote on business matters submitted by
the Directors.
The quorum required, in person or by proxy, for an ordinary meeting, upon
first notice is at least 50 percent of the total number of issued and
outstanding ordinary shares, while on second call there is no quorum
requirement. Resolutions at ordinary meetings may be adopted, in first and
second calls, by a simple majority of ordinary shares represented at such
meeting.
Extraordinary meetings of shareholders may be called to vote upon, among
other things, proposed amendments to the by-laws, capital increases, mergers,
spin-offs, issuance of debentures, appointment of receivers and similar
extraordinary actions. Pursuant to Decree n. 58/98, extraordinary shareholders
meetings shall be properly convened when, in the case of the first meeting,
shareholders representing more than one half of our share capital are present at
the meeting, and in the case of the second and third meetings, shareholders
representing, respectively, more than one-third and one-fifth of our share
capital are present at the meeting. Resolutions are adopted on first, second and
third calls of extraordinary shareholders meetings with the affirmative vote of
holders of at least two thirds of the shares represented at the meeting.
The meeting notice period of 30 days is reduced to, respectively, 20 days
with respect to meetings convened at the request of minority shareholders and
meetings convened to resolve upon Luxottica Group S.p.A.'s dissolution, and 15
days for meetings convened pending a public tender offer launched with respect
to our ordinary shares. The notice may specify a date for a second meeting in
the event that a quorum is not obtained at the first meeting. Notice of any
meeting on third notice, which must be held within 30 days from the previously
adjourned meeting, must be published at least eight days prior to the date of
the meeting. In addition, a meeting will be deemed duly convened if shareholders
representing 100 percent of Luxottica
63
Group S.p.A.'s share capital, together with all members of the Board of
Directors and the Board of Statutory Auditors, are present at the meeting.
To attend any shareholders' meeting, a holder of ordinary shares must, at
least five days prior to the date fixed for the meeting, deposit a certified
statement of account which evidences its ownership of the ordinary shares at our
offices or with such agent banks as may be specified in the notice of meeting in
exchange for an admission ticket and proxy form for the meeting. Such statements
may be obtained by beneficial owners of the ordinary shares through the
intermediaries associated with Monte Titoli (or such authorized centralized
securities custody and administration system with which their accounts are
held). Alternatively, beneficial owners may instruct the relevant intermediary
to procure the admission tickets and proxy forms.
Shareholders may appoint proxies by completing the form attached to the
admission ticket. Directors, Statutory Auditors, external auditors or our
employees as well as of companies controlled by us may not vote as proxies for
shareholders and any one proxy cannot represent more than 100 shareholders of
Luxottica Group S.p.A.
Proxy solicitation is possible. Pursuant to Decree n. 58/98, proxies may be
solicited by an intermediary (for example, banks or investment firms) on behalf
of a qualified soliciting stakeholder (generally, one or more shareholders who
own, and have owned for more than six months, at least 1 percent (or such lesser
percentage determined by CONSOB) of our voting capital and who has been
registered in our shareholders register as a holder of such shares for at least
six months).
Proxies may be collected by a shareholders association provided that such
association has been formed by certified private agreement, does not carry out
business activities and is made up of at least 50 individuals each of whom owns
no more than 0.1 percent of our voting capital. Members of the shareholders'
association may, but are not obliged to, grant proxies to the legal
representative of the association and proxies may be granted in respect of only
certain of the matters to be discussed at the relevant shareholders' meeting.
The association may vote in different ways in compliance with the instructions
expressed by each member who has granted a proxy to the association. CONSOB has
established by implementing regulations provisions which govern the transparency
and the proper performance of the solicitation and collection of proxies.
Our by-laws do not contain any limitations on the voting rights in respect
of ordinary shares held by any shareholder. Resolutions adopted at a
shareholders meeting are binding on all shareholders. However, each absent or
dissenting shareholder (as well as any Director or Statutory Auditor) has the
right, under Italian law, to ask a court to annul resolutions taken in violation
of applicable laws or the by-laws. In addition, in a limited number of cases
(including the merger of a listed company with, and its incorporation into, an
unlisted company) applicable law grants dissenting and absent shareholders the
right to obtain the redemption of their shares by the issuer at the average
market price of the shares during the previous six month period. A redemption
can be effected either by utilizing the available reserves of the issuer (in
which case the shares may be held and registered in the name of the issuer) or
alternatively by a reduction of share capital of the issuer.
64
PREEMPTIVE RIGHTS
Pursuant to Italian law, holders of ordinary shares are entitled to
subscribe for issuances of shares, debentures convertible into shares and rights
to subscribe for shares in proportion to their holdings, unless such preemptive
rights are waived or limited by a shareholders' resolution adopted by the
affirmative vote of holders of more than 50 percent of the ordinary shares and
such waiver or limitation is in the interest of Luxottica Group S.p.A. It is
likely that the preemptive rights generally available to holders of ordinary
shares may not be fully available to holders of ADRs. See "--Description of
American Depositary Receipts--Share Dividends and Other Distributions."
Pursuant to Decree n. 58/98, in the event that: (i) the newly issued shares
are offered for subscription to our employees or employees of our subsidiaries;
and (ii) the new shares to be issued by us for subscription by the
aforementioned parties do not exceed 1 percent of our share capital, the
resolution excluding preemptive rights is to be approved by shareholders
representing the majority required for extraordinary meetings. If the
aforementioned conditions are not satisfied, the resolution excluding the
preemptive rights must be approved by shareholders representing more than 50
percent of our share capital, even if the resolution is taken at a meeting held
on second or third notice.
PREFERENTIAL SHARES
Under Italian law, a company such as ours may issue shares which have a
preference over ordinary shares with respect to the distribution of dividends or
surplus assets. At present, we have no such preferential shares outstanding and
any issuance of such shares would be subject to approval by a majority of
shareholders.
RIGHTS ON LIQUIDATION
On a liquidation or winding-up of the company, subject to the preferential
rights of holders of any outstanding preferential shares, holders of ordinary
shares will be entitled to participate in any surplus assets remaining after
payment of the creditors. Shares rank PARI PASSU among themselves in
liquidation.
PURCHASE OF SHARES BY LUXOTTICA GROUP S.p.A.
We may purchase up to 10 percent of our ordinary shares, subject to certain
conditions and limitations provided by Italian law, including that the purchase
be approved by shareholders. Shares may only be purchased out of profits
available for dividends or out of distributable reserves in each case as
appearing in the latest shareholder-approved unconsolidated financial
statements. Further, we may only repurchase fully paid shares. As long as such
shares are owned by us, they would not be entitled to dividends nor to subscribe
for new ordinary shares in the case of capital increases, and their voting
rights would be suspended. A corresponding reserve must be created in our
balance sheet which is not available for distribution.
Decree n. 58/98 provides that the purchase by a listed company of its own
shares and the purchase of shares of a listed company by its subsidiary must
take place by way of a public offer
65
or on the market in a manner agreed with Borsa Italiana S.p.A. which must ensure
the equality of treatment among shareholders, subject to certain limitations.
The foregoing does not apply to shares being purchased by a listed company from
its employees or employees of its parent company or subsidiaries.
MINORITY SHAREHOLDERS RIGHTS
Each absent or dissenting shareholder may, within three months, ask a court
to annul shareholders resolutions taken in violation of applicable laws or of
our by-laws. Each shareholder may bring to the attention of the Board of
Statutory Auditors facts or acts which are deemed wrongful. Pursuant to Decree
n. 58/98, if such shareholders represent more than 2 percent of our share
capital, the Board of Statutory Auditors must investigate without delay and
report its findings and recommendations at the shareholders meeting.
Shareholders representing more than 5 percent of our share capital have the
right to report major irregularities to the relevant court. In addition,
shareholders representing at least 5 percent of our share capital who have been
registered as shareholders for at least six months may initiate a liability suit
against the Directors, Statutory Auditors and general managers of Luxottica
Group S.p.A. We may waive or settle the suit only if less than 5 percent of the
shareholders 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 (i) the court does not award such costs against the relevant
Directors, Statutory Auditors or general managers, or (ii) such costs cannot be
recovered from such Directors, Statutory Auditors or general managers. In
compliance with decree n. 58/98, our by-laws give minority shareholders the
right to appoint one Statutory Auditor and one Alternate Auditor to the Board of
Statutory Auditors. See Item 6 - "Directors, Senior Management and
Employees--Directors and Senior Management."
ITALIAN TENDER OFFER RULES
Under Decree n. 58/98, a public tender offer is required to be made by any
person that through share purchases holds more than 30 percent of the voting
stock of an Italian listed company. The public tender offer must cover the whole
voting stock of the company. Similarly, under CONSOB rules, a public tender for
the entire voting stock of a listed company must be made by any person who
currently owns more than 30 percent of the voting stock of a company (but does
not exercise majority voting rights at an ordinary shareholders' meeting) and
purchases or acquires through the exercise of subscription or conversion rights
during a 12 month period more than 3 percent of the ordinary capital. The offer
must be launched within 30 days from the date on which the relevant threshold
was exceeded, and must be made at a price not lower than the average of the
weighted average of the market price for the shares in the previous 12 months,
and the highest price paid for the shares by the offeror during the same period.
CONSOB regulates these provisions in greater detail through a number of
exemptions from the duty to launch a tender offer. Such exemptions include,
among others: (i) when another person or persons jointly control the company;
(ii) when a party exceeds the threshold as a result of shares transferred to it
by a related party; and (iii) when the threshold is exceeded by a party
following the exercise of pre-emption or conversion rights to which such party
was entitled. Article 107 of the Testo Unico provides, however, that the
acquisition of an interest above 30
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percent of the voting stock of a company does not trigger the obligation to
launch a 100 percent tender offer if the person concerned has exceeded the
threshold as a result of a public tender offer launched on 60 percent or more of
the voting stock of the company. This provision is available only (i) if the
tender offer is conditional on the acceptance by the majority of the
shareholders of the company (excluding for the purpose of calculating such
majority, the offeror or any shareholder that holds an absolute or relative
majority shareholding exceeding 10 percent as well as the offeror's
subsidiaries, controlling persons, related companies and other persons connected
to it by virtue, among other things, of a shareholders' agreement (together,
"persons or entities acting in concert with the offeror")), (ii) if the offeror
(including the persons or entities acting in concert with the offeror) has not
acquired more than 1 percent of the voting stock of the company in the preceding
12 months and during the offer period and (iii) upon receipt of satisfactory
evidence that the terms of (i) and (ii) have complied with CONSOB rules that a
mandatory bid need not be made. However, after the offer has been completed the
offeror nevertheless becomes subject to the duty to launch an offer for 100
percent of the voting stock, if, in the course of the subsequent 12 months, (i)
it (including the persons or entities acting in concert with the offeror) has
purchased more than 1 percent of the voting stock of the company, or (ii) the
company has approved a merger or spin-off. Finally, anyone holding 90 percent or
more of the voting stock of a company must launch an offer for the remaining
shares, unless an adequate distribution of the shares is resumed so as to ensure
proper trading within a period of four months. Any person who, following a
tender offer for 100 percent of the voting stock holds more than 98 percent of
such voting stock, is entitled to acquire the residual shareholding during a
period of four months upon conclusion of the tender offer, if it has declared in
the offering documentation its intention to make such acquisition. Shares held
in breach of these rules cannot be voted and must be sold within 12 months.
DERIVATIVE SUITS
Under Italian law, action against members of the Board of Directors,
members of the Statutory Auditors and General Managers of a company may be
brought on behalf of the company if authorized by a resolution adopted at an
ordinary meeting of shareholders. In respect of listed companies, the Testo
Unico provides for a new form of shareholders' action against members of a board
of directors, which may be brought by holders of at least 5 percent of the
outstanding shares who have been registered in the shareholders' register for at
least six months. We are allowed to not commence, or to settle, the suit
provided that shareholders representing at least 5 percent of the issued and
outstanding shares do not vote against a resolution to this effect. We will
reimburse the legal costs of such action in the event that the claim of such
shareholders is successful and (i) the court does not award these costs as part
of the judgment against the relevant Directors, Statutory Auditors or general
managers or (ii) these costs cannot be recovered from such Directors, Statutory
Auditors or general managers. In addition, Italian law permits a shareholder
acting alone to bring an action against members of a board or directors in the
event that such shareholder has suffered damages directly related to negligence
or willful misconduct.
NO LIMITATION OF OWNERSHIP
Neither Italian law nor any of our constituent documents impose any
limitations on the right of non-resident or foreign shareholders to hold or
exercise voting rights on our ordinary shares or the ADSs.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of certain provisions of the Deposit Agreement,
dated as of January 22, 1990, as amended and restated as of July 9, 1992 and as
further amended and restated as of March 27, 1998, June 23, 2000 and July 16,
2001, respectively, among The Bank of New York, as depositary, the holders from
time to time of ADRs issued thereunder and us. This summary does not purport to
be complete and is qualified in its entirety by reference to the Deposit
Agreement, a copy of which has been filed as an exhibit to this annual report.
For more complete information, the entire agreement should be read. Copies of
the Deposit Agreement are available for inspection at the principal corporate
trust office of The Bank of New York at 101 Barclay Street, New York, New York
10286.
ADRs are issued by The Bank of New York. Each ADR evidences an ownership
interest in a number of American Depositary Shares, each of which represents one
ordinary share which we will deposit with UniCredito Italiano, as custodian
under the Deposit Agreement. Each ADR will also represent securities, cash or
other property deposited with The Bank of New York but not distributed to ADR
holders. The Bank of New York's Corporate Trust Office is located at 101 Barclay
Street, New York, New York 10286, and its principal executive office is located
at One Wall Street, New York, New York 10286.
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
The Bank of New York has agreed to pay to ADR holders the cash dividends or
other distributions it or the custodian receives on ordinary shares or other
deposited securities, after deducting its fees and expenses.
CASH
The Bank of New York converts any cash dividend or other cash distribution
we pay on the ordinary shares into U.S. dollars, if it can do so on a reasonable
basis and can transfer the U.S. dollars to the United States. If it is not
possible for The Bank of New York to convert foreign currency in whole or in
part into U.S. dollars, or if any approval or license of any government is
needed and cannot be obtained, The Bank of New York may distribute the foreign
currency to, or in its discretion may hold the foreign currency uninvested and
without liability for interest for the accounts of, ADR holders entitled to
receive the same.
SHARES
The Bank of New York will, unless otherwise requested by us, distribute new
ADRs representing any shares we may distribute as a dividend or free
distribution. The Bank of New York will only distribute whole ADRs. It will sell
shares which would require it to issue a fractional ADR and distribute the net
proceeds in the same way as it does with dividends or distributions of cash. If
The Bank of New York does not distribute additional ADRs, each ADR will also
represent the additional deposited shares.
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RIGHTS TO RECEIVE ADDITIONAL SHARES
If we offer holders of our ordinary shares any rights to subscribe for
additional ordinary shares or any other rights, The Bank of New York may make
these rights available to ADR holders. We must first instruct The Bank of New
York to do so and furnish it with satisfactory evidence that it is legal to do
so. If we do not furnish this evidence and/or give these instructions, or if The
Bank of New York determines in its reasonable discretion that it is not lawful
and feasible to make such rights available to all or certain owners, The Bank of
New York may sell the rights and allocate the net proceeds to holders' accounts.
The Bank of New York may allow rights that are not distributed or sold to lapse.
In that case, ADR holders will receive no value for them.
If The Bank of New York makes rights available to ADR holders, upon
instruction from such holders it will exercise the rights and purchase the
shares on behalf of the ADR holders.
DEPOSIT, WITHDRAWAL AND CANCELLATION
ADRs may be turned in at the Corporate Trust Office of The Bank of New
York. Upon payment of its fees and expenses and of any taxes or charges, such as
stamp taxes or stock transfer taxes or fees, The Bank of New York will deliver
the deposited securities underlying the ADRs at the office of the custodian,
except that The Bank of New York may deliver at its Corporate Trust Office any
dividends or distributions with respect to the deposited securities represented
by the ADRs, or any proceeds from the sale of any dividends, distributions or
rights, which may be held by The Bank of New York. Alternatively, at the
request, risk and expense of the applicable ADR holder, The Bank of New York
will deliver the deposited securities at its Corporate Trust Office.
VOTING RIGHTS
ADR holders may instruct The Bank of New York to vote the shares underlying
ADRs but only if we ask The Bank of New York to ask for such instructions.
Otherwise, ADR holders will not be able to exercise their right to vote unless
such holders withdraw the ordinary shares underlying the ADRs. However, an ADR
holder may not know about a meeting at which such holder may be entitled to vote
enough in advance to withdraw the shares.
If we ask for instructions of an ADR holder, The Bank of New York will
notify the ADR holder of the upcoming vote and arrange to deliver voting
materials. The materials will (1) describe the matters to be voted on and (2)
explain how ADR holders, on a certain date, may instruct The Bank of New York to
vote the shares or other deposited securities underlying the ADRs as directed.
For instructions to be valid, The Bank of New York must receive them on or
before the date specified. The Bank of New York will try, as far as practical,
subject to Italian law and the provisions of our articles of association, to
vote or to have its agents vote the shares or other deposited securities as
instructed by the ADR holder. The Bank of New York will only vote or attempt to
vote as instructed by the ADR holder and will not vote any of such holder's
shares or other deposited securities except in accordance with such
instructions.
The Bank of New York shall fix a record date whenever:
69
- any cash dividend or distribution shall become payable;
- any distribution other than cash shall be made;
- rights shall be issued with respect to the deposited securities;
- The Bank of New York, for any reason, causes a change in the
number of ordinary shares that are represented by each ADS; or
- The Bank of New York receives notice of any meeting of holders of
ordinary shares or other deposited securities.
The purpose of fixing a record date is to determine which ADR holders are:
- entitled to receive such dividend, distribution or rights;
- entitled to receive the net proceeds from the sale of such
dividend, distribution or rights; and
- entitled to give instructions for the exercise of voting rights
at any such meeting.
MATERIAL CONTRACTS
The contracts described below have been entered into by Luxottica Group
S.p.A. and/or its subsidiaries since January 1, 2002 and, as of the date of this
annual report, contain provisions under which Luxottica Group S.p.A. or one or
more of its subsidiaries has an obligation or entitlement which is or may be
material to us. This discussion is not complete and should be read in
conjunction with the agreements described below, each of which has been filed
with the Securities and Exchange Commission as an exhibit to this annual report.
