Gruppo Benetton Bilancio consolidato 2004
Benetton Group Annual Report 2004
Benetton Group Annual Report 2004
Benetton Group S.p.A. Villa Minelli Ponzano Veneto [Treviso] - Italy Share Capital: Euro 236,026,454.30 fully paid Tax ID/Treviso Company register: 00193320264
The Benetton Group 5 Directors and other officers 7 Letter to Shareholders from the Chairman and Founder of the Benetton Group, Luciano Benetton 8 Financial highlights
11 Directors’ report Markets, trademarks and licenses 12 Production organization 14 Human resources Information Technology
INDEX
15 Accounting, tax and corporate organization Investor Relations 16 Communications 17 Corporate Governance 2 25 Supplementary information Benetton shares and shareholdings 27 Performance of Benetton shares 29 Relationships between the parent company, its subsidiaries and other related parties Management of financial risks 30 Privacy and the protection of personal data 31 Directors Principal organizational and corporate changes 32 Significant events since year-end Outlook for 2005 33 Group consolidated results Consolidated statement of income 35 Performance by activity 37 Financial situation - highlights
42 Impact of introducing IAS/IFRS Development of the relative regulatory framework IAS/IFRS conversion process for the Benetton Group
47 Consolidated financial statements 48 Consolidated balance sheet reclassified according to financial criteria 50 Consolidated statement of income with revenues and cost of sales reclassified 52 Consolidated balance sheet – Assets 54 Consolidated balance sheet – Liabilities, Shareholders’ equity and Memorandum accounts 56 Consolidated statement of income
59 Statement of changes in minority interests
INDEX
58 Statement of changes in Shareholders’ equity
60 Consolidated statement of cash flow
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62 Companies and groups included in the consolidation as of December 31, 2004
65 Notes to the consolidated financial statements Activities of the Group Form and content of the consolidated financial statements 66 67 70 73 82 90 91
Principles of consolidation Accounting principles and valuation criteria Supplementary information Comments on principal asset items Comments on principal liability and equity items Memorandum accounts Comments on principal items in the statement of income
100 Auditors’ report 101 Glossary 107 2005 financial calendar
Main consolidated companies as of December 31, 2004 Benetton Group SpA Ponzano Veneto [Tv] 100%0% Benind SpA Ponzano Veneto [Tv]
100% Benetton Retail Italia Srl Ponzano Veneto [Tv]
100% Bentec SpA Ponzano Veneto [Tv]
100% Bencom Srl Ponzano Veneto [Tv]
100% Olimpias SpA Ponzano Veneto [Tv]
50% Filatura di Vittorio Veneto SpA Vittorio Veneto [Tv]
100% Benair SpA Ponzano Veneto [Tv]
100% SIGI Srl Ponzano Veneto [Tv]
100% Buenos Aires 2000 Srl Ponzano Veneto [Tv]
100% Fabrica SpA Ponzano Veneto [Tv]
100% Colors Magazine Srl Ponzano Veneto [Tv]
100% Benetton International SA Luxembourg
3% Benetton Real Estate Austria GmbH, Wien
100% Benetton Retail Ungheria Kft Nagykallo
100% Benetton Retail [1988] Ltd London
100% Denware Ltd London
100% Benetton Retail Spain SL Barcelona
100% Benetton Retail Deutschland GmbH, München
51% New Ben GmbH Frankfurt am Main
100% Benetton International Property NV SA, Amsterdam
100% Benetton 2 Retail Comércio de Produtos Têxteis SA, Maia [Portugal] 100% Benetton Realty Spain SL Barcelona 100% Benetton Real Estate International SA, Luxembourg
97% Benetton Real Estate Austria GmbH, Wien
100% Benetton France Sàrl Paris
100% Benetton Realty Russia OOO Moscow
100% Benetton Realty Portugal Imobiliaria SA, Maia [Portugal]
100% Benetton Real Estate Belgique SA, Bruxelles
100% Benetton Real Estate Spain SL Barcelona
100% Benetton Deutschland GmbH München
100% Benetton USA Corp. Wilmington
100% Benetton Australia Pty Ltd Sydney
100% Benetton Realty France SA Paris
100% Benetton Holding International NV SA, Amsterdam
100% Benetton Argentina SA Buenos Aires
100% Benetton Austria GmbH Salzburg
100% DCM Benetton India Ltd New Delhi
100% Benetton Ungheria Kft Nagykallo
100% 100% United Colors Communication SA Benetton Trading USA Inc Lawrenceville Lugano
100% Benetton Manufacturing Holding NV, Amsterdam
100% Benetton Croatia doo Osijek
100% Benetton Têxtil - Confecção de Têxteis SA, Maia [Portugal]
100% Benetton Slovakia sro Dolny Kubin
100% Benetton Manufacturing Tunisia Sàrl, Sahline
100% Benetton Japan Co Ltd Tokyo
50% Benetton Korea Inc Seoul
100% Benetton Retailing Japan Co Ltd Tokyo
100% Benetton Finance SA Luxembourg
100% Benetton Società di Servizi SA Lugano
100% Lairb Property Ltd Dublin
100% Benetton Tunisia Sàrl Sahline
100% Benetton Trading Sàrl Sahline
100% Benetton Asia Pacific Ltd Hong Kong 100% United Colors of Benetton Do Brasil Ltda, Curitiba
Directors and other officers
Luciano Benetton [1]
Chairman
Carlo Benetton
Deputy Chairman
Silvano Cassano [2]
Managing Director
Giuliana Benetton Gilberto Benetton Alessandro Benetton Reginald Bartholomew Luigi Arturo Bianchi Sergio De Simoi Gianni Mion Ulrich Weiss
Directors
Pierluigi Bortolussi
Secretary to the Board
Board of Statutory Auditors Angelo Casò
Chairman
Filippo Duodo Dino Sesani
Auditors
Antonio Cortellazzo Marco Leotta
Alternate Auditors
Independent Auditors PricewaterhouseCoopers S.p.A.
Powers granted [1]
Company representation and power to carry out
[2]
Power to carry out any action relating to the
any action that is consistent with the Company’s
ordinary administration of the Company as well
purposes, except for those expressly reserved
as certain acts of extraordinary administration
by law to the Board of Directors and to the
subject to limits on values.
Shareholders’ Meeting, with limitation on some categories of action.
D I R E C TO R S A N D OT H E R O F F I C E R S
Board of Directors
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Letter to Shareholders from the Chairman and Founder of the Benetton Group, Luciano Benetton Dear Shareholders,
In fact, we are convinced that being entrepreneurs means believing in the future and in our abilities, taking advantage of difficult times in the market to become more competitive. And to invest more in the distribution network as well as in pricing policies that are more attractive to the customer. In 2005, in particular, we intend to increase our commitment, earmarking resources of more than 200 million euro for development: with investments directed at restyling stores and new openings, as well as at the product, in order to achieve an even more excellent quality-price ratio, and at style and service to the network. These are important commitments that we take on with conviction and optimism because we believe in our network distribution model – a widespread presence in the world, in large capitals as well as in smaller towns – in cooperation with partners who, in turn, believe and invest in our common development plan. And these are responsible choices, directed towards future growth, which can be achieved only by those with substantial economic strength and constantly reducing financial position.
Luciano Benetton Chairman of the Benetton Group
L E T T E R TO S H A R E H O L D E R S
2004 closes with the distribution of dividends totaling 50% of net income [which was higher than forecasted], demonstrating the policy of the Benetton Group to create value for the shareholders and the market. During the year, we confirmed our talent for exporting, making 50% of total sales abroad. Having always adopted the practice of thinking and planning with a long-term entrepreneurial mentality, we intend to stay ahead of the competition, concentrating on emerging markets like China and India, where we are already among the principal western players in the clothing sector. In the Chinese market, we distribute our products; and India, where we produce and distribute, is our bridgehead to entry into other Asian countries.
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Financial highlights Key operating data [millions of euro] Revenues Cost of sales Gross operating income Contribution margin EBITDA Income from operations Net income/[loss] for the year
2004 1,686 929 757 653 317 217 123
Key financial data [millions of euro] Working capital Assets due to be sold Net capital employed Net financial position Shareholders’ equity Self-financing Investments in tangible and intangible fixed assets Purchase of equity investments
2004 688 8 1,668 431 1,230 312
2003 729 8 1,655 468 1,174 327
2002 798 114 1,768 613 1,141 349
2001 811 1,896 640 1,241 374
2000 772 1,723 536 1,175 311
152 22
151 19
169 1
311 -
305 7
Financial ratios [in %] Return on equity [ROE] Return on investments [ROI] EBITDA Return on sales [ROS] Net income [loss]/Revenues
2004 10.0 13.0 18.8 12.9 7.3
2003 9.2 14.0 18.0 12.5 5.8
2002 [0.9] 13.7 18.8 12.2 [0.5]
2001 11.9 15.1 19.0 13.6 7.1
2000 20.7 17.9 19.8 15.3 12.1
2004 0.68 6.77 0.34 50 3.9 9.74 10.18 8.33 14.3 1.4 1,768 181,558,811 181,558,811
2003 0.59 6.47 0.38 64 3.8 9.11 11.30 5.90 15.4 1.4 1,654 181,558,811 181,558,811
2002 [0.05] 6.29 0.35 n.a. 4.8 8.50 15.90 8.50 n.a. 1.4 1,543 181,341,018 181,558,811
2001 0.82 6.86 0.41 50 3.6 12.72 22.44 9.75 15.5 1.9 2,309 180,720,969 181,558,811
2000 1.35 6.50 0.46 37 4.8 22.01 24.20 18.71 16.5 3.4 3,996 180,505,910 181,558,811
Share and market data Earnings/[Loss] per share [euro] [1] Shareholders’ equity per share [euro] [1] Dividend per share [euro] [1] Pay out ratio [%] Dividend yield Share price: December 31 [euro] Screen-based market: high [euro] Screen-based market: low [euro] Price/earnings ratio [P/E] Share price/Shareholders’ equity per share Market capitalization [millions of euro] Average no. of shares outstanding [2] Number of shares outstanding
% 100.0 55.1 44.9 38.7 18.8 12.9 7.3
2003 1,859 1,049 810 696 335 232 108
[1]
Restated after a reverse split of the shares approved by Shareholders’ Meeting on May 8, 2001.
[2]
Net of treasury shares held during the year.
% 100.0 56.4 43.6 37.4 18.0 12.5 5.8
2002 1,992 1,124 868 744 376 243 [10]
% 100.0 56.4 43.6 37.3 18.8 12.2 [0.5]
2001 2,098 1,189 909 776 398 286 148
% 100.0 56.7 43.3 37.0 19.0 13.6 7.1
2000 % 2,018 100.0 1,138 56.4 880 43.6 740 36.7 400 19.8 309 15.3 243 12.1
2004 revenues by activity [in %]
Sportswear and equipment 4.4% Manufacturing and other 6.4% Casual 89.2%
Ricavi 2004 per area geografica (in %)
2004 revenues by geographical area [in %] Ricavi netti
FINANCIAL HIGHLIGHTS
Rest of the world 0.3% Asia 10.3% The Americas 4.3% Europe 85.1%
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Net revenues [millions of euro]
Ricavi netti
1,686
2004
1,859
2003
1,992
2002
2,098
2001
2,018
2000
Total capital expenditures and self-financing [millions of euro] 174
2004
312 170
2003
327 170
2002
349 311
2001
374 312 311 Total capital expenditures Self-financing
2000
The Benetton Group, in 2004, can be briefly summarized as follows: consolidated revenues of 1,686 million euro, impacted by the sale of the sports equipment business [completed during the first half of 2003] and by continuing unfavorable trends in the principal foreign currency exchange rates; increasing net income, in line with forecasts, and a satisfying cash flow, with a significant gain in efficiency on the costs front; balance sheet strength, confirmed as being of the first order. With consumers being very cautious in their spending and a deflationary trend generated by both economic uncertainty and the ending of the multifiber agreement with China, the market is presenting complex challenges. The economic environment, in the principal European markets in particular, continues to be cautious.
In conclusion, we believe that we have strong foundations for the competitive relaunch of our business model in the medium term, which will enable the Group to compete in all international markets in future years.
Silvano Cassano Managing Director
D I R E C TO R S ’ R E P O RT
But the Group can count on significant strengths to compete in this highly competitive situation. I would particularly like to mention, on the one hand, a network of expert and experienced partners who work for and invest in the brand; and on the other, a management team that combines the traditional innovative Benetton culture with new and ambitious management and planning capabilities.
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Directors’ report Markets, trademarks and licenses The areas with highest growth in 2004 were Eastern European countries and Russia, followed by Spain and Switzerland where our presence was further consolidated. In a market of primary importance like Germany, our position was strengthened by a joint venture agreement and purchase of stores to be managed directly. The retail network has reached 200 stores in the principal international capitals of fashion; this is strategic for the protection of commercial positions which are already important or tactical for future development. In 2004, there were new openings in Paris, in the prestigious Boulevard Haussmann, as well as in Berlin, Stuttgart,
“Our market response must travel at the same speed as our ideas.” Fabrizio De Nardis, Chief Commercial Officer Stockholm, Fukuoka in Japan and St. Moritz in Switzerland. Regarding emerging countries, plans for commercial agreements are being studied in Middle-Eastern markets and an organization has been set up in India, controlled from Hong Kong, which is directly managing production and sales in the local market.
D I R E C TO R S ’ R E P O RT
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The stores network has been involved in a program to change internal architecture, developed following specific and consistent concepts with a more precise and distinctive positioning of the various brands. During 2004, the new Twins concepts were launched for UCB, designed to express the various styles in the collections more effectively, and for Undercolors. In 2005, Pentagram, the new Sisley concept will make its debut. Also in 2004, a progressive sales policy action was introduced which, confirming the central role and value of the partner-entrepreneur system, aims to achieve greater competitiveness based on more pronounced flexibility in terms of pricing and margins, which should guarantee benefits both to the sales network, providing investment to keep it fresh and efficient, and to the final customer. In terms of product mix, a program was started to enhance the accessory collections of the various brands, with the twofold objective of completing the proposed “looks” and of providing interesting independent purchasing opportunities. A single team is involved in this, combining design, marketing and sourcing skills. On the license front, during 2004, development continued, in cooperation with highly experienced and competent companies and producers, in sectors [from furnishing to publishing, from fabrics to décor, from perfume to stationery] in which Benetton taste, design and “way of life” make an innovative and unique contribution. In particular, agreements were signed in the jewelry and contraceptive sectors and the widening of the product ranges offered continued, from toys to children’s books, with Benny the sheep, the Benetton brand mascot, as the star. Production organization Capital expenditure was directed above all towards the managerial independence of production centers in Croatia, Hungary and Tunisia, which operate complete cycles [from
“The production organization has its head in Italy and its operations arm without borders.” Biagio Chiarolanza, Chief Operating Officer raw material to finished product] and on quality control systems which fully meet the strictest Benetton Group standards. In an ever more competitive scenario, the production organization, which maintains its strategic heart [design, planning, coordination and programming] in Italy, is arranged into a dual production line: in Italy, based mainly on a logic of speed of response to the market, and abroad, where efficiency is combined with the necessary cost control. The process of decentralization of production activities within Europe continued during the year. Special attention was given to the “sourced products” area, with total outsourcing of production, reserved for particular products and specific markets like China. This area of activity, among other things, has triggered competitive benefits within the Benetton organization, in terms of cost reduction and shortening of production times. In 2004, the Hong Kong sourcing platform was completed, which, with 40 specialists, ensures faster action and better customer service in the markets of China, Far Eastern countries, Japan and the United States. In addition, the new “multi-hub” model was designed and implemented for management of the international logistics platform. This model is supported by a centralized I.T. system, accessible to the various logistics centers, which is able to coordinate and optimize, from the
2004 net sales by brand [in %] United Colors of Benetton 72.0% Other 6.4% Playlife 2.0% Killer Loop 0.7% Sisley 18.9%
Net sales by brand [in %]
United Colors of Benetton 72.0 %
Sisley 18.9%
Other 6.4%
Playlife 2.0%
2004 2003 United Colors of Benetton 67.5%
Sisley 19.0%
Playlife 1.4%
Other 6.2% Rollerblade 3.3%
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Nordica 0.3% Ricavi x settore di attività
Prince and Ektelon 1.5% Killer Loop 0.8%
Revenues by activity [in %]
Casual 89.2%
Sportswear and equipment 4.4%
Manufacturing and other 6.4% 2004 2003
Casual 84.9%
Sportswear and equipment 8.6%
Manufacturing and other 6.5%
D I R E C TO R S ’ R E P O RT
Killer Loop 0.7%
headquarters, dispatches of products according to required delivery date and geographic location of the customer, combining timeliness of information and better control of the business. The new Product Technical function was brought into operation, which, acting as a link between product, operations and commercial functions, focuses efforts and resources on the common objectives of innovation and programming, also working with research centers, universities and laboratories.
D I R E C TO R S ’ R E P O RT
Human resources During the year, Human Resources function concentrated on the development of an organization which is able to merge the innovative capacity of new resources with the company culture that encompasses the experience and strong managerial tradition of Benetton.
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“The human capital at the center of the company, a mix of innovative abilities and historical knowledge.” Andrea Negrin, Human Resources Officer
One of the many projects under development to be implemented was Project Vivaio, aimed at identifying company resources of high-potential young people, to be integrated, in line with the company’s multicultural and international vision, with talents coming from all over the world, people with innovative abilities to be fitted into the three key areas of sales and marketing, product and operations. Another important project implemented in the year was the Product Technology Center, a center of excellence which cooperates with the most prestigious international institutes and universities [from the Massachusetts Institute of Technology to The Milan Politecnico], dedicated to the development of new and innovative materials, fabrics and products to be introduced into the production lines. Information technology The most significant initiative in the year was part of Project Phoenix, of which the main objective is to support the core business through total systems integration. A new production planning project was initiated which provides for a complete review of the process and for
“Investments in Information Technologies are the new frontier of competition.” Adolfo Pastorelli, Chief Information Technology application and technological updating of the systems used. This project forms part of a complete review of the production and logistics structure in order to achieve a shorter time to market than at present, and with optimized and coordinated customer deliveries. The work related in particular to the merchandized products support system [from planning to production by the chosen supplier, from Benetton quality control to delivery to the customer] with high savings in terms of costs and time. IT support was also implemented for
Accounting, tax and corporate organization The impact of the introduction of International Accounting Standards/International Financial Reporting Standards [IAS/IFRS] is currently being analyzed, with the resultant organizational repercussions, also in terms of training and information systems. A project has also been started to adjust for the requisites of the Sarbanes Oxley Act, the 2002 American law that requires companies listed on the NYSE to provide and document a detailed control and documentation system for company processes and data reported in the financial statements. This project will ensure Benetton Group compliance within the time limits set by the law. Finally, during 2004, the Company has been working on consolidation of the corporate structure created by the business reorganization which took place in December 2003. Investor relations During 2004, Investor Relations stayed in constant touch with the market: in the year, various meetings were organized with members of the national and international financial community and major brokers continuously publicized research on Benetton shares. The department’s activities also included telephone conferences at the time of publication of the results, organization of days dedicated to financial analysts, which involved top management and some operational managers, as well as participation in sector conferences. 2004 also saw the celebration of 15 years listing on the NYSE. On that occasion, June 8, the Benetton Group took part in the ceremony at the end of the New York Stock Exchange working day, ringing the traditional closing bell.
“Financial soundness and strong operational leverage are the certainties which can be relied on for future growth.” Pier Francesco Facchini, Chief Financial Officer
During 2004, the Benetton Group Investor Relations website was enhanced with new sections: IAS/IFRS, Glossary, “Share your thoughts”, FAQ [Frequently Asked Questions]. The structure of the Corporate Governance and Analyst coverage sections were revised to enhance the contents and make navigation easier. The website characteristics of completeness, clarity and ease of navigation, in April, earned the Group the prize for the best European IR website in 2004 and, in September, it was awarded the prize for the best IR website in the consumer goods sector by the Web Marketing Association. In September 2004, an identification of the composition of shareholders was completed, which showed the subdivision of shares on the market by geographical area; in particular, shares held by European investors were equivalent to 67% of the total floating shares [33%], while American investors represented 31%.
D I R E C TO R S ’ R E P O RT
the new logistics/distribution structure in Hong Kong for products sourced in the Far East: a “multi-hub” model which will contribute to increase our international presence due to greater timeliness of information flows, combined with better control of all activities. Concerning the foreign production centers, the new production control system has enabled us to monitor stages of production in the various production units in real time and to make projections for the dispatch of orders.
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D I R E C TO R S ’ R E P O RT
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Communications In 2004, Fabrica, the Benetton communication research center had its tenth birthday. What immediately became a workshop where communication for the future could be planned and, at the same time, tested in the field, is now an international, multicultural center which participates in the free circulation of opinions and in the debate on ideas. The anniversary, celebrated by a book published by Electa, also provided an opportunity to highlight the role of Fabrica, as a frontier outpost of the Benetton Group business culture. Fabrica ran the United Colors of Benetton 2004 fall-winter communication campaign, which showed pictures of orphaned primates confiscated from illegal traders. The campaign continues Benetton’s reflection on diversity, seen as the “richness” of our world, extending it from the variety of human races to living beings that occupy first place in zoological classification. It was presented in London in October, at the Natural History Museum, which will host the entire exhibition of pictures from May to July 2005. The English publisher Boots has published the book James and other Apes with an introduction by Jane Goodall, one of the leading experts on the science of animal behavior and habitat and the defense of nature, who backed the Benetton project. Also in fall season, the product campaign, photographed by David Sims for Fabrica, was launched; this reaffirmed the values of the United Colors of Benetton brand, in particular color, youth and contemporary style.
