benetton group annual report 2005 directors’ report -...
TRANSCRIPT
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
Benetton Group Annual Report 2005
Directors’ report - Consolidated financial statements
orissa21°17’N 85°59’E
The Benetton Group
8 40 years of history
10 Main consolidated companies as of December 31, 2005
13 Directors and other officers
15 Letter to shareholders from the Chairman and Founder of the Benetton Group, Luciano Benetton
16 Key financial data - highlights
Directors’ report
21 The product
22 Production organization
23 The markets
24 Human resources
25 Information Technology Communication
26 Administration, Tax and Corporate
27 Investor relations Corporate Governance
36 Supplementary information Benetton shares and shareholders
38 Performance of Benetton shares
41 Relations with the parent company, its subsidiaries and other related parties The protection of personal data
42 Directors Principal organizational and corporate changes
43 Significant events following the close of the financial year Outlook for 2006
44 Consolidated Group results Consolidated income statement
46 Business segments
51 Balance sheet and financial position highlights
Consolidated financial statements
59 Consolidated income statement
60 Consolidated balance sheet - Assets
61 Consolidated balance sheet - Shareholders’ equity and liabilities
62 Shareholders’ equity - Statement of changes
63 Consolidated cash flow statement
são paulo23°31’S 46°37’W
tehran35°40’N 51°26’E
1965
1968
1978 19
85
1974 19
77
1980
Creation of Benetton Group.
First Benetton store outside Italy (Paris).
Sisley enters the Group brand portfolio.
Group exports 60% of production.
Opening of the first New York store, in Madison Avenue.
1982
1983
1985
1986 19
89
Opening of the first store in Tokyo.
Collaboration with Oliviero Toscani begins.
The Group enters Formula One as sponsor of the Tyrrel team. In 1986, following the acquisition of
Toleman, Benetton Formula Limited racing team is created. It wins two world drivers and one
constructors championships. In 2000 Renault acquires the Benetton team.
Benetton advertising wins the “Grand Prix de la Publicité”
in France. It is the first in a series of acknowledgments
that, together with critiques and censorship, fosters
debate in many countries around the world.
The Group is listed on Milan, Frankfurt
and New York Stock Exchanges.
1989
1991
1994
2005
2003
Entry into East Europe and former Soviet
Union markets.
First presences of the brand
in China and India.
Fabrica, Benetton Group communication
research center, is created.
The family takes a step back in order to give more responsibility
to managers.
Benetton is present in 120 countries with
5,000 stores. Alessandro Benetton is
appointed Deputy Chairman of the Group.
40 years of history40 years of history
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The Benetton Group
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Benetton Retail DeutschlandGmbH München
100%
Benetton 2 Retail Comérciode Produtos Têxteis S.A. Porto
Benetton Asia Pacific Ltd. Hong Kong
100%
Benetton Argentina S.A. Buenos Aires
95%
Benetton Trading USA Inc. Lawrenceville
100%
Benetton Tunisia S.à r.l. Sahline
100%
Benetton India Pvt. Ltd. Gurgaon
100%
Benetton Real EstateBelgique S.A. Bruxelles
100%
Benetton Real Estate AustriaGmbH Vienna
97%
Benetton Realty PortugalImobiliaria S.A. Porto
100%
Benetton Denmark A.p.S.Copenhagen
100%
Benetton Giyim Sanayi ve Ticaret A.S. Istanbul
50%
United Colors Communication S.A. Lugano
100%
Benetton Austria GmbH Salzburg
100%
Benetton Ungheria Kft. Nagykallo
100%
Benetton Real Estate Spain S.L.Barcelona
100%
Lairb Property Ltd. Dublin
100%
Benetton Japan Co., Ltd. Tokyo
100%
Benetton Manufacturing Holding N.V. Amsterdam
100%
United Colors of BenettonDo Brasil Ltda. Curitiba
100%
Benetton Società di Servizi S.A. Lugano
100%
Benetton France S.à r.l.Paris
100%
Benetton Realty Netherlands N.V.Amsterdam
100%
Real Estate Russia Z.A.O.St. Petersburg
25%
100%
Benetton Group S.p.A.Ponzano Veneto (TV)
Benetton Retail Italia S.r.l. Ponzano Veneto (TV)
100%
Benind S.p.A. Ponzano Veneto (TV)
100%
Fabrica S.p.A. Ponzano Veneto (TV)
100%
Benetton Realty Spain S.L.Barcelona
100%
Benetton Real EstateInternational S.A. Luxembourg
100%
Buenos Aires 2000 S.r.l.Ponzano Veneto (TV)
100%
Benetton Realty Russia O.O.O.Moscow
100%
Benetton International Property N.V.S.A. Amsterdam
100%
Benetton Realty France S.A. Paris
56.31%
S.I.G.I. S.r.l. Ponzano Veneto (TV)
100%
New Ben GmbH Frankfurt am Main
51%
100%
Benetton Trading Ungheria Kft.Nagykallo
Benetton Retail (1988) Ltd.London
100%
Benetton Retail Spain S.L.Barcelona
100%
Benetton France CommercialS.A.S. Paris
100%
Shanghai Benetton TradingCompany Ltd. Shanghai
100%
Bencom S.r.l. Ponzano Veneto (TV)
100%
Bentec S.p.A. Ponzano Veneto (TV)
100%
Benetton Deutschland GmbH München
100%
Benair S.p.A.Ponzano Veneto (TV)
100%
Filatura di Vittorio Veneto S.p.A. Vittorio Veneto (TV)
50%
Benetton International S.A. Luxembourg
100%
Benetton Australia Pty. Ltd. Sydney
100%
Olimpias S.p.A. Ponzano Veneto (TV)
100%
Benetton USA Corp. Wilmington
100%
Benetton Holding International N.V.S.A. Amsterdam
100%
Benetton Commerciale Tunisie S.à r.l. Seousse
100%
Benrom S.r.l. Sibiu (Romania)
100%
Benetton Istria D.O.O. Rijeka
100%
Benetton Manufacturing Tunisia S.à r.l. Shaline
100%
Benetton Textil - Confeçcãode Têxteis S.A. Porto
100%
Benetton Croatia D.O.O. Osijek
100%
Benetton Slovakia s.r.o. Dolny Kubin
100%
Benetton Beograd D.O.O. Belgrado
100%
Benetton Retailing Japan Co. Ltd. Tokyo
95%
Benetton Korea Inc.Seoul
50%
Main consolidated companies as of December 31, 2005
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Benetton Retail DeutschlandGmbH München
100%
Benetton 2 Retail Comérciode Produtos Têxteis S.A. Porto
Benetton Asia Pacific Ltd. Hong Kong
100%
Benetton Argentina S.A. Buenos Aires
95%
Benetton Trading USA Inc. Lawrenceville
100%
Benetton Tunisia S.à r.l. Sahline
100%
Benetton India Pvt. Ltd. Gurgaon
100%
Benetton Real EstateBelgique S.A. Bruxelles
100%
Benetton Real Estate AustriaGmbH Vienna
97%
Benetton Realty PortugalImobiliaria S.A. Porto
100%
Benetton Denmark A.p.S.Copenhagen
100%
Benetton Giyim Sanayi ve Ticaret A.S. Istanbul
50%
United Colors Communication S.A. Lugano
100%
Benetton Austria GmbH Salzburg
100%
Benetton Ungheria Kft. Nagykallo
100%
Benetton Real Estate Spain S.L.Barcelona
100%
Lairb Property Ltd. Dublin
100%
Benetton Japan Co., Ltd. Tokyo
100%
Benetton Manufacturing Holding N.V. Amsterdam
100%
United Colors of BenettonDo Brasil Ltda. Curitiba
100%
Benetton Società di Servizi S.A. Lugano
100%
Benetton France S.à r.l.Paris
100%
Benetton Realty Netherlands N.V.Amsterdam
100%
Real Estate Russia Z.A.O.St. Petersburg
25%
100%
Benetton Group S.p.A.Ponzano Veneto (TV)
Benetton Retail Italia S.r.l. Ponzano Veneto (TV)