CREDIT AGREEMENTS
CREDIT AGREEMENT, DATED AS OF DECEMBER 11, 2002, BETWEEN LUXOTTICA GROUP
S.p.A. AND BANCA INTESA S.p.A. We entered into this credit facility to
refinance a prior credit agreement with Banca Intesa, expiring on December
31, 2002. This credit facility is unsecured, expires in December 2005 and
allows us to select interest periods of one, two, three or six months. The
facility includes a Euro 500 million term loan, which will require a balloon
payment of Euro 200 million in June 2004 and equal quarterly installments of
principal of Euro 50 million subsequent to that date. Interest accrues on the
term loan at Euribor (as defined in the agreement) plus 0.45 percent (3.317
percent at December 31, 2002). The revolving loan portion provides borrowing
availability of up to Euro 150 million, and amounts borrowed under the
revolving portion may be borrowed and repaid until final maturity. The
revolving loan accrues interest at Euribor plus 0.45 percent (3.40 percent at
December 31, 2002 for the relevant interest period). The debt contains
financial covenants of minimum EBITDA to financial charges and maximum debt
to equity ratios, as defined in the agreement.
CREDIT AGREEMENT, DATED JUNE 13, 2002, BETWEEN LUXOTTICA U. S. HOLDINGS
CORP. AND UNICREDITO ITALIANO, NEW YORK BRANCH, AS ADMINISTRATOR. We entered
into this credit facility to repay Euro 350 million aggregate principal amount
of our Eurobonds, which were scheduled to
70
mature in June 2002, as well as obligations under a related currency swap
agreement. This credit facility is guaranteed by Luxottica Group S.p.A. and
matures in June 2005. The term loan portion of the credit facility provides
U.S.$200 million of borrowing availability and requires equal quarterly
principal installments beginning in March 2003. The revolving loan portion of
the credit facility allows for maximum borrowings of U.S. $150 million. Interest
accrues under the credit facility at LIBOR plus .50 percent (1.9050 percent on
December 31, 2002), and the credit facility allows us to select interest periods
of one, two or three months.
ITALIAN EXCHANGE CONTROLS
There are no exchange controls in Italy. Residents and non-residents of
Italy may effect any investments, disinvestments and other transactions that
entail a transfer of assets to or from Italy, subject only to the reporting,
record-keeping and disclosure requirements described below. In particular,
residents of Italy may hold foreign currency and foreign securities of any kind,
within and outside Italy, while non-residents may invest in Italian securities
without restriction and may export from Italy cash, instruments of credit or
payment and securities, whether in foreign currency or Lire, representing
interest, dividends, other asset distributions and the proceeds of dispositions.
Updated reporting and record-keeping requirements are contained in recent
Italian legislation which implements a European Union directive regarding the
free movement of capital. Such legislation requires that transfers into or out
of Italy of cash or securities in excess of Lit. 20 million be reported in
writing to the UFFICIO ITALIANO CAMBI (the Italian Exchange Office) by residents
or non-residents that effect such transfers directly, or by banks, securities
dealers or "POSTE ITALIANE S.p.A." (Italian Mail) that effect such transactions
on their behalf. In addition, banks, securities dealers or "POSTE ITALIANE
S.p.A." (Italian Mail) effecting such transactions on behalf of residents or
non-residents of Italy are required to maintain records of such transactions for
five years, which may be inspected at any time by Italian tax and judicial
authorities. Non-compliance with these reporting and record-keeping requirements
may result in administrative fines or, in the case of false reporting and in
certain cases of incomplete reporting, criminal penalties. The UFFICIO ITALIANO
CAMBI will maintain reports for a period of ten years and may use them, directly
or through other government offices, to police money laundering, tax evasion and
any other crime or violation.
Individuals, non-profit entities and certain partnerships that are
residents of Italy must disclose on their annual tax declarations all
investments held abroad and foreign financial assets held at the end of a
taxable period, as well as the total amount of transfers effected during a
taxable period to, from, within and between countries other than Italy relating
to such foreign investments or financial assets, even if at the end of the
taxable period such persons no longer owned such foreign investments or
financial assets. No such disclosure is required in respect of foreign
investments or financial assets that are deposited for management with Italian
qualified financial intermediaries, upon condition that the items of income
derived from the foreign investments or financial assets are collected through
the intervention of the same intermediaries. In addition, such disclosure
requirement does not apply if the total value of the foreign investments and
financial assets held at the end of a taxable period or the total amount of the
transfers effected during the taxable period is not greater than Lit. 20
million. Corporate
71
residents of Italy are exempt from such disclosure requirements with
respect to their annual tax declarations because this information is required to
be disclosed in their financial statements.
There can be no assurance that the present regulatory environment in or
outside Italy will continue or that particular policies presently in effect will
be maintained, although Italy is required to maintain certain regulations and
policies by virtue of its membership in the European Union and other
international organizations and its adherence to various bilateral and
multilateral international agreements.
TAXATION
The following summary contains a description of the principal United States
federal and Italian income tax consequences of the ownership and disposition of
ADSs or ordinary shares by U.S. holders (as defined below) resident in the
United States for tax purposes. The following description does not purport to be
a complete analysis of all possible tax considerations that may be relevant to a
U.S. tax resident holder of ADSs or ordinary shares, and U.S. tax resident
holders are advised to consult their advisors as to the overall consequences of
their individual circumstances. In particular, this discussion does not address
all material tax consequences of owning ordinary shares or ADSs that may apply
to special classes of holders, some of whom may be subject to different rules,
including:
- tax-exempt entities;
- certain financial institutions and insurance companies;
- broker-dealers;
- traders in securities that elect to mark to market;
- investors liable for alternative minimum tax;
- investors that actually or constructively own 10 percent or more of
the voting stock of Luxottica Group S.p.A.;
- investors that hold ordinary shares or ADSs as part of a straddle or a
hedging or conversion transaction;
- investors whose functional currency is not the U.S. dollar; or
- investors who do not hold the ordinary shares or ADSs as capital
assets within the meaning of the Internal Revenue Code of 1986, as
amended (the "Code").
In addition, the following summary does not discuss the tax treatment of
ordinary shares or ADSs that are held in connection with a permanent
establishment or fixed base through which a U.S. holder carries on business or
performs personal services in Italy.
Furthermore, certain persons that may not be U.S. holders but who may
otherwise be subject to United States federal income tax liability will also be
subject to United States federal
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as well as Italian tax consequences due to their ownership and disposition of
ADSs or ordinary shares. Such investors should consult with their own advisors
as to the particular consequences associated with their investment.
This discussion is based on the tax laws of Italy and of the United States,
including the Code, its legislative history, existing and proposed regulations,
and published rulings and court decisions, as currently in effect, as well as on
the currently applicable Convention Between the United States of America and
Italy for the Avoidance of Double Taxation with respect to Taxes on Income and
the Prevention of Fraud or Fiscal Evasion (the "Treaty") and the Convention
Between the United States of America and the Italian Republic for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on
Estates and Inheritances (the "Estate Tax Convention"). These laws are subject
to change, possibly on a retroactive basis. A new tax treaty and protocol
between Italy and the United States (collectively, the "New Treaty") to replace
the current Treaty was signed on August 25, 1999, but is not yet in effect. The
New Treaty would include an anti-abuse provision and a provision limiting treaty
benefits to individuals, qualified governmental entities, companies that are
publicly traded or that satisfy certain share ownership requirements, certain
pension plans and other tax-exempt entities, and certain other persons meeting
prescribed anti-treaty shopping requirements. The New Treaty also would clarify
the availability of treaty benefits to entities that are treated as fiscally
transparent under United States or Italian law.
In addition, this section is based in part upon the representations of the
depositary and the assumption that each obligation in the Deposit Agreement and
any related agreement will be performed in accordance with its terms.
This discussion addresses only Italian income taxation, gift and
inheritance taxation and capital gains taxation and United States federal income
and estate taxation.
For purposes of the current Treaty, the Estate Tax Convention and the Code,
U.S. holders of ADSs will be treated as the owners of the underlying ordinary
shares represented by such ADSs. Exchanges of ordinary shares for ADSs and ADSs
for ordinary shares generally will not be subject to Italian tax or United
States federal income tax.
ITALIAN TAX LAW
WITHHOLDING OR SUBSTITUTE TAX ON DIVIDENDS. In general, dividends paid by
Italian corporations to non-Italian resident beneficial owners without a
permanent establishment in Italy to which ordinary shares or ADSs are
effectively connected, are subject to final Italian withholding tax at the rate
of 27 percent, unless reduced by an applicable double taxation treaty. Reduced
rates (normally 15 percent) of withholding tax on dividends apply to
non-resident beneficial owners of ordinary shares or ADSs who are entitled to
and timely comply with procedures for claiming benefits under an applicable
income tax treaty entered into by Italy. Italy has concluded income tax treaties
with over 60 foreign countries, including all European Union member states,
Argentina, Australia, Brazil, Canada, Japan, New Zealand, Norway, Switzerland,
the United States and some countries in Africa, the Middle East and East Asia.
It should be noted that in general the income tax treaties are not applicable if
the beneficial owner is a tax-exempt entity or, with a few exceptions, a
partnership or a trust.
73
Under the Treaty, Italian withholding tax at a reduced rate of 15 percent
will generally apply to dividends paid by an Italian corporation to a U.S.
resident entitled to Treaty benefits who timely complies with the procedures for
claiming such benefits, provided the dividends are not effectively connected
with a permanent establishment in Italy through which the U.S. resident carries
on a business or with a fixed base in Italy through which the U.S. resident
performs independent personal services. The foregoing treatment will not be
changed by the dividend article of the New Treaty.
Under Italian law, in general, shares of Italian companies listed on the
Italian Stock Exchange have to be registered in the centralized deposit system
managed by MONTE TITOLI. With respect to dividends paid by Italian corporations
listed in Italy (such as Luxottica Group S.p.A.) to non-Italian resident
beneficial owners, without a permanent establishment in Italy to which ADSs or
ordinary shares are effectively connected, on shares held in the MONTE TITOLI
system (including our shares), instead of the 27 percent final withholding tax
mentioned above, a substitute tax will apply at the same rate (which rate may,
however, be reduced under an applicable double tax treaty) and conditions as the
above-mentioned withholding taxes. This substitute tax will be levied by the
Italian authorized intermediary that participates in the MONTE TITOLI system and
with which the securities are deposited, as well as by non-Italian authorized
intermediaries participating in the MONTE TITOLI system (directly or through a
non-Italian centralized deposit system participating in the MONTE TITOLI
system), through a fiscal representative to be appointed in Italy.
Since the ordinary shares are registered in the centralized deposit system
managed by MONTE TITOLI, the substitute tax regime will apply to dividends paid
by Luxottica Group S.p.A., instead of the withholding tax regime.
For a non-Italian resident beneficial owner of the ordinary shares or ADSs
to obtain a reduced rate of substitute tax on dividends pursuant to an
applicable income tax treaty entered into by Italy, including the Treaty, the
following procedure must be followed. The intermediary with which the shares are
deposited must timely receive:
- a declaration by the beneficial owner of ordinary shares or ADSs that
contains all the data identifying this person as the beneficial owner
and indicates the existence of all the conditions necessary for the
application of the relevant income tax treaty, as well as the elements
that are necessary to determine the applicable treaty substitute tax
rate; and
- a certification by the tax authorities of the beneficial owner's
country of residence that the beneficial owner of the ordinary shares
or ADSs is a resident of that country for the purposes of the
applicable income tax treaty that is valid until March 31 of the year
following submission. The time for processing requests for
certification by the applicable authorities will vary. The time
normally required by the U.S. Internal Revenue Service (the "IRS") is
six to eight weeks.
The intermediary must keep the foregoing documentation for the entire
period in which the Italian tax authorities are entitled to issue an assessment
with respect to the tax year in which the dividends are paid and, if an
assessment is issued, until the assessment is settled. If the
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intermediary with which the shares are deposited is not resident in Italy, the
aforesaid duties and obligations must be carried out by (i) a bank or an
investment services company that is a resident in Italy or (ii) a permanent
establishment in Italy of a non-resident bank or investment services company,
appointed by the foreign intermediary as its fiscal representative in Italy.
As an alternative to the application of the more favorable treaty rate of
substitute tax on dividends or where an income tax treaty does not apply, under
domestic Italian law non-resident shareholders can claim a refund of an amount
up to four-ninths of the 27 percent substitute tax on dividend income from
Italian tax authorities provided that (i) they implement an AD HOC refund
procedure in accordance with the terms and conditions established by law, and
(ii) they provide evidence that this dividend income was subject to income tax
in their country of residence in an amount at least equal to the total refund
claimed. Beneficial owners of ordinary shares or ADSs should contact their tax
advisors concerning the possible availability of these refunds, the payment of
which is normally subject to extensive delays.
Distributions of newly issued ordinary shares to beneficial owners with
respect to their shares or ADSs that are made as part of a pro rata distribution
to all shareholders based on a gratuitous increase of the share capital through
transfer of reserves or other provisions to share capital generally will not be
subject to Italian tax. However, distributions of dividends in kind will be
subject to withholding tax.
TAX ON CAPITAL GAINS. As a general rule, non-resident individuals and
foreign corporations without a permanent establishment in Italy to which the
ordinary shares or ADSs are effectively connected will be subject to capital
gains tax ("CGT") upon the disposal of ordinary shares or ADSs of an Italian
resident corporation and/or rights through which shares may be acquired, even if
those ordinary shares, ADSs or rights are held outside Italy. In particular,
non-resident shareholders without a permanent establishment in Italy to which
the ordinary shares or ADSs are effectively connected disposing of any
"qualified" shareholding are subject to the 27 percent CGT on the realized
gains. The disposal of a "qualified" shareholding in a corporation the stock of
which is listed on a regulated market (such as Luxottica Group S.p.A.) is
defined to occur when a shareholder (i) owns shares, ADSs and/or rights through
which shares may be acquired representing in the aggregate more than 5 percent
of the share capital or 2 percent of the shares with voting rights in an
ordinary shareholders' meeting of the corporation and (ii) in any twelve month
period following the date the ownership test under (i) is met, such shareholder
engages in the disposal of shares, ADSs and/or of rights through which shares
may be acquired that individually or in the aggregate exceed the percentages
indicated under (i) above. An exemption from CGT is provided, however, for gains
realized by non-resident shareholders without a permanent establishment in Italy
to which the ordinary shares or ADSs are effectively connected on the disposal
of "non-qualified" shareholdings in Italian resident corporations the stock of
which is listed on a regulated market (such as Luxottica Group S.p.A.) even when
such shareholdings are held in Italy. Non Italian residents who dispose of
shares or ADSs may be required to timely provide a self-declaration not to be
resident in Italy for tax purposes, in order to benefit from this exemption.
The above is subject to any provisions of an income tax treaty entered into
by the Republic of Italy, if the income tax treaty provisions are more
favorable. The majority of double tax treaties entered into by Italy, in
accordance with the OECD Model tax convention, provide
75
that capital gains realized from the disposition of Italian securities are
subject to CGT only in the country of residence of the seller. Therefore, the
capital gains realized by a non-Italian resident entitled to the benefits of a
treaty entered into by Italy in accordance with the OECD Model in respect of
taxation of capital gains from the disposition of Italian securities will not be
subject to Italian CGT, regardless of whether the shareholding disposed of is
qualified or non-qualified. Non-Italian residents who dispose of shares or ADSs
may be required to timely provide appropriate documentation establishing that
the conditions of non-taxability of capital gains realized pursuant to the
applicable income tax treaties have been satisfied.
Under the Treaty, a person who is considered a U.S. resident for purposes
of the Treaty and is fully entitled to benefits under the Treaty will not incur
Italian capital gains tax on disposal of ordinary shares or ADSs, unless the
ordinary shares or ADSs form part of a business property of a permanent
establishment of the holder in Italy or pertain to a fixed base available to a
holder in Italy for the purpose of performing independent personal services.
U.S. residents who sell ordinary shares or ADSs may be required to timely
produce appropriate documentation establishing that the above-mentioned
conditions of non-taxability of capital gains under the Treaty have been
satisfied. Such treatment will not be changed by the capital gains provisions of
the New Treaty.
TRANSFER TAX. An Italian transfer tax is normally payable on the transfer
of shares in an Italian company by and/or to Italian residents; no general
exception is provided from the transfer tax for transfers made by non-residents
of Italy. Sales of securities on a stock exchange are exempt, however, from the
Italian transfer tax.
INHERITANCE AND GIFT TAX. According to Law No. 383 of 18 October 2001 ("Law
No. 383"), starting from 25 October 2001, Italian inheritance and gift tax,
previously payable on the transfer of the Shares as a result of death or
donation, has been abolished.
However, according to the current literal interpretation of Law No. 383,
for donations to donees other than spouses, direct descendants or ancestors and
other relatives within the fourth degree, if and to the extent that the value of
gift attributable to each such donee exceeds Euro 180,759.91, the gift of Shares
may be subject to the ordinary transfer taxes provided for the transfer thereof
for consideration.
Moreover, an anti-avoidance rule is provided by Law No. 383 for any gift of
assets (such as the Shares) which, if sold for consideration, would give rise to
capital gains subject to the IMPOSTA SOSTITUTIVA (CGT) provided for by Italian
Legislative Decree No. 461 of 21 November 1997. In particular, if the donee
sells the Shares for consideration within 5 years from the receipt thereof as
gift, the donee is required to pay the relevant IMPOSTA SOSTITUTIVA on capital
gains as if the gift has never taken place.
UNITED STATES FEDERAL TAXATION
For purposes of this section, a U.S. holder is an individual or entity
which is a beneficial owner of shares or ADSs and is:
76
- a citizen or resident of the United States;
- a corporation or other entity taxable as a corporation organized under
the laws of the United States or any state thereof;
- an estate whose income is subject to United States federal income tax
regardless of its source; or
- a trust if a United States court can exercise primary supervision over
the trust's administration and one or more United States persons are
authorized to control all substantial decisions of the trust.