Corporate Governance
Ownership of the Company. As described in greater detail in the “Ownership of the Company” section of the Directors’ report relative to the 2004 financial statements and based on the latest available report, the Shareholder Edizione Holding S.p.A. controls the Company with a shareholding of 67.144%. Board of Directors. Directors. Executive Committee, Related Party Transactions. Board of Directors. During 2004, the Board of Directors held eight meetings during which they reviewed and approved guidelines for the Group’s operations, proposals for changes to the organization and general policies regarding the management of human resources, proposals for the reorganization of the corporate structure, the trend of business, extraordinary operations, and the quarterly and half-year results. During these meetings, the Executive Directors also provided adequate information to the Board of Directors and to the Board of Statutory Auditors concerning any significant, atypical or unusual transactions or transactions with Related Parties. The Board of Directors also paid particular attention to the periodic reports prepared by the Internal Audit Committee regarding its activities and, amongst other things, evaluation of the adequacy of the internal audit system. For Board meetings, Directors are provided, sufficiently in advance, with all the documentation and information needed to enable the Board to make decisions with adequate background knowledge of the matters in question. The current system of powers granted by the Board of Directors on May 12, 2004, as illustrated below, and the information procedures adopted by the Company ensure that all transactions of major economic and financial importance are submitted for Board approval. The code of conduct relating to “transactions with Related Parties” and “significant transactions”, adopted by the Company on March 30, 2004, also requires that the Executive Directors, although having the relative powers, submit for prior approval of the Board of Directors, any transactions with significant balance sheet, profit or financial impacts for the Company and the Group. For significant transactions which exceed a value of 1.5 million euro, each Director or Statutory Auditor has the right to ask for an evaluation by one or more independent experts.
D I R E C TO R S ’ R E P O RT
Corporate Governance. Again, in 2004, the Benetton Group paid particular attention to corporate governance, continuing with the adaptation of organization structures relating to control, decision-making and management to best national and international practice, complying with the standards required by the Code of Conduct for Listed Companies. The corporate governance system, as outlined below, is based on the principles of proper management and information, achieved by means of a continuous process of verification of their efficiency and effectiveness. The Company has adopted a traditional system of corporate governance by virtue of which the management body of the Company is the Board of Directors, the monitoring body relating to compliance with such matters as the law, the articles of association and the principles of correct administration is the Board of Statutory Auditors, while the independent auditors carry out the accounting audit.
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D I R E C TO R S ’ R E P O RT
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Directors. The Board of Directors, which remains in office until the Shareholders’ meeting to approve the financial statements to December 31, 2004, is made up of eleven Directors. On September 9, 2004, the Company, at the time of adopting some changes to the articles of association resulting from coming into effect of the recent reform of company law, took the opportunity to increase the maximum number of members of the Board of Directors from eleven to fifteen. The Chairman, Luciano Benetton, has power to represent the Company and to carry out all acts that are pertinent to the Company’s activities, with limits on certain categories of acts and in particular the following operations: _ purchase and sale of shareholdings, company stocks and bonds for amounts over 25 million euro; _ purchase and sale of companies and businesses, purchase and sale of real property for amounts over 25 million euro; _ granting of loans to persons or entities other than subsidiary companies for amounts over 5 million euro. The Managing Director, Silvano Cassano, has power to carry out acts relating to ordinary administration, as well as certain acts of extraordinary administration, subject to limits on values for the following operations in particular: _ purchase and sale of shareholdings and company stocks for amounts over 5 million euro; _ purchase and sale of securities and bonds for amounts over 10 million euro; _ purchase and sale of companies and businesses, purchase and sale of real property for amounts over 10 million euro; _ granting of loans to persons or entities other than subsidiary companies for amounts over 5 million euro. None of the other Directors have executive powers. There are seven Non-Executive Directors [Carlo Benetton, Gilberto Benetton, Giuliana Benetton, Reginald Bartholomew, Luigi Arturo Bianchi, Sergio De Simoi and Ulrich Weiss] and, of these, three [Reginald Bartholomew, Luigi Arturo Bianchi and Ulrich Weiss] are “independent” from the owners and from corporate management, as prescribed by the Code of Conduct for Listed Companies, while all are assiduous participants in the Board’s activities. The Board of Directors, also based on information supplied by the Directors themselves, annually checks the existence of the requirements of independence of each of its members in accordance with the Code of Conduct for Listed Companies.
Director Luciano Benetton
Office Director
Company 21,Investimenti S.p.A., Edizione Holding S.p.A.
Carlo Benetton
Deputy Chairman Director
Edizione Holding S.p.A. Tecnica S.p.A.
Gilberto Benetton
Chairman Deputy Chairman Director
Autogrill S.p.A., Edizione Holding S.p.A., Ragione S.A.p.A. di G. Benetton & C. Telecom Italia S.p.A., Olimpia S.p.A. Banca Antoniana Popolare Veneta S.p.A., Mediobanca S.p.A., Autogrill Group Inc., Lloyd Adriatico S.p.A., Autostrade S.p.A., Pirelli & C. S.p.A. , Schemaventotto S.p.A.
Giuliana Benetton
Director
Edizione Holding S.p.A.
Alessandro Benetton
Chairman and Managing Director Chairman Deputy Chairman Sole Director Director
21,Investimenti S.p.A., 21,Investimenti Partners S.p.A. 21,Partners S.G.R. S.p.A. Nordest Merchant S.p.A. Saibot S.r.l. Edizione Holding S.p.A., Autogrill S.p.A., Sirti S.p.A., Permasteelisa S.p.A., 21,Centrale Partners S.A. [member of the Supervisory Board]
Reginald Bartholomew
Director
Pirelli & C. Real Estate S.p.A.
Luigi Arturo Bianchi
Director
Anima S.G.R. S.p.A., Assicurazioni Generali S.p.A.
Gianni Mion
Deputy Chairman Managing Director Director
Tim S.p.A. Edizione Holding S.p.A., Schemaventotto S.p.A. 21,Investimenti S.p.A., Autogrill S.p.A., Autogrill Group Inc., Autostrade S.p.A., Cartiere Burgo S.p.A., Banca Antoniana Popolare Veneta S.p.A., Olimpia S.p.A., Telecom Italia Media S.p.A., Telecom Italia S.p.A., Fondazione Cassa di Risparmio di Venezia, Luxottica Group S.p.A.
Sergio De Simoi
Auditor Director
Olimpia S.p.A. Autostrade S.p.A., Schemaventotto S.p.A., 21,Investimenti Partners S.p.A., 21,Investimenti S.p.A.
Ulrich Weiss
Director
Ducati Motors S.p.A., HeidelbergCement AG [Heidelberg], Continental AG [Hannover], Bego Medical AG [Bremen]
D I R E C TO R S ’ R E P O RT
The following table lists the offices which Directors hold in other companies not belonging to the Group:
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D I R E C TO R S ’ R E P O RT
Executive Committee. An Executive Committee was set up in September 2003, consisting, in addition to the Chairman Luciano Benetton, of the Managing Director Silvano Cassano and Directors Alessandro Benetton and Gianni Mion. Executive Committee meetings are also attended by the Board of Statutory Auditors and the Chairman of the Internal Audit Committee, neither of which have the right to vote. One of the Executive Committee’s tasks is to define, upon proposal by the Managing Director, Company and Group strategic, industrial and financial plans, the annual budget and interim adjustments for subsequent submittal to the Board of Directors. The Executive Committee also reviews and approves investment and divestiture plans of particular importance, the granting of loans and the giving of guarantees, and analyzes the more important problems relating to the Company’s performance, which in turn enables the Board of Directors to comply more effectively with its legal obligations. The Executive Committee met seven times during 2004.
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Related Party Transactions. On March 31, 2004, the Board of Directors formally adopted the Rules of Conduct that Benetton Group S.p.A. will have to comply with in matters regarding Related Party Transactions and significant transactions. These Rules reiterate the central role of the Board of Directors in the Company’s system of corporate governance and aims to ensure that the transactions being regulated are carried out according to criteria of substantial and procedural fairness. Related Party Transactions, also non-intercompany transactions, which are atypical, unusual or concluded with non-standard conditions, even though not normally subject to Board approval, must, nevertheless, be submitted for prior Board approval. Prior Board of Directors’ approval is also required for transactions that could have a significant economic or financial impact on the Company or the Group and which in terms of value, counterparty quality, object, methods or timing could jeopardize the Company’s assets. For both of these types of transactions, the Board of Directors has to decide on the basis, among other things, of detailed information acquired with suitable advance notice. The above-mentioned Rules of Conduct do not expressly provide for directors with an interest in an operation to leave the board meeting. Therefore it is left to the Board to decide whether it is suitable or not to leave when this could prejudice the maintenance of a quorum in the meeting. The Rules of Conduct in relation to significant transactions and transactions with Related Parties have been adopted by subsidiary companies in 2005. Board of Statutory Auditors. The Board of Statutory Auditors is made up of: _ Angelo Casò . Chairman; _ Filippo Duodo . Auditor; _ Dino Sesani . Auditor; _ Antonio Cortellazzo . Alternate Auditor; _ Marco Leotta . Alternate Auditor. All members of the Board of Statutory Auditors were appointed on May 14, 2002. Their mandate expires on the date of the Shareholders’ Meeting to approve the 2004 financial statements. The Statutory Auditors are appointed, in accordance with the criteria laid down in art. 148 of the Finance Consolidation Act, which is implemented in art. 19 of the articles of association, on the basis of voting lists submitted to the Company’s registered office prior to the Shareholders’ Meeting, accompanied by an adequate description of each candidate’s personal and professional characteristics.
There is no Auditor representing the minority Shareholders, as they did not present alternative voting lists. The Board of Statutory Auditors met seven times during 2004.
D I R E C TO R S ’ R E P O RT
Management and coordination in accordance with articles 2497 and subsequent of the Italian Civil Code. In January 2004, all of the Italian subsidiaries, directly or indirectly wholly owned by Benetton Group S.p.A., made the announcements required by art. 2497-bis of the Italian Civil Code, recognizing the management and coordination function performed by the Parent Company Benetton Group S.p.A.
22
Compensation Committee and Committee for Proposed Appointments of Directors. In implementation of the Code of Conduct for Listed Companies and with the duties mentioned therein, the Board of Directors reconfirmed, as members of the Compensation Committee for 2004, Directors Reginald Bartholomew, Ulrich Weiss and Gianni Mion, Chairman. The Committee, therefore, consists mainly of non-executive directors; in view of the composition of the shareholders, a non-independent director is included among the members of the committee. The Compensation Committee, by express provision of the relative rules governing its activities, formulates its proposals for submission to the Board of Directors, in the absence of persons directly interested, who leave the meeting during discussions and resolutions concerning them. During 2004, the Compensation Committee met three times. For fiscal year 2004, compensation for executive Directors and/or Directors with special tasks was apportioned by the Board of Directors on the basis of the proposal formulated by the Compensation Committee, in the amounts indicated in the notes to the consolidated financial statements of the Benetton Group, following the determination of the aggregate compensation by the Shareholders’ Meeting, in accordance with the Articles of Association. During the reference year, the Compensation Committee also proposed, having used a company with experience in the preparation of variable compensation schemes, adoption of a Stock Option Plan aimed at motivation and retention of the Company’s top managers. After adoption of the Plan by the Board of Directors on July 15, 2004, the Compensation Committee provided the Board with further indications of the number of options to be assigned and the identity of the persons to receive them. The said Stock Option Plan is linked to company results and achievement of preset objectives. Further information is shown in the paragraph “stock option” in the Directors’ Report accompanying the statutory and consolidated financial statements of Benetton Group S.p.A. Given the current composition of the Company’s Shareholders, the Board of Directors does not consider it necessary yet to set up a Committee for proposed appointments of Directors. Directors are nominated on the basis of a single voting list which is deposited at the Company’s head office prior to the Shareholders’ Meeting, accompanied by an adequate description of the candidates’ personal and professional characteristics. Internal Audit Committee. Internal audit. The Internal Audit Committee is made up of three Non-Executive Directors, two of whom are independent. On May 12, 2004, the appointments of Directors Ulrich Weiss, Luigi Arturo Bianchi and Sergio De Simoi were confirmed. The Internal Audit Committee has the following tasks: _ make proposals for the establishment of an internal audit department responsible for the internal audit and to determine the duties of this department; _ review periodic reports, reporting relationships and the executive plan of persons
The Committee performed its functions during 2004, meeting five times under the chairmanship of Ulrich Weiss and with the participation of the entire Board of Statutory Auditors, in conformity with the regulations adopted by the Company. The functionality and adequacy of the internal audit system were guaranteed by the Board of Directors, with the help of the specific corporate function coordinated by the Head of Internal Audit. Organization and information systems were found to be able to assure, also as regards subsidiaries, monitoring of the administrative and accounting system and of the central and decentralized organizational structure. Work continued on mapping of processes and risks concerning the activities of all Group companies, as well as operational and budget control of individual businesses and review of internal auditing procedures. These activities, taking into account the listing of Benetton shares also on the United States stock exchange, were carried out observing likewise the regulatory provisions contained in the so-called “Sarbanes-Oxley Act”. Non-Executive Directors, the Board of Statutory Auditors, and the independent auditing firm all received adequate information in this respect. During 2004, the Internal Supervisory and Monitoring Body, as required by article 6, paragraph 1 letter b] of Legislative Decree 231/2001, consisting of Ulrich Weiss, Chairman, Luigi Arturo Bianchi and Roberto Taiariol, performed its checks on operation and observance of the Organizational and Operational Model adopted by the Company. This Model, you are reminded, consists of: _ a code of ethics and of conduct; _ operating procedures and reporting systems; _ an internal supervisory and monitoring body; _ a disciplinary system. The Organizational and Operational Model was also adopted by the main Group companies during 2004. Handling of confidential information. All confidential information is managed by the Managing Director, upon consultation with the Chairman. Together, the Managing Director and the Chairman also ensure that adequate checks are carried out with regard to the classification of confidential information in accordance with current legislation. The Board of Directors approves all press releases relating to approval of the annual financial statements, the half-year report, and the quarterly report, as well as extraordinary operations that are subject to the approval of the Board of Directors. All communications to and relations with the press, institutional investors and individual
D I R E C TO R S ’ R E P O RT
responsible for internal audit, also promoting actions for the improvement of the internal audit system; _ report to the Board of Directors, at least every 6 months, in connection with its approval of year-end financial statements and the half-year report, on activities carried out and on the adequacy of the internal audit; _ monitor compliance with, and periodic revision of, corporate governance rules; _ verify, together with the head of the finance function and the independent audit company, the adequacy of accounting principles used; _ assess, together with the heads of the finance and internal audit functions, proposals submitted by independent auditing firms for assignment of the independent audit, making a recommendation for assignment of the task that the Board of Directors has to submit to the Shareholders’ Meeting; _ evaluate the results presented in the independent auditor’s report.
23
D I R E C TO R S ’ R E P O RT
Shareholders are conducted by the Media and Communications Department and the Investor Relations Department, respectively. Implementing the “Regulation for Markets Organized and Managed by Borsa Italiana S.p.A.” [Regolamento dei Mercati Organizzati e Gestiti da Borsa Italiana S.p.A.], since fiscal year 2002, the Board of Directors has officially adopted the “Code of Conduct for Internal Dealing”. This is designed to regulate obligations of notification and disclosure concerning transactions undertaken in financial instruments issued by Benetton Group S.p.A. by those persons defined by the Code as “Important Persons”. The notification obligations imposed by the Code on “Important Persons” provide for tighter timing and involve wider categories of subjects and securities than does the Regulation of Borsa Italiana S.p.A. Since Benetton Group S.p.A. shares are also listed on the Frankfurt stock exchange, the Code of Conduct also implements the obligations of notification and disclosure provided by the Wertpapierhandelsgesetz – WpHG law [Securities Trading Act], Section 15a, introduced by the 4th Finanzmarktförderungsgesetz [Fourth Financial Markets Promotion Act].
24
Relations with Institutional Investors and with other Shareholders. The Investor Relations Department ensures correct management of relations with financial analysts, institutional investors and individual Italian and foreign Shareholders. Among other things, this department co-ordinates activities with members of the Financial Community. This function complies with the criteria of fairness, clarity and equal access to information contained in the “Market Information Guide” drafted by Borsa Italiana S.p.A., making available in the Investor Relations section of the Company’s website http://www.benettongroup.com/ investors/ ample documentation and information concerning the Company, with particular reference to price-sensitive information. The following documents, among others, are available on the site: the Articles of Association, the Code of Conduct for Internal Dealing, the Organizational and Operational Model, the Rules of Conduct in Related Party Transactions, press releases and periodical financial information. This document is available on website http://www.benettongroup.com/investors/ in the Corporate Governance section.
Supplementary information
Shares held by Directors and Statutory Auditors. Directors Luciano, Gilberto, Giuliana and Carlo Benetton directly and indirectly hold equal interests in the entire share capital of Edizione Holding S.p.A., the parent company of Benetton Group S.p.A. and owner of 67.144% of the share capital. Except as indicated, Directors Luciano, Gilberto, Giuliana and Carlo Benetton [including their not legally separated spouses and children who are minors] have not, during 2004, held other shares in Benetton Group S.p.A. or in subsidiary companies, either directly or through subsidiaries, trust companies, or third parties, except as indicated below, referring to Gilberto Benetton. As indicated in the statements received, during 2004 no other equity investments in the Company have been held by its other Directors and Statutory Auditors, except those indicated in the table below:
Name and surname Gilberto Benetton Alessandro Benetton Ulrich Weiss
Number of shares held as of 12.31.2003 45,000 4,000 3,500
Company Benetton Group S.p.A. Benetton Group S.p.A. Benetton Group S.p.A.
Number Number of shares of shares purchased sold -
Number of shares held as Type of of 12.31.2004 ownership 45,000 Owned 4,000 Owned 3,500 Owned
Stock option plan. The resolution of the extraordinary Shareholders’ Meeting authorized the Board of Directors, in accordance with article 2443 of the Italian Civil Code, to decide, also more than once and for a maximum period of five years from the date of the shareholders’ meeting resolution, to increase the share capital, for cash, one or more times, with the consequent issue of ordinary shares, with normal ownership, to be offered for subscription by employees of Benetton Group S.p.A. and subsidiary companies at prices equivalent to the nominal value of 1.30 euro each, as well as a share premium determined at the time they are assigned, on the basis of the arithmetic average of share prices recorded in the last month in Borsa Valori di Milano [Milan Stock Exchange], excluding option rights in accordance with article 2441, final paragraph of the Italian Civil Code, for a maximum total of 6.5 million euro, through the issue of a maximum of 5,000,000 ordinary shares with a nominal value of 1.30 euro each. The Board of Directors on the same date resolved to increase, for cash, the share capital by 236,026,454.30 euro to 240,230,104.40 euro to service the share incentive Plan, issuing 3,233,577 options which confer the right to subscribe to the same number of Company shares, at a price of 8.984 euro. If the resolved increase is not fully subscribed within the period from time to time fixed for the purpose, the capital will be increased by an amount equivalent to subscriptions received at the expiry of this period. These stock options represent an instrument to motivate and retain, in the medium-long term, employees and directors, selected from among the top executives of the Company and its subsidiary companies, who hold offices which are considered the most important strategically.
D I R E C TO R S ’ R E P O RT
Benetton shares and shareholdings Treasury shares. During the period, Benetton Group S.p.A. neither bought nor sold any treasury shares or shares or stock in parent companies, either directly or indirectly or through subsidiaries, trustees or other intermediaries.
25
The assignment cycle envisaged consists of a period when exercise of the options is restricted of four years from the date of assignment [the so-called vesting period] and a further period of five years for exercise of the options; however, under certain conditions, there will be the possibility of exercising up to a maximum of 50 % of options assigned two years after the date of assignment. The proportion of offers assigned that will become effectively exercisable, once the vesting period of four years has passed, will depend on the level of achievement, accumulated in the vesting period, of preset objectives which are used as indicators of EVA [Economic Value Added] performance with reference to the 2004/2007 four year period. More details are contained in the “Stock Option Plan Rules” available under “Codes” in the Corporate Governance/Investor Relations section of the Company’s website.
D I R E C TO R S ’ R E P O RT
Ownership of the Company. Edizione Holding S.p.A. [with registered office in Treviso, Italy], a holding company, wholly owned by the Benetton family, has the majority holding in the Company with 121,905,639 ordinary shares, equivalent to 67.144%.
26
Shareholders by class Edizione Holding S.p.A. Institutional investors and banks Other investors By size of holding [1] From 1 to 4,999 shares From 5,000 to 9,999 shares Over 10,000 shares Holdings not classified Total [1]
As per last Spafid survey as of January 13, 2005.