100%
Benind S.p.A. Ponzano Veneto (TV)
100%
Fabrica S.p.A. Ponzano Veneto (TV)
100%
Benetton Realty Spain S.L.Barcelona
100%
Benetton Real EstateInternational S.A. Luxembourg
100%
Buenos Aires 2000 S.r.l.Ponzano Veneto (TV)
100%
Benetton Realty Russia O.O.O.Moscow
100%
Benetton International Property N.V.S.A. Amsterdam
100%
Benetton Realty France S.A. Paris
56.31%
S.I.G.I. S.r.l. Ponzano Veneto (TV)
100%
New Ben GmbH Frankfurt am Main
51%
100%
Benetton Trading Ungheria Kft.Nagykallo
Benetton Retail (1988) Ltd.London
100%
Benetton Retail Spain S.L.Barcelona
100%
Benetton France CommercialS.A.S. Paris
100%
Shanghai Benetton TradingCompany Ltd. Shanghai
100%
Bencom S.r.l. Ponzano Veneto (TV)
100%
Bentec S.p.A. Ponzano Veneto (TV)
100%
Benetton Deutschland GmbH München
100%
Benair S.p.A.Ponzano Veneto (TV)
100%
Filatura di Vittorio Veneto S.p.A. Vittorio Veneto (TV)
50%
Benetton International S.A. Luxembourg
100%
Benetton Australia Pty. Ltd. Sydney
100%
Olimpias S.p.A. Ponzano Veneto (TV)
100%
Benetton USA Corp. Wilmington
100%
Benetton Holding International N.V.S.A. Amsterdam
100%
Benetton Commerciale Tunisie S.à r.l. Seousse
100%
Benrom S.r.l. Sibiu (Romania)
100%
Benetton Istria D.O.O. Rijeka
100%
Benetton Manufacturing Tunisia S.à r.l. Shaline
100%
Benetton Textil - Confeçcãode Têxteis S.A. Porto
100%
Benetton Croatia D.O.O. Osijek
100%
Benetton Slovakia s.r.o. Dolny Kubin
100%
Benetton Beograd D.O.O. Belgrado
100%
Benetton Retailing Japan Co. Ltd. Tokyo
95%
Benetton Korea Inc.Seoul
50%
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manarola44°04’N 09°55’E
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Directors and other officers
Board of Directors
Board of Statutory Auditors
Independent Auditors
Luciano Benetton (1) Chairman Carlo Benetton Deputy Chairman Alessandro Benetton Deputy Chairman Silvano Cassano (2) Chief Executive Officer Giuliana Benetton Directors Gilberto Benetton Reginald Bartholomew Luigi Arturo Bianchi Giorgio Brunetti Gianni Mion Ulrich Weiss Pierluigi Bortolussi Secretary to the Board
Angelo Casò Chairman
Filippo Duodo Auditors Antonio Cortellazzo Marco Leotta Alternate Auditors Piermauro Carabellese
PricewaterhouseCoopers S.p.A.
Powers granted (1) Company representation and powers to carry out any action that is consistent with the Company’s business purpose,
except for those expressly reserved by law to the Board of Directors and to the shareholders’ Meeting, with limitation on some categories of action.
(2) Power to carry out any action relating to the ordinary administration of the Company as well as certain acts of extraordinary administration subject to limits on amounts.
canberra35°17’S 149°08’E
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Letter to shareholders from the Chairman and Founder of the Benetton Group, Luciano Benetton
To the shareholders,
Anniversaries normally lead us to look at the past, at how far we have come. I prefer to turn this on its head and to project these last 40 years into the future, almost as if this were our first day of business. Throughout our journey, there have certainly been many successes for us to be proud of - and we will be celebrating these this fall at the Centre Pompidou in Paris - but it is equally true that “our” future begins each and every day, and it is our duty to keep pace with the passing of time with optimism and vigor.
For us, for example, the results achieved in 2005 should be seen, above all, as the basis upon which to grow even further in 2006. These results demonstrate that our Group is equipped to meet the challenges of the years to come, because we can count on a stable shareholder base and a highly skilled management team. Equally important is the ability of each of us to work as a team and play an active role, working towards a common goal shared throughout the organization’s value chain: this is the glue that gives strength to our entrepreneurial culture.
Our network of sales partners, in particular, continues to strengthen and become more sophisticated day by day. It is together that we invest in the updating of shops, in the services we provide, in the value of our brands, and in the style and quality of our collections. All this is driven by a philosophy of being in direct contact with the market and as close as possible to the final consumer.
The ability to weave a global “network of skills”, selecting the best industrial and commercial resources available upon which to further develop Benetton know-how, has enabled us to make bold forays into markets that only western shortsightedness could see as being “emerging”. A case in point is India, where our 15 years of presence has provided us with a significant competitive advantage, or China. Both these countries are acting as invaluable springboards for the development of other Asian markets.
Tomorrow, as today, we will continue to focus on development. This means investing in technology, innovation, and organization, in order to be as competitive, fast, and dynamic as we can. This approach will enable us to be highly reactive, both in coming up with ideas - and putting them into action with the projects, products and solutions that anticipate coming trends.
Because, in reality, our future begins now - at 40!
Luciano BenettonChairman, Benetton Group S.p.A.
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Key financial data - highlights
Application of IFRS
The Group’s financial statements for 2005 and comparative periods have been drawn up in accordance with the International Financial Reporting Standards (IFRS) applicable at the date of preparation and on the basis of Appendix 3D to the Issuers’ Regulations no. 11971 of May 14, 1999, and subsequent amendments and additions. Regarding financial year 2004, the year of first-time adoption of the IFRS, the section “Transition to IFRS” has been prepared (and is included below), which details the procedures followed for the transition, as well as the impact of the adoption of IFRS on the consolidated balance sheet, income statement, and statement of cash flows.
Key operating data
(millions of euro) 2005 % 2004 % Change % Revenues 1,765 100.0 1,704 100.0 61 3.6 Gross operating income 770 43.6 775 45.5 (5) (0.6) Contribution margin 643 36.4 654 38.4 (11) (1.6) Ordinary operating result (*) 205 11.6 225 13.2 (20) (8.7) Operating profit 157 8.9 158 9.3 (1) (0.4) Net income for the year attributable to the Parent Company and minority interests 114 6.5 108 6.4 6 5.3 Net income for the year attributable to the Parent Company 112 6.3 109 6.4 3 2.8
(*) Ordinary operating result is indicated for the purposes of evaluating the performance of the company’s core business and to aid financial analysts in using their models to analyze the company’s results. This information is not required by either IFRS or US GAAP.