If a partnership, or an entity treated for U.S. tax purposes as a
partnership, holds ordinary shares or ADSs, the tax treatment of a partner will
generally depend upon the status of the partner and the activities of the
partnership. Persons who are partners in partnerships holding ordinary shares or
ADSs should consult their tax advisors.
TAXATION OF DIVIDENDS. Under the United States federal income tax laws, a
U.S. holder must include as gross income the gross amount of any dividend paid
by Luxottica Group S.p.A. out of its current or accumulated earnings and
profits, as determined for United States federal income tax purposes. Such
holder must also include any Italian tax withheld from the dividend payment in
this gross amount even though the holder does not in fact receive such amounts
withheld. The dividend is ordinary income that must be included in income when
the U.S. holder, in the case of ordinary shares, or the depositary, in the case
of ADSs, receives the dividend, actually or constructively. The dividend will
not be eligible for the dividends received deduction generally allowed to United
States corporations in respect of dividends received from other United States
corporations. The amount of the dividend distribution that must be included in
income for a U.S. holder will be the U.S. dollar value of the Euro payments
made, determined at the spot Euro/U.S. dollar rate on the date the dividend
distribution is includible in income, regardless of whether the payment is in
fact converted into U.S. dollars. Generally, any gain or loss resulting from
currency exchange fluctuations during the period from the date the U.S. holder
includes the dividend payment in income to the date he converts the payment into
U.S. dollars will be treated as ordinary income or loss. The gain or loss
generally will be income from sources within the United States for foreign tax
credit limitation purposes. Distributions in excess of current and accumulated
earnings and profits, as determined for United States federal income tax
purposes, will be treated as a return of capital to the extent of the U.S.
holder's basis in the shares or ADSs and thereafter as capital gain.
Subject to certain generally applicable limitations, the Italian
withholding or substitute tax imposed on dividends in accordance with the Treaty
and paid over to Italy will be creditable against a U.S. holder's United States
federal income tax liability. To the extent a refund of the tax withheld is
available to the U.S. holder under Italian law or under the Treaty, the amount
of tax withheld that is refundable will not be eligible for credit against such
holder's United States federal income tax liability. See "--Italian Tax
Law--Withholding Tax on Dividends" for the procedures for obtaining a tax
refund.
77
Dividends paid by foreign corporations generally constitute income from
sources outside the United States, but generally will be "passive income" or
"financial services income" which are treated separately from other types of
income for purposes of computing the foreign tax credit allowable. The rules
governing the foreign tax credit are complex. U.S. holders should consult their
tax advisors regarding the availability of a foreign tax credit for Italian
withholding taxes imposed on dividends paid on ordinary shares or ADSs.
TAXATION OF CAPITAL GAINS. If a U.S. holder sells or otherwise disposes of
ordinary shares or ADSs, such holder will recognize capital gain or loss for
United States federal income tax purposes equal to the difference between the
U.S. dollar value of the amount realized and the tax basis, determined in U.S.
dollars, in the ordinary shares or ADSs. Capital gain of a non-corporate U.S.
holder, recognized in taxable years which include May 6, 2003 and which begin
before January 1, 2009, is generally taxed at a maximum rate of 15 percent for
property held more than one year. Additionally, the gain will generally be
income from sources within the United States for foreign tax credit limitation
purposes and losses will be allocated against U.S.-source income.
BACKUP WITHHOLDING AND INFORMATION REPORTING. In general, dividend payments
or other taxable distributions made within the United States to a U.S. holder
will be subject to information reporting requirements and backup withholding tax
(currently at the rate of 28 percent) if such U.S. holder is a non-corporate
United States person and such holder:
- fails to provide an accurate taxpayer identification number;
- is notified by the IRS that he has failed to report all interest or
dividends required to be shown on his federal income tax returns and the
payor of the interest or dividends is notified by the IRS of the
underreporting; or
- in certain circumstances, fails to comply with applicable certification
requirements.
After December 31, 2010, the backup withholding rate will increase to 31% under
the sunset provisions of currently applicable U.S. tax law.
Persons who are not United States persons may be required to establish
their exemption from information reporting and backup withholding by certifying
their status on Internal Revenue Service Form W-8BEN, W-8ECI or W-8IMY.
The payment of proceeds from the sale of ordinary shares or ADSs to or
through a United States office of a broker is also subject to these United
States backup withholding and information reporting rules unless the seller
certifies, under penalties of perjury, that such seller is a non-U.S. person (or
otherwise establishes an exemption). Special rules apply where ordinary shares
or ADSs are sold through a non-U.S. office of a non-U.S. broker and the sale
proceeds are paid outside the United States.
U.S. holders generally may obtain a refund of any amounts withheld under
the backup withholding rules that exceed such holder's income tax liability by
filing a timely refund claim with the IRS.
78
ESTATE TAX CONVENTION. Under the Estate Tax Convention between the United
States and Italy, the ordinary shares or ADSs will be deemed situated in Italy.
Subject to certain limitations, the Estate Tax Convention affords a credit for
estate or inheritance tax imposed by Italy on ordinary shares or ADSs that is
applicable against United States federal estate tax imposed on ordinary shares
or ADSs. This credit is available only to the estate of a deceased person who,
at the time of death, was a national of or domiciled in the United States.
DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange
Act of 1934, applicable to foreign private issuers, and in accordance therewith
file reports and other information with the Commission. Reports and other
information filed by us are available for inspection and copying at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, DC 20549, and at the Regional Offices of the
Commission located at Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661-2551 and 233 Broadway, New York, New York 10279.
Copies of such material are also available by mail from the Public Reference
Branch of the Commission at 450 Fifth Street, N.W., Washington, DC 20549 at
prescribed rates. In addition, such material may also be inspected and copied at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
Please call the Commission at 1-800-SEC-0330 for more information on the
public reference rooms. We furnish The Bank of New York, as depositary of the
ADSs, with annual reports in English (or a translation or summary in English of
the Italian reports), which include a review of operations and annual audited
consolidated financial statements prepared in conformity with U.S. GAAP. We also
furnish The Bank of New York with quarterly reports in English (or a translation
or summary in English of the Italian reports) that include unaudited interim
financial information prepared in conformity with U.S. GAAP. If requested by us,
The Bank of New York arranges for the mailing of such reports to registered
holders of ADRs. We also furnish to The Bank of New York, in English, all
notices of shareholders meetings and other reports and communications that are
made generally available to our shareholders. To the extent permitted by law,
The Bank of New York makes such notices, reports and communications available to
holders of ADRs in such manner as we request and mails to holders of ADRs a
notice containing the information (or a summary thereof in a form provided by
us) contained in any notice of a shareholders' meeting received by The Bank of
New York. As a foreign private issuer, we are exempt from the rules under the
Securities Exchange Act of 1934 prescribing the furnishing and content of proxy
statements.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
At December 31, 2002, our interest rate sensitivity was limited to the
outstanding debt under our credit facilities with UniCredito Italiano of Euro
100 million and U.S. $350 million, and our credit facility with Banca Intesa of
Euro 575 million. As of such date, debt under the UniCredito Italiano facility
bore interest at Euribor plus 0.4 percent (for the term loan) or 0.375
79
percent (for the revolving loan) (3.371 percent or 3.400 percent,
respectively, at December 31, 2002), LIBOR plus 0.5 percent (1.9050 percent
at December 31, 2002) and debt under the Banca Intesa credit facility bore
interest at the rate of Euribor plus 0.45 percent (3.317 percent for the term
loan and 3.400 percent for the revolving loan for the relevant interest
period, each at December 31, 2002). The effect of a 10 percent change in
interest rates (upward or downward) would have an immaterial effect on our
future pretax earnings and cash flows.
We monitor our exposure to interest rate fluctuations and may enter into
hedging arrangements to mitigate our exposure to increases in interest rates if
we believe it is prudent to do so. We have three interest rate derivatives
outstanding as of December 31, 2002:
i. We have an outstanding Convertible Swap Step-up ("Swap") with an
initial notional amount of U.S. $275 million. This Swap converts a
portion of the U.S.$350 million UniCredito loan to a mixed position
rate agreement. This Swap allows the U.S. subsidiary to pay a fixed
rate of interest if LIBOR remains under certain thresholds and for the
U.S. subsidiary to receive an interest payment of three month LIBOR as
defined in the agreement;
ii. In December 2002, we entered into two interest rate swap transactions
(the "Intesa Swaps") beginning with an aggregate maximum notional
amount of Euro 250 million, which will decrease by Euro 100 million on
June 27, 2004 and by Euro 25 million each subsequent 3-month period.
These Intesa Swaps will expire on December 27, 2005. The Intesa Swaps
were entered into as a cash flow hedge of a portion of the Banca
Intesa Euro 650 million unsecured credit facility disclosed above. The
Intesa Swaps exchange the floating rate based on Euribor to a fixed
rate of 2.985 percent.
FOREIGN EXCHANGE SENSITIVITY
Our manufacturing subsidiaries are mainly located in Italy and our sales
and distribution facilities are maintained worldwide. As such, we are vulnerable
to foreign currency exchange rate fluctuations in two principal areas:
1. we incur most of our manufacturing costs in Euro and receive a
significant portion of our revenues in other currencies; and
2. differences between the functional currency of certain subsidiaries
and the Euro as the reporting currency.
In the first case, a strengthening of the Euro relative to other currencies
in which we receive revenues could negatively impact the demand for our products
and /or reduce our gross margins. In addition, to the extent that our
receivables and payables are denominated in different currencies, exchange rate
fluctuations could further impact our reported results of operations. However,
our production cycles are relatively short and our receivables and payables are
generally short term in nature. As a result, we do not believe that we currently
have significant exposure in this area. We will, if we believe it is necessary,
enter into foreign exchange contracts to hedge certain of these transactions,
which could include sales, or receivables and/or payables balances.
80
Effective January 1, 2001, we adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities.
SFAS No. 133 requires that all derivatives, whether designed in hedging
relationship or not, be recorded on the balance sheet at fair value regardless
of the purpose or intent for holding them. If a derivative is designated as a
fair-value hedge, changes in the fair value of the derivative and the related
change in the hedge item are recognized in operations. If a derivative is
designated as cash-flow hedge, changes in the fair value of the derivative are
recorded in other comprehensive income ("OCI") in the consolidated statement of
stockholders' equity and are recognized in the consolidated statements of income
when the hedged item affects operations. For a derivative that does not qualify
as hedge, changes in fair value are recognized in operations.
We use derivative financial instruments; principally interest rate and
currency swap agreements as part of its risk management policy to reduce its
exposure to market risks from changes in interest and foreign exchange rate.
Although it has not done so in the past, we may enter into other derivative
financial instruments when it assesses that the risk can be hedged effectively.
On January 1, 2001 as part of the transition adjustment related to the
adoption of SFAS No. 133, we adjusted the debt associated with the currency swap
agreement to fair value and recorded a reduction to OCI of approximately Euro
7.8 million (U.S. $7 million) as a cumulative transition adjustment for its
derivative as a cash flow type hedge upon adoption of SFAS No. 133. The SWAP and
the debt it hedged were both settled and repaid in June 2002. The net impact on
the 2002 statement of operations for these settlements was not significant.
In the second case, a substantial portion of our assets, liabilities,
revenues and costs are denominated in various currencies other than Euro. The
following table provides information about our assets, liabilities, revenues and
costs denominated in various currencies as of or for the year ended December 31,
2002:
U.S. DOLLARS EURO OTHER TOTAL
------------ ---- ----- -----
Net financial position(1) 26% 74% 0% 100%
Revenues 74% 16% 10% 100%
Expenses 69% 24% 7% 100%
----------
(1) Represents cash and cash equivalents minus bank overdrafts and outstanding
debt.
Because a large portion of our revenues, expenses and assets are
denominated in U.S. dollars, fluctuations in the exchange rate between the U.S.
dollar and the Euro, our reporting currency, could have a material effect on our
reported financial position and results of operations. In addition, a
significant change in the mix of assets, revenues or expenses between or among
geographic or operating segments could increase or decrease our exposure to
other currency exchange rate fluctuations. We will continue to monitor our
exposure to exchange rate fluctuations and enter into hedging arrangements if
and to the extent we believe it to be appropriate.
81
The acquisition of Sunglass Hut in 2001 has further increased our exposure
to fluctuations in currency exchange rates. The majority of the operations,
assets and liabilities of Sunglass Hut are denominated in U.S. dollars.
CROSS CURRENCY INTEREST RATE SWAP
In November 1999, we entered into a currency swap agreement with an Italian
bank. The termination date of this swap agreement was June 25, 2002, at which
time our notional amount due was U.S. $ 350.2 million and we received a notional
amount of Euro 340.0 million. The parties exchanged semi-annual payments of
interest. The U.S. dollar denominated notional amount accrued interest at 6.1
percent and the Euro denominated notional amount accrued interest at 3.625
percent. Based on these terms, the swap was considered a hedging instrument. The
SWAP and the debt it hedged were both settled and repaid in June 2002. The net
impact on the 2002 statement of operations for these settlements has not been
significant.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
None.
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
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the filing date of this annual report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Because of inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Luxottica have been detected. However,
based upon the evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, subject to the limitations described above, our
disclosure controls and procedures are effective. In addition, they concluded
that there were no significant deficiencies in the design or operation of
internal controls which could significantly affect our ability to record,
process, summarize and report financial data.
(b) Changes in Internal Controls
82
There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of the evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 16. [RESERVED]
Not applicable.
83
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Page
----
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................................F-1
Consolidated Balance Sheets, December 31, 2001 and 2002..................................F-2
Statements of Consolidated Income for the Years Ended
December 31, 2000, 2001 and 2002.........................................................F-4
Statements of Earnings Per Share.........................................................F-5
Statements of Consolidated Shareholders' Equity for the
Years Ended December 31, 2000, 2001 and 2002.............................................F-6
Statements of Consolidated Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002.........................................................F-7
Notes to Consolidated Financial Statements...............................................F-9
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts/Allowance for Doubtful Accounts.........F-32
84
Deloitte & Touche S.p.A.
Revisione e organizzazione contabile
Viale della Repubblica, 22
31020 Fontane di Villorba
Treviso
Italia
Tel: + 39 0422 42 19 41
Fax: + 39 0422 42 01 71
R.E.A. Treviso n. 222191
www.deloitte.it [LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Luxottica Group S.p.A.:
We have audited the accompanying consolidated balance sheets of Luxottica
Group S.p.A. (an Italian corporation) and Subsidiaries (collectively, "the
Company") as of December 31, 2001, and 2002 and the related statements of
consolidated income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2002. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. 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 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 Luxottica Group
S.p.A. and Subsidiaries as of December 31, 2001 and 2002 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
Our audits comprehended the translation of Euro amounts into U.S. dollar
amounts and, in our opinion, such translation has been made in conformity with
the basis stated in Note 1. Such U.S. dollar amounts are presented solely for
the convenience of international readers.
As described in Note 1 to the consolidated financial statement, effective as
of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, which established new accounting and reporting standards for
the recording, amortization and impairment of goodwill and other intangible
assets.
/s/ Deloitte & Touche
Treviso, Italy
February 14, 2003
Milano Ancona Bari Bergamo Bologna Cagliari Firenze
Genova Napoli Parma Padova Roma Torino Treviso Vicenza
Sede legale: Palazzo Carducci - Via Olona, 2-20123 Milano -
[LOGO] Capitale Sociale Euro 3.354.488,80 i.v.
Partita ICVA/Codice Fiscale/Registro delle Impresse Milano
n. 03009430152 - R.E.A. Milano n. 945128
--------------------------------------------------------------------------------
F-1
LUXOTTICA GROUP S.p.A. and Subsidiaries(*)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2002
ASSETS
-----------------------------------------------------------------------------------------------
2001 2002 2002
(thousand of
U.S.
NOTES (thousand of Euro) Dollars)(1)
-----------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 199,202 151,418 $ 158,762
Restricted cash 1, 8 213,507 -- --
Accounts receivable
(Less allowance for doubtful accounts,
Euro 22.4 million in 2001, and Euro 18.1
million in 2002; U.S. Dollars 19.0
million) 2 381,281 370,234 388,190
Sales and income taxes receivable 23,327 10,956 11,487
Inventories 3 371,406 406,032 425,725
Prepaid expenses and other 75,468 53,385 55,974
Deferred tax assets 7 163,201 148,088 155,270
TOTAL CURRENT ASSETS 1,427,392 1,140,113 1,195,408
PROPERTY, PLANT AND EQUIPMENT--NET 2, 5 501,346 506,545 531,112
OTHER ASSETS
Intangible assets--net 6 2,009,740 1,916,526 2,009,478
Investments 4 5,798 12,837 13,460
Other assets 4,086 10,311 10,811
TOTAL OTHER ASSETS 2,019,624 1,939,674 2,033,749
TOTAL 3,948,362 3,586,332 $3,760,269
-----------------------------------------------------------------------------------------------
See notes to Consolidated Financial Statements
(*) In accordance with U.S. GAAP
(1) Translated for convenience at the New York City Noon Buying Rate as
determined in Note 1
F-2
LUXOTTICA GROUP S.p.A. and Subsidiaries(*)
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 2001 AND 2002
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------
2001 2002 2002
(thousand of
U.S.