% 67.144 17.220 15.636 No. of shareholders 27,221 206 371 27,798
Number of shares 10,502,130 1,395,851 176,692,592 [7,031,762] 181,558,811
Share and market data Earnings/[Loss] per share [euro] [1] Shareholders’ equity per share [euro] [1] Dividend per share [euro] [1] Pay out ratio [%] Dividend yield Share price: December 31 [euro] Screen-based market: high [euro] Screen-based market: low [euro] Price/earnings ratio [P/E] Share price/Shareholders’ equity per share Market capitalization [millions of euro] Average no. of shares outstanding [2] Number of shares outstanding
2004 2003 2002 2001 2000 0.68 0.59 [0.05] 0.82 1.35 6.77 6.47 6.29 6.86 6.50 0.34 0.38 0.35 0.41 0.46 50 64 n.a. 50 37 3.9 3.8 4.8 3.6 4.8 9.74 9.11 8.50 12.72 22.01 10.18 11.30 15.90 22.44 24.20 8.33 5.90 8.50 9.75 18.71 14.3 15.4 n.a. 15.5 16.5 1.4 1.4 1.4 1.9 3.4 1,768 1,654 1,543 2,309 3,996 181,558,811 181,558,811 181,341,018 180,720,969 180,505,910 181,558,811 181,558,811 181,558,811 181,558,811 181,558,811
[1]
Restated after a reverse split of the shares approved by Shareholders’ Meeting on May 8, 2001.
[2]
Net of treasury shares held during the year.
D I R E C TO R S ’ R E P O RT
Performance of Benetton shares. The performance of Benetton shares during 2004 was positive overall, with an increase of 6.9% compared with December 31, 2003, against a Mibtel performance of 18.1% and a Midex performance of 12.6%. In the American market, Benetton ADRs [American Depositary Receipts] went up by 17.4% with increased trading during the year.
27
12.31.04
12.01.04
11.01.04
10.01.04
09.01.04
08.02.04
07.01.04
06.01.04
05.03.04
04.01.04
03.01.04
02.02.04
01.02.04
Performance of ordinary share and Benetton ADR - Dec. 31, 2003 to Dec. 31, 2004
3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0
10.5 10.0 9.5 9.0 8.5 8.0
12.31.04
12.01.04
11.01.04
10.01.04
09.01.04
08.02.04
07.01.04
06.01.04
04.01.04
03.01.04
02.02.04
01.02.04
05.03.04
Share [euro]
Volume
2,500,000
28.0
2,000,000
26.0
1,500,000
24.0
1,000,000
22.0 20.0
500,000 Volume
ADR [US $]
Relationships between the parent company, its subsidiaries and other related parties. The Benetton Group has limited trade dealings with Edizione Holding S.p.A. [the parent company], with subsidiary companies of the same and with other parties which, directly or indirectly, are linked by common interests with the majority Shareholder. Trading relations with such parties are conducted on an arm’s-length basis and using the utmost transparency. These transactions relate mostly to purchases of tax credits and services. In addition, Italian Group companies are participating in a national tax consolidation per article 117 and subsequent of the Tax Consolidation Act DPR 917/86 based on a proposal by the consolidating company Edizione Holding S.p.A. which exercised the option for this regime on December 31, 2004. The duration of the option is three years starting from the 2004 fiscal year. The relationships arising from participation in the consolidation are governed by specific Rules approved and signed by all participating companies.
[thousands of euro] Accounts receivable _ including for participation in the Edizione Holding S.p.A. tax consolidation Accounts payable _ including for participation in the Edizione Holding S.p.A. tax consolidation Purchases of raw materials Other costs and services Sales of products Revenue from services and other income
2004 32,864 32,283 19,285 18,664 2,982 13,229 17 937
2003 1,198 11,049 3,432 13,863 76 776
D I R E C TO R S ’ R E P O RT
The relevant totals appear below:
29 The Group has also undertaken some transactions with companies directly or indirectly controlled by, or in any case, under the influence of, managers serving within the Group. The Parent Company’s management believes that such transactions were completed at market rates. The total value of such transactions was not, in any case, significant in relation to the Group’s total value of production. No Director, Manager, or Shareholder is a debtor of the Group. Management of financial risks. The Group has always paid special attention to financial risk management by constantly monitoring its exposures and managing them by means of derivative instruments. Exposure to exchange risk is marginal and almost totally concentrated in the US dollar, Japanese yen, British pound and Swiss franc; at the end of 2004, such exposure was substantially neutralized by Outrights, Currency Swaps, Non Deliverable Forwards and Collars [“zero cost”] for:
[in millions] US dollar Japanese yen British pound Swiss franc
Currency to sell Currency Euro 159 124 49,672 368 35 51 50 33
Currency to buy Currency Euro 116 87 33,300 247 2 2 1 1
D I R E C TO R S ’ R E P O RT
During 2004, the Group did not use any derivative instruments that involved collecting or paying premiums.
30
Under the Group’s guidelines, its exposure to exchange risk is split into: _ exposure to economic exchange risk: represented by the sum of monetary flows [receipts and payments in the same currency are netted] in all currencies other than the “functional currency”. Risk exposure arises as soon as the price lists for collections are defined [each year being divided into two main collections], which takes place approximately 15 months prior to the time when cash will be received: the prices in foreign currency applied to the budget volumes for each item are converted at an exchange rate [known as the “target rate”] to calculate a budgeted result that the hedging policy has to ensure; _ exposure to exchange translation risk: on the net investment made by Benetton Group S.p.A. in foreign Group companies. Each variation in the exchange rate generates a new value for the net amount that the Parent Company has invested in Group companies located outside of the euro-zone. The “translation differences” that arise in such cases represent gains or losses that have a cash impact when there is a distribution of dividends or if the foreign subsidiary is liquidated or sold off; these differences do not flow into the statement of income, but are a direct adjustment to Group Shareholders’ equity. In the same way as the exposure to exchange risk, exposure to interest risk is also monitored on an ongoing basis and managed by way of derivative instruments. At the end of the year, the risk exposure on the liabilities side [essentially a floating-rate bond loan with maturity in 2005 for 300 million euro and a floating-rate syndicated loan with maturity in 2007 for 500 million euro] is partially hedged by interest rate swaps for a notional value of 240 million euro, taken out mostly in previous years of which 190 million will mature in 2005. The offsetting asset risk exposure is controlled by a policy, approved by the Parent Company Board of Directors in July 2003. The policy requires that investment instruments be bank deposits, monetary funds or short-term bonds and fixed or variable rate bonds with durations under three years. These instruments have to have an issuer rating of not less than “A-“ from S&P or Fitch or “A3” from Moody’s. Moreover, in order to avoid an excessive concentration of risk in a single issuer in the case of issuers with a rating of less than “AA” [or equivalent], the maximum amount that can be invested must not exceed 10% of the Group’s total investment of liquid funds up to a maximum of 20 million euro. Privacy and the protection of personal data. As early as 2000, the Company adopted the Security Planning Document [SPD] envisaged by the legislation then in force. This concerned the processing by IT systems of information considered “sensitive” or “judicial”. Legislative Decree 196 of June 30, 2003, partially amending the previous regulations, provides for adoption of the new minimum security measures and compliance with reference to the same data by December 31, 2005 [date in the latest extension by Decree Law 314 of December 30, 2004, article 6-bis]. The Company updated its SPD as of 2004 and will again update it in compliance with the new rules by December 31, 2005. All Group companies have brought themselves into line with the data security model adopted by the Parent Company.
Directors. Parent Company Directors as of December 31, 2004 are as follows: Date of birth 05.13.1935 12.26.1943 12.18.1956 07.08.1937 06.19.1941 03.02.1964 09.06.1943 05.23.1945 06.03.1936 02.17.1936 06.03.1958
Appointed 1978 1978 2003 1978 1978 1998 1990 2003 1997 1999 2000
Office Chairman Deputy Chairman Managing Director Director Director Director Director Director Director Director Director
Luciano Benetton, Gilberto Benetton, Carlo Benetton and Giuliana Benetton are brothers and sister; Alessandro Benetton is the son of Luciano Benetton. Directors’ fees due to members of the Board of Benetton Group S.p.A. totaled 4,927 thousand euro in 2004. Principal organizational and corporate changes. The branches of Bencom S.r.l. in Spain, France and Great Britain became operational in January 2004. Through these branches, Bencom S.r.l. directly manages a certain number of Benetton stores in the above-mentioned countries, previously controlled by Benetton Retail Spain S.L., Benetton Retail France S.A.S. and Benetton Retail [1988] Ltd., respectively. During June, a branch was set up in Belgium, operational from August 1, to purchase and manage, also by rental to third parties, businesses operating Benetton stores. On February 17, 2004 Benfin S.p.A. bought from third parties, for 15 million euro, 15% of the Olimpias S.p.A. share capital, of which it previously held 85%. This company produces, mainly for Group companies, textile products and, in particular, fabrics, knitted fabrics, yarns, woven and printed fabrics, as well as acting as a dye house and laundry. With effect from December 1, 2004, Olimpias S.p.A. was merged by incorporation into the parent company Benfin S.p.A., which changed its name at the same time to Olimpias S.p.A. The operation is part of and is based on the same rationale as a more general reorganization of the Group, largely completed during the 2003 financial year. During May, Benetton International S.A. [formerly Benetton Retail International S.A.] sold to Benetton Holding International N.V. S.A. [formerly Benetton International N.V. S.A.] its holding in Benetton Asia Pacific Ltd., a company operating in Hong Kong in retail activities and services for other Group companies. The German subsidiary New Ben GmbH purchased, for a price of 4 million euro, the entire shareholding in Mari Textilhandels GmbH, a German company owning around 30 stores engaged in the sale of Group-branded products in various German regions. This purchase was effective on July 1, 2004; from the same date, Mari Textilhandels GmbH was merged by incorporation into New Ben GmbH. Continuing with the same process of simplification of the corporate structure, with effect from September 1, 2004, I.M.I. S.r.l. was merged by incorporation into the parent company Bencom S.r.l. In September 2004, Benetton Group S.p.A. sold its holding of 10% of the share capital of Tecnica S.p.A. to third parties.
D I R E C TO R S ’ R E P O RT
Name and surname Luciano Benetton Carlo Benetton Silvano Cassano Giuliana Benetton Gilberto Benetton Alessandro Benetton Gianni Mion Sergio De Simoi Ulrich Weiss Reginald Bartholomew Luigi Arturo Bianchi
31
During its July 15 meeting, Benetton Group S.p.A. Board of Directors approved a stock option plan for Group top management. Details of this operation are shown in the paragraph “Stock option plan”. The corporate restructuring plan in Spain and Portugal was completed with the transfer of the shareholding in Benetton Real Estate Spain S.L. [formerly Benetton Textil Spain S.L.] from Benetton Holding International N.V. S.A. to Benetton Realty Spain S.L. Benetton Realty Spain S.L. sold its shareholding in Benetton Realty Portugal Imobiliaria S.A. to Benetton Real Estate International S.A.; Benetton Real Estate Spain S.L. sold its shareholding in Benetton Têxtil Confecção de Têxteis S.A. to Benetton Manufacturing Holding N.V.
D I R E C TO R S ’ R E P O RT
The corporate restructuring plan continued in France with the transfer of the shareholding in Benetton France Commercial S.A.S. [formerly Benetton Retail France S.A.S.] by Benetton International S.A. to Benetton France S.à r.l. [formerly Benetton France Trading S.à r.l.]. Benetton France Commercial S.A.S. sold to third parties the entire shareholding in the French company L’Apollinaire S.n.c., owner of a sales business. In December, the purchase of the remaining 50% of the share capital of DCM Benetton India Ltd. from third parties by Benetton Holding International N.V. S.A. was finalized and the liquidations of Benetton Sportsystem Taiwan Ltd. and Benetton [Far East] Ltd. were completed. Significant events since year-end. No significant events occurred after year-end. 32 Outlook for 2005. The economic environment in the principal European markets, especially in Italy and Germany which represent 55% of Group revenues, continues to be disappointing. Consumers are spending very cautiously and are placing great emphasis on the quality-price ratio even more than in the past. Deflationary pressures in the market are generated both by economic uncertainty and by the ending of the multifiber agreement for the Chinese market. In this situation, it is difficult to speculate on an economic recovery in the short-term. The Group has established an important policy of incentives to the network of partners, in line with the business model, with the objective of placing them in a condition to increase their investment capacity, to open new stores and to renew the existing ones, as well as to increase their competitive capacity in terms of price to the final customer. This policy of incentives to the network has been made possible by the strategic focus on efficiency actions, optimization of production and organization systems and strict containment of administrative costs. Expected revenues for 2005 are between 1,620 and 1,650 million euro, with EBIT around 9.5-10% and net income around 6%. In 2005, the level of investments will amount to around 130-150 million euro, leading to a net financial position of around 400 million euro and free cash flow of around 100 million euro.
Group consolidated results
[millions of euro] Revenues Cost of sales Gross operating income Variable selling costs Contribution margin General and administrative expenses Income from operations Foreign currency gain, net Net financial expenses Ordinary income Other expenses Non-recurring items Income before taxes Income taxes Minority interests income Net income for the year
2004 1,686 [929] 757 [104] 653 [436] 217 [23] 194 [3] [26] 165 [42] 123
% 100.0 [55.1] 44.9 [6.2] 38.7 [25.8] 12.9 [1.4] 11.5 [0.2] [1.5] 9.8 [2.5] 7.3
2003 1,859 [1,049] 810 [114] 696 [464] 232 10 [32] 210 [7] [38] 165 [56] [1] 108
% 100.0 [56.4] 43.6 [6.2] 37.4 [24.9] 12.5 0.5 [1.7] 11.3 [0.4] [2.0] 8.9 [3.0] [0.1] 5.8
Change [173] 120 [53] 10 [43] 28 [15] [10] 9 [16] 4 12 14 1 15
% [9.3] [11.4] [6.5] [9.4] [6.0] [6.0] [6.2] n.s. [25.0] [7.6] [57.1] [31.6] [0.6] [26.0] n.s. 14.1
D I R E C TO R S ’ R E P O RT
Consolidated statement of income. The highlights of the Group’s statement of income for 2004 are presented below; they are based on the statement of income with the reclassified revenues and cost of sales used for internal reporting purposes [percentage changes are calculated on the precise values].
33 In the year, the Group generated revenues of 1,686 million euro compared with 1,859 million the previous year, an overall decrease of 9.3%. This is the combined result of two main factors: sale of the sports equipment business, completed in the first half of 2003, and persistent unfavorable trends in the principal foreign currency exchange rates, especially the dollar and the yen. The reduction in sales due to the business sold was around 89 million euro, while the exchange impact on total consolidated revenues was 17 million euro; without this impact and excluding the sports equipment business, the contraction in sales is reduced to 3.6% compared with 2003, in a very weak consumer market, especially in Europe. Casual sector sales, net of the exchange impact, showed a reduction of 3.7% with constant volumes. In the sports sector, the net reduction in revenues was 84 million euro due mainly to the impact of sale of the equipment business, partially compensated by sportswear which increased by 5 million euro. Sales in the manufacturing sector reduced by around 14 million euro, equivalent to 11.5%, due to the contraction of demand in the market for fabrics and yarns. Cost of sales decreased both in absolute terms, by 120 million euro, and as a percentage of revenues, from 56.4% to 55.1%. This improvement is attributable to greater production and logistics efficiency in the casual sector, sale of the sports equipment business, with an impact of 57 million euro and a positive exchange impact of 8 million euro.
D I R E C TO R S ’ R E P O RT
34
Gross operating income was 757 million euro compared with 810 million in 2003, representing 44.9% of sales compared with 43.6% in the previous year. The reduction in absolute terms was 53 million euro, of which 32 million euro was due to sale of the sports equipment business and 17 million euro related to the casual sector, where, however, it increased from 46.7% to 48.0% of revenues. The manufacturing sector went down both in absolute terms and as a percentage of revenues. Variable selling costs were 6.2% of revenues, in line with the previous year. General and administrative costs were 436 million euro compared with 464 million euro in 2003, with a reduction of 28 million euro, and 25.8% of net revenues compared with 24.9% in the previous year. The reduction in absolute terms was mainly due to the business sold and to strong rationalization and cost containment actions carried out in 2004; these latter almost entirely compensated for the natural growth of costs for development of retail activities. In the casual sector, general and administrative costs increased in absolute terms by 4 million euro, increasing from 26.1% to 27.8% of net revenues; among administrative costs, personnel costs and other operating costs went up by 25 million euro, due to the greater number of directly operated stores; advertising and sponsorship costs and provisions reduced by 8 and 13 million euro respectively. Income from operations was 217 million euro compared with 232 million in 2003, improving from 12.5% to 12.9% of revenues. The reduction in absolute terms of 15 million euro was mainly due to the casual sector, where this was 14.0% of revenues against 14.4% in the previous year. The sports sector’s income from operations was 1 million euro compared with a loss in the previous year of around 2 million. This improvement was due to the impact of selling the sports equipment business. Foreign exchange management tended towards breakeven compared with the 10 million euro net gains of the previous year, influenced by movements of the principal foreign currencies. Net financial expenses, of 23 million euro, reduced in absolute terms by 9 million euro, from 1.7% to 1.4% of net revenues; this improvement was due to both the reduction in the average financial position by 100 million euro and the reduced cost of borrowing. Ordinary income was 194 million euro, compared with 210 million euro in the previous year, improving from 11.3% to 11.5% of revenues. Net other and non-recurring expenses were 29 million euro and mainly comprised adjustment to current values of some assets in England, France and the United States relating to the sales network and gains from the sale of some property in the third quarter. The significant reduction, compared with 45 million in 2003, was due to expenses of Italian companies for the tax amnesty included in the amount for the previous year. Net income for the year was 123 million euro compared with 108 million euro in 2003, representing 7.3% of revenues compared with 5.8%.
Revenues by geographical area are as follows: 2004 1,435 72 174 5 1,686
% 85.1 4.3 10.3 0.3 100.0
2003 1,546 113 190 10 1,859
% 83.2 6.1 10.2 0.5 100.0
Change [111] [41] [16] [5] [173]
% [7.2] [36.3] [8.4] [50.0] [9.3]
Europe continues to be the Group’s main reference market. The two years are not directly comparable because of the exchange rate impact of the US dollar and the Japanese yen and the impact of selling the sports equipment business. Performance by activity. The Group’s activities are traditionally divided into three sectors to provide the basis for effective administration and adequate decision-making by company management, and to supply accurate and relevant information about company performance to financial investors. The business sectors are as follows: _ casual, representing the Benetton brands [United Colors of Benetton, Undercolors and Sisley], which also incorporates figures for the retail business, as well as complementary products, such as accessories and footwear; _ sportswear and equipment, developed with the Playlife and Killer Loop brands; it also includes sales of equipment relating to production for third parties by a Group manufacturing company. The 2003 comparison period still includes sales of sports equipment carrying the Nordica, Rollerblade and Prince brands; _ manufacturing and other, composed mainly of sales of raw materials, semi-finished products and industrial services as well as of revenues and expenses from real estate activity.
D I R E C TO R S ’ R E P O RT
[millions of euro] Europe The Americas Asia Rest of the world Total
35
Results of the Casual sector
D I R E C TO R S ’ R E P O RT
[millions of euro] Sector total revenues Cost of sales Gross operating income Selling costs Contribution margin General and administrative costs Income from operations
36
2004 1,504 [783] 721 [93] 628 [417] 211
% 100.0 [52.0] 48.0 [6.2] 41.8 [27.8] 14.0
2003 1,579 [841] 738 [98] 640 [413] 227
% 100.0 [53.3] 46.7 [6.2] 40.5 [26.1] 14.4
Change [75] 58 [17] 5 [12] [4] [16]
% [4.7] [6.9] [2.2] 5.1 [1.7] [1.2] [7.0]
Change [84] 55 [29] 5 [24] 27 3
% [52.8] [49.0] [61.6] [62.9] [61.4] [65.8] n.s.
Sector revenues were 1,504 million euro compared with 1,579 million euro in 2003 with a reduction of 4.7%. Without the exchange effect, described in the previous section, the reduction in sales goes down to 3.7%. Sales volumes were substantially unchanged. Cost of sales reduced by 6.9%, improving from 53.3% to 52.0% of net revenues and gross operating income increased from 46.7% to 48.0%, due to even more efficient rationalization of the manufacturing process. Selling costs remained stable as a percentage of sales, whereas general and administrative expenses felt the impact of actions undertaken to develop the sales network. Income from operations was 211 million euro, representing 14.0% of net revenues. Results of the Sportswear and equipment sector [millions of euro] Sector total revenues Cost of sales Gross operating income Selling costs Contribution margin General and administrative costs Income from operations
2004 75 [56] 19 [3] 16 [15] 1
% 100.0 [75.3] 24.7 [3.9] 20.8 [19.7] 1.1
2003 159 [111] 48 [8] 40 [42] [2]
% 100.0 [69.7] 30.3 [5.0] 25.3 [27.1] [1.8]
Sale of the sports equipment business was completed in the first half of 2003 and around 89 million euro of the reduction in sales revenues in 2004 was due to this disposal, while sportswear sales at 45 million euro increased by around 12%. Cost of sales was 55 million euro lower following sale of the sports equipment sector and increased from 69.7% to 75.3% of net revenues. Selling costs went from 5.0% to 3.9% of revenues. The improvement from operations, from a loss of 2 million euro to a profit of 1 million euro, was due to savings in general and administrative costs relating to both sportswear and the business sold.