(millions of euro) 12.31.2005 12.31.2004 Working capital 688 711 Assets held for sale 8 8 Net capital employed 1,626 1,654 Net financial position 351 441 Total shareholders’ equity 1,275 1,213 Free cash flow (normalized) 167 (A) 182 (B)
Net total investments/(disposals) (excluding purchase and sale of securities) 118 95
Key financial data
(A) Not including 118 million euro for the sale of financial assets.(B) Not including the payment of substitute taxes of 124.5 million euro, the sale of the sports equipment segment, in the amount of 49 million euro, and the
purchase of financial assets, in the amount of 90 million euro.
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12.31.2005 12.31.2004 Basic earnings per share (euro) 0.62 0.60 Shareholders’ equity per share (euro) 6.95 6.64 Price at period end (euro) 9.62 9.74 Screen-based market: high (euro) 10.15 10.18 Screen-based market: low (euro) 7.01 8.33 Market capitalization (thousands of euro) 1,746,596 1,768,383 Average no. of shares outstanding 181,558,811 181,558,811 Number of shares outstanding 181,558,811 181,558,811
Share and market data
Financial ratios
(in %) 12.31.2005 12.31.2004 ROE (Net income / Equity) 8.87 9.02 ROI (Operating profit / Net capital employed) 9.67 9.54 EBITDA ((Operating profit + depreciation and amortization + other non-monetary costs) / Revenues) 16.20 18.30 ROS (Operating profit / Revenues) 8.90 9.26 Net income / Revenues 6.34 6.38
Number of personnel
12.31.2005 12.31.2004 Total employees 7,978 7,424
xishuang27°38’N 100°47’E
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Directors’ report
albuquerque35°06’N 106°36’W
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Financial year 2005 worked out at two different speeds, which ref lects the unique nature of the Benetton business model and the potential of a system in which an entrepreneurial spirit can be harnessed to face complex market challenges.
Consolidated revenues, which have grown 3.6%, were driven by the strong performance of the Fall/Winter season, thanks to reorders that were substantially higher than originally expected. Also contributing to this performance was the particularly good product mix and the signif icant development of business in Mediterranean countries, including Turkey, as well as in eastern Europe and Korea.
The heightened competitiveness and greater f lexibility of our product offerings have enabled us to provide consumers throughout the world with quality and style, designed by an unparalleled team able to integrate design, marketing, and manufacturing skills more quickly than our competitors.
Good cost control and the increase in sales volumes have made it possible to offset the pressure on margins coming from focused sales initiatives, centered around the sales network and the f inal consumer.
Discipline in employing invested capital has enabled us to contain working capital while increasing revenues, as well as to generate additional resources that are available to be used to accelerate the company’s internal growth.
In 2006, 40 years after the start of operations and 20 years after the f irst public listing in Italy, the challenges that lie ahead for Benetton continue to be a vital source of motivation to constantly rethink and renovate all areas of the company’s business. In this way prof itable growth can be sustained while long-term value for our shareholders, sales partners, and all our other stakeholders is created.
Silvano CassanoChief Executive Off icer (CEO)
+3.6%consolidated
revenues
20years of SE
listing
40years
of history
The product: style and planning
Throughout 2005, the Product Development Unit, which was established in 2004, continued consolidating its role of connecting the product, operations, and sales units. This unit has the twofold objective of providing an ever better service to Benetton’s traditional customers, the company’s global network of partners, and of generating more direct contact with the market and the final consumer.
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An improved rationalization of the collections, in particular, led to an average reduction in the number of articles presented in 2005, thereby lowering dispersion, inefficiency, and costs, while at the same time strengthening the identity and consistency of the various brands. In conjunction with this, and in order to complement the product offering and take advantage of as many opportunities for growth as possible, Benetton collections now include “nice price” articles, which are basic yet original and are inspired by the practical needs of day-to-day living. Product planning is also intended to constantly reduce the time it takes to restock the points of sale, in order to quickly reach the goal of offering with the base, flash, integrations and new fashion collections at least a new proposal every four weeks. The continuative articles, which represent the very genetic makeup of each brand, are available throughout the year and at increasingly rapid resupply times: as low as seven days in Italy and 15 throughout the rest of the world. In 2005, a merchandising plan was also created for each brand, which analyzes the sales performance of the various articles from the previous year and provides additional guidelines for planning and developing future collections.
Production organization: speed and service
Benetton’s production system was redesigned in 2005, evolving from an organization based on divisions (e.g. wool and cotton) to a structure based on Service Units, such as planning and quality control.The new system is more efficient, flexible, and integrated, and makes it possible to optimize quality, service, and product delivery times, while being able to sustain desired growth in production over the coming years. In 2005, clothing production increased by as much as 3 million articles over the previous year.
“Benetton’s collections are constantly evolving, yet never lose their own identity. With innovative raw materials, colors that are in touch with the times, and new, youthful shapes, we help stimulate the market by designing articles that always evoke the history and tradition of our brands. From 2005, hanging garments made a decisive entry into the collections alongside our casualwear, while knitwear was the focus of a special color project. The search for new materials has also led us to produce articles made of bamboo viscose for Fall/Winter 2006, which provides a soft, natural feel and advanced ecological and anti-bacterial characteristics. Benetton’s constant dedication to the quest for new materials and new designs has led us, for example, to strengthen our relationship with Politecnico di Milano, particularly on a project, co-funded by the Italian Ministry of Education and Research, to study and eliminate the peeling effect of wool and other fabrics. Another study, which we are developing with Istituto di Nanotecnologie in Venice, involves the application of Nanotechnology in fabrics, which will lead to further innovation in our collections.” Vincenzo Scognamiglio, UCB Chief Product Officer
“We are working to provide the necessary creativity in the design of our collections, taking into account the demands of rationalization and organization, so as to combine product innovation and planning in a quick and effective response to the needs of the marketplace.” Walter Giuriato, head of the Product Development Unit
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This system relies on a “network of skills”, which, leverages the best industrial capabilities available internationally, into which Benetton know-how is introduced, in each case using the most appropriate production techniques. In a landscape of increasing competition, such a system ensures rapid response times, product quality, and customer satisfaction.Benetton’s control and research units, which govern the entire system, operate in eastern Europe, in the Mediterranean - led by Tunisia and Turkey - and in transitional Asian markets, such as China and India.In terms of logistics, in 2004, the new Hong Kong hub became fully operational and, together with the European hub, allows for more rapid response times and better customer service in China, Japan, and the Far East in general, as well as in the U.S. Other such units throughout the world are being studied and will consolidate the transition from a centralized system to a new model based on satellite logistics.