NOTES (thousand of Euro) Dollars)(1)
----------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Bank overdrafts 411,193 371,729 $ 389,758
Current portion of long-term debt 8 1,339,131 178,335 186,984
Accounts payable 183,431 202,897 212,738
Accrued expenses
Payroll and related 81,099 64,622 67,756
Customers' right of return 14,087 9,130 9,573
Other 264,765 153,262 160,695
Income taxes payable 7 5,793 18,748 19,657
TOTAL CURRENT LIABILITIES 2,299,499 998,723 1,047,161
LONG-TERM DEBT 8 132,247 855,654 897,153
LIABILITY FOR TERMINATION INDEMNITIES 9 35,029 48,945 51,319
DEFERRED TAX LIABILITIES 7 10,282 121,805 127,713
OTHER LONG-TERM LIABILITIES 9 122,989 133,605 140,085
COMMITMENTS AND CONTINGENCIES 14
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES 5,473 9,705 10,176
SHAREHOLDERS' EQUITY
Capital stock par value Euro 0.06--
452,865,817 and 454,263,600 ordinary
shares authorized and issued at
December 31, 2001 and 2002,
respectively; 451,660,817 and
452,351,900 shares outstanding as of
December 31, 2001 and 2002 11 27,172 27,256 28,578
Additional paid-in capital 18,381 34,799 36,487
Retained earnings 1,152,508 1,447,374 1,517,572
Accumulated other comprehensive income
(loss) 1 147,116 (66,987) (70,236)
TOTAL 1,345,177 1,442,442 1,512,401
Less treasury shares at cost; 1,205,000
and 1,911,700 shares as of December 31,
2001 and 2002, respectively 2,334 24,547 25,739
SHAREHOLDERS' EQUITY 1,342,843 1,417,895 1,486,662
TOTAL 3,948,362 3,586,332 $ 3,760,269
----------------------------------------------------------------------------------------------
See notes to Consolidated Financial Statements
(*) In accordance with U.S. GAAP
(1) Translated for convenience at the New York City Noon Buying Rate as
determined in Note 1
F-3
LUXOTTICA GROUP S.p.A. and Subsidiaries(*)
STATEMENTS OF CONSOLIDATED INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
---------------------------------------------------------------------------------------------------------
2000 2001 2002(2) 2002(2)
(thousand of
U.S.
NOTES (thousand of Euro) Dollars)(1)
---------------------------------------------------------------------------------------------------------
NET SALES 12 2,416,788 3,064,907 3,132,201 $3,284,113
COST OF SALES 697,301 883,961 878,003 920,586
GROSS PROFIT 1,719,487 2,180,946 2,254,198 2,363,527
OPERATING EXPENSES
Selling and advertising 983,138 1,302,383 1,355,148 1,420,873
General and administrative 324,428 369,071 297,542 311,973
TOTAL OPERATING EXPENSES 1,307,566 1,671,454 1,652,690 1,732,846
INCOME FROM OPERATIONS 12 411,921 509,492 601,508 630,681
OTHER INCOME/(EXPENSES)
Interest income 16,562 15,060 5,036 5,280
Interest expense (72,562) (91,978) (65,935) (69,133)
Other--net 6,098 8,737 (1,167) (1,224)
OTHER INCOME/(EXPENSES) NET (49,902) (68,181) (62,066) (65,076)
INCOME BEFORE PROVISION FOR
INCOME TAXES 362,019 441,311 539,442 565,605
PROVISION FOR INCOME TAXES 7 101,488 123,450 162,696 170,587
INCOME BEFORE MINORITY
INTERESTS IN CONSOLIDATED
SUBSIDIARIES 260,531 317,861 376,746 395,018
MINORITY INTERESTS IN INCOME
OF CONSOLIDATED SUBSIDIARIES 5,254 1,488 4,669 4,897
NET INCOME 255,277 316,373 372,077 $ 390,121
---------------------------------------------------------------------------------------------------------
See notes to Consolidated Financial Statements
(*) In accordance with U.S. GAAP
(1) Translated for convenience at the New York City Noon Buying Rate as
determined in Note 1
(2) Results for the year ended December 31, 2002 include the effect of the
adoption of SFAS No. 142. For comparison among the three periods on a
pro-forma basis see Note 1 "Goodwill and Other Change in Accounting"
F-4
LUXOTTICA GROUP S.p.A. and Subsidiaries(*)
STATEMENTS OF CONSOLIDATED INCOME (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
----------------------------------------------------------------------------------------------
Years ended December 31,
------------------------------------------------
2000 2001 2002 (2) 2002 (2)
--------- --------- --------- -----
Euro U.S.
Dollars(1)
----------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
BASIC 0.57 0.70 0.82 $0.86
EARNINGS PER SHARE:
DILUTED 0.56 0.70 0.82 $0.86
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (THOUSAND):
Basic 449,987.9 451,037.0 453,174.0
Diluted 452,920.2 453,965.5 455,353.5
----------------------------------------------------------------------------------------------
See notes to Consolidated Financial Statements
(*) In accordance with U.S. GAAP
(1) Translated for convenience at the New York City Noon Buying Rate as
determined in Note 1
(2) Results for the year ended December 31, 2002 include the effect of the
adoption of SFAS No. 142. For comparison among the three periods on a
pro-forma basis see Note 1 "Goodwill and Other Change in Accounting"
F-5
LUXOTTICA GROUP S.p.A. and Subsidiaries(*)
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
------------------------------------------------------------------------------------------------------------------
Accumulated
Common stock Additional Other other Treasury
---------------------- paid-in Retained comprehensive comprehensive shares
Shares Amount capital earnings income/(loss) income/(loss) amount
----------- -------- ---------- ---------- ------------- ------------- --------
(NOTE 11) (Euro/000)
------------------------------------------------------------------------------------------------------------------
BALANCES,
JANUARY 1, 2000 450,539,600 23,268 2,774 682,529 80,055 (2,334)
Exercise of stock
options 1,042,700 54 7,992
Translation
adjustment 37,893 37,893
Dividends declared (38,345)
Net income 255,277 255,277
COMPREHENSIVE INCOME 293,170
BALANCES,
DECEMBER 31, 2000 451,582,300 23,322 10,766 899,461 117,948 (2,334)
Exercise of stock
options 1,283,517 71 11,394
Translation
adjustment 40,486 40,486
Euro Conversion 3,779 (3,779)
Cummulative effect of
SFAS 133 adoption (7,749) (7,749)
Change in fair value
of derivative
instruments (3,569) (3,569)
Dividends declared (63,326)
Net income 316,373 316,373
COMPREHENSIVE INCOME 345,541
BALANCES,
DECEMBER 31, 2001 452,865,817 27,172 18,381 1,152,508 147,116 (2,334)
Exercise of stock
options 1,397,783 84 9,483
Translation
adjustment (198,463) (198,463)
Minimum pension
liability, net of
taxes (26,569) (26,569)
Sell of treasury
shares, net of taxes 6,935 2,334
Purchase of treasury
shares (24,547)
Change in fair value
of derivative
instruments 10,929 10,929
Dividends declared (77,211)
Net income(2) 372,077 372,077
COMPREHENSIVE INCOME 157,974
BALANCES,
DECEMBER 31, 2002 454,263,600 27,256 34,799 1,447,374 (66,987) (24,547)
COMPREHENSIVE
INCOME(1) $165,636
BALANCES,
DECEMBER 31, 2002(1) 454,263,600 $ 28,578 $ 36,487 $1,517,572 $(70,236) $(25,738)
(thousands of
U.S.Dollars)(1)
------------------------------------------------------------------------------------------------------------------
See notes to Consolidated Financial Statements
(*) In accordance with U.S. GAAP
(1) Translated for convenience at the New York City Noon Buying Rate as
determined in Note 1
(2) Results for the year ended December 31, 2002 include the effect of the
adoption of SFAS No. 142. For comparison among the three periods on a
pro-forma basis see Note 1 "Goodwill and Other Change in Accounting"
F-6
LUXOTTICA GROUP S.p.A. and Subsidiaries(*)
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
--------------------------------------------------------------------------------------------------
2000 2001 2002 2002
(thousand
of
U.S.
(thousand of Euro) Dollars)(1)
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
INCOME BEFORE MINORITY INTERESTS 260,531 317,861 376,746 $395,018
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 175,231 211,907 145,980 153,060
Benefit for deferred income taxes (14,234) (15,983) (7,785) (8,163)
(Gain)/Loss on disposals of fixed assets--net 254 1,764 (1,212) (1,271)
Termination indemnities matured during the year--net 2,861 2,886 5,977 6,267
CHANGES IN ASSETS AND LIABILITIES, NET OF
ACQUISITIONS OF BUSINESSES:
Accounts receivable (37,760) (56,021) (17,522) (18,372)
Prepaid expenses and other 22,182 8,012 56,339 59,071
Inventories 9,171 (29,200) (58,573) (61,414)
Accounts payable 30,239 (27,121) 8,926 9,359
Accrued expenses and other (74,708) 29,506 (78,611) (82,424)
Accrual for customers' right of return 2,467 745 (3,147) (3,300)
Income taxes payable (36,651) (8,310) 13,055 13,688
TOTAL ADJUSTMENTS 79,052 118,185 63,427 66,503
CASH PROVIDED BY OPERATING ACTIVITIES 339,583 436,046 440,173 461,521
--------------------------------------------------------------------------------------------------
See notes to Consolidated Financial Statements
(*) In accordance with U.S. GAAP
(1) Translated for convenience at the New York City Noon Buying Rate as
determined in Note 1
F-7
LUXOTTICA GROUP S.p.A. and Subsidiaries(*)
STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
-------------------------------------------------------------------------------------------------------
2000 2001 2002 2002
(thousand of Euro) (thousand of
U.S.
Dollars)(1)
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment:
Additions (78,358) (123,475) (173,330) (181,737)
Disposals 16,194 7,811 4,646 4,871
Purchases of business net of cash acquired -- (568,981) (27,428) (28,758)
Sales of treasury shares -- -- 9,269 9,719
Investment in treasury shares -- -- (24,547) (25,738)
(Increase) Decrease in investments 176 (2,718) (7,611) (7,980)
(Increase) Decrease in intangible assets (3,325) (23,714) 28,611 29,999
CASH USED IN INVESTING ACTIVITIES (65,313) (711,077) (190,390) (199,624)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (592,732) -- -- --
Long term debt:
Proceeds 757,202 500,000 1,000,714 1,049,249
Repayments (107,090) (245,916) (1,408,308) (1,476,611)
Repayment of acquired line of credit -- (104,155) -- --
(Investment in) Use of restricted cash deposit (249,750) 44,610 201,106 210,860
Exercise of stock options 8,046 11,465 9,567 10,031
Dividends (38,781) (63,326) (77,211) (80,956)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (223,105) 142,678 (274,132) (287,427)
EFFECT OF TRANSLATION ADJUSTEMENTS (3,578) (15,404) 3,944 4,135
INCREASE/(DECREASE) IN CASH 47,587 (147,757) (20,405) (21,395)
NET BANK OVERDRAFT, BEGINNING OF YEAR (114,953) (66,718) (211,991) (222,273)
EFFECT OF TRANSLATION ADJUSTMENTS IN CASH 648 2,484 12,085 12,672
NET BANK OVERDRAFT, END OF YEAR (66,718) (211,991) (220,311) $ (230,996)
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for interest 72,072 91,174 58,162 60,983
Cash paid during the year for income taxes 103,896 126,833 137,650 144,326
Acquisition of businesses:
Fair value of assets acquired -- (102,347) -- --
-------------------------------------------------------------------------------------------------------
See notes to Consolidated Financial Statements
(*) In accordance with U.S. GAAP
(1) Translated for convenience at the New York City Noon Buying Rate as
determined in Note 1
F-8
LUXOTTICA GROUP S.p.A. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Luxottica Group S.p.A. and its subsidiaries (collectively
"Luxottica Group" or the "Company") operates in two industry segments:
manufacturing and wholesale distribution, and retail distribution. Through its
manufacturing and wholesale distribution operations, Luxottica Group is engaged
in the design, manufacturing, wholesale distribution and marketing of house
brand and designer lines of mid- to premium-priced prescription frames and
suglasses. The Company operates in the retail segment through its Retail
Division, consisting of LensCrafters, Inc. and other affiliated companies
("LensCrafters") and, since April 2001, Sunglass Hut International, Inc. and its
subsidiaries ("Sunglass Hut International"). As of December 31, 2002,
LensCrafters operated 882 stores throughout the United States of America, Canada
and Puerto Rico and Sunglass Hut operated 1,914 stores located in North America,
Europe and Australia.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION--The consolidated
financial statements of Luxottica Group include the financial statements of the
Parent and all wholly- or majority-owned Italian and foreign subsidiaries. The
consolidated financial statements for all periods presented also include
50 percent-owned companies over which Luxottica Group exercises significant
economic and operational control. The Company's investments in unconsolidated
subsidiaries which are at least 20 percent-owned and where the Company exercises
significant influence over operating and financial policies are accounted for
using the equity method. Luxottica Group holds a 44 percent interest in a
affiliated wholesale distributor, located in India, and a 50 percent interest in
an affiliated company, located in Great Britain. Both companies are accounted
for under the equity method. The result of operations of these investments are
not material to the results of the operations of the Company. Investments in
other companies with less than a 20 percent interest are carried at cost. All
significant intercompany accounts and transactions are eliminated in
consolidation. Luxottica Group prepares its consolidated financial statements in
accordance with accounting principles generally accepted in United States of
America (U.S. GAAP).
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS--Luxottica Group accounts for
its foreign currency denominated transactions and foreign operations in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52
("Foreign currency translation"). The financial statements of foreign
subsidiaries are translated into Euro, which is the functional and the reporting
currency. Assets and liabilities of foreign subsidiaries are translated at
year-end exchange rates. Results of operations are translated using the average
exchange rates prevailing throughout the year. The resulting cumulative
translation adjustments have been recorded as a separate component of
accumulated other comprehensive income/(loss). Transactions in foreign
currencies are recorded at the exchange rate in effect at the transaction date.
The Company has one subsidiary in a high inflationary country. However,
these operations are currently not material to the Company's consolidated
financial statements. This entity's operations have been remeasured using the
historical exchange rate and the result of the remeasurement has been accounted
for in the current year earnings.
Realized exchange gains or losses during the year are recognized in
consolidated income in such year.
CASH AND CASH EQUIVALENTS--Luxottica Group considers investments purchased
with an original maturity of three months or less to be cash equivalents.
F-9
RESTRICTED CASH--As of December 31, 2001, Euro 213.5 million (U.S. Dollars
190 million) of cash was pledged as collateral for outstanding current debt (see
Note 8.e) and was classified as restricted cash on the consolidated balance
sheet. During 2002, the outstanding debt was repaid releasing the restricted
cash which was utilized by the Company.
INVENTORIES--Luxottica Group's manufactured inventories, approximately
83.5 percent and 82.5 percent of total inventory for 2001 and 2002,
respectively, are stated at the lower of cost, as determined under the
weighted-average method (which approximates the first-in, first-out method), or
market value. Retail inventory not manufactured by the Company or its
subsidiaries are stated at the lower of cost, as determined on a last-in,
first-out method ("LIFO"), or market value. The LIFO reserve was not material as
of December 31, 2001 and 2002.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
historical cost. Depreciation is computed principally on the straight-line
method over the estimated useful lives of the related assets as follows:
--------------------------------------------------------------------------------
ESTIMATED USEFUL LIFE
Buildings 19 to 33 years
Machinery and equipment 3 to 10 years
Aircraft 6 years
Other equipment 5 to 8 years
Leasehold improvements Less of 10 years
or the remaining life
of the lease
--------------------------------------------------------------------------------
Maintenance and repair expenses are expensed as incurred. Upon the sale or
disposition of property and equipment, the cost of the asset and the related
accumulated depreciation and leasehold amortization are removed from the
accounts and any resulting gain or loss is included in income.
GOODWILL AND CHANGE IN ACCOUNTING--In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141 ("Business combinations"), which
requires all business combinations initiated after June 30, 2001 to be accounted
for under the purchase method. SFAS No. 141 also sets forth guidelines for
applying the purchase method of accounting in the determination of intangible
assets, including goodwill acquired in a business combination, and expands
financial disclosures concerning business combinations consummated after
June 30, 2001. The application of SFAS No. 141 did not affect any previously
reported amounts included in goodwill.
Effective January 1, 2002, Luxottica Group adopted SFAS No. 142 ("Goodwill
and other intangible assets"), which established new accounting and reporting
requirements for goodwill and other intangible assets. SFAS No. 142 requires
that goodwill amortization be discontinued and replaced with periodic tests of
impairment.
The Company's goodwill was tested for impairment during the first half of
2002, as well as in connection with the announcement of the termination of the
license agreement for the production and distribution of the Giorgio Armani and
Emporio Armani collections incurred in November 2002, as required by the
transitional provisions of SFAS No.142. The result of this process was the
determination that the carrying value of the Company was not impaired when
compared to the carrying value of goodwill and as such, Luxottica Group has not
recorded an asset impairment charge for the adoption.
Actual results of operations for the year ended December 31, 2002 and
pro-forma results of operations for the year ended December 31, 2001 and 2000
had the Company applied the
F-10
non-amortization provisions of SFAS No. 142 in those periods follows (thousands
of Euro, except per share amounts):
2000 2001 2002
-------- -------- --------
Reported net income 255,277 316,373 372,077
Add: Goodwill amortization, net of tax 59,781 80,249 --
------- ------- -------
ADJUSTED NET INCOME 315,058 396,622 372,077
======= ======= =======
Weighted number of share (thousand)
Basic 449,988 451,037 453,174
Diluted 452,920 453,966 455,354
Basic earning per share (Euro) 0.70 0.88 0.82
Diluted earning per share (Euro) 0.70 0.87 0.82
TRADE NAMES--In connection with various acquisitions, Luxottica Group has
recorded as intangible assets certain trade names under the names of
"LensCrafters", "Ray-Ban" and "Sunglass Hut International". Trade names, which
the Company has determined have a finite life, continue to be amortized on a
straight-line basis over periods ranging from 20 to 25 years (see Note 6) and
are subject to testing for impairment in accordance with SFAS No. 144
("Accounting for the impairment or disposal of long-lived assets"). Amortization
for the years ended December 31, 2000, 2001 and 2002 is Euro 23.6 million, Euro
23.8 million and Euro 36.1 million, respectively.
IMPAIRMENT OF ASSETS--Luxottica Group's long-lived assets, other than
goodwill, 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
long-lived asset to the estimated undiscounted future cash flows expected to
result from the use of the assets and their eventual disposition. If the sum of
the expected undiscounted future cash flows were less than the carrying amount
of the assets, the Company would recognize an impairment loss. The impairment
loss, if determined to be necessary, would be measured as the amount by which
the carrying amount of the asset exceeds the fair value of the asset in
accordance with SFAS No. 144. The Company determined that, as of December 31,
2001 and 2002, there had been no impairment in the carrying value of its
long-lived assets.
ACCRUAL FOR CUSTOMERS' RIGHT OF RETURN--Luxottica Group records an accrual
for estimated returns of merchandise in connection with their conditions of
sale. Such amount is included in the caption "Accrued expenses--customers' right
of return".