Results of the Manufacturing and other sector 2004 107 [90] 17 [8] 9 [4] 5
% 100.0 [84.2] 15.8 [6.9] 8.9 [4.3] 4.6
2003 121 [97] 24 [8] 16 [9] 7
% 100.0 [80.2] 19.8 [6.8] 13.0 [7.2] 5.8
Change [14] 7 [7] [7] 5 [2]
% [11.5] [7.2] [29.2] [8.7] [39.8] [47.1] [30.6]
Manufacturing sector sales went down by 11.5%, due to contraction of the fabrics and yarns market, while the cost of sales increased to 84.2% of revenues compared with 80.2% in the previous year. This resulted in a reduction in gross operating income both in absolute terms and as a percentage of sales. Selling costs remained substantially in line with the previous year, while general and administrative expenses reduced both in absolute terms and as a percentage of sales, partially compensating for the higher cost of sales and leading to income from operations of 4.6% of revenues compared with 5.8% in 2003. Financial situation - highlights. The more important elements of the balance sheet, with comparative figures as of December 31, 2003, are as follows: [millions of euro] Working capital Assets due to be sold Total capital employed Net financial position Shareholders’ equity Minority interests
12.31.2004 688 8 1,668 431 1,230 7
12.31.2003 729 8 1,655 468 1,174 13
Change [41] 13 [37] 56 [6]
Compared with the previous year, working capital reduced by 41 million euro, mainly due to a reduction in trade receivables, partially offset by the increase in inventories and other receivables. Assets due to be sold in 2004 relate to a factory in the manufacturing sector, while those in 2003 related to the sports equipment sector. Apart from what has already been said, the change in net capital employed was also due to the combined effect of the following factors: _ additions to tangible and intangible fixed assets as a result of investments totaling 152 million euro; _ depreciation/amortization, write-downs and disposals of 100,14 and 62 million euro respectively; _ change in operational reserves of 10 million euro; _ increase in tax receivables of 99 million euro, relating essentially to the corporate business transfer operation at the end of 2003, the impact of which on net capital employed emerged during 2004; _ decrease in financial fixed assets of 41 million euro.
D I R E C TO R S ’ R E P O RT
[millions of euro] Sector total revenues Cost of sales Gross operating income Selling costs Contribution margin General and administrative costs Income from operations
37
The net financial position was 431 million euro, a decrease of 37 million euro compared with the previous year, broken down as follows: 12.31.2004
12.31.2003
118 141 119 16 394
27 207 118 17 369
91 [66] 1 [1] 25
29 423
31 400
[2] 23
Current financial liabilities: _ bond loan _ short-term financial payables _ current portion of medium-term debt _ current portion of amounts due to leasing companies Total current financial liabilities
[300] [25] [1] [6] [332]
[35] [2] [5] [42]
Medium-term financial payables: _ bond loan _ syndicated loan _ other medium-term loans _ due to leasing companies Total medium-term financial payables Total financial liabilities Net financial position
[500] [4] [18] [522] [854] [431]
[300] [500] [4] [22] [826] [868] [468]
300 4 304 14 37
Net short-term financial position Net medium-term financial position Net financial position
62 [493] [431]
327 [795] [468]
[265] 302 37
[millions of euro] Current financial assets: _ Italian government securities and monetary and bond funds _ bank deposits _ cash and ordinary current accounts _ other short-term financial receivables Total current financial assets
D I R E C TO R S ’ R E P O RT
Medium-term financial receivables Total financial assets
38
To provide better support for the cyclical nature of the Group business and meet future commitments, on March 4, 2005, the Board of Directors authorized the management to negotiate a revolving line of credit for a maximum amount of 500 million euro and with a maximum duration of 5 years. These financial resources, of 394 million euro at the end of 2004, will enable to meet the maturity date in July 2005 of the 300 million euro bond loan, which places limitations on giving collateral security for new loans but does not require observance of any financial ratio [“financial covenants”]. The syndicated loan of 500 million euro, maturing in July 2007, provides for compliance with two financial ratios that have to be calculated every six months on the consolidated figures, namely: _ minimum ratio between EBITD [earnings before interest, tax and depreciation] and net financial charges of 2.5 times; _ maximum ratio between the net financial position and shareholders’ equity of 1. Moreover, there are limits on significant disposals of activities and on the granting of collateral security for new loans.
Change
[300] 10 1 [1] [290]
Statement of cash flow [millions of euro] Cash flow from operating activities Net operating investments Change in financial fixed assets Free cash flow Payment of dividends Payment of substitute tax Disposal of the sports equipment sector Net financial surplus
2004 269 [69] [23] 177
2003 252 [126] [4] 122
[69] [125] 50 33
[64] 81 139
For further information of an economic and financial nature, see the notes to the consolidated financial statements.
D I R E C TO R S ’ R E P O RT
Free cash flow improved significantly by 55 million euro. Payment of substitute tax associated with the corporate reorganization had a significant impact. The net proceeds from sale of the sports equipment business, of 50 million euro, are made up as follows: _ sale of the 10% interest in Tecnica S.p.A. for 15 million euro; _ receipt of a restricted deposit [escrow account] of 27 million euro; _ sale of a property by the American subsidiary for 8 million euro.
Quarterly financial data
39 1st quarter
2nd quarter
3rd quarter
4th quarter
381 171 28
472 202 39
389 176 33
444 208 23
Profit per share [euro] _ basic earnings per share
0.15
0.21
0.18
0.13
2003 quarters Net revenues Gross operating income Net income
444 192 25
525 223 25
413 182 26
477 213 32
Profit per share [euro] _ basic earning per share
0.14
0.14
0.14
0.18
[millions of euro] 2004 quarters Net revenues Gross operating income Net income
Gross operating income and income from operations [millions of euro]
757
2004
217 810
2003
232 868
2002
243 909
2001
286 880
2000
309
D I R E C TO R S ’ R E P O RT
Gross operating income Margine lordo industriale e risultato operativo Income from operations
Income before taxes and net income/[loss] [millions of euro]
165
2004
123
40
165
2003
108 49
2002
[10] 243
2001
148 346 243 Income before taxes Net income/[loss]
2000
Sources and uses [millions of euro]
Payment of dividends 64
Change in financial fixed assets 4 Cash flow from operating activities 252
Net financial surplus 139
2004 Assets Net operating investments 69
Current assets 60.1%
Payment of substitute tax 125
Cash flow from operating activities 269
Payment of dividends 69
Change in financial fixed assets 23 Net financial surplus 33
Liabilities
2004 Net operating investments 126
Uses
Sources Disposal of the sport equipment sector 50
Current liabilities 27.6%
Medium/long-term liabilities 25.3%
Fixed assets 39.9%
Shareholders’ equity 47.1%
D I R E C TO R S ’ R E P O RT
Disposal of the sport equipment sector 81
Uses
Sources
2003
2004 consolidated balance sheet structure [in %]
41
D I R E C TO R S ’ R E P O RT
Impact of introducing IAS/IFRS Development of the relative regulatory framework. European Community [EC] regulation 1606/2002, implemented by the Italian legislature through Law 306/2003, requires companies quoted in regulated European markets to adopt international accounting standards [IAS/IFRS] in the preparation of consolidated financial statements as from January 1, 2005. The Italian government subsequently approved, on February 25, 2005, the Legislative Decree to activate the options provided by article 5 of EC regulation 1606/2002, which made application of IAS/IFRS to financial statements of quoted companies optional for the 2005 financial year and obligatory as from the 2006 financial year. For the 2005 financial year, the Benetton Group has chosen to apply IAS/IFRS to the consolidated financial statements only. International accounting principles and related interpretations existing on September 14, 2002, with the exception of IAS 32 and 39, were ratified by the European Commission by the adoption of Regulation 1725 of September 29, 2003. During 2004, the European Commission adopted a series of Regulations to ratify international accounting standards published and revised subsequently. In particular, the following Regulations were issued: _ no. 707 of April 6, 2004 which ratified IFRS 1 “First-time adoption of International Financial Reporting Standards”; _ no. 2086 of November 19, 2004 which ratified IAS 39, with some limitations; _ nos. 2236, 2237 and 2238 of December 29, 2004 which ratified IAS 32, IFRIC 1, other standards revised by the IASB and new IFRS issued in March 2004; _ no. 211 of February 4, 2005 which ratified IFRS 2. The version of IAS 39 approved by EC Regulation 2086 differs from the text approved by the IASB; the Benetton Group will apply IAS 39 in the version approved by the IASB.
42 IAS/IFRS conversion process for the Benetton Group. The first annual financial statements of the Benetton Group that will be prepared in accordance with international accounting standards will be those for the year ending December 31, 2005. The Group intends to adopt IAS/IFRS as from the consolidated half-year report to June 30, 2005. The transition date, namely the opening date of the financial year prior to that of first-time adoption of IAS/IFRS, is January 1, 2004. The consolidated balance sheet at that date is required to be adjusted on the basis of international accounting standards as if they had always applied, with the exception of obligatory and optional concessions set out in IFRS 1. For the purposes of the adjustment of the opening balance sheet at the transition date and of consolidated financial statements to December 31, 2004, the Benetton Group will adopt the following options stated for in IAS/IFRS for preparing the financial statements: _ in the balance sheet, assets and liabilities are classified according the criterion which divides categories between “current” and “non-current”; _ the statement of income is classified based on the nature of costs. With reference to the optional exemptions set out in IFRS 1, the following choices were made. Valuation of real estate, plant and machinery and intangible assets - IFRS 1 allows the assumption of fair value or, if certain requirements are met, revalued cost, such as replacement cost of original depreciated/amortized cost. The Benetton Group is not making use of this exemption, since it has adopted the criterion of depreciated/amortized historic cost for the valuation of tangible and intangible fixed assets.
D I R E C TO R S ’ R E P O RT
Reserve for net exchange differences arising from the conversion of the financial statements of foreign shareholdings - IAS 21 “Effects of changes in foreign exchange rates” states that the differences arising from conversion of the financial statements of a foreign consolidated company must be classified as a separate item in Shareholders’ equity, which is transferred to the statement of income when the company is sold. The Group has adopted the facility granted by IFRS 1 to apply IAS 21 on a prospective basis, assuming that, at the date of transition to IAS/IFRS, the translation reserve is zero. Business combinations - IFRS 1 states that, at the transition date, the choice can be made not to apply IFRS 3 “Business Combinations” retroactively to company combinations which took place before the date of transition to IAS/IFRS. The Benetton Group intends to make use of this exemption and adopt IFRS 3 on a prospective basis, as from January 1, 2004, even though the effects of its application at the transition date would be minimal. Compound financial instruments - IAS 32 “Financial instruments: disclosure and presentation” states that, where there are compound financial instruments, the liability and shareholders’ equity components must be separated. IFRS 1 allows the non-separation of the two components if the liability element no longer exists at the transition date. The Benetton Group does not hold any compound financial instruments. Financial instruments accounted for in accordance with previous standards - IAS 32 and 39 “Financial instruments: recognition and measurement” applies to annual financial statements of financial years commencing as from January 1, 2005, however its early adoption is encouraged and the Benetton Group intends to apply this standard on a prospective basis as from January 1, 2004. Considering the designation of financial instruments as “instruments valued at fair value with variations attributed directly to the statement of income” or as “available for sale” - IAS 39 allows entry of a financial instrument at the time of its first entry either in the category “financial assets and liabilities valued at fair value with changes attributed directly to the statement of income” or in the category “assets available for sale”. IFRS 1 allows these designations to be made at the date of transition to IAS/IFRS and the Benetton Group is making use of this exemption. Derecognition of financial assets and liabilities - IAS 39 requires recognition in the opening balance sheet at January 1, 2004 of financial assets and liabilities, other than derivatives, which were previously written off following application of previous accounting principles. However, IFRS 1 allows application of the principle of “derecognition” on a prospective basis and therefore applicable to financial assets and liabilities, not consisting of derivatives, purchased after the transition date. The Benetton Group does not have any cases which would lead to adoption of the exemption in question. Share-based payments - IFRS 2 “Share-based payments” applies to annual financial statements of years commencing as from January 1, 2005, however its early adoption is encouraged and the Benetton Group intends to apply the standard on a prospective basis as from the 2004 financial year.
43
D I R E C TO R S ’ R E P O RT
Relative to accounting treatments allowed by IAS/IFRS, the Benetton Group has adopted the options described below. Concerning tangible and intangible assets, IAS/IFRS provide that, subsequent to acquisition, tangible and intangible assets may be valued at cost or fair value. The Benetton Group has adopted the cost option. IAS 2 allows valuation of inventories according to the criterion of weighted average cost or FIFO. The Benetton Group has opted for the criterion of weighted average cost, in line with what was also applied in previous financial statements prepared on the basis of Italian accounting principles.
44
Adjustments to shareholders’ equity at January 1, 2004, now emerging from the application of IAS/IFRS to the Benetton Group financial statements are summarized below: write-off of monetary revaluations in accordance with IAS 16 - in the past some categories of tangible fixed assets were the subject of monetary revaluations as allowed by Italian and Spanish law. The amount of the revaluation will be written off from the value of the asset, with an offsetting entry in a reserve in shareholders’ equity; write-off of start-up and expansion expenses in accordance with IAS 38 - start-up and expansion expenses will be written off, under Italian accounting principles, such expenses could be capitalized, however, under IAS/IFRS, qualify for recognition according to IAS 38; valuation of employee termination indemnities [TFR] in accordance with IAS 19 - Italian accounting principles require the liability for TFR to be shown at nominal value, calculated according to the provisions of the Italian Civil Code, whereas, according to IAS/IFRS, the amount of TFR falls within the category of defined benefit plans as provided in IAS 19 and subject to actuarial valuation. The Benetton Group has instructed an actuary to value the TFR liability at the transition date; accounting for leases according to IAS 17 - for the purposes of IAS 17, both lease income and expense must be registered in constant periodic amounts over the duration of the contract. The Benetton Group has entered into lease contracts in the USA and UK with increasing lease payments and, for the purposes of determining the income or charge for each period in accordance with IAS/IFRS, it is necessary to equalize these installments into constant amounts; fair value of exchange rate hedges in accordance with IAS 39 - the impact of mark to market valuation of exchange rate hedging instruments for future sales will be included in shareholders’ equity, whereas in accordance with accounting principles applied to date, they have been attributed to the statement of income; fair value of derivative instruments on interest rates in accordance with IAS 39 - the Benetton Group holds Interest Rate Swaps [IRS] to manage interest variation risks. Under Italian accounting principles, IRS satisfy the requirements of hedging instruments and therefore the difference between interest paid and that received is attributed directly to the relevant statement of income. For the purposes of IAS/IFRS, the derivative instruments in question do not satisfy all the requirements of IAS 39 for consideration as hedges and therefore will be valued at fair value.
IFRS 3 eliminates the concept of amortization of “Goodwill”; this requirement will have a limited impact on the Benetton Group financial statements, since the amounts currently in “Goodwill” in the consolidated financial statements mainly refer to payments for surrender of leases for acquisitions on a lease basis of properties for use as stores. These lease surrender payments will be amortized over the duration of the lease contract with the exception of French and Belgian “fonds de commerce”, amortized over 20 years.
D I R E C TO R S ’ R E P O RT
Further differences emerging from the application of IAS/IFRS to the Benetton Group financial statements but which do not have any impact on the reconciliation at January 1, 2004 are summarized below: leasehold improvements in accordance with IAS 16 - leasehold improvements will be reclassified from intangible to tangible fixed assets and depreciated over their estimated useful life or the duration of the lease contract to which they refer, if less; stock options in accordance with IFRS 2 - IFRS 2 considers stock options to be in the category of “share-based payments” and requires them to be valued at fair value at the time of their assignment, showing a cost in the statement of income offset by an increase in shareholders’ equity reserves; impairment test in accordance with IAS 36 - IAS/IFRS require an impairment procedure for company assets to ensure that they are not included in balance sheet assets at a value higher than is recoverable. The Benetton Group is proceeding with the identification of CashGenerating Units [CGUs] and establishing guidelines to allocate values and flows to these CGUs, as well as parameters to be used in the valuation process; available-for-sale financial assets - investments of liquidity in securities will be reclassified into the category foreseen in IAS 39 “Available-for-sale financial assets”; any losses or gains arising from comparison with market prices at the various accounting period-ends will be attributed to shareholders’ equity until the actual sale of these financial assets.