The markets: knowledge and development
The areas of greatest growth in 2005 were eastern Europe, the Mediterranean - Spain, Greece, and Turkey - and Korea. In Turkey, a joint venture has also been established with the Boyner Group in order to develop production and sales in the country and certain surrounding areas.Retail distribution, which, as of this year, is being centrally coordinated in Italy, numbered almost than 300 shops in the leading international fashion capitals and posted encouraging economic results. The evolution of the interior design elements of shops continued in 2005 with the new Sisley concept, known as Pentagram, which is a better fit for the glam image and for brand positioning. The previous year also saw the debut of the Twins concept for UCB, which expresses the themes of the various collections very effectively.Commercial policies were also launched in 2005 aimed both at broadening the product offering to include “nice price” articles while favoring an increase in customer traffic in the points of sale and at the same time at supporting an increase in margins for our partners so that they can invest to keep the sales network fresh and up to date. The results achieved will enable us to continue confidently along this path in 2006.In the area of co-branding, Benetton and Mattel have begun a global partnership through December 31, 2006, for the creation of a girlswear line called “Barbie loves Benetton”, which has been well received throughout the world.With regard to licensing, of particular note is the agreement with Zorlu Holding, one of the largest Turkish groups, for Sisley Casa products, as well as the exclusive agreement
“In 2005, Benetton celebrated the fifteenth anniversary of its presence in India, which represents a significant competitive advantage in a market rich in history and tradition, but which is, at the same time, strategic to the development of business in Asia. The production of cotton clothing, shirts, accessories, and footwear by our production network, which includes the facilities in Gurgaon (Haryana) just outside of Delhi, has enabled us to continue the strong growth of Benetton India (wholly owned by Benetton Group since December 2004), which boosted sales by 70 percent in 2005. The more than 50 shops currently in business in the country are expected to double over the next three years.” Gagan Singh, managing director of Benetton India
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with the French firm Selective Beauty for the development and global distribution of United Colors of Benetton perfumes, colognes, and fragrances.
Human resources: teamwork and corporate culture
In 2005, the department contributed to the evolution of the Group’s corporate culture by redesigning the organizational structure around three fundamental principles: teamwork, knowledge, and quality.Directly managed distribution, in particular, is currently being coordinated by a centralized Retail Unit, which also serves to connect the various units throughout the world. By preparing forecasts of market dynamics, the new Production Planning office makes it possible to anticipate and reduce production times in order to respond to the needs of the marketplace in a timely manner. The Commercial department, in turn, has been redesigned around the two main sales channels: wholesale distribution and the retail chain.In terms of training, of particular note is a visual merchandising program (concepts, brand communication, and window and in-shop displays) for our partners, which involved more than 250 shops in 2005.For young people looking for a career in sales, there was also the Wanna Sell? project, including hands-on sales experience in the field. The program has a duration of roughly one year and highlight characteristics such as strong sales ability, product sensitivity, pragmatism, and speed at becoming one with the system. After an initial period of six to eight months in the shop, the most promising participants continue on with a trial period with a Benetton agent/area manager.
“The new Benetton Giyim Sanayi, a joint venture between Benetton and Boyner Group, manages all commercial activities of the brands United Colors of Benetton, Sisley, Playlife, and Killer Loop. According to the development plan, sales should increase by 50 percent over the next f ive years, thereby signif icantly strengthening our presence in Turkey. Benetton has grown here like no other international brand. With entrance into the European Union, our domestic market is certain to grow, as will our business in the Eurasia zone, which shows strong potential for sales development. Today in Turkey, there are already more than 100 shops in 50 cities displaying the Benetton logo.”Zeynep Selgur, general manager of Benetton Giyim Sanayi
“Barbie and Benetton have joined forces to create one of 2005’s most exciting developments in the world of fashion, delighting and surprising customers throughout the world by combining Benetton’s brilliant abilities in the clothing industry and its strength in distribution with the world’s most famous fashion doll. Being successful in business today means having the courage to run risks and to support innovative, creative ideas. That’s the difference between a good brand and an exceptional one. The Benetton-Barbie relationship shows that innovative thinking, imaginative leadership, and the courage to run with an idea can lead to exciting results. Mattel is enthusiastic about this partnership and is looking forward to future innovations with Benetton. ‘Barbie loves Benetton’ is a splendid partnership and a sign for these two world-famous brands that will stand the test of time.”Richard Dickson, senior vice president of worldwide marketing, media and entertainment for Mattel
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Information Technology: analysis and reliability
During 2005, numerous initiatives were launched as part of Project Phoenix, which supports the core business with the renovation and full integration of IT systems. Completed projects included the new information system for the retail channel, which is based on the Oracle platform and manages the main processes (financial planning and management of both corporate activities and stores activities) globally through a single centralized system. The project Benettontv calls for the implementation of a new portal for Benetton partners (agents, clients, shops, and buyers), which provides controlled access with all the necessary security assurances. The system will make it possible to provide information to the entire Benetton commercial network in real time, updating everyone on initiatives (new collections, reassortments, display methods, distance learning for employees, and so on) and receiving orders via web. In particular, the Continuative Articles project has already begun according to which orders for these products will be entered directly, and, thanks to integration with the information systems of the production and logistics units, the system will provide immediate confirmation and guaranteed delivery times (first in, first out).Upon completion of the Planning project for the organization of production and having implemented the first phase of the “Sell-out” project to keep track of market trends in real time, the diffusion of the centralized system of Administration and Control, based on the SAP platform has gradually advanced. Among the other projects in 2005, the followings are of particular note: support for the Benetton orders process, from receipt of the orders to their fulfillment using the SAP Apparel and Footwear (SAP AFS) platform; the adoption of Java technology in order to complete and launch the packaging system; the design of a new high-speed metropolitan area network (MAN) to connect the corporate offices of Benetton Group, based in the Treviso area.
Communication: innovation and vision
In 2005, we launched the communication project to celebrate Benetton Group’s 40th anniversary, which will culminate in a grand event in Paris in October 2006 at the prestigious Centre Pompidou, featuring both fashion and art and which will be designed by Fabrica.During the year, Benetton’s communication research center continued its multicultural and international activities with projects and events ranging from the global campaign to promote tourism in the Veneto region to Flipbook, the media art project encompassing nearly 200,000 animations and 15 million visitors (winning the Grand Prize at the Japan
“The Phoenix-SAP project sees IBM’s Business Consulting Services division working side by side with Benetton. It is a project of strategic importance for the company, one which seeks to update the information system that supports the company’s main processes, beginning with sales and logistics. IBM feels deeply involved and is working as a close-knit team with Benetton, sharing commitments, objectives, and results.” Andrea Pontremoli, CEO of IBM Italia
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Media Art Festival), from promotion and graphic design for art exhibits to a documentary on the city of Shanghai for Swiss German television.The United Colors of Benetton campaign, photographed for Fabrica by David Sims, reaffirmed the brand’s values of color and youth with a decidedly modern flair. Sisley asserted its reputation as a sexy, trendy brand in its Fall/Winter 2005 campaign, which was set in the streets of Naples and photographed by Terry Richardson. The success of the clothing collections in 2005 was also supported by communication, with a significant increase worldwide, up 16%, of coverage in fashion newspapers and periodicals.In the world of new media, both the blog, benettontalk, designed to open up dialogue with online youth, and the new web site dedicated to the world’s media debuted during the year.