STORE OPENING AND CLOSING COSTS--Store opening costs are charged to
operations as incurred in accordance with Statement of Position 98-5
("Accounting for the cost of start-up activities"). The costs associated with
closing stores or facilities are accrued when the decision is made to close the
location.
INCOME TAXES--Income taxes are recorded in accordance with SFAS No. 109
("Accounting for income taxes"), which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the Company's consolidated financial statements or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between the consolidated financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
LIABILITY FOR TERMINATION INDEMNITIES--Termination indemnities represent
amounts accrued for employees in Australia, Austria, Greece, Israel, Italy and
Japan, determined in accordance with labor laws and agreements in each
respective country (see Note 9).
REVENUE RECOGNITION--Revenues from sales of products are recognized at the
time of shipment to or receipt by the customer. In connection with the
conditions of sale in certain countries, certain subsidiaries of the Company
record as a liability an amount based on an estimate of anticipated returns
F-11
of merchandise by customers in subsequent periods. Such amount is included in
the consolidated balance sheet under the caption "Accrued expenses--customers'
right of return". Revenues from retail sales, including Internet and catalog
sales, are recorded upon customer purchase.
PERVASIVENESS OF ESTIMATES--The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS PER SHARE--Luxottica Group calculates the basic and diluted
earnings per share in accordance with SFAS No. 128 ("Earnings per share"). Basic
earnings per share are based on the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share are based on the
weighted average number of shares of common stock and common stock equivalents
(options and warrants) outstanding during the period, except when the common
stock equivalents are anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Financial instruments consist primarily
of investments in cash, marketable securities, trade account receivables,
accounts payable, notes payable, long-term debt, restricted cash and derivative
financial instruments. Luxottica Group estimates the fair value of financial
instruments based on interest rates available to the Company and by comparison
to quoted market prices. As of December 31, 2001 and 2002, the fair value of the
Company's financial instruments approximated the carrying value except as
otherwise disclosed.
SFAS No. 123 ("Accounting for stock-based compensation"), as amended,
requires the disclosure of pro-forma net income and earnings per share had
Luxottica Group adopted the fair value method as of the beginning of 1998. Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using the
Black-Sholes option-pricing model with the following weighted average
assumptions:
2000 2001 2002
-------- -------- --------
Dividend yield 0.97% 0.53% 0.70%
Risk free interest rate 6.10% 5.74% 4.48%
Expected option life (years) 5 5 5
Expected volatility 44.50% 53.58% 47.04%
Weighted average fair value (Euro) 6.44 8.00 7.37
Luxottica Group's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur.
F-12
If compensation cost for the Company's outstanding and vested stock options
had been determined consistent with SFAS No. 123, Luxottica Group's net income
and earnings per share would have been the pro-forma amounts indicated below:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
------------ ------------ ------------
NET INCOME (thousands of Euro):
As reported 255,277 316,373 372,077
Pro-forma 247,435 307,345 362,718
BASIC EARNINGS PER SHARE (Euro):
As reported 0.57 0.70 0.82
Pro-forma 0.55 0.68 0.80
DILUTED EARNINGS PER SHARE (Euro):
As reported 0.56 0.70 0.82
Pro-forma 0.55 0.68 0.80
DERIVATIVE FINANCIAL INSTRUMENTS--Effective January 1, 2001, Luxottica Group
adopted SFAS No. 133 ("Accounting for derivative instruments and hedging
activities"). SFAS No. 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 requires that all derivatives, whether designed in hedging
relationship or not, be recorded on the balance sheet at fair value regardless
of the purpose or intent for holding them. If a derivative is designated as a
fair-value hedge, changes in the fair value of the derivative and the related
change in the hedge item are recognized in operations. If a derivative is
designated as cash-flow hedge, changes in the fair value of the derivative are
recorded in other comprehensive income ("OCI") in the consolidated statement of
stockholders' equity and are recognized in the consolidated statements of income
when the hedged item-effects operations. For a derivative that does not qualify
as a cash flow hedge, changes in fair value are recognized in operations.
Luxottica Group uses derivative financial instruments, principally interest
rate and currency swap agreements as part of its risk management policy to
reduce its exposure to market risks from changes in interest and foreign
exchange rates. Although it has not done in the past, the Company may enter into
other derivative financial instruments when it assesses that the risk can be
hedged effectively.
On January 1, 2001 as part of the transition adjustment related to the
adoption of SFAS No. 133, the Company adjusted the debt associated with the
currency swap agreement to fair value and recorded a reduction to OCI of
approximately Euro 7.8 million (U.S. Dollars 7 million) as a cumulative
transition adjustment for its derivative as a cash flow type hedge upon adoption
SFAS No. 133.
RECENT ACCOUNTING PRONOUNCEMENTS--In August 2001, the FASB issued SFAS
No. 143 ("Accounting for asset retirement obligations"). The standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. The standard is effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
In July 2002, the FASB issued SFAS No. 146 ("Accounting for costs associated
with exit or disposal activities"). SFAS No. 146 requires companies to recognize
the costs associated with exit or disposal activities when they are incurred.
Currently, these types of costs are recognized at the time management commits
the Company to the exit/disposal plan in accordance with Emerging Issues Task
force ("EITF") issue No. 94-3 ("Liability recognition for certain employee
termination benefits and other costs to exit an activity (Including certain
costs incurred in restructuring)"). SFAS No. 146 is effective for exit or
disposal activities initiated subsequent to December 31, 2002. Luxottica Group
expects that adoption of this statement will not have material impact on the
Company's consolidated financial statements.
F-13
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45")
("Guarantor's accounting and disclosure requirements for guarantees, including
indirect guarantees of indebtedness of other"), which requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. FIN 45 also elaborates on
the disclosures to be made by a guarantor in its financial statements about its
obligation under certain guarantees it has issued. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for financial statements ending after
December 15, 2002. Luxottica Group does not expect the adoption of this
Interpretation to have a material impact on the Company's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148 ("Accounting for stock-based
compensation-transition and disclosure"), an amendment of FASB Statement
No. 123. SFAS No. 148 amends SFAS No. 123 ("Accounting for stock-based
compensation"), to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in annual
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Finally,
this Statement amends APB Opinion No. 28 ("Interim financial reporting") to
require disclosure about those effects in interim financial information. SFAS
No. 148 is effective for fiscal years ending after December 15, 2002. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
Since the Company is continuing to account for stock-based compensation
according to APB No. 25, adoption of SFAS No. 148 requires the Company to
provide prominent disclosures about the effects of SFAS No. 123 on reported
income and will require disclosure of these effects in interim financial
statements as well. Luxottica Group does not expect the adoption of SFAS
No. 148 to have a material effect on its consolidated financial position,
results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")
("Consolidation of variable interest entities"), which requires the
consolidation of variable interest entities, as defined. FIN 46 requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
parties involved. FIN 46 applies to variable interest entities created after
January 31, 2003, and to the variable interest entities in which an enterprise
obtains an interest after that date. The Interpretation applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which the enterprise holds a variable interest that it
acquired before February 1, 2003. The Company is evaluating the impact of this
Interpretation on its consolidated financial statements.
INFORMATION EXPRESSED IN U.S. DOLLARS--The consolidated financial statements
are stated in Euro, the currency of the country in which the Company is
incorporated and operates. The translation of Euro amounts into U.S. Dollar
amounts is included solely for the convenience of international readers and has
been made at the rate of Euro 1 to U.S. Dollar 1.0485. Such rate was determined
by the noon buying rate of the Euro to U.S. Dollars as certified for custom
purposes by the Federal Reserve Bank of New York as of December 31, 2002. Such
translations should not be construed as representations that Euro amounts could
be converted into U.S. Dollars at that or any other rate.
F-14
RECLASSIFICATIONS AND EURO CONVERSION--Starting January 1, 2002, certain
costs and expenses of the optical retailing division included in the statement
of consolidated income have been reclassified. Therefore the presentation of
certain prior years information has been reclassified to conform to the current
year presentation.
As part of the European Economic and Monetary Union ("EMU"), a single
currency, the Euro, replaced the national currencies of most of the European
countries in which the Company conducts business. As a result, all information
contained in the consolidated financial statements relating to the period 2000
have been converted at the fixed exchange rate of Euro 1 to Italian Lire
1936.27.
2. RELATED PARTY TRANSACTIONS
DUE FROM RELATED PARTY--In December 2000, Luxottica Group became a listed
public company also on the Italian Stock Exchange. Expenses incurred in the
listing process were to be recovered from the majority shareholder of the
Company (La Leonardo Finanziaria S.r.l.). As of December 31, 2001, an amount of
Euro 1.4 million was included in account receivables. This amount was repaid in
full in 2002.
FIXED ASSETS--In January 2002, a subsidiary of Luxottica Group acquired for
Euro 28.5 million certain assets and a loan from "Partimmo S.a.S.", a company
owned by the Company's Chairman. The assets acquired were a building, including
all improvements for a total cost of Euro 42.0 million. The Company's
headquarter is located in this building. The loan acquired had an outstanding
balance of Euro 20.6 million on such date. In connection with the acquisition of
this building the Company's subsidiary entered into an agrement with the
Chairman who leases for Euro 0.5 million annually a portion of this building.
The expiration date of this lease is 2010.
INVESTMENT--On December 31, 2001, a U.S. subsidiary held on 1,205,000 of the
Company's ordinary shares, which had been previously purchased at a cost of U.S.
Dollars 3.1 million (Euro 2.3 million at historical exchange rate). These shares
were sold during 2002 at an after-tax net profit of U.S. Dollars 8.8 million
(Euro 9.3 million) and were recorded as an increase to the Company's additional
paid-in capital balance. Approximately 63 percent of these shares were sold to a
related party at an after-tax net gain of U.S. Dollars 4,273,000 (Euro
4.4 million).
3. INVENTORIES
Inventories consisted of the following (thousands of Euro):
--------------------------------------------------------------------------------
December 31,
2001 2002
---------------------------------------------------------------------------------
Raw materials and packaging 59,460 64,581
Work-in process 23,634 22,624
Finished goods 288,312 318,827
TOTAL 371,406 406,032
---------------------------------------------------------------------------------
4. ACQUISITIONS AND INVESTMENTS
a) Ray-Ban
On June 26, 1999, Luxottica Group acquired certain assets and liabilities of
the Eyewear Division of Bausch & Lomb Incorporated. ("Ray-Ban"). The transaction
included all of the Bausch & Lomb sunglass lines, including the Ray-Ban, Revo,
Arnette and Killer Loop brands. The acquisition of Bausch & Lomb's eyewear
business was accounted for by the purchase method, and accordingly, the purchase
price of approximately Euro 635 million (U.S. Dollars 655 million) was allocated
to the assets acquired and liabilities assumed based on their fair values at the
date of acquisition. During 2000, the Company
F-15
finalized the assumed value of all liabilities and in connection therewith
increased goodwill by approximately Euro 150 million. The excess of purchase
price over net assets acquired ("goodwill") has been recorded in the
accompanying consolidated balance sheet and, prior to 2002, was amortized over a
20 year life.
In accordance with the terms of the Purchase Agreement, the purchase price
was subject to a post-closing adjustment based upon the amount of the Closing
Net Operating Assets, as defined by the Purchase Agreement.
In 2001, as a result of the business combination between two wholly-owned
subsidiaries, deferred tax assets previously deemed less likely than not to be
realized were thereafter considered realizable in the amount of Euro
66.5 million. As a result of this reversal of the valuation allowance, goodwill
was been reduced by an equal amount.
On January 22, 2002, Luxottica Group resolved its dispute with Bausch & Lomb
Incorporated relating to the purchase agreement of assets and liabilities
acquired. The result of this settlement was a purchase price reduction of U.S.
Dollars 42 million to Luxottica Group. As a result of this agreement, goodwill
and due to Bausch & Lomb Incorporated previously recorded was reduced and a net
receivable of U.S. Dollars 23 million for the balance due by Bausch & Lomb
Incorporated was included in the Company's 2001 consolidated financial
statements. The net receivable was subsequently realized. As a consequence of
the settlement agreement, goodwill was further reduced for an amount of Euro
36.2 million in 2001.
b) Sunglass Hut International, Inc.
On February 20, 2001, Luxottica Group formed an indirect wholly-owned U.S.
subsidiary, Shade Acquisition Corp., for the purpose of making a tender offer
for all the outstanding common stock of Sunglass Hut International, Inc.
("SGHI"), a publicly traded company on the NASDAQ National Market. The tender
offer commenced on March 5, 2001 and was completed on March 30, 2001. On
April 4, 2001, Shade Acquisition Corp. was merged with and into SGHI and SGHI
became an indirect wholly-owned subsidiary of the Company. As such, the results
of SGHI have been consolidated into the Company's consolidated financial
statements as of the acquisition date. The acquisition was accounted by using
the purchase method, and accordingly, the purchase price of Euro 558 million
(including approximately Euro 33.9 million of acquisition-related expenses) was
allocated to the assets acquired and liabilities assumed based on their fair
value at the date of the acquisition. This included an independent valuation of
the value of intangibles, including trade names. As a result of the final
independent valuation, which was completed in March 2002, the aggregate balance
of goodwill and other intangibles previously recorded as of December 31, 2001
increased by approximately Euro 147 million. The excess of purchase price over
net assets acquired has been recorded in the accompanying consolidated balance
sheets.
F-16
The purchase price and expenses have been allocated based upon the valuation
of the Company's acquired assets and liabilities assumed as follows:
--------------------------------------------------------------------------------
THOUSANDS
OF EURO
ASSETS PURCHASED
Cash and cash equivalents 17,023
Inventories 90,034
Property, plant and equipment 113,212
Prepaid expenses and other current assets 14,717
Accounts receivable 2,161
Trade name 340,858
Other assets including deferred tax assets 34,657
LIABILITIES ASSUMED
Accounts payable and accrued expenses (101,020)
Other current liabilities (52,200)
Deferred tax liabilities (135,340)
Long-term debts (128,691)
Bank overdraft (104,155)
FAIR VALUE OF NET ASSETS 91,256
Other intangible assets (including goodwill) 466,790
TOTAL PURCHASE PRICE 558,046
--------------------------------------------------------------------------------
Pro-forma consolidated statements of operation for each year ended
December 31, 2000 2001, assuming the acquisition took place at January 1, 2000:
-----------------------------------------------------------------------------------
2000 2001
(Thousands of Euro)
-----------------------------------------------------------------------------------
Sales 3,110,988 3,211,063
Operating income 440,489 490,998
Net income 248,000 297,851
Number of shares (thousands) 449,988 451,037
Earnings per share (Euro) 0.55 0.66
-----------------------------------------------------------------------------------
c) First American Health Concepts, Inc.
During 2001, Luxottica Group acquired all outstanding shares of First
American Health Concepts, Inc. ("FAHC"), a publicly traded company on the
American Stock Exchange, for approximately Euro 27.7 million (U.S. Dollars
23.5 million), net of cash acquired (Euro 3.6 million or U.S. Dollars
3 million). FAHC markets and administers vision care plans throughout the United
States of America. FAHC tangible assets and liabilities assumed were
insignificant individually and in aggregate and accordingly substantially the
entire purchase price was allocated to goodwill. No pro-forma financial
information is required as the acquisition was not material to the Company's
consolidated financial statements.
F-17
d) Other acquisitions and establisments:
--In 2001, Luxottica Group established a new subsidiary, Luxottica Poland
Sp. Z.o.o, which is 75 percent-owned by the Company. Luxottica Poland is a
wholesale subsidiary with an initial investment of approximately Euro
0.1 million.
--In 2001, Luxottica Group acquired the remaining interest in some
manufacturing and wholesale subsidiaries (Tristar Optical Co., Ltd and Luxottica
Australia PTY, Ltd) for an aggregate cash consideration of Euro 8.5 million.
These subsidiaries have been accounted for as step acquisitions and the Company
has recorded goodwill of approximately Euro 4.8 million in connection therewith.
--In 2001, Luxottica Group acquired 51 percent of capital stock of Mirarian
Marketing Ltd for an initial investment of Euro 1.9 million. The subsidiary is
engaged in marketing and sales activity of the Company's products in Asia.
--During 2002 the Company acquired six retail companies for an aggregate
amount of Euro 35.0 million (U.S. Dollars 33.5 million). All tangible assets and
liabilities assumed were insignificant individually and in aggregate and,
accordingly, substantially the entire purchase price were allocated to goodwill.
No pro-forma financial information is required as the acquisitions were not
material to the Company's consolidated financial statements. One of these
company is accounted for under the equity method.
--At the end of 2002, the Company established a new wholly owned subsidiary
in China, Luxottica Tristar Optical Co. with an initial investment of Euro
3.8 million. The subsidiary is engaged in the manufacturing and distribution of
frames worldwide.
5. PROPERTY, PLANT AND EQUIPMENT--NET
Property, plant and equipment consisted of the following (thousands of Euro):
-------------------------------------------------------------------------------------
December 31,
2001 2002
-------------------------------------------------------------------------------------
Land and buildings 408,501 451,900
Machinery and equipment 366,335 366,027
Aircraft 24,252 25,185
Other equipment 324,380 263,340
Building, held under capital lease 2,332 2,332
1,125,800 1,108,784
Less: accumulated depreciation and amortization 624,454 602,239
TOTAL 501,346 506,545
-------------------------------------------------------------------------------------
Depreciation and amortization expenses for the years ended December 31,
2000, 2001 and 2002 are Euro 86.1 million, Euro 101.1 million and Euro
103.8 million, respectively. Included in other equipment is approximately Euro
51.6 million and Euro 25.1 million of construction in-progress as of
December 31, 2001 and 2002, respectively.