45
Benetton Group 2004 consolidated financial statements and related notes
Consolidated balance sheet reclassified according to financial criteria [thousands of euro]
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Assets Current assets Cash and banks Marketable securities Differentials on forward transactions Financial receivables
48
Accounts receivable Trade receivables Other receivables less - Reserve for doubtful accounts
Assets due to be sold Inventories Accrued income and prepaid expenses Total current assets Financial fixed assets Equity investments Securities held as fixed assets Guarantee deposits Medium/long-term financial receivables Other non-current receivables Total financial fixed assets Tangible fixed assets Real estate Plant, machinery and equipment Office furniture, furnishings and electronic equipment Vehicles and aircraft Construction in progress and advances for tangible fixed assets Finance leases less - Accumulated depreciation Total tangible fixed assets Intangible fixed assets Licenses, trademarks and industrial patents Deferred charges Total intangible fixed assets Total assets
12.31.2004
12.31.2003
notes
260,196 117,879 6,857 9,167 394,099
324,835 27,289 10,000 7,298 369,422
11 10 10 3
755,082 249,328 [97,642] 906,768
848,508 297,220 [95,870] 1,049,858
5, 8
7,840 255,436 13,367 276,643 1,577,510
8,088 233,736 15,842 257,666 1,676,946
5,116 223 16,715 28,273 44,436 94,763
20,514 9 15,832 30,615 8,662 75,632
703,449 305,636 112,655 22,366 3,724 13,259 [419,293] 741,796
641,966 327,409 100,269 22,817 17,019 13,913 [409,553] 713,840
9 4 12
3
2
1 25,041 184,392 209,433 2,623,502
28,225 202,800 231,025 2,697,443
12.31.2004
12.31.2003
notes
19,924 300,000 4,985 1,101 6,007 284,011 93,422 14,113 723,563
33,879 1,339 1,567 4,977 331,563 91,364 126,514 591,203
18 17 19 18 19 20 23, 24 22
Medium/long-term liabilities Bonds Medium/long-term loans net of current portion Other medium/long-term liabilities Lease financing Reserve for employee termination indemnities Other reserves Total medium/long-term liabilities
501,180 41,343 17,748 51,518 50,990 662,779
300,000 502,269 3,330 21,834 49,774 42,373 919,580
17 18 21, 23 19 16 15
Minority interests in consolidated subsidiaries
6,840
12,799
14
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Liabilities and Shareholders’ equity Current liabilities Due to banks Bonds Short-term loans Current portion of medium/long-term loans Current portion of lease financing Accounts payables Other payables, accrued expenses and deferred income Reserve for income taxes Total current liabilities
49 Shareholders’ equity Share Capital Additional paid-in capital Surplus from monetary revaluation of assets Other reserves and retained earnings Translation differences Net income/[loss] for the year Total Shareholders’ equity Total liabilities and Shareholders’ equity
13 236,026 56,574 22,058 790,211 2,377 123,074 1,230,320 2,623,502
236,026 56,574 22,058 762,986 [11,657] 107,874 1,173,861 2,697,443
Consolidated statement of income with revenues and cost of sales reclassified [thousands of euro]
Revenues
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Cost of sales Material and net change in inventories Payroll and related costs Subcontract work Industrial depreciation and amortization Other manufacturing costs
50
Gross operating income Selling, general and administrative expenses Payroll and related costs Distribution and transport Sales commission Advertising and promotion Depreciation and amortization Other expenses
Income from operations Other income/[expenses] Foreign currency gain/[loss], net Interest income Interest expenses Other income/[expenses], net
Income before taxes and minority interests Income taxes Income before minority interests Minority interests [income]/loss Net income for the year
2004 1,686,351
2003 1,858,983
notes 26
438,992 86,977 340,217 21,118 42,046 929,350
528,315 90,786 364,291 24,075 41,731 1,049,198
29 32 30 33
757,001
809,785
125,181 29,988 73,573 53,714 78,447 178,894 539,797
121,424 31,687 82,622 69,477 79,178 193,818 578,206
217,204
231,579
165 21,816 [45,402] [29,448] [52,869]
9,652 28,780 [60,213] [44,480] [66,261]
164,335
165,318
41,754
56,399
122,581
108,919
32 30 30 30 33 28, 30, 31, 34
33, 34, 36-40
493 123,074
[1,045] 107,874
41
Consolidated balance sheet - Assets [thousands of euro]
A
Receivable from Shareholders for payments not yet due
B
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
I 1 3 4 5 6 7 II 1 2 3 4 5 III 1
52
2
3
Fixed assets Intangible fixed assets start-up and expansion expenses industrial patents and intellectual property rights concessions, licenses, trademarks and similar rights goodwill and consolidation differences assets under construction and advances to suppliers other intangible fixed assets Total intangible fixed assets Tangible fixed assets real estate plant and machinery industrial and commercial equipment other assets assets under construction and advances to suppliers Total tangible fixed assets Financial fixed assets equity investments in: a. subsidiary companies b. associated companies d. other companies Total equity investments accounts receivable due from: d. third parties: _ within 12 months _ beyond 12 months Total accounts receivable other securities Total financial fixed assets Total fixed assets
12.31.2004 -
12.31.2003 -
3,685 1,099 23,942 90,285 222 90,200 209,433
7,361 1,491 26,734 90,078 206 105,155 231,025
590,184 79,498 884 67,506 3,724 741,796
540,099 87,343 1,206 68,173 17,019 713,840
notes
1
2
3 3,216 5 1,895 5,116
3,549 5 16,960 20,514
9,326 44,989 54,315 223 59,654 1,010,883
34,742 46,447 81,189 9 101,712 1,046,577
I 1 2 4 5 II 1
2 3 4
4bis
4 5
ter
6 III 6 7 8
IV 1 2 3
Current assets Inventories raw materials, other materials and consumables work in progress and semi-manufactured products finished goods and goods for resale advances from customers Total inventories Accounts receivable trade receivables: _ within 12 months _ beyond 12 months Total trade receivables subsidiary companies associated companies parent company: _ within 12 months _ beyond 12 months Total parent company taxes: _ within 12 months _ beyond 12 months Total taxes deferred tax assets other receivables: _ within 12 months _ beyond 12 months Total other receivables assets due to be sold Total accounts receivable Financial assets not held as fixed assets other securities other financial receivables differentials on forward transactions within 12 months Total financial assets not held as fixed assets Liquid funds bank and post office deposits checks cash in hand Total liquid funds Total current assets
D Accrued income and prepaid expenses Total assets
12.31.2004
12.31.2003
101,559 57,558 96,099 220 255,436
101,734 53,147 78,422 433 233,736
notes 4
5 657,002 3,400 660,402 351
752,153 3,581 755,734 101 364
405 32,283 32,688
447 447
39,592 2,052 41,644 182,624
26,004 2,479 28,483 202,250
26,425 6,701 33,126 7,840 958,675
41,061 2,602 43,663 8,088 1,039,130
117,879 209
27,289 34
6,857 124,945
10,000 37,323
200,175 59,594 427 260,196 1,599,252
265,024 59,503 308 324,835 1,635,024
13,367 2,623,502
15,842 2,697,443
6
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
C
53 7 8
9 10
11
12
Consolidated balance sheet - Liabilities and Shareholders’ equity [thousands of euro]
A I II III IV VII IX C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
12.31.2004
12.31.2003
236,026 56,574 22,058 47,210 745,378 123,074 1,230,320 6,840 1,237,160
236,026 56,574 22,058 32,240 719,089 107,874 1,173,861 12,799 1,186,660
Reserves for risks and charges taxes, including deferred other Total reserves for risks and charges
46 50,944 50,990
3,039 39,334 42,373
Reserve for employee termination indemnities
51,518
49,774
300,000 300,000
300,000 300,000
20,965 500,710 521,675
35,388 501,739 537,127
9,652 18,218 27,870 1,611
5,835 22,364 28,199 2,715
281,066 281.066 1,408 2,684 -
317,292 101 317,393 1,080 2,630 5
Shareholders’ equity Share Capital Additional paid-in capital Revaluation reserves Legal reserve Other reserves Net income for the year Group interest in Shareholders’ equity Minority interests Total Shareholders’ equity
B 2 3
C D 1
54
4
5
6 7
8 9 10
Accounts payable bonds: _ within 12 months _ beyond 12 months Total bonds due to banks: _ within 12 months _ beyond 12 months Total due to banks due to other lenders: _ within 12 months _ beyond 12 months Total due to other lenders advances from customers trade payables: _ within 12 months _ beyond 12 months Total trade payables securities issued within 12 months due to subsidiaries due to associated companies
notes 13
14
15
16
17
18
19
20
12
13 14
due to parent company: _ within 12 months _ beyond 12 months Total due to parent company due to tax authorities: _ within 12 months _ beyond 12 months Total due to tax authorities due to social security and welfare institutions other payables: _ within 12 months _ beyond 12 months Total other payables Total accounts payable
Accrued expenses and deferred income accrued expenses and deferred income Total accrued expenses and deferred income Total liabilities and Shareholders’ equity
12.31.2004
12.31.2003
51 18,664 18,715
11,005 11,005
31,251 59 31,310 9,210
149,440 149,440 8,931
49,871 19,936 69,807 1,265,356
40,427 604 41,031 1,399,556
18,478 18,478 2,623,502
19,080 19,080 2,697,443
22
23
E
1
notes 21
24
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
11
55
Memorandum accounts [thousands of euro]
Fiduciary guarantees granted Guarantees Commitments Sale commitments Purchase commitments
12.31.2004
12.31.2003
136,488
2,786
116
1,950 6,895
609,394 341,158 15 1,087,171
581,088 278,267 1,725 872,711
Other Currency to be sold forward Currency to be purchased forward Notes presented for discount Total memorandum accounts
25
Consolidated statement of income [thousands of euro]
A 1 2
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
4 5
B
Value of production Revenues from sales and services Change in work in progress, semi-manufactured products and finished goods Own work capitalized Other revenues and income Total value of production
Production costs Raw materials, other materials, consumables and goods for resale External services Leases and rentals Payroll and related costs: a. wages and salaries b. social security contributions c. employee termination indemnities e. other costs Total payroll and related costs 10 Amortization, depreciation and write-downs: a. amortization of intangible fixed assets b. depreciation of tangible fixed assets c. other write-downs of fixed assets d. write-downs of current receivables and of liquid funds Total amortization, depreciation and write-downs 11 Changes in inventories of raw materials, other materials, consumables and goods for resale 12 Provisions for risks 13 Other provisions 14 Other operating costs Total production costs Difference between production value and costs 6 7 8 9
56
C 15 16
Financial income and expenses Income from equity investments Other financial income: a. from receivables held as financial fixed assets from other companies c. from securities included among current assets not representing equity investments d. financial income other than the above: _ from subsidiary companies _ from others Total financial income other than the above Total other financial income
2004
2003
notes
1,686,351
1,858,983
26
22,811 2,134 51,345 1,762,641
[35,603] 750 55,868 1,879,998
27
452,168 620,579 89,728
487,048 657,767 90,870
159,172 44,599 8,555 1,328 213,654
157,289 45,715 8,858 1,531 213,393
40,894 58,671 13,332
42,916 60,741 16,129
39,241 152,138
48,430 168,216
405 6,897 25,668 22,278 1,583,515 179,126
6,828 11,888 11,085 28,709 1,675,804 204,194
375
4,042
28
29 30 31 32
33
34 34 35
36 852
1,945
1,099
795
20,141 20,141 22,092
81 26,102 26,183 28,923
17bis
D 18
19
E
Interest and other financial expenses: _ from subsidiary companies _ from others Total interest and other financial expenses Gains/[losses] on exchange rate differences Total financial income and expenses Adjustments to financial assets Revaluations: c. of securities included among current assets not representing equity investments Write-downs: a. of equity investments c. of securities included among current assets not representing equity investments Total write-downs Total adjustments to financial assets
Extraordinary income and expenses 20 Income: _ gains on disposals _ other Total income 21 Expenses: _ losses on disposals _ taxes relating to prior years _ other Total expenses Total extraordinary income and expenses
48,631 48,631 114 [26,050]
2003 49 64,767 64,816 9,652 [22,199]
2
-
213
261
16 229 [227]
53 314 [314]
38
39 24,157 15,142 39,299
2,870 10,369 13,239
4,095 642 23,076 27,813 11,486
1,902 10,916 16,784 29,602 [16,363]
164,335
165,318
22 Taxes on income for the year, deferred income and expenses Income before minority interests
41,754 122,581
56,399 108,919
[Income]/Loss attributable to minority interests 23 Net income for the year
493 123,074
[1,045] 107,874
Results before income taxes
notes 37
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
2004 17
57 40
41
Statement of changes in Shareholders’ equity [thousands of euro]
Share Capital
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Balance as of December 31, 2002
58
Surplus from Other Additional monetary reserves paid-in revaluations and retained capital of assets earnings 836,393
Net Translation income/[loss] difference for the year [617]
Total
236,026
56,574
22,058
Loss for 2002 brought forward
-
-
-
[9,861]
-
9,861
Dividends distributed as approved at the ordinary Shareholders’ meeting on May 12, 2003
-
-
-
[63,546]
-
-
[63,546]
Translation differences from conversion of foreign financial statements
-
-
-
-
-
[11,040]
Net income for 2003
-
-
-
-
Balance as of December 31, 2003
236,026
56,574
22,058
762,986
Income for 2003 brought forward
-
-
-
107,874
-
Dividends distributed as approved at the ordinary Shareholders’ meeting on May 12, 2004
-
-
-
[68,992]
-
-
[68,992]
Translation differences from conversion of foreign financial statements
-
-
-
-
2,377
-
2,377
Net income for 2004
-
-
-
-
-
123,074
123,074
Balance as of December 31, 2004
236,026
56,574
22,058
801,868
[11,040] -
[11,657]
[9,280]
[9,861] 1,140,573
-
107,874
107,874
107,874
1,173,861
[107,874]
-
123,074 1,230,320
Statement of changes in minority interests [thousands of euro] Net income 1,609
Total 14,780
2002 income brought forward Acquisition of investments/Share capital increase Dividends distributed Translation differences Net income for 2003
1,609 [1,337] [761] [928] -
[1,609] 1,045
Balances as of December 31, 2003
11,754
1,045
12,799
2003 income brought forward Acquisition of investments/Share capital increase Dividends distributed Translation differences Loss for 2004
1,045 [5,355] [422] 311 -
[1,045] [493]
[5,355] [422] 311 [493]
Balances as of December 31, 2004
7,333
[493]
[1,337] [761] [928] 1,045
6,840
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Balances as of December 31, 2002
Capital and reserves 13,171
59
Consolidated statement of cash flow [thousands of euro]
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
2004
60
2003
Cash flow from operating activities Income before minority interests Depreciation and amortization Amortization of deferred charges on medium/long-term loans Provision for doubtful accounts and other non-monetary charges Provision for income taxes Losses/[Gains] on disposal of assets, investments, net Payment of termination indemnities and use of other reserves Self-financing
122,581 99,565 359 76,446 41,754 159 [28,931] 311,933
108,919 103,657 363 76,517 56,399 26,493 [45,275] 327,073
Payment of taxes
[35,627]
[71,442]
Change in accounts receivable Change in other operating receivables Change in inventories Change in accounts payable Change in other operating payables and accruals Change in working capital
56,820 4,488 [15,245] [54,904] 1,520 [7,321]
[5,078] [22,885] 42,683 [16,001] [2,532] [3,813]
Net cash flow from operating activities
268,985
251,818
Cash flow from investing activities Purchase of tangible fixed assets Investment in intangible fixed assets Sales of tangible fixed assets Disposal of intangible fixed assets Net change in investment-related receivables and payables Net cash flow from investing activities
[114,898] [37,081] 55,134 7,134 28,597 [61,114]
[104,447] [46,091] 38,378 103,065 2,511 [6,584]
[21,607] 15,167 25,267 18,827
[18,526] 3,854 [27,232] [41,904]
[69,414] [124,514] 32,770
[64,307] 139,023
Cash flow relating to equity investments and other investing activities Purchase of equity investments Sale of equity investments [Increase]/Decrease in guarantee deposits and treasury shares Total cash flow relating to equity investments and other investing activities Payment of dividends Payment of substitute tax Net financing surplus
Change of liquidity Effect of translation adjustments Net cash used by financing activities
2003
1,960 [10,688] [1,554] 8 58 [8,916] 9,034 [3,057] [13,155]
245 66,868 [55,710] 1,304 [25,248] 7,128 [3,070] [8,483]
[26,445] 6,830 [32,770]
[145,468] 14,928 [139,023]
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
2004 Cash flow from financing activities Change in Shareholders’ equity Change in short-term borrowing Repayment of medium/long-term debt Change in securities held as fixed assets Change in medium/long-term debt/financial receivables with Group companies Increase in medium/long-term financial receivables Decrease in medium/long-term financial receivables Change in lease financing
61
Companies and groups included in the consolidation as of December 31, 2004
Name of the company
Share Capital
Group interest
Location
Currency
Ponzano Veneto [Tv]
Eur
236,026,454.30
Ponzano Veneto [Tv] Ponzano Veneto [Tv] Ponzano Veneto [Tv] Ponzano Veneto [Tv] Ponzano Veneto [Tv] Ponzano Veneto [Tv] Ponzano Veneto [Tv]
Eur Eur Eur Eur Eur Eur Eur
5,100,000 47,988,000 1,548,000 26,000,000 4,128,000 1,549,370.69 150,000,000
100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000%
Ponzano Veneto [Tv] Ponzano Veneto [Tv] Ponzano Veneto [Tv]
Eur Eur Eur
36,150,000 10,516,456 12,900,000
100.000% 100.000% 100.000%
Munich Sydney Amsterdam Lugano Salzburg Nagykallo Amsterdam Maia Sahline Osijek Sahline Sahline New Delhi Lawrenceville Curitiba Tokyo
Eur Aud Eur Chf Eur Eur Eur Eur Tnd Hrk Tnd Tnd Inr Usd Brl Jpy
2,812,200 500,000 92,759,000 1,000,000 3,270,277.54 89,190 225,000 100,000 350,000 2,000,000 303,900 20,000 109,241,000 379,148,000 78,634,578 400,000,000
100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000%
Companies and groups consolidated on a line-by-line basis:
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Parent Company Benetton Group S.p.A.
62
Italian subsidiaries Benetton Retail Italia S.r.l. Olimpias S.p.A. _ Benair S.p.A. Benind S.p.A. Fabrica S.p.A. _ Colors Magazine S.r.l. Bencom S.r.l. Società Investimenti e Gestioni Immobiliari [S.I.G.I.] S.r.l. _ Buenos Aires 2000 S.r.l. Bentec S.p.A. Foreign subsidiaries Benetton Deutschland GmbH Benetton Australia Pty. Ltd. Benetton Holding International N.V. S.A. _ United Colors Communication S.A. _ Benetton Austria GmbH _ Benetton Ungheria Kft. _ Benetton Manufacturing Holding N.V. _ Benetton Têxtil - Confecção de Têxteis S.A. _ Benetton Manufacturing Tunisia S.à r.l. _ Benetton Croatia d.o.o. _ Benetton Tunisia S.à r.l. _ Benetton Trading S.à r.l. _ DCM Benetton India Ltd. _ Benetton Trading USA Inc. _ United Colors of Benetton Do Brasil Ltda. _ Benetton Japan Co. Ltd.
Share Currency Capital Jpy 160,000,000 Krw 2,500,000,000 Hkd 41,400,000 Eur 181,905,390 Chf 80,000,000 Eur 260,000 Eur 17,608,000 Eur 116,600,000 Eur 14,500,000 Eur 2,500,000 Eur 99,495,711.60 Eur 94,900,125 Eur 10,000,000 Rur 64,600,000 Eur 100,000 Eur 15,270,450 Eur 150,250 Eur 2,500,000 Eur 2,000,000 Eur 5,000,000 Huf 50,000,000 Gbp 56,800,000 Eur 10,180,300
Group interest 100.000% 50.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 51.000% 100.000% 100.000% 100.000%
Maia Wilmington
Eur Usd
500,000 84,654,000
100.000% 100.000%
Investments in subsidiary companies carried at equity: _ Benetton Slovakia s.r.o. _ Benetton Argentina S.A.
Dolny Kubin Buenos Aires
Svk Arp
135,000,000 500,000
100.000% 100.000%
Investments in subsidiary and associated companies carried at cost: _ Consorzio Generazione Forme - Co.Ge.F.
S. Mauro Torinese [To]
Eur
15,492
33.333%
C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Location Tokyo Seoul Hong Kong Luxembourg Lugano Dublin Amsterdam Luxembourg Brussels Vienna Paris Paris Paris Moscow Maia Barcelona Barcelona Luxembourg Munich Frankfurt Nagykallo London Barcelona
Name of the company _ Benetton Retailing Japan Co. Ltd. _ Benetton Korea Inc. _ Benetton Asia Pacific Ltd. _ Benetton Finance S.A. _ Benetton Società di Servizi S.A. _ Lairb Property Ltd. Benetton International Property N.V. S.A. _ Benetton Real Estate International S.A. _ Benetton Real Estate Belgique S.A. _ Benetton Real Estate Austria GmbH _ Benetton Trading S.à r.l. _ Benetton Realty France S.A. _ Benetton France Commercial S.A.S. _ Benetton Realty Russia O.O.O. _ Benetton Realty Portugal Imobiliaria S.A. _ Benetton Realty Spain S.L. _ Benetton Real Estate Spain S.L. Benetton International S.A. _ Benetton Retail Deutschland GmbH _ New Ben GmbH _ Benetton Retail Ungheria Kft. _ Benetton Retail [1988] Ltd. _ Benetton Retail Spain S.L. _ Benetton 2 Retail Comércio de Produtos Têxteis S.A. Benetton USA Corp.
63
The consolidated financial statements have been prepared in conformity with chapter III of Legislative Decree no. 127 of April 9, 1991, which implemented the EC VII Directive in Italy. The notes to the consolidated financial statements explain, analyze and, in some cases, supplement the data reported on the face of the financial statements and include information required by article 38 and other provisions of Legislative Decree no. 127/1991. Additional information is also provided in order to present a true and fair view of the financial and operating position of the Group, even where this is not required by specific legislation. The statement of income and balance sheet for 2004 has been drawn up incorporating changes required by the reform of company law [Legislative Decree no. 6 of January 17, 2003 and subsequent amendments and additions] as illustrated in the relative paragraph. Unless otherwise specified, amounts indicated in these notes are expressed in thousands of euro. Activities of the Group Benetton Group S.p.A., the Parent Company, and its subsidiary companies [collectively the “Group”] primarily manufacture and market fashion apparel in wool, cotton and woven fabrics, as well as sportswear and leisure goods. The manufacture of finished articles from raw materials is undertaken partly within the Group and partly using subcontractors, whereas marketing is carried out through an extensive sales network both in Italy and abroad, consisting mainly of stores owned by third parties. Form and content of the consolidated financial statements The consolidated financial statements of the Group include the financial statements as of December 31, 2004 of Benetton Group S.p.A., the Parent Company, and all the Italian and foreign companies in which the Parent Company holds, directly or indirectly, the majority of the voting rights. They also include the accounts of some 50%-owned companies over which the Group exercises a dominant influence. The companies included within the scope of consolidation are listed in the appendix “Companies and groups included in the consolidation as of December 31, 2004”. Financial statements utilized for the consolidation are those prepared for approval at the Shareholders’ meetings of the individual companies. Financial statements of foreign subsidiaries have been reclassified, where necessary, for consistency with the format adopted by the Parent Company. Such financial statements have been adjusted so that they are consistent with the accounting policies referred to below. A reconciliation between Shareholders’ equity and net income as reported in the statutory financial statements of Benetton Group S.p.A., and the consolidated Shareholders’ equity and net income of the Group is presented in the consolidated Shareholders’ equity section.
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Notes to the consolidated financial statements
65
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
66
Principles of consolidation The most significant consolidation principles adopted for the preparation of the consolidated financial statements are as follows: a. The assets and liabilities of subsidiary companies are consolidated on a line-by-line basis and the carrying value of investments held by the Parent Company and other consolidated subsidiaries is eliminated against the related Shareholders’ equity accounts. b. When a company is consolidated for the first time, any positive difference emerging from the elimination of its carrying value on the basis indicated in a] above, is allocated, where applicable, to the assets of the subsidiary. Any excess arising upon consolidation, described as “consolidation difference”, is entered in assets in “Goodwill and consolidation differences”. Negative differences are classified within the “Reserve for future risks and charges arising on consolidation” if they reflect expected future losses; otherwise, they are classified as part of the “Consolidation reserve” within Shareholders’ equity. Goodwill is amortized over its estimated useful life. c. Intercompany receivables and payables, costs and revenues, and all significant transactions between consolidated companies, including the intragroup payment of dividends, are eliminated. Unrealized intercompany profits and gains and losses arising from transactions between Group companies are also eliminated. d. The minority Shareholders’ interest in Shareholders’ equity and the results for the year of consolidated subsidiaries are classified separately as “Minority interests” in the consolidated balance sheet and as “Income attributable to minority interests” in the consolidated income statement. e. The financial statements of foreign subsidiaries are translated into euro using year-end exchange rates for balance sheet items and average exchange rates for the year for income statement items. Differences arising from the translation into euro of foreign currency financial statements are reflected directly in consolidated Shareholders’ equity.