Administration, tax and corporate: skill and precision In 2005, the Group completed the transition to International Financial Reporting Standards (IFRS), which have become the accounting standards for the Benetton Group consolidated financial statements. The 2005 half-year report, which we presented last September, was the first to be prepared in accordance with IFRS and included the “transition” document with the reconciliations of the 2004 financial statements between Italian GAAP and IFRS and which detailed the main impacts on those financials. We have therefore continued efforts to train and update administrative personnel, both corporate and at subsidiaries’ level, as well as to perfect the accounting information system. Training also involved the staff of the fiscal and corporate areas, which have been affected by many important regulatory changes.Beginning in 2006, the financial statements for the parent group, Benetton Group S.p.A., will be prepared in accordance with IFRS. Also in 2006, the organization will be engaged in meeting the requirements of Italian law nos. 62/2005, on market abuse, and 262/2005, on investment and savings.Finally, for Benetton Group, as SEC registrant, 2006 will be the first year of application of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. This law requires publicly listed companies in the U.S. to have and document a detailed system of documentation and controls regarding corporate processes and financial statement information.
“Working for Benetton is a lot of fun. It’s interesting to see how the company has united clothing and values, fashion and color. As a photographer, I tend towards the essential, and interpreting the colors and weave of a fabric, bringing them together, and creating a fluid, modern image is a challenge that I face with great pleasure. In the Benetton campaign, I tried to give new light to products and issues such as the trademarks of the brand, one of the first to be truly ‘global’, with an unmistakable international image.” David Sims, fashion photographer
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Investor relations: proactivity and discipline
During the year, the Investor Relations unit sought to strengthen direct communication with institutional investors throughout the world, with the organization of an ongoing series of presentations, conference calls, and meetings with the management.Communication with the retail investors has also been further strengthened with the enhancement of the web site at www.benettongroup.com/investors, where new sections have been added (Social and Glossary) and content has been expanded. A new means of communicating with analysts has also been introduced, with a “virtual room” that facilitates group discussion on issues of common interest. Particular emphasis has also been placed on communicating clearly and fully the impact of the adoption of IAS/IFRS.Finally, at the end of the year, a shareholders identification study was conducted in order to provide a breakdown by geographic area and to define the structure of institutional investors. The study showed that European investors hold roughly 55% of the organization’s free float, with some 40% being held by American investors and the remaining 5% by Japanese investors.
Corporate Governance
Again in 2005, Benetton Group paid particular attention on corporate governance, continuing to evolve the organizational structure in accordance with Italian and international best practices and the standards required by the Italian Corporate Governance Code for listed companies (Codice di Autodisciplina delle Società Quotate).The system of corporate governance, as outlined below, is inspired by the principles of fairness and transparency in management and information and includes an ongoing process of verifying its efficiency and efficacy. The Company has adopted the traditional system of corporate governance by which the company is led by a Board of Directors, while the body that oversees observance of the law, the Company’s bylaws and the principles of proper administration is the Board of Statutory Auditors, while an independent auditing firm provides for the auditing of the accounts. Within this system of governance, the Internal Audit Committee plays a key role, as described in greater detail below.
Controlling interest. As described in greater detail below in the related section of the 2005 Directors’ Report and based on the latest available data, the shareholder Edizione Holding S.p.A. holds a controlling interest in the company with a 67.144% stake.
Board of Directors. Directors. Executive Committee. Related Party Transactions. Board of Directors. During 2005, the Board of Directors held nine meetings in which it analyzed and approved the guidelines for Group operations, organizational recommendations and general guidelines regarding human resources management, proposals to reorganize the corporate structure, operating performance, extraordinary operations and the quarterly and half-year results. During these meetings, the executive directors also provided the Board of Directors and Board of Statutory Auditors with information regarding any significant or unusual operations or related party transactions. The Board of Directors has paid particular attention on analyzing the periodic
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reports of the Internal Audit Committee regarding its activities and an evaluation of the appropriateness of the internal control system, and providing updates on the accomplishments adopted by the Committee in accordance with the Sarbanes-Oxley Act (the U.S. law that Benetton is required to observe as a result of being listed on the New York Stock Exchange). At the Board meetings, the necessary documentation and information were provided, with reasonable advance notice, such that the Board could knowingly deliberate on the various issues submitted before it.The current system of powers granted by the Board of Directors on May 16, 2005, as described below, and the disclosure procedures adopted ensure that the Board is informed of all of the most significant transactions for the Company and for the Group. Indeed, even though vested with the related powers, executive directors are required to submit such transactions to the Board of Directors for approval before their execution. Particular attention has been paid on transactions with related parties, as described in greater detail below in the section “Related Party Transactions”.
Directors. The current Board of Directors, appointed by the shareholders’ meeting on May 16, 2005, is composed of 11 members, who are to remain in office until the meeting of shareholders to approve the financial statements for the year ended December 31, 2005.
Benetton Group Governance - 2005
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A complete overview of the directors’ curricula are available on the Company’s web site in the Corporate Governance section. The Chairman, Luciano Benetton, is vested with the powers of company representation and the power to carry out all actions related to the Company’s activities, with limitations for certain categories of actions and the following transactions in particular: - the purchase and sale of shares or corporate bonds for amounts exceeding 25 million
euro;- the purchase and sale of business units and the purchase and sale of property for
amounts exceeding 25 million euro; - the approval of loans to parties other than subsidiaries for amounts exceeding 5 million
euro. The Chief Executive Officer, Silvano Cassano, is vested with the power to carry out actions related to ordinary administration and certain actions of extraordinary administration, with limitations for the following actions in particular:- the purchase and sale of shares in companies for amounts exceeding 5 million euro;- the purchase and sale of securities and bonds for amounts exceeding 10 million euro; - the purchase and sale of business units and the purchase and sale of property for
amounts exceeding 10 million euro; - the approval of loans to parties other than subsidiaries for amounts exceeding 5 million
euro; - the guarantee of loans of companies that are not wholly controlled, either directly or
indirectly, by Benetton Group S.p.A.None of the other directors have executive powers.The Board of Directors has appointed two Deputy Chairmen (Carlo Benetton and Alessandro Benetton), who are vested severally with the powers of Company representation in the absence of the Chairman.There are seven non-executive directors (Carlo Benetton, Gilberto Benetton, Giuliana Benetton, Reginald Bartholomew, Luigi Arturo Bianchi, Giorgio Brunetti and Ulrich Weiss), of whom four (Reginald Bartholomew, Giorgio Brunetti, Luigi Arturo Bianchi and Ulrich Weiss) are “independent” from the owners and corporate management, in accordance with the concept of independence as defined by the Corporate Governance Code for listed companies in effect for financial year 2005. All directors participate diligently in the board’s activities. On an annual basis, the Board of Directors, based also on the information provided by the directors themselves, evaluates the requirements of independence of all members in accordance with the aforementioned Corporate Governance Code. No limits to the reappointment of directors have been defined.