F-18
6. INTANGIBLE ASSETS--NET
Intangible assets consisted of the following (thousands of Euro):
-------------------------------------------------------------------------------------
December 31,
2001 2002
-------------------------------------------------------------------------------------
Goodwill, which arose in connection with the acquisition of
LensCrafters, net of accumulated amortization of Euro
208,082 thousands and Euro 176,646 thousand as of December
31, 2001 and 2002, respectively(a) 577,133 489,944
Goodwill, which arose in connection with the acquisition of
Ray-Ban, net of accumulated amortization of Euro 44,575
thousands and Euro 44,575 thousand as of December 31, 2001
and 2002, respectively (see Note 4)(b) 231,194 228,354
Goodwill, which arose in connection with the acquisition of
Sunglass Hut International, net of accumulated amortization
of Euro 24,556 and Euro 13,681 thousand as of December 31,
2001 and 2002, respectively (see Note 4)(c) 635,837 409,036
LensCrafters trade name, the value of which has been
established as part of an independent valuation performed in
connection with the acquisition ofLensCrafters, net of
accumulated amortization of Euro 65,498 thousand and Euro
63,996 thousands as of December 31, 2001 and 2002,
respectively(d) 181,665 145,827
Ray-Ban acquired trade names, net of accumulated
amortization of Euro 42,295 and Euro 48,896 thousand as of
December 31, 2001 and 2002, respectively (see Note 4)(d) 258,775 230,305
Sunglass Hut International trade name, the value of which
has been established as part of an independent valuation
performed in connection with the acquisition of Sunglass
Hut, net of accumulated amortization of Euro 20,162 thousand
as of December 31, 2002 (see note 4)(d) -- 267,868
Goodwill, which arose in connection with other business
acquisitions, net of accumulated amortization of Euro 47,344
thousands and Euro 43,589 thousand as of December 31, 2001
and 2002, respectively(e) 106,100 117,325
Other intangibles, net 19,036 27,867
TOTAL 2,009,740 1,916,526
-------------------------------------------------------------------------------------
(a) The acquisition of LensCrafters in 1995 was accounted for by the purchase
method and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their fair values at the date
of acquisition. The excess of purchase price over the fair value of net
assets acquired (U.S. Dollars 698.9 million) was recorded in the
accompanying consolidated balance sheets. Since the Company changed its
accounting, effective January 1, 2002, for goodwill will no longer be
subjected to periodic amortization matter, but rather will be subjected to
an impairment test method. Amortization expense for the year ended
December 31, 2001 was Euro 31.2 million. In connection with the acquisition
of LensCrafters incurred in May 1995, Luxottica Group recorded certain
liabilities for commitments and other costs expected to be paid in future
periods. As a result of negotiations with vendors and other settlements, the
Company settled these liabilities at an amount less than the accrual set up
at the date of the acquisition. Accordingly, included in the consolidated
results for fiscal 2001 and 2002 is income of approximately Euro
10.1 million (U.S. Dollars 9 million) and Euro 3.8 million (U.S. Dollars
4.0 million), net of taxes, for the final settlement of these liabilities,
respectively.
(b) The acquisition of Ray-Ban in 1999 was accounted for by the purchase method
and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their fair values at the date
of acquisition. The excess of purchase price over the fair value of net
assets acquired (Euro 272.9 million) was recorded in the accompanying
consolidated balance sheets. Since the Company changed its accounting,
effective January 1, 2002, for goodwill will no longer be subjected to
periodic amortization matter, but rather will be subjected to an impairment
test method. Amortization expense for the year ended December 31, 2001 was
of Euro 16.2 million.
(c) The acquisition of Sunglass Hut International in 2001 was accounted for by
the purchase method and, accordingly, the purchase price has been allocated
to the assets acquired and the liabilities assumed based on their fair
values at the date of acquisition. The excess of purchase price over the
fair value of net assets acquired (Euro 466.7 million) was recorded in the
accompanying consolidated balance sheets. Since the Company changed its
accounting, effective January 1, 2002, for
F-19
goodwill will no longer be subjected to periodic amortization matter, but
rather will be subjected to an impairment test method. Amortization expense
for the year ended December 31, 2001 was of Euro 14.5 million.
(d) The LensCrafters, Ray-Ban and Sunglass Hut International trade names
continue to be amortized on a straight-line basis over a period of
25 years, 20 years and 25 years, respectively, as the Company believes these
trade names to be finite life assets.
(e) Goodwill was also created as the difference between the purchase price paid
over the value of net assets of many additional businesses acquired,
resulting from retail locations and wholesales entities over the past
several years. Beginning in fiscal 2002, goodwill is no longer amortized on
a finite-life basis but tested for impairment annually in accordance with
SFAS No. 142. Amortization for the year ended December 31, 2001 in such
goodwill, exclusive of the amortization of the LensCrafters, Ray-Ban and
Sunglass Hut International goodwill discussed in (a), (b), (c) above, was
approximately Euro 9.2 million.
--------------------------------------------------------------------------------
7. INCOME TAXES
The provisions for income taxes consisted of the following (thousands of
Euro):
-------------------------------------------------------------------------------------------
Year ended December 31,
2000 2001 2002
-------------------------------------------------------------------------------------------
CURRENT
Italian companies 13,738 15,079 52,616
Foreign companies 101,984 124,354 117,865
115,722 139,433 170,481
DEFERRED
Italian companies (8,422) (10,619) (14,204)
Foreign companies (5,812) (5,364) 6,419
(14,234) (15,983) (7,785)
TOTAL 101,488 123,450 162,696
-------------------------------------------------------------------------------------------
The Italian statutory tax rate is the result of two components: national
("IRPEG") and regional ("IRAP") tax. IRAP could have a substantially different
base for its computation. In 2001, the statutory tax rate was reduced to
40.25 percent.
Reconciliation between the Italian statutory tax rate and the effective tax
rate is as follows:
----------------------------------------------------------------------------------------------------
Year ended December 31,
2000 2001 2002
----------------------------------------------------------------------------------------------------
Italian statutory tax rate 41.3% 40.3% 40.3%
Aggregate effect of different rates in foreign jurisdictions (0.5%) (1.6%) (2.3%)
Permanent differences, principally losses in subsidiary
companies funded through capital contributions, net of
non-deductible goodwill (12.8%) (10.7%) (7.8%)
EFFECTIVE RATE 28.0% 28.0% 30.2%
----------------------------------------------------------------------------------------------------
For income tax purposes, the Company and its Italian Subsidiaries file tax
returns on a separate company basis.
The deferred tax assets and liabilities as of December 31, 2001 and 2002,
respectively are comprised of (thousands of Euro):
F-20
---------------------------------------------------------------------------------------------------
December 31,
2001 2002
DEFERRED TAX DEFERRED TAX
ASSET/(LIABILITY) ASSET/(LIABILITY)
---------------------------------------------------------------------------------------------------
CURRENT PORTION
Inventory 64,821 43,459
Insurance and other reserves 20,106 16,993
Restructuring reserve 49,826 24,080
Net operating losses--carryforward 46,004 48,120
Loss on investments 15,901 14,128
Dividends (49,704) (5,616)
Other, net 16,247 6,924
NET CURRENT DEFERRED TAX ASSETS 163,201 148,088
NON-CURRENT PORTION
Difference in basis of fixed assets (63,642) (53,486)
Net operating losses--carryforward 200,893 128,016
Sale of businesses 2,554 2,023
Restructuring reserve 22,903 5,265
Occupancy reserves 4,398 5,473
Depreciation (4,197) (3,042)
Employee-related reserves (including minimum pension
liability) 7,119 21,845
Trade name -- (104,643)
Trade mark lease (38,712) (55,777)
Valuation allowance (149,272) (76,285)
Other, net 7,674 8,806
NET NON-CURRENT DEFERRED TAX LIABILITIES (10,282) (121,805)
---------------------------------------------------------------------------------------------------
Percentages ranging from 36 percent to 41.25 percent were applied to the
individual deferred tax items, based on the different deductibility allowed by
the new regional tax. From 2001 percentage of income tax has been reduced to
40.25 percent. Beginning 2003, the income tax percentage has been reduced to
38.25 percent. As a consequence, deferred tax assets and liabilities have been
recomputed according with the new tax rate. The immaterial result of the change
in the Italian tax rate has been included in deferred tax income.
Tax years for Italian companies are open from 1997 and subject to review
pursuant to Italian Law. Certain Luxottica Group companies have been subject to
tax reviews for previous years. Management believes no significant unaccrued
liabilities will arise from the related tax reviews.
As of December 31, 2002, the taxes that would be due on the distribution of
retained earnings, including net earnings of the year, of subsidiaries for the
year 2002 and prior to the related parent company would approximate Euro
121.5 million. Luxottica Group has not provided an accrual for taxes on such
distributions, nor has it provided an accrual for taxes on its investments in
such subsidiaries as the likelihood of distribution is remote and such earnings
and investments are deemed to be permanently reinvested. In connection with the
2002 earnings of certain subsidiaries, the Company has provided for an accrual
for Italian income taxes related to declared dividends of earnings.
As of December 31, 2001 and 2002, the Company has recorded an aggregate
valuation allowance of Euro 149.3 million and Euro 76.3 million, respectively,
against deferred tax assets recorded in connection with net operating losses.
In connection with various founded capital contributions, certain Italian
subsidiaries, which file tax returns on separate company basis, have incurred
net operating losses, which expire in five years. It is management's belief that
such net operating losses are not more likely that not to be realized in future
periods, valuation allowances have been recorded in the Company's consolidated
financial statements.
F-21
Management will continue to evaluate the likelihood of such deferred tax assets
and will reverse such valuation allowance when realization of deferred tax
assets become more likely than not.
8. LONG-TERM DEBT
Long-term debt consisted of the following (thousands of Euro):
-------------------------------------------------------------------------------------
December 31,
2001 2002
-------------------------------------------------------------------------------------
Credit agreement with various financial institutions(a) 775,000 675,000
Notes payable issued by Luxottica Luxembourg, interest at
3.625 percent, subsequently repaid(b)(c) 350,000 --
UniCredito Italiano credit facility(d) -- 333,810
San Paolo IMI credit facility, subsequently repaid(e) 212,309 --
Notes payable, interests at 8.63 percent, payable
semi-annually, subsequently repaid(f) 49,738 --
5.25 percent convertible subordinated notes, net of
un-amortized discount of Euro 225 thousand, interest payable
semi-annually, subsequently repaid(g) 77,128 --
Capital lease obligations, payable in installments through
2005 985 1,040
Loans with banks and other third parties, interest at
various rates (from 2.47 to 4.48 percent per annum), payable
in installments through 2017. Certain subsidiaries' fixed
assets are pledged as collateral for such notes 6,218 24,139
TOTAL 1,471,378 1,033,989
Less: current maturities 1,339,131 178,335
LONG-TERM DEBT 132,247 855,654
-------------------------------------------------------------------------------------
(a) In June 2000, Luxottica Group entered into a credit agreement with several
financial institutions. The credit facility provided for a total maximum
borrowing of Euro 500 million. This unsecured credit facility expires in
June 2003, and allows the Company to select interest periods of one, two,
three or six months.
In March 2001, the Company entered into a new credit facility with Banca
Intesa S.p.A. to finance the acquisition of Sunglass Hut International, as
described earlier. The credit facility was unsecured and on December 27,
2002, the amount outstanding at that time was repaid in full.
In December 2002, Luxottica Group entered into a new unsecured credit
facility with Banca Intesa S.p.A. for a maximum available line of Euro
650 million. This line of credit maintains a term portion of Euro
500 million which will require a balloon payment of Euro 200 million in
June 2004 and equal quarterly installments of principal of Euro 50 million
subsequent to that date. Interest accrues based on Euribor as defined in the
agreement plus 0.45 percent (3.317 percent on December 31, 2002). The
revolver portion allows the Company a maximum line available of Euro
150 million which can be borrowed and repaid until final maturity. Interest
accrues on the revolving loan at Euribor as defined in the agreement plus
0.45 percent (3.40 percent on December 31, 2002). The final maturity of all
outstanding principle amounts and interest is December 27, 2005. The Company
has the option to choose interest periods of one, two or three months. The
debt contains financial covenants of minimum EBITDA and maximum debt to
equity ratios as defined in the agreement. Luxottica Group is in compliance
with those covenants.
In December 2002, the Company entered into two interest rate swap
transactions (the "Intesa Swaps") beginning with an aggregate maximum
notional amount of Euro 250 million, which will decrease by Euro
100 million on June 27, 2004 and by Euro 25 million during each subsequent
three-month period. The Intesa Swaps will expire on December 27, 2005. The
Intesa Swaps were entered into as a cash flow hedge of a portion of the
Banca Intesa Euro 650 million unsecured credit facility disclosed above. The
Intesa Swaps exchange the floating rate based on Euribor to a fixed rate of
2.985 percent per annum.
(b) In June 1999, Luxottica Luxembourg (a subsidiary of the Company) issued Euro
350 million of notes ("Euroloan"). The Euroloan principal matured in
June 2002 and required annual interest payments to be made based on a fixed
interest rate of 3.625 percent, as defined in the Euroloan agreement. Notes
were repaid in full.
(c) In November 1999, a subsidiary of the Company entered into a currency swap
agreement ("Swap 99") with an Italian bank. Swap 99 terminated on June 25,
2002 whereby the Company's notional amount of U.S. Dollars 350.2 million was
paid and received a notational amount of Euro 340 million.
(d) In June 2002, a U.S. subsidiary entered into a U.S. Dollars 350 million
credit facility with a group of four Italian banks led by UniCredito
Italiano S.p.A the proceeds of which refinanced the Euroloan noted in
(b) above. The new credit facility is guaranteed by Luxottica Group and
matures in June 2005. The term loan portion of the credit facility provided
U.S. Dollars 200 million of borrowing and requires equal quarterly principal
installments beginning March 2003. The revolving loan portion of the credit
facility allows for a maximum borrowings of U.S. Dollars 150 million.
Interest accrues at Libor as defined in the agreement plus 0.5 percent
(1.905 percent as of December 31, 2002) and the credit facility allows the
Company to select
F-22
interest periods of one, two or three months. The credit facility contains
financial and operating covenants. The Company is in compliance with those
covenants.
The U.S. subsidiary entered into a Convertible Swap Step-Up ("Swap 2002")
with an initial notional amount of U.S. Dollars 275 million which decreases
quarterly by U.S. Dollars 20 million starting March 17, 2003. The Swap 2002
expiration date is June 17, 2005. Swap 2002 was entered into to convert the
UniCredito floating rate credit agreement to a mixed position rate
agreement. Swap 2002 allows the U.S. subsidiary to pay a fixed rate of
interest if Libor remains under certain defined thresholds and for the U.S.
subsidiary to receive an interest payment of the three month Libor rate as
defined in the agreement. This amount is settled net every three months.
This derivative instrument does not qualify for hedge accounting under SFAS
No. 133 and as such is marked to market with the gain or losses from the
change in value included in the consolidated financial statements. As of
December 31, 2002 a loss of Euro 2.6 million is included in current
operations.
(e) In December 2000, the Company received a credit facility of Euro
256.3 million from San Paolo IMI S.p.A. Bank. The credit facility, utilized
as of December 31, 2001 for an amount of Euro 212.3 million, was pledged by
a restricted cash deposit in a U.S. subsidiary's bank account for an amount
of U.S. Dollars 190 million (Euro 213.5 million). In June 2002 the credit
facility matured and the amount outstanding at that time was paid in full.
(f) As of December 31, 2001, a subsidiary of Luxottica Group had notes
outstanding issued under a bond indenture which matured and was paid in full
in October 2002.
(g) The Company's subsidiary Sunglass Hut International, issued Euro
129 million (U.S. Dollars 115 million) principal amount of convertible
subordinated notes to certain qualified institutional investors. The resale
of these convertible subordinated notes was later registered with the
Securities and Exchange Commission in October 1996. The notes accrued
interest at 5.25 percent payable semi-annually and were to mature in
June 2003. The notes were subordinated to all existing and future
indebtedness of the Company. In March 2002, Luxottica Group redeemed the
outstanding convertible subordinates notes at the redemption price set forth
in the bond agreement. The net loss on the extinguishment of the debt was
not material to the Company's consolidated financial statements.
--------------------------------------------------------------------------------
Long-term debt matures in the years subsequent to December 31, 2003 as
follows (thousands of Euro):
-------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2004 378,168
2005 457,984
2006 1,540
2007 1,606
2008 1,674
Thereafter 14,682
TOTAL 855,654
-------------------------------------------------------------------------------
9. EMPLOYEE BENEFITS
LIABILITY FOR TERMINATION INDEMNITIES--The liability for termination
indemnities represents amounts accrued for employees in Australia, Austria,
Greece, Israel, Italy and Japan, determined in accordance with labor laws and
labor agreements in each respective country. Each year, Luxottica Group adjusts
its accrual based upon headcount, changes in compensation level and inflation.
This liability is not funded. Therefore, the accrued liability represents the
amount that would be paid if all employees were to resign or be terminated as of
the balance sheet date. This treatment is in accordance with SFAS No. 112
("Employers' accounting for post employment benefits"), which requires employers
to expense the costs of benefit paid before retirement (i.e. severance) over the
service lives of employees. The charge to earnings during the years ended
December 31, 2000, 2001 and 2002 aggregated Euro 8.5 million, Euro 7.8 million
and Euro 5.7 million, respectively.
DEFINED BENEFIT PLANS--During 1998, a U.S. subsidiary of the Company ("U.S.
Holding") merged all of its pension plans into a single plan sponsored by a U.S.
subsidiary. This plan covers substantially all employees of the U.S.
subsidiaries and affiliates. This pension plan was amended effective January 1,
2002 to allow the employees of Sunglass Hut International to participate in the
plan.
The Company's funding policy is in accordance with minimum funding
requirements of the Employee Retirement Income Security Act of 1974 as amended.
No contributions were made in 2000,
F-23
2001 and 2002. Net periodic pension cost for 2000, 2001 and 2002 includes the
following components (thousands of Euro):
--------------------------------------------------------------------------------------------
2000 2001 2002
--------------------------------------------------------------------------------------------
Service cost 8,791 9,776 10,518
Interest cost 11,405 12,901 12,168
Return on plan assets (13,918) (16,123) (14,672)
Net amortization and deferral 759 747 671
NET PERIODIC PENSION COST 7,037 7,301 8,685
--------------------------------------------------------------------------------------------
For convenience all amounts are translated at noon buying rate in effect at
the end of each year.