Intangible fixed assets. These are recorded at purchase or production cost, including related charges. The value of these assets may be subject to revaluation in accordance with statutory regulations. One method for determining the value of intangible fixed assets is to allocate the excess price deriving from investments acquired or other company transactions. This type of allocation is used for excess prices paid for trademarks acquired under these types of operation, on the basis of an independent appraisal. Intangible fixed assets are written down in cases where, regardless of the amortization accumulated, there is a permanent loss in value. The value of such assets is reinstated in future accounting periods should the reasons for such write-downs no longer apply. Book value is systematically amortized on a straight-line basis in relation to the residual useful economic lives of such assets. The duration of amortization plans is based on the estimated economic use of these assets. Normally, amortization periods for trademarks fluctuate between fifteen and twenty-five years, while patents are amortized over three years. Goodwill and consolidation differences are amortized over ten years. Leasehold improvements costs are amortized over the duration of the lease contract. Start-up and expansion expenses and other deferred charges are mostly amortized over five years. Tangible fixed assets. These are recorded at purchase or production cost, revalued where required or permitted by statutory regulations. Cost includes related charges and direct and indirect expenses reasonably attributable to the individual assets. Tangible fixed assets are written down in cases where, regardless of the depreciation accumulated, there is a permanent loss in value. The value of such assets is reinstated in future accounting periods should the reasons for such write-downs no longer apply. Ordinary maintenance costs are fully expensed as incurred. Improvement expenditure is allocated to the related assets and depreciated over their residual useful lives. Depreciation is calculated systematically on a straight-line basis using rates considered to reflect the estimated useful lives of the assets. In the first year such assets enter into service, these rates are halved in consideration of their shorter period of use. The depreciation rates applied by consolidated companies are as follows: Real estate Plant and machinery Industrial and commercial equipment
2% - 3% 8% - 25% 10% - 25%
Other tangible fixed assets: _ office and store furniture, furnishings and electronic machines _ vehicles _ aircraft
10% - 25% 20% - 25% 6%
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Accounting principles and valuation criteria These have been adopted in observance of article 2426 of the Italian Civil Code, also taking account of accounting principles prepared by the Italian Accounting Profession and, in the absence thereof, those issued by the International Accounting Standards Board [IASB].
67
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
68
In order to incorporate the changes required by the reform of company law [Legislative Decree no. 6 of January 17, 2003 and subsequent amendments and additions] in the statutory financial statements of Italian Group companies, eliminations have been made of tax-based adjustments resulting from accelerated depreciation made in prior years, by allocating past income effects to extraordinary income and the relative tax effects to extraordinary expenses. These impacts have been reversed in the consolidated financial statements where they had already been eliminated in previous years. Assets acquired under finance leases are stated at their fair value at the start of the lease and the capital portion of the lease installments is recorded as a liability to the leasing company. Financial fixed assets. Investments in subsidiaries not consolidated on a line-by-line basis, because no longer operative or in liquidation at the date of the financial statements, together with those in associated companies, are valued at cost on an equity basis, eliminating the Group’s share of any unrealized intercompany profits, where significant. The difference between cost and Shareholders’ equity of subsidiary companies at the time they are acquired is allocated on the basis described in paragraph b] of the consolidation principles. Equity investments of less than 20% in other companies are stated at cost, which is written down where there is a permanent loss in value. The original value of these investments is reinstated in future accounting periods should the reasons for such write-downs no longer apply. Receivables included among financial fixed assets are stated at their estimated realizable value. Other securities in fixed assets are entered at cost, adjusted for issue and dealing discounts. This cost is written down for any lasting losses of value. Inventories. Inventories are stated at the lower of purchase or manufacturing cost, generally determined on a weighted average cost basis, and their market or net realizable value. Manufacturing cost includes raw materials and all direct and indirect production-related expenses. The calculation of estimated realizable value includes any manufacturing costs still to be incurred and direct selling expenses. Obsolete and slow-moving inventories are written down in relation to their possibility of employment in the production process or to their net realizable value. Accounts receivable. These are recorded at their estimated realizable value, net of appropriate reserves for doubtful accounts determined on a prudent basis. Any medium/longterm receivables that include an implicit interest component are discounted using a suitable market rate. Receivables discounted without recourse, for which the insolvency risk is transferred to the acquirer, are reversed in the financial statements at their nominal value. Commission paid to the factoring company for the service is included in expenses for financial services. Other securities not held as fixed assets. These securities are stated at the lower of purchase cost and market value; the original value of these investments is reinstated in future accounting periods, should the reasons for such write-downs no longer apply. Securities acquired subject to resale commitments are recorded at cost and classified among other securities not held as fixed assets. The difference between the spot and forward prices of such securities is recognized in the period to which it relates over the duration of the contract. Accruals and deferrals. These are recorded to match costs and revenues in the accounting periods to which they relate.
Reserve for employee termination indemnities. This reserve represents the liability of Italian companies within the Group for indemnities payable upon termination of employment, accrued in accordance with labor laws and labor agreements in force. This liability is subject to annual revaluation using the officially-established indices. Accounts payable. These are stated at face value. The implicit interest component which is included in medium/long-term debt is recorded separately using a suitable market rate. Transactions in foreign currencies. Transactions in foreign currencies are recorded using the exchange rates in effect at the transaction dates. Exchange gains or losses realized during the year are included in the consolidated statement of income. At the date of the financial statements, the Italian Group companies adjust receivables and payables in foreign currency to the exchange rates ruling at the year end, booking all resulting gains and losses to the income statement. Exchange gains or losses incurred, on forward contracts opened to hedge receivables and payables are booked to the income statement; the discount or premium on these contracts is recorded on an accrual basis. The value of forward contracts, other than those hedging specific foreign currency assets and liabilities, is restated at year-end with reference to the differential between the forward exchange rates applicable to the various types of contract at the balance-sheet date and the contracted forward exchange rates; the net result of this comparison is charged to the statement of income. Revenue recognition. Revenues from product sales are recognized when change of ownership occurs, which normally occurs at the time of shipment to the customer. Expense recognition. Expenses are recorded on accrual basis. Income taxes. Current income taxes are provided on the basis of a reasonable estimate of the tax liability for the year, in accordance with applicable local regulations. Italian companies of the Group are participating in a national tax consolidation according to articles 117 and subsequent of the Tax Consolidation Act DPR 917/86 based on a proposal by the consolidating parent company Edizione Holding S.p.A. which exercised the option for this ruling on December 30, 2004. The duration of the option is three years starting from the 2004 fiscal year. Relationships arising from participation in the consolidation are governed by specific Rules approved and signed by all participating companies. This participation enables the companies to identify, and then transfer, current taxes, even when the taxable result is negative, with a receivable from Edizione Holding S.p.A. as the counter entry. Vice versa, if the taxable result is positive, current taxes have a payable to the parent company as the counter entry. The relationship between the parties, governed by a contract, provides for the recognition by all of the amount calculated based on the fiscal losses and profits transferred at current IRES (corporation tax) rates. Moreover, the net total of prepaid and deferred tax is recorded. Deferred tax assets relate to costs and expenses not yet deductible at year-end, to
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Reserves for risks and charges. These reserves cover known or likely losses, the timing and amount of which cannot be determined at year-end. The reserves reflect the best estimate of losses to be incurred based on the information available.
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70
consolidation adjustments and to the benefit of accumulated tax losses carrying forward; deferred tax assets are recognized when there is a high degree of certainty that they can be recovered in the future. Deferred tax liabilities refer to transactions where taxation is deferred to future years, such as gains on the disposal of tangible and intangible fixed assets or consolidation adjustments arising from the reversal of accelerated depreciation or lease transactions recorded as finance leases. Deferred tax assets are adjusted to take account of the reasonable certainty of their recovery. Supplementary information Accounting treatment of the business transfers in the consolidated financial statements. The businesses transferred by the Parent Company to three Italian companies in December 2003 involved transferring assets and liabilities on the basis of a valuation carried out by expert appraisers in accordance with art. 2343 of the Italian Civil Code. The assets transferred mainly consisted of trademarks and patents, licenses and software, real estate, plant and machinery and IT equipment. The expert appraisal recalculated the residual useful life of the assets and gave each of them a value, which resulted in a significant capital gain for the transferor in the financial statements to December 31, 2003, which, reassessed for tax purposes, was subject to the 19% flat-rate substitute tax as per arts. 1 and 4.2 of D. Lgs. 358/1997. The accounting treatment of this operation had the following impact on the consolidated financial statements: _ elimination of the intercompany gain on transfer and reallocation of the pre-contribution values to the various assets and related reserves; _ elimination of the depreciation and amortization charged on the new higher values in the transferee companies; _ recalculation of depreciation and amortization on the basis of the assets’ historical costs and adjustment of their residual useful life to that established for the financial statements of the transferee companies. The substitute tax will make it possible to deduct the depreciation and amortization on these capital gains for tax purposes in future years. This tax was paid in the first half of 2004. According to Accounting Principle no. 25 issued by the Italian Accounting Profession, elimination of the intercompany gains in the consolidation will give rise to timing differences between the post-elimination asset values in the consolidated financial statements and the corresponding values shown in the statutory financial statements of the transferee companies, in which deferred tax assets have been booked. These deferred tax assets have been calculated by applying the current tax rate to the said timing differences, given that it is reasonably certain that they will be recoverable in future years by earning sufficient taxable income, as reflected in the Company’s forecasts. The Killer Loop brand, on the other hand, was transferred at fair value, based on an appraisal. Such fair value was lower than the book value. The expert appraisers chose the “market royalty rate” as their main method of valuation as this was considered the most prudent, even if it does not necessarily represent the value that could be obtained by selling the brands (market value). As pointed out in this appraisal, different methods of valuation can lead to quite different values; in fact, the appraisers used “enterprise value” as a control method to assess the economic sustainability of the values indicated by the main valuation method. Under this method, the value of the Killer Loop brand and related goodwill as shown in the financial statements were confirmed and the expected cash flows were not at risk of impairment.
Statement of cash flows. The statement of consolidated cash flows provides information by type of flow and activity. Cash and bank accounts and readily marketable securities are treated as cash. Reform of company law. The statement of income and balance sheet have been drawn up incorporating changes required by the reform of company law [Legislative Decree no. 6 of January 17, 2003 and subsequent amendments and additions], which required some changes to the consolidated financial statements relative to the financial statements; in particular in accordance with art. 2423 ter, paragraph 5, the following items were reclassified as of December 31, 2003 to put them on a like basis and comparable with those at December 31, 2004: _ C 4 bis “Taxes”; _ C 4 ter “Deferred tax assets”; _ C 17 bis “Gains/[losses] on exchange rate differences”; _ information on receivables and payables, which must be analyzed by geographic area.
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Article 2423, paragraph 4, of the Italian Civil Code. Departures from statutory accounting criteria and policies according to the fourth paragraph of article 2423 of the Italian Civil Code have not occurred.
71
Comments on principal asset items Fixed assets
[thousands of euro] Start-up and expansion expenses Industrial patents and intellectual property rights Concessions, licenses, trademarks and similar rights Goodwill and consolidation differences: _ goodwill _ consolidation differences Total goodwill and consolidation differences Assets under construction and advance payments Other intangible fixed assets: _ issue expenses for bonds and loans _ software and other _ leasehold improvements Total other intangible fixed assets Total
12.31.2004 Gross Net 17,633 3,685 3,477 1,099 65,890 23,942
12.31.2003 Gross Net 18,367 7,361 3,355 1,491 64,851 26,734
120,970 17,325 138,295
84,048 6,237 90,285
110,464 17,542 128,006
83,236 6,842 90,078
222
222
206
206
1,653 66,355 98,961 166,969 392,486
491 24,724 64,985 90,200 209,433
1,722 58,087 103,187 162,996 377,781
876 25,798 78,481 105,155 231,025
“Start-up and expansion expenses” include 3,060 thousand euro in start-up expenses for retail projects. “Concessions, licenses, trademarks and similar rights” include the net book value of the following brands: [thousands of euro] United Colors of Benetton Sisley Killer Loop Other Total
12.31.2004 3,046 444 14,273 1,112 18,875
12.31.2003 2,964 426 16,058 1,206 20,654
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[1] Intangible fixed asset
73
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“Goodwill” is made up essentially of the value of the retailing companies bought in Italy’s main cities with a view to developing the network of clothes stores. Increases in 2004 relate mainly to investments in the sales network in Italy and Belgium. “Consolidation differences” of 6,237 thousand euro reflect the residual goodwill emerging from consolidation of the companies acquired, with 1,549 thousand euro attributable to the business represented by the Killer Loop trademark and the remainder to other European companies. This consolidation difference is amortized over ten years, which is considered appropriate since it is consistent with the accounting policies currently applied in the sector where Group companies operate. Leasehold improvements relate mainly to the restructuring and modernization of stores belonging to third parties; the change in the year is due to new investments, amortization and adjustments to market value in some foreign companies. “Software and other” includes costs incurred for the purchase and development of software which represent costs incurred for the study, diagnosis and implementation, as well as the purchase, of IT programs and applications. The increase in this item relates to purchases from third parties and internal development of programs. This item also includes costs incurred for the early vacation of third party premises, which are amortized over the life of the lease, as well as expenses related to taking over lease contracts of properties and companies. Movements in the principal intangible fixed asset items during 2004 were as follows:
74 [thousands of euro] Net opening balance Change in the scope of consolidation Additions Disposals Amortization Translation differences and other movements Net closing balance
Patent rights 1,491 130 [7] [515] 1,099
Concessions, licenses, trade marks Goodwill and Other and similar consolidation Leasehold intangible rights differences improvements fixed assets 26,734 90,078 78,481 34,241 5 4,409 [1] 1,327 15,103 8,701 11,819 [94] [4,452] [4,235] [1,124] [3,968] [12,090] [9,347] [14,974] [62] 23,942
[2,763] 90,285
[8,614] 64,985
[840] 29,122
Total 231,025 4,413 37,080 [9,912] [40,894] [12,279] 209,433
The depreciation charge for the period was 58,671 thousand euro. Movements in the principal tangible fixed asset items during 2004 were as follows:
[thousands of euro] Net opening balance Change in the scope of consolidation Additions Disposals Depreciation Translation differences and other movements Net closing balance
Real Plant and estate machinery 540,099 87,343 75,545 19,224 [24,654] [8,196] [17,173] [19,765] 16,367 590,184
892 79,498
Industrial and commercial equipment 1,206 251 [29] [593] 49 884
Fixed assets Other in progress assets and advances 68,173 17,019 1,639 24,030 3,610 [2,047] [472] [21,140] -
Total 713,840 1,639 122,660 [35,398] [58,671]
[3,149] 67,506
[2,274] 741,796
[16,433] 3,724
Some tangible fixed assets are pledged as security for long-term loans from banks and other lenders. The outstanding balance of such loans is 1,195 thousand euro. Additions in respect of “Other assets” relate to investments in furniture, furnishings and electronic machines of 19,322 thousand euro, to acquisitions of leased assets of 3,741 thousand euro and to vehicles and aircraft of 967 thousand euro. Other assets include the following assets acquired under finance leases: [thousands of euro] Real estate Other assets less - Accumulated depreciation Total
12.31.2004 9,472 3,787 [1,516] 11,743
12.31.2003 13,790 123 [1,577] 12,336
Outstanding capital payments due to lessors as of December 31, 2004, classified as amounts due to leasing companies, are reported in the note “Due to other lenders”.
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[2] Tangible fixed assets Tangible fixed assets are stated net of accumulated depreciation of 419,293 thousand euro. Additions in the period mainly concerned: _ investments in real estate for commercial use and the related modernization and upgrading of premises; _ plant, machinery and equipment purchased to improve the efficiency of production processes, particularly in the Italian manufacturing companies.
75
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[3] Financial fixed assets
76
Equity investments. Equity investments in subsidiary companies relate primarily to foreign selling and production companies. These companies are valued at cost or by the equity method and are not included in the consolidation because they are non-operative or in liquidation at the date of the financial statements. Other investments mainly represent minority interests in Italian and Japanese companies and in a Swiss company. The balance as of December 31, 2003 related mainly to the purchase, for 15,000 thousand euro, of 10% of the share capital of Tecnica S.p.A., sold in the third quarter of 2004. Accounts receivable
[thousands of euro] Other receivables: _ due within 12 months _ due beyond 12 months Total other receivables Guarantee deposits Total
Maturities [in years] Within 1 From 1 to 5 Beyond 5
12.31.2004
12.31.2003
9,326 9,326
22,458 22,458
5,816 5,816
9,326 28,274 37,600
34,742 30,615 65,357
9,326
22,458
16,715 22,531
16,715 54,315
15,832 81,189
Other receivables as of December 31, 2004 maturing beyond 1 year include financial receivables with interest at market rates. Accounts receivable due from others within 12 months include 368 thousand euro in tax credits for advance taxes paid by the Italian companies in relation to employee termination indemnities, under Law 140 of May 28, 1997. Guarantee deposits outstanding as of December 31 mainly relate to lease contracts stipulated by the Japanese subsidiary. Other securities held as financial fixed assets [thousands of euro] Other The balance corresponds to foreign securities purchased by a German subsidiary.
12.31.2004 223
12.31.2003 9
Current assets
12.31.2004 2,334 750 14,727 17,811
[thousands of euro] Raw materials, other materials and consumables Work in progress and semi-manufactured products Finished goods Total
12.31.2003 348 590 7,546 8,484
The valuation of closing inventories at weighted average cost is not appreciably different from their value at current purchase cost. [5] Accounts receivable Trade receivables. As of December 31, 2004, trade receivables, net of the reserve for doubtful accounts, amount to 660,402 thousand euro [755,734 thousand euro as of December 31, 2003]. The reserve for doubtful accounts at December 31, 2004 amounts to 97,642 thousand euro [95,870 thousand euro as of December 31, 2003]. 33,862 thousand euro of this reserve was used during the period. Valuation of the risk, both specific and generic, associated with receivables existing at year-end, resulted in a provision to the reserve of 39,240 thousand euro. Moreover, in the fourth quarter of 2004, trade receivables were discounted without recourse through a factoring contract with Unicredit Factoring S.p.A., amounting to around 18,500 thousand euro, of which 14,900 thousand euro had not yet matured at year-end. The analysis of trade receivables with third parties by geographic area is shown below:
[thousands of euro] Trade receivables
Europe 595,902
Asia 33,362
The Americas 30,225
Rest of the world 913
Total 660,402
Due from subsidiaries, associated companies and the parent company. Receivables from the parent company Edizione Holding S.p.A., of 32,688 thousand euro, include: _ receivables maturing within the next twelve months of 405 thousand euro, of which 86 thousand euro were trade and 319 thousand euro other; _ receivables due beyond the next twelve months of 32,283 thousand euro, representing current taxes calculated on the negative taxable results of some Group companies as provided by the Rules for relationships between companies participating in a national fiscal consolidation; these receivables fall due in 2006. Receivables from associated companies of 351 thousand euro were trade receivables.
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[4] Inventories Inventories, of 255,436 thousand euro [233,736 thousand euro as of December 31, 2003], are shown net of the related write-down reserve, analyzed as follows:
77
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78
[6] Tax receivables. These include: _ VAT recoverable from the tax authorities of 27,422 thousand euro [18,481 thousand euro as of December 31, 2003], including 1,238 thousand euro due beyond 12 months; _ tax credits of 9,362 thousand euro [5,553 thousand euro as of December 31, 2003], including 287 thousand euro maturing beyond 12 months; _ other receivables from the tax authorities of 4,860 thousand euro, including 527 thousand euro maturing beyond twelve months. [7] Deferred tax assets. The following table shows total net deferred tax assets: [thousands of euro] Tax effect of eliminating intercompany profits Tax effect of provisions and costs which will be deductible in future years Deferred taxes on reversal of excess depreciation and accounting for leases using the financing method Deferred taxes on gains taxable over a number of accounting periods Deferred tax assets on losses Different basis for the depreciation/amortization of tangible/intangible fixed assets Total benefit on losses brought forward for tax purposes Deferred taxes on profits/reserves distributable by subsidiaries Total deferred tax assets Adjustment of benefits on losses brought forward Total
12.31.2004 4,162 81,243 [15,355] [2,927] 595
12.31.2003 5,955 79,828 [17,685] [2,267] -
115,650 140,329 [7,957] 315,740
128,500 135,153 329,484
[133,116] 182,624
[127,234] 202,250
Potential tax benefits deriving from tax losses which may be carried forward by Group companies are recognized for the theoretical maximum amount and, at the same time, partially written down because their recoverability is not reasonably certain. The deferred tax assets relate to: [thousands of euro] Italian companies Foreign companies Total [8] Other receivables. These include advances to agents and suppliers, receivables for the sale of fixed assets and other items. The amount due beyond twelve months is 6,701 thousand euro. [9] Assets due to be sold. This item, of 7,840 thousand euro, arises from the reclassification to current assets of the realizable value of “Manifattura Goriziana” business, following shutdown of activity in the relative factory. The operation did not have a significant impact in the statement of income; while the balance sheet includes an asset relative to the sale. The 2003 amount related to the amount agreed for the sale of a property owned by a foreign subsidiary, which was received during 2004.
12.31.2004 165,141 17,483 182,624
12.31.2003 179,282 22,968 202,250
[10] Financial assets not held as fixed asset Treasury shares. The Company was not holding any treasury shares at the close of the year.