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The table below shows the offices that the directors hold in other companies listed on regulated markets, either domestic or foreign, or in banks, insurance companies, or other financial organizations, as well as in other companies of significant size that are not a part of the Group:
Director Office Company Luciano Benetton Board member 21,Investimenti S.p.A., Edizione Holding S.p.A. Carlo Benetton Deputy Chairman Edizione Holding S.p.A. Gilberto Benetton Chairman Autogrill S.p.A., Edizione Holding S.p.A., Ragione S.A.p.A. di G. Benetton & C. Deputy Chairman Telecom Italia S.p.A., Olimpia S.p.A. Board member Aldeasa S.A., Mediobanca S.p.A., Lloyd Adriatico S.p.A., Autostrade S.p.A., Pirelli & C. S.p.A., Schemaventotto S.p.A., Infrastrutture e Sviluppo S.p.A. Giuliana Benetton Board member Edizione Holding S.p.A. Alessandro Benetton Chairman and CEO 21,Investimenti S.p.A. Chairman 21 Partners S.G.R. S.p.A., 21,Investimenti Partners S.p.A., 21 Network S.p.A. Deputy Chairman Nordest Merchant S.p.A. Sole Director Saibot S.r.l. società unipersonale Board member Edizione Holding S.p.A., Autogrill S.p.A., Sirti S.p.A., Permasteelisa S.p.A., Industrie Zignago Santa Margherita S.p.A. Member of the Supervisory Board 21 Centrale Partners S.A. Reginald Bartholomew Chairman Merrill Lynch Italy Deputy Chairman Merrill Lynch Holdings Ltd Board member Pirelli & C. Real Estate S.p.A. Giorgio Brunetti Board member Autogrill S.p.A., Carraro S.p.A., Messaggerie Italiane S.p.A. Auditor Autorità per l’energia e il gas Luigi Arturo Bianchi Board member Anima S.G.R. S.p.A., Assicurazioni Generali S.p.A., MBE Holding S.p.A. Gianni Mion Deputy Chairman TIM Italia S.p.A. CEO Edizione Holding S.p.A. Board member Aldeasa S.A., 21,Investimenti S.p.A., Autogrill S.p.A., Autogrill Group Inc., Autostrade S.p.A., Cartiere Burgo S.p.A., Olimpia S.p.A., Telecom Italia S.p.A., Fondazione Cassa di Risparmio di Venezia, Luxottica Group S.p.A., Infrastrutture e Sviluppo S.p.A., Schemaventotto S.p.A., Igli S.p.A. Ulrich Weiss Board member Ducati Motors S.p.A., Bego Medical AG (Bremen)
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The Group has recently adopted a new Policy, which was also approved by the Boards of Directors of the subsidiaries, regarding the exercise of power granted to Benetton Group S.p.A.’s proxy holders and to directors and proxy holders of its subsidiaries. This Policy provides prior authorization by the Board of Directors of each company, or by its shareholders’ meeting, for the execution of the following transactions, in the event that such transactions are not conducted within the scope of ordinary intragroup relations: the issuance of guarantees, concessions or requests for financing, the purchase or sale of property, the purchase or sale of shares in companies (with certain exceptions). In principle, the Policy assures to the Group the directors and proxy holders of all foreign or domestic subsidiaries are vested with uniform decision-making powers regardless of the provisions of local laws and regulations.
Executive Committee. The Executive Committee members include the Chairman, Luciano Benetton, the CEO, Silvano Cassano, and Board members Alessandro Benetton and Gianni Mion.The meetings of the Executive Committee are also attended, without voting rights, by the Board of Statutory Auditors and the chairman of the Internal Audit Committee.The Executive Committee’s responsibilities include defining strategic, industrial, and financial plans for the Group, as proposed by the CEO - preliminarily to the analysis by the Board of Directors - as well as preparing the annual budgets and interim forecasts. The Executive Committee also examines and approves particularly significant investment and divestment plans, the approval of financing, and the provision of guarantees, and analyzes the most significant issues related to Company performance, to enable the Board of Directors to carry out its duties effectively.In 2005, the Executive Committee met three times.
Related party transactions. The Rules of Conduct regarding transactions with related parties and other significant transactions, which were approved in 2004 and formally adopted by all subsidiaries during 2005, reiterated the central role played by the Board of Directors in the system of corporate governance and have ensured that the transactions regulated therein were always executed appropriately, according to criteria of substantial and procedural fairness.Related party transactions, that are atypical or concluded at non-standard conditions and for which the Board of Directors is not directly responsible, are, notwithstanding, submitted to the Board for prior approval. Greater details on the related party transactions executed during the financial year in question are provided in the section “Relations with the parent company, its subsidiaries, and other related parties” of the Directors’ Report for the consolidated accounts.Also submitted to the Board of Directors for prior approval are those transactions of a significant impact on the financial standing or performance of the Company and the Group and which, for their amount, type of counterparty, object, methods or timeframes, could adversely affect the value of the Company. For both categories of transactions, the Board of Directors has passed resolutions based on adequate information provided with suitable advance notice. The Rules of Conduct mentioned above do not expressly require that Board members with an interest in the transaction abstain from voting on such issue. In this way, it is left to the decision of the Board whether or not it is appropriate for such members to abstain from
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deliberations when this could compromise the maintenance of the quorum required. On March 30, 2006, the Company’s Board of Directors adopted the new Procedure for Related party transactions and for Significant transactions in order to adopt the latest indications on the subject contained in the Corporate Governance Code of Listed Companies and to follow other domestic and international best practices in identifying the parties, the transactions and the corporate procedures necessary to facilitate the appropriate flow of information.This new procedure provides for a more extensive definition (based on the indications contained in IAS 24) of related parties of Benetton Group S.p.A. and more rigorous authorization and disclosure procedures for transactions with such parties, including the requirement, in certain cases, of the prior opinion of the Internal Audit Committee regarding the transaction. The new procedure also requires that the Board member who, either directly or through a third party, has an interest in a company transaction, even if such interest is potential or indirect, abstains from the Board’s deliberations on the issue or, in the event the member’s presence should be necessary for the purposes of maintaining the quorum required, from the actual vote. This Procedure is to be adopted in 2006 by all the Group’s companies. The entire text of this Procedure can be found on the Company’s web site in the Corporate Governance section.
The Board of Statutory Auditors. The Board of Statutory Auditors is made up of the following members:- Angelo Casò - Chairman;- Filippo Duodo - Auditor;- Antonio Cortellazzo - Auditor; - Marco Leotta - Alternate Auditor; - Piermauro Carabellese - Alternate Auditor.A complete overview of the qualifications of the members of the Board of Statutory Auditors is available on the Company’s web site in the Corporate Governance section.All members of the Board were appointed on May 16, 2005. Their terms expire with the meeting of shareholders to approve the financial statements for 2007. The members of the Board were appointed in accordance with the criteria established by Article 148 of the Italian Consolidated Law on Finance (TUF for Testo Unico della Finanza) in effect at the time, as reflected in Article 19 of the Company’s Articles of Association, and based on the lists of candidates presented to the company 10 days prior to the meeting of shareholders along with sufficient documentation of their professional and personal qualifications.There is no auditor representing minority interests, as no related list of candidates was submitted.During 2005, the Board of Statutory Auditors met 12 times.
Direction and coordination function pursuant to Article 2497 et seq. of the Italian Civil Code. In January 2004, all Italian subsidiaries owned, directly or indirectly, by Benetton Group S.p.A. recognized the role of direction and coordination played by the Parent Company Benetton Group S.p.A. pursuant to Article 2497 et seq. of the Italian Civil Code. All obligations required by law have been fulfilled in that regard.