The following table summarizes key information pertaining to the Company's
defined benefit plan as of September 30, 2001 and 2002 (thousands of Euro):
---------------------------------------------------------------------------------
2001 2002
---------------------------------------------------------------------------------
Change in benefits obligation:
Benefit obligation, beginning of year 170,132 194,634
Translation differences 5,892 (29,365)
Service cost 9,838 10,518
Interest cost 12,983 12,168
Actuarial loss 3,586 20,219
Benefits paid (7,797) (6,602)
BENEFIT OBLIGATION, END OF YEAR 194,634 201,572
Change in plan assets:
Fair value of plan assets, beginning of year 218,306 180,860
Translation differences 7,559 (27,323)
Actual return in plan assets (37,208) (14,385)
Benefits paid (7,797) (6,602)
FAIR VALUE OF PLAN ASSETS, END OF YEAR 180,860 132,550
Funded status (13,774) (69,021)
Unrecognized net actuarial gain 8,677 56,643
Unrecognized prior service cost 4,797 3,439
ACCRUED BENEFIT COSTS (300) (8,939)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
2001 2002
---------------------------------------------------------------------------------
Amounts recognized in the consolidated balance sheet
consist of the following:
LIABILITIES
Accrued pension cost 300 8,939
Additional minimum liability -- 41,565
LIABILITIES--OTHER LONG TERM LIABILITIES 300 50,504
ASSET--INTANGIBLE ASSET -- 3,439
EQUITY--OTHER COMPREHENSIVE INCOME -- 38,126
WEIGHTED AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30:
Discount rate 7.25% 6.50%
Expected return on assets 9.00% 9.00%
Rate of compensation increase 5.50% 5.50%
---------------------------------------------------------------------------------
F-24
Plan assets were invested in equity securities, United States Government
obligations, other fixed income securities and money market funds.
SUPPLEMENTAL RETIREMENT PLAN--A U.S. subsidiary of Luxottica Group maintains
an unfunded supplemental retirement plan for participants of its Pension Plan to
provide benefits in excess of amounts permitted under the provisions of
prevailing tax law. The pension liability associated with this plan is accrued
using the same actuarial methods and assumptions as those used for the
subsidiary's Pension Plan noted above, and such amounts are not material to the
consolidated financial statements.
HEALTH BENEFIT PLANS--A U.S. subsidiary of the Company partially subsidizes
health care benefits for eligible retirees. Included in other non-current
liabilities on December 31, 2001 and 2002 is approximately Euro 1.7 million and
Euro 1.6 million of accrued benefits, respectively.
OTHER BENEFITS--A U.S. subsidiary of Luxottica Group provides certain
post-employment medical and life insurance benefits. The Company's accrued
liability related to this obligation as of December 31, 2001 and 2002 was Euro
1.4 million and Euro 1.3 million, respectively.
SAVING PLAN--Luxottica Group also sponsors a tax incentive savings plan
covering all employees. U.S. Holding makes quarterly contributions in cash to
the plan based on a percentage of employees' contributions. Additionally, the
Company may make an annual discretionary contribution to the plan, which may be
made in the Company's American Depositary Receipts (ADRs) or cash. Aggregate
contributions made to the tax incentive savings plan by the Company for the
years ended December 31, 2001 and 2002 were Euro 9.1 million and Euro
6.4 million, respectively.
10. STOCK OPTION AND INCENTIVE PLANS
STOCK OPTION PLAN--Beginning in April 1998, certain officers and other key
employees of the Company and its subsidiaries were granted stock options of
Luxottica Group under the Company's stock option plan. The stock options were
granted at a price equal to the market value of the shares at the date of grant.
These options become exercisable in three equal annual installments from the
date of grant and expire on or before January 31, 2011.
As Luxottica Group has elected to apply Accounting Principles Board Opinion
No. 25, ("Accounting for stock issued to employees"), no compensation expense
was recognized because the option exercise price was equal to the fair market
value on the date of grant.
F-25
The following table summarizes information about stock options outstanding
as of December 31, 2002 as analyzed for the stock split (see note 11):
--------------------------------------------------------------------------------------------
Weighted average
Number exercise price
of options (Denominated
outstanding in Euro)(3)
--------------------------------------------------------------------------------------------
OUTSTANDING AS OF JANUARY 1, 2000 6,099,800 5.75
Granted 2,142,200 9.52
Forfeitures (467,400) 6.75
Exercised (1,042,700) 6.31
OUTSTANDING AS OF DECEMBER 31, 2000 6,731,900 6.80
Granted 2,079,300 17.08
Forfeitures (119,900) 10.34
Exercised (1,283,517) 6.49
OUTSTANDING AS OF DECEMBER 31, 2001 7,407,783 9.67
Granted 2,348,400 16.98
Forfeitures (248,367) 14.54
Exercised (1,397,783) 6.67
OUTSTANDING AS OF DECEMBER 31, 2002 8,110,033 11.51
--------------------------------------------------------------------------------------------
(3) For convenience all amounts are translated at noon buying rate in effect at
the end of each year.
Stock options outstanding as of December 31, 2002 are summarized as follows:
----------------------------------------------------------------
Exercise price
denominated Number Number Remaining
in Euro(4) outstanding exercisable life (Years)
----------------------------------------------------------------
7.38 953,533 953,533 4.1
4.38 1,513,300 1,513,300 5.1
9.52 1,538,400 945,200 6.1
14.49 1,863,500 585,700 7.1
16.98 2,241,300 -- 8.1
----------------------------------------------------------------
(4) Certain options were granted in U.S. Dollars and have been converted for the
footnote as of December 31, 2002 conversion rate of the Euro to the U.S.
Dollar of 1 to 1.0485.
Included as an addition to the Luxottica Group's paid-in-capital account in
fiscal 2001 and 2002 is Euro 3.1 million and Euro 3.9 million, respectively of
tax benefits the Company received from employees exercising these stock options.
STOCK INCENTIVE PLAN
Luxottica Group granted stock options to certain employees under an
incentive plan. These options vest and became exercisable only if certain
financial performance measures are met over a three year period ending
December 2004. As of December 31, 2002, there are 970,000 shares outstanding at
an exercise price of Euro 15.32 (U.S. Dollars 16.06) per share. Compensation
expense will be recognized for the options issued under the incentive plan based
on the market value of the underlying ordinary shares when the number of shares
to be issued is known.
11. SHAREHOLDERS' EQUITY
In June 2001 and 2002, at the Company's Annual Shareholders' Meetings, cash
dividends of Euro 63.3 million and Euro 77.2 million, respectively, were
approved. These amounts became payable in July 2001 and 2002, respectively.
Italian law requires that 5 percent of net income be retained, as a legal
F-26
reserve until this reserve is equal to one-fifth of the issued share capital. As
such, this legal reserve is not available for dividends to the shareholders.
Legal reserves of the Italian entities included in retained earnings as of
December 31, 2001 and 2002 aggregated Euro 7.5 million and Euro 6.4 million,
respectively. In addition, there is an amount of Euro 2.3 million, which
represents other legal reserves of foreign entities that is not available for
dividends to the shareholders.
On May 3, 2000, the Shareholders' Meeting approved a two-for-one stock split
of the Company's common stock. All prior years presented have been restated to
reflect the stock split, as if they occurred on the first day of earliest period
presented.
On June 26, 2001, as consequence of Euro conversion, an amount of Euro
3.8 million was recognized as free capital stock increase.
In accordance with SFAS No. 87, Luxottica Group has recorded a minimum
pension liability for underfunded plan of Euro 41.6 million as of December 31,
2002, representing the excess of unfunded accumulated benefit obligations over
previously recorded pension cost liabilities. A corresponding amount is
recognized as an intangible asset except to the extent that these additional
liabilities exceed related unrecognized prior service cost and net obligation,
in which case the increase in liabilities is charged directly to shareholders'
equity. The principal cause of the deterioration of the funded status in the
pension liability was caused by negative returns from investments held in the
worldwide equity market. As of December 31, 2002, Euro 26.5 million of the
excess minimum liability, net of income taxes, resulted in a charge to equity.
A U.S. subsidiary held as of December 31, 2001, 1,205,000 of Luxottica
Group's ordinary shares, which had been previously purchased at a cost of U.S.
Dollars 3.1 million (Euro 2.9 million at December 31, 2002 noon buying rate).
These shares were sold during 2002 at an after-tax net profit of U.S. Dollars
8.8 million (Euro 9.3 million) and were recorded as an increase to the Company's
additional paid-in capital balance. See also note 2.
In September 2002 the Board of Directors authorized a wholly owned U.S.
subsidiary to repurchase through the open market up to 11,500,000 Luxottica
Group's ADRs, representing 2.5 percent of the authorized and issue share
capital, during a 18-month period starting in September 2002. The actual amount
and timing of the ADR purchases will depend on market conditions and other
factors. Through December 31, 2002, the U.S. subsidiary has purchased 1,911,700
ADRs at an aggregate purchase price of Euro 24.5 million (U.S. Dollars
24.8 million). In connection with the repurchase, an amount of Euro
24.5 million has been accounted as treasury shares in the Company's consolidated
financial statements. The market value of the stock as of December 31, 2002 is
approximately Euro 24.6 million (U.S. Dollars 26.0 million).
12. SEGMENTS AND RELATED INFORMATION
Luxottica Group adopted SFAS No. 131, ("Disclosures About Segments of an
Enterprise and Related Information"), in 1998. The Company operates in two
industry segments: manufacturing and wholesale distribution, and retail
distribution. Through its manufacturing and wholesale distribution operations,
Luxottica Group is engaged in the design, manufacturing, wholesale distribution
and marketing of house brand and designer lines of mid- to premium-priced
prescription frames and suglasses. The Company operates in the retail segment
through its Optical Retail Division, consisting of LensCrafters, Inc. and, since
April 2001, Sunglass Hut International. As of December 31, 2002, LensCrafters
operated 882 stores throughout the United States of America, Canada and Puerto
Rico and Sunglass Hut operated 1,914 stores located internationally in North
America, Europe and Australia.
The following tables summarize the segmental and geographic information
deemed essential by the Company's management for the purpose of evaluating the
Company's performance and for making decisions about future allocations of
resources.
The "Inter-segments transactions and corporate adjustments" column includes
the elimination of inter-segment activities and corporate related expenses not
allocated to reportable segments. This has
F-27
the effect of increasing reportable operating profit for the manufacturing and
wholesale and retail segments. Identifiable assets are those tangible and
intangible assets used in operations in each segment. Corporate identifiable
assets are principally cash, goodwill and trade names.
----------------------------------------------------------------------------------------------------
Inter-segments
(thousands of Euro) Manufacturing transactions
Year Ended and and corporate
December 31, wholesale Retail adjustments Consolidated
----------------------------------------------------------------------------------------------------
2002
Net revenues 1,128,670 2,158,346 (154,815) 3,132,201
Operating income 287,627 319,425 (5,544) 601,508
Capital expenditure 81,651 91,679 -- 173,330
Depreciation and amortization 46,298 77,217 22,465 145,980
Identifiable assets 1,431,317 882,113 1,272,902 3,586,332
2001
Net revenues 1,146,595 2,112,575 (194,263) 3,064,907
Operating income 287,570 320,149 (98,227) 509,492
Capital expenditure 45,801 77,674 -- 123,475
Depreciation and amortization 63,162 84,288 64,457 211,907
Identifiable assets 1,327,993 954,653 1,665,716 3,948,362
2000
Net revenues 1,076,241 1,444,536 (103,989) 2,416,788
Operating income 253,596 202,298 (43,973) 411,921
Capital expenditure 40,512 37,846 -- 78,358
Depreciation and amortization 68,828 62,808 43,595 175,231
Identifiable assets 1,498,789 547,271 922,148 2,968,208
----------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
(thousands of Euro) Adjustments
Year Ended North and
December 31, Italy (6) America (6) Other (6) eliminations Consolidated
------------------------------------------------------------------------------------------------------
2002
Net revenues(5) 1,009,882 2,274,390 675,941 (828,012) 3,132,201
Operating income 207,250 323,038 82,187 (10,965) 601,508
Identifiable assets 974,412 2,457,955 421,748 (267,783) 3,586,332
2001
Net revenues(5) 996,442 2,283,939 622,331 (837,805) 3,064,907
Operating income 240,581 328,518 68,752 (128,359) 509,492
Identifiable assets 1,161,117 2,828,158 416,278 (457,191) 3,948,362
2000
Net revenues(5) 889,788 1,713,660 563,150 (749,810) 2,416,788
Operating income 217,463 222,618 51,294 (79,454) 411,921
Identifiable assets 914,253 1,769,638 396,428 (112,111) 2,968,208
------------------------------------------------------------------------------------------------------
(5) No single customer represents 5 percent or more of sales in any year
presented
(6) Sales, operating income and identifiable assets are the result of
combination for legal entities located in the same geographic area
Certain amounts for the years 2001 and 2000 have been reclassified to conform to
the 2002 presentation.
F-28
13. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE RISK MANAGEMENT
Luxottica Group may enter into foreign currency futures contracts on a
continuing basis for periods consistent with its managed foreign currency
exposures. The Company in certain circumstances does this to minimize the impact
of foreign exchange rate movements on the Company's operating results.
As of December 31, 2001, Luxottica Group had one outstanding contract to
sell U.S. Dollars 107 million on January 31, 2002. This contract was denoted as
a fair value hedge of the receivable balance from a U.S. subsidiary.
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers comprising the Company's customer
base. Ongoing credit evaluations of customer's financial condition are
performed.
CONCENTRATION OF SUPPLIER RISK
As result of the Sunglass Hut International acquisition, Oakley Inc. has
become the Luxottica Group's largest supplier. For the 2001 and 2002 fiscal
years, Oakley accounted for approximately 9.1 percent and 11.8 percent of the
Company's total merchandise purchases, respectively. In December 2001 Luxottica
Group signed a three years purchase contract with Oakley. Management believes
that the loss of this vendor would not cause a significant impact on the future
operations of the Company as it could replace this vendor quickly with other
third party and Luxottica Group manufactured products.
14. COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENTS
Luxottica Group is obligated under non-cancelable distribution agreements
with designers, which expire at various dates through 2006. In accordance with
the provisions of such agreements, the Company is required to pay royalties and
advertising fees based on a percentage of sales (as defined) with, in certain
agreements, minimum guaranties of such payments in each year of the agreements.
In November 2002, Luxottica Group announced that its license agreement for the
production and distribution of the Giorgio Armani and Emporio Armani eyewear
collections will terminate in the first half of 2003.
Minimum payments required in each of the years subsequent to December 31,
2002 are detailed as follows (thousands of Euro):
----------------------------------------------------------------------
YEARS ENDING DECEMBER 31,
2003 18,441
2004 15,303
2005 2,305
2006 2,305
2007 --
TOTAL 38,354
----------------------------------------------------------------------
LEASES AND LICENSES
Luxottica Group leases through its worldwide subsidiaries various retail
store, plant, warehouse and office facilities, as well as certain of its data
processing and automotive equipment under lease arrangements expiring between
2002 and 2015, with options to renew at varying terms. The lease and license
arrangements for the Company's U.S. retail locations often include escalation
clauses and provisions requiring the payment of incremental rentals, in addition
to any established minimums contingent upon the achievement of specified levels
of sales volume.
F-29
Future minimum annual rental commitments are as follows (thousands of Euro):
----------------------------------------------------------------------
YEARS ENDING DECEMBER 31,
2003 145,986
2004 132,461
2005 121,739
2006 102,120
2007 75,267
Thereafter 118,907
TOTAL 696,480
----------------------------------------------------------------------
Total rent expense for the years ended December 31, 2000, 2001 and 2002
aggregated Euro 101.1 million, Euro 203.7 million and Euro 276.5 million,
respectively.
CREDIT FACILITIES
As of December 31, 2001 and 2002 Luxottica Group had unused short-term lines
of credit of approximately Euro 395.3 million and Euro 308.1 million,
respectively.
These lines of credit are renewed annually and are guaranteed by the
Company. At December 31, 2002, there was principal amount of borrowings
out-standing and Euro 8.8 million in aggregate face amount of standby letters of
credit outstanding under these lines of credit (see below).
OUTSTANDING STAND BY LETTERS OF CREDIT
A U.S. subsidiary has obtained various standby letters of credit from banks
that aggregate Euro 9.8 million as of December 31, 2002. Most of these letters
of credit are used for security in risk management contracts or as security on
store leases. Most contain evergreen clauses under which the letter is
automatically renewed unless the bank is notified not to renew.
LITIGATION
Luxottica Group and certain of its subsidiaries are named as defendants in
an action pending in the U.S. District Court for the Central District of
California for patent infringement and related claims originally commenced by
Oakley, Inc. ("Oakley") in 1998 against Bausch & Lomb Incorporated and certain
of its subsidiaries. The alleged liability of the defendants in this action is
premised on the fact that, in connection with the Company's acquisition of the
Ray-Ban business in 1999, Luxottica Group assumed certain of Bausch & Lomb's
liabilities, including the potential liability in this case. Oakley is seeking
lost profits and damages for the alleged patent infringement and has asked that
the damages be trebled for willful infringement. Various amendments of the
complaint have been filed and the defendants have filed an answer to the
complaint and certain counterclaims against Oakley. A tentative trial date of
March 16, 2004 has been set. Luxottica Group intends to defend against Oakley's
claims and assert its own claims vigorously and believes that such defenses and
claims are meritorious, but can provide no assurance as to the likely outcome of
the case.
In November 2001, Oakley filed a second action in the same Court naming
Luxottica Group and certain of its subsidiaries as defendants. The complaint
alleges that the defendants purportedly misappropriated what Oakley claims as
certain of its trade dress, allegedly consisting of sunglasses that feature
coordinated colored lenses, frames and ear stems. The complaint also asserts
that two colors of lens coatings used in manufacturing by the Company and sold
by its subsidiaries infringe on an Oakley patent that is also involved in the
first action. Oakley seeks a permanent injunction and compensatory and punitive
damages. In November 2001, the Court granted a preliminary injunction that
prohibits the defendants from offering, selling and importing sunglasses
featuring the lenses having the coating. In December 2001, the defendants filed
an answer and counterclaims, denying the allegations in Oakley's complaint in
all material respects. Defendants' counterclaims assert that Oakley's patent and
claimed trade dress should both be declared to be invalid and unenforceable. A
tentative trial date of April 27,
F-30
2004 has been set. The Company also intends to defend against Oakley's claims
and assert its own claims vigorously in this second action and believes that
such defenses and claims are meritorious, but can provide no assurance as to the
likely outcome of the case.