[thousands of euro] Government bonds [BTP] maturing between 2005 and 2006 at interest rates between 2.75% and 4.5% Treasury Certificates [CCT] maturing between 2008 and 2011 at an interest rate of 2.4% Zero coupon Treasury certificates [CTZ] maturing in 2005 at rates of interest between 2.064% and 2.068% Ordinary Government bonds [BOT] maturing in 2005 at interest rates between 2.092% and 2.098% Amex European Short Term Euro Gestielle Bt Euro Sinopia Alternactiv Euro Generali Am-Eu Sty-cd cap Vontobel Euro Bond A2 Morgan Fund-Short Maturity Euro SCH Euro Short Term A Euro Total
12.31.2004
12.31.2003
32,509
7,201
20,550
14,866
29,796
-
29,658 824 609 557 551 1,243 1,582 117,879
822 605 1,513 2,282 27,289
The following transactions were carried out during the year by the Parent Company: _ purchases of bonds [BTP, CTZ, CCT and BOT] for 103,468 thousand euro; _ sale of bonds [BTP and CCT] for 12,996 thousand euro, including 8,058 thousand euro of bonds purchased in previous years; _ purchases of monetary fund units for 3,590 thousand euro; _ sale of monetary fund units for 3,446 thousand euro, including 3,157 thousand euro purchased in previous years. Differentials on forward transactions [thousands of euro] Differentials on forward transactions
12.31.2004 6,857
12.31.2003 10,000
The amount refers principally to the adjustment of hedging transactions outstanding at the end of the year to year-end exchange rates.
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Other securities
79
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[11] Liquid funds
80
[thousands of euro] Current account deposits [euro] Current account deposits [foreign currencies] Time deposits [euro] Time deposits [foreign currencies] Checks Cash in hand Total
12.31.2004 31,726 26,773 141,522 154 59,594 427 260,196
12.31.2003 26,058 31,756 204,281 2,929 59,503 308 324,835
12.31.2004
12.31.2003
2,792 125 2,917
3,810 159 3,969
2,165 4,929 113 1,551 1,610 82 10,450 13,367
27 8,871 278 847 1,625 225 11,873 15,842
The time deposits in euro are liquid funds belonging to the finance companies. They also include a bank deposit of 94,500 thousand euro made by the Parent Company with due date January 3, 2005. Average interest rates reflect market returns for the various currencies concerned. The amount of cash and banks as of December 31, 2004 reflects the receipts from customers at year end. [12] Accrued income and prepaid expenses [thousands of euro] Accrued income: _ financial income _ other income Total accrued income Prepaid expenses: _ financial charges _ rentals and leasing charges _ advertising and sponsorships _ taxes _ other expenses _ discount on bond Total prepaid expenses Total Accrued income relates mainly to interest maturing on temporary investments of liquidity and interest on outstanding Interest Rate Swaps, to hedge the rate on the loan of 500,000 thousand euro obtained in 2000. In previous years, merger differences were released from further taxation via payment of a substitute tax at 27%. This substitute tax has been classified under current income taxes with a matching balance in “Due to tax authorities”. In accordance with the concept of allocating costs to the appropriate period, some 406 thousand euro of this tax has been recorded as a prepayment because the cost of freeing up merger differences from tax is related to the benefit deriving from future tax savings linked to the possibility of deducting depreciation and amortization. Given the different periods of depreciation/amortization for the assets concerned and taking account of the prudence principle, the substitute tax is being deferred over a period of 10 years.
Comments on principal liability and equity items
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[13] Shareholders’ equity
82
Share Capital The share capital of Benetton Group S.p.A. at December 31, 2004 amounts to 236,026,454.30 euro and consists of 181,558,811 shares with a par value of 1.30 euro each. The 1980 spin-off reserve and part of the monetary revaluation reserves were capitalized by Benetton Group S.p.A. in prior years by the issue of stock dividends. Additional paid-in capital This balance is unchanged with respect to the previous year. Revaluation reserves The monetary revaluation reserves exclusively reflect the residual amounts of revaluation reserves established in accordance with the provisions of Law 72 of March 19, 1983 and Law 413 of December 30, 1991, and the monetary revaluation of tangible fixed assets by a Spanish subsidiary [Royal Decree 2607/96]. Legal reserve The increase in the legal reserve derives from the allocation, in accordance with the law and the articles of association, of a proportion of the Parent Company profit for the year ending on December 31, 2003. Other reserves As of December 31, 2004, this item amounts to 745,378 thousand euro [719,089 thousand euro as of December 31, 2003], and includes: _ 551,000 thousand euro relating to other reserves of the Parent Company [60,722 thousand euro as of December 31, 2003]; _ [9,280] thousand euro relating to the cumulative translation adjustment generated by translating the foreign-currency financial statements of companies consolidated on a line-by-line basis; _ 203,658 thousand euro representing the additional Shareholders’ equity of consolidated companies with respect to their carrying value, together with other consolidation adjustments. The first of the schedules which follow reconciles the Shareholders’ equity and net income of Benetton Group S.p.A. with the corresponding consolidated amounts; the second lists the Shareholders’ equity of consolidated subsidiaries attributable to minority Shareholders.
[thousands of euro] Per Benetton Group S.p.A. financial statements Net income and Shareholders’ equity of consolidated subsidiaries attributable to the Group, net of their carrying value and the effect of business transfers Reversal of gains on transfer of businesses, net of deferred tax receivables on the transfers Reversal of equity investments in the Parent Company Reversal of dividends received from consolidated subsidiaries Reversal of merger differences and related amortization in Benetton Group S.p.A. Deferred taxes on profits/reserves distributable by subsidiaries Allocation to fixed assets of the difference between the purchase price and Shareholders’ equity of new subsidiaries at the time they were acquired, and related depreciation Effect of reversing accelerated depreciation exceeding the useful lives of fixed assets and of intercompany gains on transfers of tangible fixed assets, net of the related tax effect Effect of applying finance lease accounting, taking account of the related tax effect Elimination of intercompany profits included in the inventory of consolidated subsidiaries, net of the related tax effect Adjustment to reflect the equity value of associated companies Net effect of other consolidation entries Per the Group consolidated financial statements
12.31.2004 12.31.2003 Shareholders’ Net income/ Shareholders’ Net income/ equity [loss] equity [loss] 948,130 39,153 977,969 574,241
832,591
197,838
698,113
45,836
[551,988] 2,071
[12,850] 14,460
[539,138] -
[539,138] 113,342
-
[80,039]
[17,961]
[92,990]
[16,432]
1,529
2,245
[7,957]
[7,957]
-
-
34,448
[8,094]
33,595
916
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Reconciliation of the Shareholders’ equity and net income of Benetton Group S.p.A. with the corresponding consolidated amounts.
83 [3,800] 8,104
[17,032] 891
25,727
2,521
7,213
1,639
[13,953]
[2,781]
[11,172]
[130] [764] 1,230,320
[213] [1,831] 123,074
99 [584] 1,173,861
844 [279] [1,303] 107,874
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[14] Minority interests At December 31, 2003 and 2004, the following consolidated companies had proportions of Shareholders’ equity attributable to minority Shareholders:
84
[in %] Italian subsidiaries: _ Olimpias group Foreign subsidiaries: _ New Ben GmbH _ DCM Benetton India Ltd. _ Benetton Korea Inc.
12.31.2004
12.31.2003
-
15
49 50
49 50 50
Uses 3,015
12.31.2004 46
12.31.2004 9,114 14,298 27,532 50,944
12.31.2003 9,235 12,745 17,354 39,334
Changes relative to the Olimpias group and DCM Benetton India Ltd. relate respectively to the acquisition of 15% of the share capital of Olimpias S.p.A. from minority Shareholders and the purchase of 50% of the share capital of DCM Benetton India Ltd. from third parties. [15] Reserves for risks and charges Taxation reserve, including deferred [thousands of euro] Taxation reserve
01.01.2004 3,039
Provisions 22
The taxation reserve of 46 thousand euro [3,039 thousand euro at December 31, 2003], was used for charges deriving from the tax amnesty governed by Law no. 289 of December 27, 2002 and subsequent amendments. Other reserves [thousands of euro] Reserve for contingencies Agents’ leaving indemnity reserve Reserve for other provisions Total The reserve for contingencies covers risks of various types, including, at year-end, those of which the amount or date when they may occur is uncertain, but where a liability could arise in future years; in the reference period, uses were made of the reserve totaling 6,990 thousand euro, of which 3,094 thousand euro to the statement of income, and it was built up again by 7,092 thousand euro for disputes arising in the year. The agents’ leaving indemnity reserve prudently reflects indemnities associated with the interruption of agency contracts in circumstances allowed by Italian law. During the period, 813 thousand euro was used from the reserve and it was credited with an additional 2,365 thousand euro in provisions. The reserve for other provisions at the start of the year was almost totally used for closure of some directly managed stores in the United States and England. It was increased by 25,668 thousand euro for expenses and liabilities expected for the closure of some stores related to restructuring of the sales network, especially in France and England.
[16] Reserve for employee termination indemnities Movements in the reserve during the year were as follows: [thousands of euro] Balance as of January 1, 2004 Provision for the year Indemnities paid during the year Other movements Balance as of December 31, 2004
[17] Bonds In July 2002, Benetton Group S.p.A. issued a 300,000 thousand euro bond, repayable on July 26, 2005, bearing floating-rate interest, which was 2.645% at year-end; the bonds are listed on the Luxembourg stock exchange. This loan provides for limitations on the granting of real guarantees for new loans; it does not provide for compliance with any financial ratios [“financial covenants”].
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
49,774 8,555 [6,723] [88] 51,518
[18] Due to banks
85
Indemnities paid in the period related mainly to the Olimpias group, Benind S.p.A., Benetton Group S.p.A and Bencom S.r.l. Accounts payable The composition of and more significant changes in this group of accounts during the year are discussed below.
[thousands of euro] Current account overdrafts Advances on receivables and other short-term loans Medium/long-term loans: _ due within 12 months _ due beyond 12 months Total medium/long-term loans Total
12.31.2004 8,238 11,686
12.31.2003 8,700 25,179
1,041 500,710 501,751 521,675
1,509 501,739 503,248 537,127
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Medium/long-term loans from banks outstanding at year-end were as follows:
86
[thousands of euro] Syndicated loan of 500 million euro maturing in 2007, granted by a pool of banks and made up of a revolving credit line for the first two years and a loan for the subsequent 5 years repayable on maturity. The annual interest rate at the balance-sheet date was 2.454% [1] Loan from Efibanca [Ente Finanziario Interbancario S.p.A.] at an annual rate of 2.81% repayable in half-yearly installments until 2005 Loan from Istituto Mobiliare Italiano at an annual rate of 2.55%, repaid in 2004 Loan granted by Medio Credito del Friuli, repayable in half-yearly installments until January 1, 2007, at an annual interest rate of 2.5% secured by mortgages on real estate Loan granted by CARI [Gorizia] on April 20, 2001 repayable in 2005 at an annual rate of 4% Other foreign currency loans obtained by foreign consolidated companies, secured by mortgages on real estate Total medium/long-term loans less - Current portion Medium/long-term loans, net of current portion [1]
This loan provides for compliance with two financial ratios, calculated every six months on the consolidated financial statements, namely: _ minimum ratio between EBITD [earnings before interest, tax and depreciation] and net financial charges of 2.5 times; _ maximum ratio between the net financial position and Shareholders’ equity of 1. There are also limits on large disposals of assets and on the granting of real guarantees for new loans.
The non-current part of medium/long-term loans at December 31, 2004, of 500,710 thousand euro, have repayment dates between 1 and 5 years. Part of medium/long-term loans, 1,194 thousand euro, is secured by mortgages on tangible fixed assets.
12.31.2004
12.31.2003
500,000
500,000
355 -
710 516
1,168
1,616
202
392
26 501,751 [1,041] 500,710
14 503,248 [1,509] 501,739
12.31.2004 3,585
12.31.2003 800
Medium/long-term loans: _ due within 12 months _ due beyond 12 months Total medium/long-term loans
60 470 530
58 530 588
Due to leasing companies: _ due within 12 months _ due beyond 12 months Total due to leasing companies Total
6,007 17,748 23,755 27,870
4,977 21,834 26,811 28,199
[thousands of euro] Other short-term loans
Medium/long-term loans obtained from other lenders outstanding at the balance sheet date are as follows: [thousands of euro] Other euro loans less - Current portion Medium/long-term loans, net of current portion
12.31.2004 530 [60] 470
12.31.2003 588 [58] 530
The non-current portion of these loans as of December 31, 2004 falls due as follows [thousands of euro]: Year 2006 2007 2008 2009 2010 and beyond Total
12.31.2004 63 117 68 71 151 470 The non-current portion of amounts due to leasing companies as of December 31, 2004 falls due as follows [thousands of euro]:
Year 2006 2007 2008 2009 2010 and beyond Total
12.31.2004 6,267 5,291 3,855 1,889 446 17,748
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[19] Due to other lenders
87
[20] Advance payments, trade payables and securities issued This item is analyzed by geographic area below:
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[thousands of euro] Accounts payable
Europe 248,924
Asia 20,626
The Americas 4,938
Rest of the world 9,597
Total 284,085
[21] Due to subsidiaries, associated companies and the parent company Payables to the parent company Edizione Holding S.p.A., of 18,715 thousand euro, include: _ trade payables due within twelve months of 51 thousand euro _ payables due beyond the next twelve months of 18,664 thousand euro, relating to current taxes calculated on the positive taxable results of some Group companies as provided by the Rules for relationships between companies participating in a national fiscal consolidation; these payables mature in 2006. Amounts payable to non-consolidated subsidiaries of 2,684 thousand euro are of a financial nature. [22] Due to tax authorities [thousands of euro] Income taxes payable: _ Italian companies _ foreign companies Total income taxes payable
12.31.2004
12.31.2003
4,672 9,441 14,113
116,785 9,729 126,514
11,361 5,836 31,310
7,642 15,284 149,440
88 VAT payable Other amounts due to tax authorities Total
Income taxes payable are stated net of deferred tax assets, all tax credits and withholding tax. Tax payables in 2003 included substitute tax associated with the corporate reorganization fully paid in 2004. “Other amounts due to tax authorities” largely relates to payables for withholding tax. In 2003, the balance consisted mainly of payables relating to the tax amnesty. Due to social security and welfare institutions This balance totals 9,210 thousand euro [8,931 thousand euro as of December 31, 2003] and reflects both the Group company and employee contributions payable to these institutions at year-end.
[24] Accrued expenses and deferred income Miscellaneous expenses include accrued expenses for rent and leasing installments payable of 3,798 thousand euro, compared with 3,686 thousand in the previous year. Miscellaneous income includes deferred income relating to rental income of 986 thousand euro, compared with 1,703 thousand euro in 2003. [thousands of euro] Accrued expenses: _ financial expenses _ miscellaneous expenses Total accrued expenses Deferred income: _ financial income _ miscellaneous income Total deferred income Total
12.31.2004
12.31.2003
9,396 5,756 15,152
10,801 4,983 15,784
885 2,441 3,326 18,478
149 3,147 3,296 19,080
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[23] Other payables Other payables of 69,807 thousand euro include payables to employees for amounts due but not paid of 18,065 thousand euro [15,561 thousand euro as of December 31, 2003], other non-trade payables of 16,355 thousand euro [13,186 thousand euro as of December 31, 2003], other payables for the purchase of fixed assets of 33,986 thousand euro [12,183 thousand euro as of December 31, 2003], including 19,191 thousand euro due beyond twelve months and differentials on forward transactions of 1,401 thousand euro [102 thousand euro as of December 31, 2003]. “Other payables” include 745 thousand euro due beyond 12 months.
89
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[25] Memorandum accounts
90
These mainly consist of currency to be sold or purchased forward. This is the countervalue in euro at the forward exchange rate of commitments deriving from contracts signed for various hedging transactions. The amount results in particular from the hedging of receivables, firm orders and future sales, these latter subject to subsequent partial renegotiation by carrying out reverse transactions. Other transactions were undertaken to hedge the exchange risk on capital employed in some Group companies. As of December 31, 2004, there were outstanding Interest Rate Swaps for a figurative value of 240,000 thousand euro and 1 billion yen. The fiduciary guarantees relate to guarantees given for the payment of rent and lease installments in favor of third parties and relative to properties in Italy, Germany and England. Purchase commitments relate to the purchase of a retail business.
Comments on principal items in the statement of income Value of production
2004 1,607,183 45,767 14,419 18,982 1,686,351
[thousands of euro] Sales of core products Miscellaneous sales Royalty income Miscellaneous revenues Total
2003 1,773,260 50,725 12,862 22,136 1,858,983
Sales of core products are net of unconditional discounts. Miscellaneous sales mainly relate to sports equipment produced for third parties by a Group company. Miscellaneous revenues mainly include the provision of services such as processing, cost recoveries and miscellaneous services. Revenues by geographic area and business sector
[thousands of euro] Casual Sportswear and equipment Manufacturing and other Total revenues 2004 Total revenues 2003
Europe % 1,276,341 88.9 65,964 4.6 92,808 6.5 1,435,113 100.0 1,545,459 -
The Rest of Americas % Asia % the world % Total 71,236 98.8 154,388 88.9 1,971 36.4 1,503,936 343 0.5 8,712 5.0 75,019 552 0.7 10,596 6.1 3,440 63.6 107,396 72,131 100.0 173,696 100.0 5,411 100.0 1,686,351 113,266 - 190,408 9,850 - 1,858,983
Group revenues reduced by 9.3% relating to various geographic areas. Please refer to the comments in the Directors’ report. Net sales of core products, by product category [thousands of euro] Casualwear, accessories and casual footwear Sportswear In-line skates and skateboards Racquets Ski boots Sports footwear Skis and snowboards Fabrics and yarns Total
2004 1,461,803 42,876 537 4,632 1,555 95,780 1,607,183
2003 1,533,651 39,749 58,323 20,664 4,967 4,480 1,429 109,997 1,773,260
For the trend of sales by product category, please refer to the breakdown provided in the Directors’ report.
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[26] Revenues from sales and services
91
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Net sales of core products, by brand
92
[thousands of euro] United Colors of Benetton Sisley Playlife Killer Loop Prince Nordica Rollerblade Other Total
2004 1,158,037 303,766 31,526 11,348 102,506 1,607,183
2003 1,196,890 336,761 25,568 13,776 26,078 6,287 57,903 109,997 1,773,260
2004 4,837 34,456 2,355 9,697 51,345
2003 4,251 42,734 2,753 6,130 55,868
The United Colors of Benetton brand also includes sales of the UCB Bambino brand of 397,329 thousand euro and the The Hip Site brand of 3,092 thousand euro. [27] Change in inventories The change of this item is principally due to the increase in closing inventories of finished products. [28] Other revenues and income [thousands of euro] Reimbursements and compensation payments Rental income Gains on disposals of fixed assets Other operating income Total “Rental income” refers mainly to income from premises to be used for the sale of Benettonlabel products. The reduction compared with the previous year is the result of terminations and renegotiations of rental contracts during the year. Other operating income includes use of the reserve for legal risks by 2,749 thousand euro following the favorable settlement of a dispute as well as of the reserve for doubtful debts by 2,278 thousand euro, set up in previous years relative to a receivable claimed by the Efim group in compulsory liquidation, based on the special laws on the subject, for the amount liquidated.
Production costs
[thousands of euro] Raw materials, semi-manufactured and finished goods Other materials Purchases for advertising and promotion Other purchases [Discounts and rebates] Total
2004 436,494 1,829 881 13,078 [114] 452,168
2003 468,313 4,485 1,036 13,285 [71] 487,048
2004 361,917 29,829 73,564 51,934 96,897 6,438 620,579
2003 373,685 31,485 82,523 62,701 99,918 7,455 657,767
[30] External services [thousands of euro] Subcontract work Distribution and transport Sales commission Advertising and promotion Other services Emoluments to Directors and Statutory Auditors Total
The reduction in sales commissions and advertising and promotion costs is mainly attributable to the elimination of costs relating to the business sold. Other services include energy costs of 24,243 thousand euro, maintenance costs of 12,342 thousand euro, consultancy and other fees of 47,117 thousand euro, insurance premiums of 4,277 thousand euro and personnel travel expenses of 8,918 thousand euro.
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[29] Raw materials, other materials, consumables and goods for resale
93
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Gross remuneration of any kind paid by the Benetton Group to Directors and members of the Board of Statutory Auditors is shown below. Name and surname Luciano Benetton Carlo Benetton Silvano Cassano Gilberto Benetton Giuliana Benetton Alessandro Benetton Reginald Bartholomew Luigi Arturo Bianchi Sergio De Simoi Gianni Mion Ulrich Weiss
Position covered Chairman Deputy Chairman Managing Director Director Director Director Director Director Director Director Director
Duration of office [1] Year 2004 Year 2004 Year 2004 Year 2004 Year 2004 Year 2004 Year 2004 Year 2004 Year 2004 Year 2004 Year 2004
Angelo Casò
Chairman of the Board of Statutory Auditors Auditor Auditor
Year 2004 Year 2004 Year 2004
Dino Sesani Filippo Duodo [1]
Up to the approval of these financial statements.
[2]
Including remuneration for employment.
[•]
Thousands of euro.