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Remuneration Committee and Nomination Committee. In implementation of the Corporate Governance Code for listed companies and with the responsibilities indicated therein, the Board of Directors confirmed the appointment of Reginald Bartholomew, Ulrich Weiss, and Gianni Mion (chairman) to the Remuneration Committee for financial year 2005. As such, this Committee is comprised primarily of non-executive directors and includes one non-independent director, given the current composition of the Company’s shareholders structure.As expressly defined by the related rules and procedures, the Remuneration Committee makes recommendations to be submitted to the Board of Directors, with those directly concerned removing themselves from the related deliberations of the Board. In 2005, the Remuneration Committee met twice. Again for 2005, the remuneration for the executive directors and those with particular responsibilities were assigned by the Board of Directors, based on the recommendations of the Remuneration Committee, as indicated in the explanatory notes to the Consolidated Financial Statements of Benetton Group, subject to definition of the total remuneration by the shareholders’ meeting as required by the Articles of Association. In 2004, with the help of external experts in preparing the variable components of remuneration, the Remuneration Committee also recommended the adoption of a stock option plan in order to motivate and promote the loyalty of the Company’s top management. The Company then adopted the proposed plan and assigned five managers a total of 3,233,577 options convertible into the same number of Company shares to be purchased at a price of 8.984 euro each, subject to the achievement of certain corporate objectives and targets.Additional information is provided in the section “Stock options” in the Directors’ report accompanying the Statutory and Consolidated Financial Statements of Benetton Group S.p.A. The content of this stock option plan can be found on the Company’s web site in the Corporate Governance section.The Board of Directors has not yet deemed it to be necessary to establish a Nomination Committee for the appointment of directors, given the current composition of the Company’s shareholder structure.The appointment of directors is done based on a single list filed with the Company prior to the meeting of shareholders along with sufficient documentation of the personal and professional qualifications of the candidates indicated.
The Internal Audit Committee. Internal Control. The Internal Audit Committee is composed of three independent, non-executive directors. On May 16, 2005, the Board members Ulrich Weiss and Luigi Arturo Bianchi were confirmed to the committee, and Giorgio Brunetti was appointed. In 2005, given that Benetton shares are listed on the New York Stock Exchange, and in compliance with the provisions of recent U.S. legislation concerning foreign private issuers, the Company vested the Internal Audit Committee with all powers necessary to fulfill the requirements of such legislation. This decision, which was formally approved by the Company’s Board of Directors, was formally communicated to and approved by the U.S. Securities Exchange Commission (SEC). This was made possible by the existence within the Company of an Internal Audit Committee - composed solely of independent directors, one of whom (Giorgio Brunetti) is a financial expert as defined by the aforementioned legislation - which was already appropriately structured and effective, thanks in part to
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the existence within the Company of the “Internal Control” function, which assists the Committee.As a result, it was necessary to modify the rules of the Internal Audit Committee in order to vest it with all responsibilities, duties and powers required in the U.S. for such a committee, compatibly with Italian laws and regulations. As such, the Internal Audit Committee’s responsibilities include:- evaluating the process of determining the financial statement account balances, with the
help of the head of the Internal Control function;- evaluating the appropriateness of the accounting principles adopted, together with the
Company’s CFO and the independent auditing firm;- receiving, as point of contact for the auditing firm, information and communications
regarding the consolidated accounts and Form 20-F concerning critical issues involving the standard or alternative accounting treatment of certain items; receiving from and transmitting to management information and communications regarding such issues;
- evaluating the proposals of independent auditing firms, with the help of the Company’s CFO and the head of the Internal Control function, for the purposes of hiring such a firm, and making related recommendations that the Board of Directors is to then present to the shareholders’ meeting;
- evaluating the results of the independent auditor’s report;- adopting procedures for (a) receiving and handling complaints received by the Company
regarding issues of accounting, internal accounting controls, or auditing in general, and (b) receiving, filing, and handling reports or disputes filed by employees regarding accounting issues or auditing in general, while ensuring the anonymity of the employee concerned. To that end, specific “Procedure for reporting complaints to the internal audit committee”, has been adopted;
- evaluating all auditing and other services provided by the independent auditing firm and expressing an opinion as to their appropriateness and consistency as a necessary requirement prior to hiring such firm;
- verifying the independence of the auditing firm.During 2005, the Committee, chaired by Ulrich Weiss, met eight times, with the participation of the entire Board of Statutory Auditors, in compliance with the adopted rules and procedures. The functioning and appropriateness of the system of internal control were verified by the Board of Directors, in part with the help of the related corporate function coordinated by the head of Internal Control, who reports directly to the chairman of the Internal Audit Committee. The systems of organization and reporting were seen to be adequate to ensuring the monitoring of the system of administration and accounting, including for subsidiaries. Efforts also continued on the mapping of processes, risks and existing controls concerning the main operating processes of the companies of the Group, while also conducting an analysis of the consistency of the related internal control procedures. Because Benetton shares are also listed in the U.S., this process was also conducted in compliance with the provisions of the Sarbanes-Oxley Act. The independent directors, the Board of Statutory Auditors and the independent auditing firm were adequately informed on the process, as well.In 2005, the Supervisory and Monitoring Body (Organismo di Vigilanza e Controllo, pursuant to Article 6(1)(b) of Italian legislative decree no. 231/2001), which is composed
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of Ulrich Weiss (chairman), Luigi Arturo Bianchi and Roberto Taiariol, carried out its responsibilities of control of the observance and functioning of the Organizational and Operational Model adopted by the Company. This Model is comprised of the following:- Code of ethics;- Operating procedures and reporting systems;- Internal supervisory and monitoring body;- Disciplinary system.The rules of the Internal Audit Committee and its procedures for reports, complaints, and disputes can be found on the Company’s web site in the Corporate Governance section.
Handling of confidential information. The management of confidential information is overseen by the CEO, with the counsel of the Chairman, both of whom are to take steps to ensure that adequate verifications are conducted regarding the qualification of confidential information in accordance with applicable laws and regulations. The press releases regarding the approval of the annual and interim financial statements, as well as any extraordinary transactions that may be subject to approval of the Board of Directors are, themselves, to be approved by the Board. The communications and relations with the press and institutional and private shareholders are the responsibility of the Media & Communications and Investor Relations offices, respectively. In 2002, by way of implementing the rules of the markets organized and managed by Borsa Italiana S.p.A., the Company adopted the related Code of Conduct on Internal Dealing, which governs the disclosure obligations regarding transactions executed by so-called “significant parties” (“persone rilevanti”), as defined by said code, in financial instruments issued by Benetton Group S.p.A. The obligations of disclosure for significant parties as defined by this Code of Conduct called for more restrictive timeframes and involved broader categories of parties and types of securities than those of the rules defined by Borsa Italiana S.p.A. On March 30, 2006, the Company adopted the new Internal Dealing Regulations, which, in compliance with the provisions of Article 114 of the Italian Consolidated Law on Finance and Article 152-sexies et seq. of the Regulation implementing the provisions on issuers of CONSOB, both of which have recently been amended, establishes new terms, conditions and procedures for the disclosure of transactions by these significant parties in Benetton securities.The entire text of the Internal Dealing Regulations can be found on the Company’s web site in the Corporate Governance section.