In November 1999, Lantis Eyewear, Inc. ("Lantis"), a former distributor of
Baush & Lomb, filed a complaint against Luxottica Group and one of its
subsidiaries claiming that, in terminating its distribution agreement with
Lantis, the Company allegedly breached the agreement. In October 2000, the Court
granted a motion by Luxottica Group to dismiss certain other claims made by
Lantis, leaving only the breach of contract claim. The Company in November 2000
filed its answer and counterclaim agaist Lantis. In December 2002, the parties
entered into a mutual release and settlement agreement and the case was
dismissed with prejudice. This settlement did not have a material impact on the
Company's 2002 consolidated financial statements.
In May 2001, certain former stockholders of Sunglass Hut
International, Inc. commenced an action in the U.S. District Court for the
Eastern District of New York against the Company, its acquisition subsidiary
formed to acquire Sunglass Hut International and certain other defendants, on
behalf of a purported class of former Sunglass Hut International stockholders,
alleging in the original and in the amended complaint filed later, among other
claims, that the defendants violated certain provisions of U.S. securities, laws
and rules there under in connection with the acquisition of Sunglass Hut
International in a tender offer and second-step merger, by reason of entering
into a consulting, non-disclosure and non-competition agreement, prior to the
commencement of the tender offer, with the former chairman of Sunglass Hut
International, which purportedly involved paying consideration to such person
for his Sunglass Hut International shares and his support of the tender offer
that was higher than that paid to Sunglass Hut International's stockholders in
the tender offer. Luxottica Group and the other defendants have filed a motion
to dismiss the complaint in its entirety, and such motion is pending. The
Company intends to defend against such claims vigorously and believes that its
defenses are meritorious, but can provide no assurance as to the likely outcome
of the case.
In late 2002 Luxottica Group was informed that the Attorney General of the
State of New York is conducting an investigation into the Company's pricing and
distribution practices relating to sunglasses under applicable state and federal
antitrust laws. Luxottica Group intends to fully cooperate with this
investigation by providing documents and other information to the New York
Attorney General. Although the Company believes it has not violated any
applicable antitrust laws, it is unable at this time to predict the outcome or
timing of this investigation.
Luxottica Group and its subsidiaries are defendants in various lawsuits
arising in the ordinary course of business. It is the opinion of management of
the Company that it has meritorious defenses against all outstanding claims,
which Luxottica Group will vigorously pursue, and that the outcome will not have
a material adverse effect on either the Company's consolidated financial
position or results of operations.
15. SUBSEQUENT EVENTS
In January 2003, Luxottica Group announced the signing of a worldwide license
agreement for the design, production and distribution of Versace, Versus and
Versace Sport sunglasses and prescription frames. The initial ten-year agreement
is renewable, at the Company's discretion for an additional ten years.
* * * * *
F-31
LUXOTTICA GROUP S.p.A. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(Amounts expressed in Euro thousands)
Year ended Balance at Charged to costs
December 31 beginning of and expenses Other Deductions Balance at end
period of period
------------------------------------------------------------------------------------------------------------------
2000 15,584 7,301 (229) (4,553) 18,103
2001 18,103 5,884 (128) (1,426) 22,433
2002 22,433 4,699 (1,665) (7,369) 18,098
F-32
ITEM 19. EXHIBITS
EXHIBITS. The following documents are filed as exhibits herewith, unless
otherwise specified and are incorporated herein by reference:
Exhibit
Number Exhibits
------- --------
1.1 Articles of Association of Luxottica Group S.p.A. (incorporated
by reference to Amendment No. 3 to Form F-1 (file No.
33-32039) filed with the Commission on January 23, 1990).
1.2 Amended and Restated By-laws of Luxottica Group S.p.A.
(incorporated by reference to our Annual Report on Form 20-F
for the fiscal year ended December 31, 1999, as filed with
the Commission on June 30, 2000) (Unofficial English
translation filed therewith).
2.1 Deposit Agreement among Luxottica Group S.p.A., The Bank of
New York, as Depositary, and the holders from time to time
of American Depositary Receipts, as amended and restated as
of July 16, 2001, including the form of American Depositary
Receipt annexed thereto (incorporated by reference to our
Annual Report on Form 20-F for the year ended December 31, 2001,
as filed with the Commission on June 28, 2002).
2.2 Subscription Agreement, dated June 18, 1999, from Luxottica
Luxembourg S.A. and Luxottica Group S.p.A., as guarantor of
the Notes, to Credit Suisse First Boston (Europe) Limited
and UniCredito Italiano S.p.A., as joint lead managers and
Banca Commerciale Italiana, Banca d'Intermediazione
Mobiliare IMI, Bayerische Hypo-und Vereinsbank AG, Caboto
Holding SIM S.p.A., Merrill Lynch International and Paribas,
as managers (incorporated by reference to our Report on Form
6-K dated November 19, 1999, as filed with the Commission on
November 23, 1999).
2.3 Fiscal Agency Agreement, dated June 25, 1999, between Luxottica
Luxembourg S.A., Luxottica Group S.p.A., Bankers Trust
Company, Bankers Trust Luxembourg S.A., and Credit Suisse
First Boston (incorporated by reference to our Report on
Form 6-K dated November 19, 1999, as filed with the
Commission on November 23, 1999).
4.1 Purchase Agreement, dated as of April 28, 1999, between
Bausch & Lomb Incorporated and Luxottica Group S.p.A.
(incorporated by reference to our Annual Report on Form 20-F
for the fiscal year ended December 31, 1998, as filed with
the Commission on June 30, 1999).
85
Exhibit
Number Exhibits
------- --------
4.2 First Amendment to Purchase Agreement, dated June 25, 1999,
between Bausch & Lomb Incorporated and Luxottica Group
S.p.A. (incorporated by reference to our Annual Report on
Form 20-F for the fiscal year ended December 31, 1998, as
filed with the Commission on June 30, 1999).
4.3 Second Amendment to Purchase Agreement, dated January 14, 2000,
between Bausch & Lomb Incorporated and Luxottica Group
S.p.A. (incorporated by reference to our Annual Report on
Form 20-F for the fiscal year ended December 31, 1999, as
filed with the Commission on June 30, 2000).
4.4 Third Amendment to Purchase Agreement, dated as of February 3, 2000,
between Bausch & Lomb Incorporated and Luxottica Group
S.p.A. (incorporated by reference to our Annual Report on
Form 20-F for the fiscal year ended December 31, 1999, as
filed with the Commission on June 30, 2000).
4.5 Schedules to Purchase Agreement, dated April 28, 1999,
between Luxottica Group S.p.A and Bausch & Lomb Incorporated
(incorporated by reference to our Report on Form 6-K dated
November 19, 1999, as filed with the Commission on November
23, 1999).
4.6 Letter Agreement, dated June 25, 1999, between Luxottica Group
S.p.A. and Bausch and Lomb Incorporated (incorporated by
reference to our Report on Form 6-K dated November 19, 1999,
as filed with the Commission on November 23, 1999).
4.7 Letter Agreement, dated March 28, 2000, between Luxottica
Group S.p.A. and Giorgio Armani S.p.A. (incorporated by
reference to our Report on Form 6-K for the quarter ended
June 30, 2000, as filed with the Commission on October 6,
2000) (Unofficial English translation filed therewith).
4.8 Letter Agreement, dated March 31, 2000, between Luxottica U.K.
and G.A. International Diffusion B.V. (incorporated by
reference to our Report on Form 6-K for the quarter ended
June 30, 2000, as filed with the Commission on October 6,
2000) (Unofficial English translation filed therewith).
4.9 Letter Agreement, dated September 14, 2000, between Luxottica
Group S.p.A. and Giorgio Armani S.p.A. (incorporated by
reference to our Report on Form 6-K for the quarter ended
September 30, 2000, as filed with the Commission on November
20, 2000) (Unofficial English translation filed therewith).
86
Exhibit
Number Exhibits
------- --------
4.10 Letter Agreement, dated September 19, 2000, between
Luxottica U.K. Ltd. and G.A. International Diffusion B.V.
(incorporated by reference to our Report on Form 6-K for the
quarter ended September 30, 2000, as filed with the
Commission on November 20, 2000) (Unofficial English
translation filed therewith).
4.11 Letter Agreement, dated December 14, 2001, between Luxottica Group
S.p.A. and Giorgio Armani S.p.A. (incorporated by reference
to our Annual Report on Form 20-F for the year ended December 31, 2001,
as filed with the Commission on June 28, 2002) (Unofficial English
translation filed therewith).
4.12 Letter Agreements, dated December 14, 2001, between Luxottica U.K. Ltd.
and G.A. International Diffusion B.V. (incorporated by
reference to our Annual Report on Form 20-F for the year ended
December 31, 2001, as filed with the Commission on June 28, 2002)
(Unofficial English translations filed therewith).
4.13 Agreement and Plan of Merger, dated as of February 22, 2001, by and
among Luxottica Group S.p.A., Shade Acquisition Corp. and
Sunglass Hut International, Inc. (incorporated by reference
to our Report on Form 6-K, dated March 23, 2001, as filed with
the Commission on April 18, 2001).
4.14 Luxottica Group S.p.A. 1998 Stock Option Plan (incorporated by
reference to our Form S-8, dated October 20, 1998, as filed
with the Commission on October 23, 1998).
4.15 Luxottica Group S.p.A. 2001 Stock Option Plan (incorporated
by reference to our Form S-8 (file no. 333-14006), as filed
with the Commission on October 15, 2001).
4.16 Credit Agreement, dated June 13, 2002, among Luxottica U.S. Holdings
Corp., Luxottica Group S.p.A., UBM-Unicredit Banca Mobiliare
S.p.A., UniCredito Italiano S.p.A., Banca Monte Dei Paschi
Di Siena S.p.A., Banca Nazionale del Lavoro S.p.A. and San
Paolo IMI S.p.A. (incorporated by reference to our Report on
Form 6-K for the quarter ended March 31, 2002, as filed with
the Commission on July 15, 2002) (Unofficial English
translation filed therewith).
4.17 Credit Agreement, dated as of December 11, 2002, between Luxottica Group
S.p.A. and Banca Intesa S.p.A., as arranger for other
financial institutions (Unofficial English summary).
8.1 List of Subsidiaries.
99.1 906 Certification
99.2 906 Certification
87
Exhibit
Number Exhibits
------- --------
99.3 Bidder's Statement, dated June 10, 2003, from Luxottica South Pacific Pty
Limited to the shareholders of OPSM Group Ltd.
88
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
LUXOTTICA GROUP S.p.A.
(Registrant)
By: /s/ Roberto Chemello
-----------------------------
Roberto Chemello
Chief Executive Officer
Dated: June 30, 2003
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Roberto Chemello, certify that:
1. I have reviewed this annual report on Form 20-F of Luxottica Group
S.p.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By: /s/ Roberto Chemello
-----------------------------
Roberto Chemello
Chief Executive Officer
Dated: June 27, 2003
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Enrico Cavatorta, certify that:
1. I have reviewed this annual report on Form 20-F of Luxottica Group
S.p.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By: /s/ Enrico Cavatorta
--------------------
Enrico Cavatorta,
Chief Financial Officer
Dated: June 27, 2003
EXHIBIT INDEX
Exhibit
Number Exhibits
------- --------
1.1 Articles of Association of Luxottica Group S.p.A. (incorporated by
reference to Amendment No. 3 to Form F-1 (file No. 33-32039)
filed with the Commission on January 23, 1990).
1.2 Amended and Restated By-laws of Luxottica Group S.p.A.
(incorporated by reference to our Annual Report on Form 20-F
for the fiscal year ended December 31, 1999, as filed with the
Commission on June 30, 2000) (Unofficial English translation
filed therewith).
2.1 Deposit Agreement among Luxottica Group S.p.A., The Bank of
New York, as Depositary, and the holders from time to time of
American Depositary Receipts, as amended and restated as of
July 16, 2001, including the form of American Depositary
Receipt annexed thereto (incorporated by reference to our
Annual Report on Form 20-F for the year ended December 31, 2001, as
filed with the Commission on June 28, 2002).
2.2 Subscription Agreement, dated June 18, 1999, from Luxottica
Luxembourg S.A. and Luxottica Group S.p.A., as guarantor of
the Notes, to Credit Suisse First Boston (Europe) Limited and
UniCredito Italiano S.p.A., as joint lead managers and Banca
Commerciale Italiana, Banca d'Intermediazione Mobiliare IMI,
Bayerische Hypo-und Vereinsbank AG, Caboto Holding SIM S.p.A.,
Merrill Lynch International and Paribas, as managers
(incorporated by reference to our Report on Form 6-K dated
November 19, 1999, as filed with the Commission on November
23, 1999).
2.3 Fiscal Agency Agreement, dated June 25, 1999, between Luxottica
Luxembourg S.A., Luxottica Group S.p.A., Bankers Trust
Company, Bankers Trust Luxembourg S.A., and Credit Suisse
First Boston (incorporated by reference to our Report on Form
6-K dated November 19, 1999, as filed with the Commission on
November 23, 1999).
4.1 Purchase Agreement, dated as of April 28, 1999, between Bausch
& Lomb Incorporated and Luxottica Group S.p.A. (incorporated
by reference to our Annual Report on Form 20-F for the fiscal
year ended December 31, 1998, as filed with the Commission on
June 30, 1999).
4.2 First Amendment to Purchase Agreement, dated June 25, 1999,
between Bausch & Lomb Incorporated and Luxottica Group S.p.A.
(incorporated by reference to our Annual Report on Form 20-F
for the fiscal year ended December 31, 1998, as filed with the
Commission on June 30, 1999).
Exhibit
Number Exhibits
------- --------
4.3 Second Amendment to Purchase Agreement, dated January 14,
2000, between Bausch & Lomb Incorporated and Luxottica Group
S.p.A. (incorporated by reference to our Annual Report on Form
20-F for the fiscal year ended December 31, 1999, as filed
with the Commission on June 30, 2000).
4.4 Third Amendment to Purchase Agreement, dated as of February 3, 2000,
between Bausch & Lomb Incorporated and Luxottica Group S.p.A.
(incorporated by reference to our Annual Report on Form 20-F
for the fiscal year ended December 31, 1999, as filed with the
Commission on June 30, 2000).
4.5 Schedules to Purchase Agreement, dated April 28, 1999, between
Luxottica Group S.p.A and Bausch & Lomb Incorporated
(incorporated by reference to our Report on Form 6-K dated
November 19, 1999, as filed with the Commission on November
23, 1999).
4.6 Letter Agreement, dated June 25, 1999, between Luxottica Group S.p.A.
and Bausch and Lomb Incorporated (incorporated by reference to
our Report on Form 6-K dated November 19, 1999, as filed with
the Commission on November 23, 1999).
4.7 Letter Agreement, dated March 28, 2000, between Luxottica Group S.p.A.
and Giorgio Armani S.p.A. (incorporated by reference to our
Report on Form 6-K for the quarter ended June 30, 2000, as
filed with the Commission on October 6, 2000) (Unofficial
English translation filed therewith).
4.8 Letter Agreement, dated March 31, 2000, between Luxottica U.K. and
G.A. International Diffusion B.V. (incorporated by reference
to our Report on Form 6-K for the quarter ended June 30, 2000,
as filed with the Commission on October 6, 2000) (Unofficial
English translation filed therewith).
4.9 Letter Agreement, dated September 14, 2000, between Luxottica Group S.p.A.
and Giorgio Armani S.p.A. (incorporated by reference to our
Report on Form 6-K for the quarter ended September 30, 2000,
as filed with the Commission on November 20, 2000) (Unofficial
English translation filed therewith).
4.10 Letter Agreement, dated September 19, 2000, between Luxottica U.K. Ltd.
and G.A. International Diffusion B.V. (incorporated by
reference to our Report on Form 6-K for the quarter ended
September 30, 2000, as filed with the Commission on November
20, 2000) (Unofficial English translation filed therewith).
4.11 Letter Agreement, dated December 14, 2001, between Luxottica
Group S.p.A. and Giorgio Armani S.p.A. (incorporated by
reference to our Annual Report on Form 20-F for the year ended
December 31, 2001, as filed with the Commission on June 28,
2002) (Unofficial English translation filed therewith).
Exhibit
Number Exhibits
------- --------
4.12 Letter Agreements, dated December 14, 2001, between Luxottica U.K. Ltd.
and G.A. International Diffusion B.V. (incorporated by reference to our
Annual Report on Form 20-F for the year ended December 31, 2001, as filed with
the Commission on June 28, 2002) (Unofficial English translations filed
therewith).
4.13 Agreement and Plan of Merger, dated as of February 22, 2001, by and
among Luxottica Group S.p.A., Shade Acquisition Corp. and Sunglass Hut
International, Inc. (incorporated by reference to our Report on Form 6-K,
dated March 23, 2001, as filed with the Commission on April 18, 2001).
4.14 Luxottica Group S.p.A. 1998 Stock Option Plan (incorporated by reference
to our Form S-8, dated October 20, 1998, as filed with the Commission on
October 23, 1998).
4.15 Luxottica Group S.p.A. 2001 Stock Option Plan (incorporated by reference
to our Form S-8 (file no. 333-14006), as filed with the Commission on
October 15, 2001).
4.16 Credit Agreement, dated June 13, 2002, among Luxottica U.S. Holdings Corp.,
Luxottica Group S.p.A., UBM-Unicredit Banca Mobiliare S.p.A., UniCredito
Italiano S.p.A., Banca Monte Dei Paschi Di Siena S.p.A., Banca Nazionale
del Lavoro S.p.A. and San Paolo IMI S.p.A. (incorporated by reference to
our Report on Form 6-K for the quarter ended March 31, 2002, as filed
with the Commission on July 15, 2002) (Unofficial English translation
filed therewith).
4.17 Credit Agreement, dated as of December 11, 2002, between Luxottica Group S.p.A. and
Banca Intesa S.p.A., as arranger for other financial institutions
(Unofficial English summary).
8.1 List of Subsidiaries.
99.1 906 Certification
99.2 906 Certification
99.3 Bidder's Statement, dated June 10, 2003, from Luxottica South Pacific Pty
Limited to the shareholders of OPSM Group Ltd.