Gross remuneration [•] 1,600 1,000 1,219 [2] 200 1,000 35 87 87 42 42 94
62 42 166
94 During the year, the Managing Director Silvano Cassano was assigned 1,731,966 options which grant the right to subscribe to the same number of Benetton Group S.p.A. shares at the price of 8.984 euro per share. 50% of the options assigned may be exercised, subject to certain conditions being satisfied, two years after the date of assignment. The remaining 50% may be exercised, subject to certain conditions being satisfied, four years after the date of assignment. The expiry of the period for exercise of the options is fixed at five years from the date on which they became exercisable. More details about the stock option plan are provided in the Directors’ report. [31] Leases and rentals “Leases and rentals”, of 89,728 thousand euro, relate mainly to rental costs of 79,232 thousand euro. [32] Payroll and related costs These costs are already analyzed in the statement of income. The number of employees is analyzed below, by category:
[thousands of euro] Managers White collars Workers Part-time Total
2004 100 3,674 2,542 1,108 7,424
2003 109 3,315 2,654 871 6,949
Average of the year 105 3,494 2,598 990 7,187
[33] Amortization, depreciation and write-downs
[thousands of euro] Amortization of start-up and expansion expenses Amortization of industrial patents and intellectual property rights Amortization of concessions, licenses, trademarks and similar rights Amortization of goodwill Amortization of consolidation differences Amortization relative to the purchase and development of software Amortization of leasehold improvements Amortization of other charges Total
2004 3,495 515 3,968 10,979 1,111 6,059 9,347 5,420 40,894
2003 3,507 766 5,043 9,972 1,911 5,337 11,495 4,885 42,916
The change in amortization is principally due to lower amortization on “Leasehold improvements” and “Concessions, licenses, trademarks and similar rights”. Depreciation of tangible fixed assets [thousands of euro] Depreciation of real estate Depreciation of plant and machinery Depreciation of equipment Depreciation of other assets Depreciation of assets acquired under finance leases Total
2004 17,173 19,765 593 20,518 622 58,671
2003 17,828 22,426 876 19,171 440 60,741
The changes in depreciation are principally due to disposals of plant and machinery during the year. Other write-downs of fixed assets. This balance, of 13,332 thousand euro, includes mainly the adjustment to current market value of certain intangible fixed assets. Write-downs of current receivables and of liquid funds. This item, amounting to 39,241 thousand euro, relates to the prudent provision to the reserve for doubtful accounts. For further comments, you are referred to the note on receivables in current assets. [34] Provisions for risks and other provisions This item, totaling 6,897 thousand euro, includes 4,510 thousand euro of provisions for future risks and 2,365 thousand euro of provisions to the agents’ leaving indemnity reserve. “Other provisions” amount to 25,668 thousand euro. For further details, please refer to the comment under “Reserves for risks and charges” in the liabilities section of the notes to the consolidated financial statements on the balance sheet.
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
Amortization of intangible fixed assets
95
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[35] Other operating costs
96
[thousands of euro] Indirect taxation Losses on disposal of fixed assets Losses on receivables Other general expenses Total
2004 7,980 2,997 560 10,741 22,278
2003 6,786 3,634 4,425 13,864 28,709
2004
2003
852
1,945
1,099
795
543 3,875 15,723 20,141 22,092
81 405 2,291 23,406 26,183 28,923
“Losses on disposal of fixed assets” refer mainly to sale of plant and equipment relative to a production company. Other general expenses include charges of 2,806 thousand euro incurred for returns and discounts on sales made in the previous year. Financial income and expenses Income from equity investments This item amounts to 375 thousand euro [4,042 thousand euro in 2003 which included 3,647 thousand euro of tax credits on dividends by consolidated subsidiary companies, for the part not compensated in taxes for the year]. [36] Other financial income [thousands of euro] From receivables held as financial fixed assets from other companies From securities included among current assets not representing equity investments Financial income other than the above: _ interest income from subsidiary companies _ interest income from trade and other receivables _ interest income from banks _ miscellaneous financial income and income from derivatives Total financial income other than the above Total “Miscellaneous financial income and income from derivatives” includes: _ positive differentials on Interest Rate Swaps of 6,481 thousand euro [12,212 thousand euro in 2003]; _ income from Currency Swaps and forward exchange contracts of 7,297 thousand euro [10,547 thousand euro in 2003].
[thousands of euro] Interest expenses on bonds Interest expenses on bank current accounts Interest expenses on advances against receivables Interest expenses on short-term loans Interest on medium/long-term bank loans Interest expenses on loans from other lenders Miscellaneous financial expenses and expenses on derivatives Total
2004 8,076 379 465 531 11,816 814 26,550 48,631
2003 9,240 352 645 369 14,965 939 38,257 64,767
Miscellaneous financial expenses and expenses on derivatives mainly include: _ negative differentials on Interest Rate Swaps of 14,497 thousand euro [23,279 thousand euro in 2003]; _ income from Currency Swaps and forward exchange contracts of 7,099 thousand euro [2,326 thousand euro in 2003]; _ discounts allowed for early settlement of trade receivables of 3,106 thousand euro [4,618 thousand euro in 2003]; _ bank charges and commissions of 1,162 thousand euro [1,454 thousand euro in 2003]. [38] Gains/[losses] on exchange rate differences [thousands of euro] Gains on exchange rate differences Losses on exchange rate differences Total
2004 93,536 [93,422] 114
2003 141,354 [131,702] 9,652
Concerning gains and losses on exchange, the changes introduced by the reform of company law [D. Lgs. no. 6 of January 17, 2003 and subsequent amendments and additions] have been adopted, showing on a single line in the statement of income, the net positive amount of gains and losses on exchange, which, in the year to December 31, 2004, amounted to 114 thousand euro. The corresponding value of gains on exchange in 2003, of 9,652 thousand euro, was included in other financial income of 141,354 thousand euro and in interest and other financial expenses for the amount of losses on exchange of 131,702 thousand euro.
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[37] Interest and other financial expenses
97
Extraordinary income and expenses
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[39] Extraordinary income
98
[thousands of euro] Gains on disposal of fixed assets
2004 24,157
2003 2,870
Other income: _ out-of-period income _ other extraordinary income Total other income Total
8,784 6,358 15,142 39,299
4,086 6,283 10,369 13,239
[thousands of euro] Losses on disposal of fixed assets Taxes relating to prior years
2004 4,095 642
2003 1,902 10,916
Other expenses: _ donations _ out-of-period expenses _ other extraordinary expenses Total other expenses Total
2,307 2,524 18,245 23,076 27,813
2,890 2,517 11,377 16,784 29,602
Gains on disposal of fixed assets in 2004 were made by the Spanish companies in the real estate business, in particular, the gain results from sale of a property in Barcelona and the gain from the sale of a production factory. The out-of-period income includes the reversal of prior year taxes of 2,052 thousand euro, collection of a receivable considered uncollectible of 2,373 thousand euro, and the elimination of payables and other income relating to previous years. Other extraordinary income includes use of the reserves for risks and charges by 3,864 thousand euro in the statement of income. [40] Extraordinary expenses
Other extraordinary expenses mainly include expenses associated with restructuring the sales network and other expenses of a miscellaneous nature, such as lease early vacation incentives and repayments and indemnities to third parties. In 2003, “Taxes relating to prior years” included expenses relative to accepting the tax amnesty, governed by Law no. 289 of December 27, 2002 and subsequent amendments.
[thousands of euro] Current taxes
2004 22,636
2003 192,415
Deferred income: _ reversal of intercompany profits _ write-down of equity investments _ provisions to write-down and risk reserves _ taxes on a different depreciation/amortization basis of tangible and intangible fixed assets _ losses _ accumulated tax losses _ others Total deferred income
1,792 8,036 [6,311]
888 [11,977] 518
12,850 142 52 [3,512] 13,049
[128,500] [738] 5,789 [859] [134,879]
Deferred expenses: _ reversal of excess depreciation and accounting for leases using the financing method _ gains _ profits/reserves distributable by subsidiaries _ others Total deferred expenses Net deferred tax [income]/expenses Total
69 [1,866] 7,957 [91] 6,069 19,118 41,754
[3,020] 2,023 [140] [1,137] [136,016] 56,399
N OT E S TO T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S
[41] Taxes on income for the year, deferred income and expenses
99 Taxes on 2003 income included 123,650 thousand euro of substitute tax on the Parent Company’s gain resulting from the business transfer operation; 128,500 thousand euro of deferred tax assets related to the operation just mentioned. Reconciliation of the tax charge is as follows: [in %] Italian statutory tax rate Effect of different taxation of subsidiaries making a profit Effect of different taxation of subsidiaries making a loss Deferred taxes on profits/reserves distributable by subsidiaries Net effect deriving from the transfer of businesses Amortization/reversal of excess cost deriving from investments acquired Tax benefit deriving from the write-down of equity investments made in previous years Effect on deferred taxes of the change in rate Higher incidence of IRAP Other, net Effective tax rate in the financial statements
2004 37.25 [15.00] 8.84 4.84 [7.63]
2003 38.25 [7.01] 21.93 [5.37]
1.45
[0.10]
[4,90] 1.41 [0.85] 25.41
[17.45] 1.03 2.68 0.16 34.12
Auditors’ report in accordance with article 156 of Law Decree no. 58 dated 24 February 1998 To the Shareholders of Benetton Group S.p.A.
A U D I TO R S ' R E P O RT I N A C C O R DA N C E
1. We have audited the consolidated financial statements of Benetton Group S.p.A. as of 31 December 2004. These consolidated financial statements are the responsibility of Benetton Group S.p.A.’s directors. Our responsibility is to express an opinion on these financial statements based on our audit.
100
2. We conducted our audit in accordance with the auditing standards and criteria recommended by CONSOB. Those standards and criteria require that we plan and perform the audit to obtain the necessary assurance about whether the consolidated financial statements are free of material misstatement and, taken as a whole, are presented fairly. 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 the directors. We believe that our audit provides a reasonable basis for our opinion. For the opinion on the consolidated financial statements of the prior year, which are presented for comparative purposes as required by law, reference is made to the report issued by other auditors dated 31 March 2004. 3. In our opinion, the consolidated financial statements of Benetton Group S.p.A. as of 31 December 2004 comply with the laws governing the criteria for their preparation; accordingly, they give a true and fair view of the financial position and of the results of operations of the Group. Treviso, 8 April 2005 PricewaterhouseCoopers S.p.A. Signed by Roberto Adami [Partner]
This report has been translated into the English language solely for the convenience of international readers.
Glossary
Base collection The base collection is the fundamental part within each collection [Spring Summer Autumn Winter], the first one to be designed and presented to clients. The base collection includes both basic and Benetton classic items and fashion items which identify the brand. Commercial network Benetton Group commercial network includes stores mainly managed by independent partners for the distribution of Benetton products in 120 countries. The relationship with the partners consists in the sale of goods and the authorization to use the brand name, free of charge, as signage in the stores. Delocalization of production The production delocalization is the process with which a company transfers its production activities or part of them from its country of origin to different economic contexts. Years ago Benetton Group started a process of delocalization of its production from Italy to its own production platforms, mainly in Europe. DOS Acronym for Directly Operated Stores, indicates stores that are directly managed by the Benetton Group rather than wholesale [sale to independent partners who manage Benetton stores]. Flash collection The flash collection is a smaller collection than the base collection and with the main aim of completing the base collection with specific fashion themes and presented after the base collection. Integrations Additions of product items not included in the collection. Lead Time Time period from the collection
of the orders to the products shipment. Reassortments Reassortments include replenishments of products included in the collection, mainly in terms of colors and sizes. Time to Market Time period from the idea and design of the products to the arrival on the market [delivery to stores].
Administration and Finance Dividend yield Ratio between the last dividend per share paid and the share price. This ratio is used as immediate expression of the stock return. For Benetton Group dividend yield, see Financial Highlights, where the ratio is calculated as dividend paid [accounted in the previous year] and price at period end. EBIT The operating profitability is represented by the item EBIT, in the Profit and loss accounts reclassified to cost of sales. EBIT is calculated as Gross operating income net of Selling, general, administrative expenses and others. EBITDA Acronym of Earnings Before Interests, Taxes, Depreciation and Amortization. EBITDA is used as measure of the operating profitability before non cash items and is calculated as EBIT, amortization, depreciation and non cash write offs. EPS Acronym of Earning Per Share. The EPS indicates the ratio between Net income/[loss] for the year and number of shares outstanding. The number of shares in Benetton Group share capital is 181,558,811, with par value of 1.30 euro each. EV Acronym of Enterprise Value, value of the company: EV represents the sum between market capitalization and Net Financial Position.
EVA
Acronym of Economic Value Added. The EVA is a measure of the performance of the company and is calculated as average NOPAT multiplied by the difference between the return on capital employed [ROIC] and the average cost of capital. [WACC]. Benetton Group uses EVA as an absolute measure of the Group performance, also for the assignment of stock option to the top management. For Benetton Group Stock option plan, see Corporate Governance. Form 20 - F
According with US law, foreign companies listed in the US file with SEC [Securities and Exchange Commission] the annual report as “Form 20 – F”, which includes fiscal year result and Shareholders’ equity reconciled with US GAAP [acronym of Generally Accepted Accounting Principles]. Benetton Group has been listed at NYSE since 1989 and file its annual report yearly as Form 20 - F. Free cash flow
Item of the statement of cash flow which represents the sum of Net cash flow from operating activities and Capital expenditures. Gross operating income
This item, in the profit and loss account reclassified to cost of sales, is equal to: Revenues net of Cost of goods sold. IAS / IFRS Acronyms for International Accounting Standards and International Financial Reporting Standards, respectively. From 2005 half-year report Benetton Group will adopt the IAS as accounting standards to report consolidated financial statements. Invested capital Item of the balance sheet which represents all the resources invested in a company and includes: Working capital, Tangible and intangible fixed assets, Financial fixed assets and Other activities/[liabilities].
G LO S S A RY
Style and Operations
103
Net Financial Position
Balance sheet item which represents the Group net financial position. It includes: _ liabilities: Bank loans, Bonds, Short-term loans, Medium and long-term loans [current portion and long-term portion] and lease financing [current portion and longterm portion]; _ assets: cash and banks, marketable securities, differentials on forward transactions, financial receivable [current and noncurrent].
account reclassified to cost of sales, includes: Payroll and related cost, Advertising and promotion, Depreciation and amortization, Other operating expenses and income, and provisions. WACC Acronym of Weighted Average Cost of Capital, WACC represents the average cost of the different sources of capital of the company, both as debt and equity. WACC is commonly used as discount rate for the operating cash flow of a company and to calculate EVA.
NOPAT
G LO S S A RY
Acronym of Net Operating Profit After Taxes. The NOPAT is calculated as EBIT net of taxes calculated on EBIT. NOPAT is used to calculate EVA.
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Pay Out Ratio between dividends and Net income/[loss]for the year which represents the percentage of net income distributed to the shareholders as dividend. Net revenues This item, in the Profit and loss accounts reclassified to cost of sales, includes: Sales of core products, Miscellaneous sales, Royalty income and Miscellaneous revenues. ROE Acronym of Return on Equity, which represents the ratio between Net income/[loss]for the year and average Shareholders’ equity. The ROE measures the return on Shareholders’ equity after remunerating the other sources of capital and indicates the return for the Shareholders. ROIC Acronym of Return On Invested Capital, which represents the ratio between Ebit and average Invested capital. The ROIC measures the return on the capital invested to service both shareholders and creditors. General & structure expenses This item, in the profit and loss
Working capital Item of the balance sheet which represents the amount of capital invested in the operating activities of the company and includes: Net trade receivables, Inventories and Other credits/[debts] net of Trade payables.
on Uniform Securities and Identification Procedures, standards body which creates and maintains a classification system for securities. The Cuspid is a ninecharacter number that uniquely identifies a particular security in the US. Benetton Group ADR CUSPID is 081795403. Free float Free float identifies the percentage of outstanding shares of a listed company which are available for negotiation, and are not under the control of a strategic reference shareholder. Benetton Group free float includes 59,653,172 shares, equal to 32.856% of outstanding shares. The remaining 67.144% is hold by Edizione Holding S.p.A., holding company, wholly owned by the Benetton family. ISIN
Market ADR Acronym of American Depositary Receipt. The ADR is negotiable certificate that represents ownership of shares in a non-US company. In 1989 Benetton Group was listed on the New York Stock Exchange, NYSE, through a Level III Program. Each Benetton ADR represents two Benetton ordinary shares. ADR –Level III Program In 1989 Benetton Group was listed on the New York Stock Exchange, NYSE, through an ADR issue structured as a Level III Program: the ADR were distributed through a public offering [with capital issue] with a ratio of 1 ADR corresponding to 2 ordinary shares, were registered under the 1933 Securities Act and under the 1934 Exchange Act and were listed on the NYSE. In addition, Benetton Group provides a full reconciliation of its annual report to US GAAP, filing a Form 20 – F and meets the NYSE listing requirements. CUSPID
Acronym of Committee
Acronym of International Securities Identification Number, a unique international code which identifies a securities issue. Each country has a national numbering agency which assigns ISIN numbers for securities in that country. Benetton ordinary shares ISIN is IT0003106777. Sedol Acronym of Stock Exchange Daily Official List number, a code used by the London Stock Exchange to identify foreign stocks [London Stock Exchange]. Benetton Group ordinary shares Sedol is 7128563, while for Benetton Group ADR is 2091671.
Corporate Governance Board of Directors Main governing body for the administration of a company. The functionality of the Board of Directors is disciplined by the Statutory Report of the company itself. The Board of Directors of Benetton is invested with the widest possible powers for the ordinary and extraordinary administration of the Company. The Board of Directors can delegate its powers to one or
Code of Ethics Official document of the Company and its subsidiaries, directly or indirectly controlled. The Code contains a set of principles according to which the Company conducts its activity and that of the parties who operate on its behalf. For Benetton Code of Ethics, see Corporate Governance. Corporate Governance Set of rules and relations referring to the company administration, ownership structure and management efficiency to reach the company targets. For information on Benetton Corporate Governance, see Corporate Governance. Executive Committee Governing body for the administration of a company. Benetton Executive Committee was set up in 2003 to ease and quicken the decisional processes of the Group. One of the Executive Committee’s tasks is to define, upon proposal by the Managing Director, company and group industrial and financial plans, strategies, the annual budget and interim adjustments for subsequent submittal to the Board of Directors. The Executive Committee also examines and approves particularly important investment and disinvestment plans, lines of credit facilities, the furnishing of guarantees and analyses the chief problems connected with company performance, so that the Board of Directors can accomplish its legal duties more efficiently. For information on Benetton Executive Committee members, see Corporate Governance.
Statutory Auditors Internal body of a company, which is responsible for the control of the company management activities. The Statutory Auditors monitor the compliance of the other governing bodies, in particular the Board of Directors, with the law and the statutory report. Benetton Board of Statutory Auditors consists of three standing members and two alternate members, who can be re-appointed. The members remain in office for three financial years to the date of the General Meeting for the approval of the latest financial year results. For information on Benetton Statutory Auditors members, see Corporate Governance. Stock option Right for the option beneficiary to subscribe a certain number of shares per option, at a predetermined price [exercise price] at or by a certain date [Vesting period]. In September 2004, Benetton Board of Directors, in application of the powers authorized by the Extraordinary Shareholders’ Meeting, approved a capital increase to service a Stock option plan for Benetton top management, subject to achievement of the objectives for creation of accumulated value envisaged in the 2004-2007 Guidelines. For information on Benetton Group Stock Option Plan, see Corporate Governance. Stock Option Plan Document which rules the award of stock options for the subscription of shares at a predetermined price [exercise price] at or by a certain date [Vesting period]. In September 2004, Benetton Board of Directors, in application of the powers authorized by the Extraordinary Shareholders’ Meeting, approved a capital increase to service a Stock option plan for Benetton top management, subject to achievement of the objectives for creation of accumulated value envisaged in the 2004-2007 Guidelines.
For information on Benetton Group Stock Option Plan, see Corporate Governance. Vesting Period Time period before stock options become exercisable and the underlying stocks can be acquired by the beneficiary according to a certain stock option plan. According to Benetton Stock Option Plan approved in September 2004 the vesting period for the top management options on Benetton stocks is equal to 2 years after award date for 50% of the assigned options and 4 years for the remaining 50%, subject to achievement of objectives for creation of accumulated value. For information on Benetton Group Stock Option Plan, see Corporate Governance. G LO S S A RY
more of the Directors who will exercise them, jointly or severally, in conformity with decisions taken by the Board of Directors. The Board of Directors may also entrust part of its authority to an Executive Committee made up of certain Board members. For information on Benetton Board of Directors members, see Corporate Governance.
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2005 financial calendar
2005 Shareholders’ meeting
05.16.2005
2005 1st quarter results
05.16.2005
Dividend payment
05.23.2005
2005 1st half results
09.12.2005
2005 9 months results
11.11.2005
2 0 0 5 F I N A N C I A L C A L E N DA R
Date
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Corporate information Headquarters Benetton Group S.p.A. Villa Minelli 31050 Ponzano Veneto [Treviso] - Italy tel +39 0422 519111
C O R P O R AT E I N F O R M AT I O N
Legal data Share Capital: Euro 236,026,454.30 fully paid-in R.E.A. [register of Commerce] no.: 84146 Tax ID/Treviso Company Register no.: 00193320264 Media & communications department e-mail:
[email protected] tel +39 0422 519036 fax +39 0422 519930 Investor Relations e-mail:
[email protected] tel +39 0422 519412 fax +39 0422 519740 TV Conference +39 0422 510623/24/25
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www.benettongroup.com
Graphic design and photo Fabrica - Catena di Villorba - Treviso Consultancy & co-ordination Ergon Comunicazione - Rome Films Sartori Group - Quinto - Treviso Printed in Italy Grafiche Tintoretto - Treviso