Compliance to the evolution of corporate governance legislation. The Corporate Affairs Department, in coordination with the various corporate departments involved, ensures observance of the legislation in force regarding corporate governance, which includes all related laws and legislation in the U.S. and Germany, given that Benetton shares are listed in New York and Frankfurt, as well as in Italy.To that end, the Department promotes the evolution of the corporate governance structure and tools to adapt them to new legislation, while also seeing to the adoption of appropriate rules of corporate governance that are in line with domestic and international best practice.
In 2006, the Company will adopt the provisions of the new Corporate Governance Code issued on March 2006.
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Relations with institutional investors and other shareholders. The Investor Relations Department is responsible for ensuring the proper management of relations with financial analysts, institutional investors and private shareholders, both foreign and domestic, which includes coordinating activities with the financial community.In accordance with the principles of fairness, clarity and equal access to information, the Department provides ample documentation and information regarding the Company, with a particular emphasis on price-sensitive information, on the web site at www.benettongroup.com/investors.
In the Corporate Governance section of the web site, the following documents are also available (as also mentioned above): Articles of Association; Internal dealing regulations; Organizational and operational model; Procedure for Related party transactions and for significant transactions; Procedure for reporting complaints to the Internal Audit Committee; Stock option plan; press releases and periodic financial information.
This document is also available on in the Corporate Governance section of the web site www.benettongroup.com/investors.
Supplementary information Benetton shares and shareholdersTreasury shares. During the period in question, Benetton Group S.p.A. neither bought nor sold any treasury shares, or shares in parent companies, either directly or indirectly or through subsidiaries, trustees or other intermediaries.
Shares held by directors and statutory auditors. The directors Luciano, Gilberto, Giuliana, and Carlo Benetton hold, directly and indirectly, equal shares in the entirety of the share capital of Edizione Holding S.p.A., which, in turn, holds a controlling interest of 67.144% in the share capital of Benetton Group S.p.A. Other than the above, in 2005, these directors, their spouses (not legally separated) and minor children held no shares in Benetton Group S.p.A. or its subsidiaries, either directly or through subsidiaries, trust companies, or other intermediaries, with the exception of the shares indicated in the table below for Gilberto and Alessandro Benetton.In 2005, as demonstrated by specific declarations received, no other shares in the company are held by directors or statutory auditors, except as indicated below: No. of shares No. No. No. of shares held as of Company of shares of shares held as of Type of Name & surname 12.31.2004 held purchased sold 12.31.2005 ownership Gilberto Benetton 45,000 Benetton Group S.p.A. - - 45,000 Owned Alessandro Benetton 4,000 Benetton Group S.p.A. - - 4,000 Owned Ulrich Weiss 3,500 Benetton Group S.p.A. - - 3,500 Owned
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Stock option plan. On September 9, 2004, following authorization by the extraordinary shareholders’ meeting held on the same date, the Board of Directors voted to increase share capital, for cash, from 236,026,454.30 euro to 240,230,104.40 euro to service the share incentive plan, by issuing 3,233,577 options to purchase the same number of company shares at a price of 8.984 euro. If the approved increase is not fully subscribed within the various deadlines established for this purpose, share capital will be increased by an amount equivalent to the subscriptions actually received as of the given deadline. These stock options are intended to be a means of medium and long-term motivation and retention of employees and directors, selected from among the top executives of the company and its subsidiaries and who hold offices which are considered to be of the greatest strategic importance. The options assignment cycle, which involves five of the Group’s executives, includes a four-year vesting period from the date of assignment plus a further five-year period until the actual exercise date of the options themselves. However, under certain conditions, it is also possible to exercise up to 50% of the options assigned after just two years from the assignment date. The portion of options assigned that actually become exercisable will depend on the degree to which certain objectives are reached during the vesting period. These targets use economic value added (EVA) as the performance indicator for the period 2004-2007. Further details on the rules of this stock options plan can be found under “Codes” in the Corporate Governance/Investor Relations section of the company’s website (www.benettongroup.com/investors).
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2004 stock options plan
Controlling interest. Edizione Holding S.p.A., registered office in Treviso (Italy), is a holding company wholly owned by the Benetton family. The company holds a controlling interest in Benetton Group S.p.A. with 121,905,639 ordinary shares, for a 67.144% stake.
Performance of Benetton sharesBenetton shares ended 2005 essentially in line with 2004 at a price of 9.62 euro, as compared with the 9.74 euro as of December 31, 2004. Average daily trading volumes during the year came to roughly 660,000 shares.
Benetton American Depositary Receipts (ADRs) in circulation on the NYSE increased during the year by roughly 450,000, bringing the total number of securities to 2,172,289 (equivalent to 4,344,578 ordinary shares or 7.1% of the free float). Benetton ADRs ended trading on December 30, 2005, at Usd 22.90 (versus Usd 26.76 as of December 31, 2004).
Options Options Options Options expired and cancelled Options of which outstanding New options exercised not exercised in the period due outstanding exercisable as of granted in the in the or lost in the to termination of as of as of (euro) 01.01.2005 period period period employment 12.31.2005 12.31.2005 No. of options 3,233,577 - - - - 3,233,577 - Allocation ratio 1.781 - - - - 1.781 - Weighted average exercise price 8.98 - - - - 8.98 - Market price 9.74 - - - - 9.62 -
Shareholder % Edizione Holding S.p.A. 67.144 Institutional investors and banks 9.718 Other investors 23.138 Shareholder structure (1) No. of shareholders No. of shares From 1 to 4,999 shares 21,807 10,314,682 From 5,000 to 9,999 shares 256 1,638,047 10,000 shares and above 294 148,888,512 Non-classified shares - 20,717,570 Total 22,357 181,558,811
(1) Based on Spafid data as of January 30, 2006.
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Benetton Group ADR performance in 2005
(month)01 02 03 04 05 06 07 08 09 10 11 12
10
8
6
4
2
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
resultsresults
Benetton Group share (euro) Volumes
02-01 2004 preliminary
revenues
03-04 2005
forecasts
04-21 JV withTurkish
group Boyner
03-31 BoD for
2004 consol.results
05-13United
Fragrancesof Benettonagreement
05-04Barbie-
BenettonGroup
Partnership
05-161Q resultsand AGM
09-21 2005
first half results
11-112005
nine-monthsresults
01 02 03 04 05 06 07 08 09 10 11 12 (month)
Benetton Group ADR (Usd) Volumes
25
20
15
10
5
60,000
50,000
40,000
30,000
20,000
10,000
05-23Ex dividend
05-25dividendpayment
05-16500 mEurrevolving credit line
Benetton Group share performance in 2005
(month)01 02 03 04 05 06 07 08 09 10 11 12
10
8
6
4
2
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
resultsresults
Benetton Group share (euro) Volumes
02-01 2004 preliminary
revenues
03-04 2005
forecasts
04-21 JV withTurkish
group Boyner
03-31 BoD for
2004 consol.results
05-13United
Fragrancesof Benettonagreement
05-04Barbie-
BenettonGroup
Partnership
05-161Q resultsand AGM
09-21 2005
first half results
11-112005
nine-monthsresults
01 02 03 04 05 06 07 08 09 10 11 12 (month)
Benetton Group ADR (Usd) Volumes
25
20
15
10
5
60,000
50,000
40,000
30,000
20,000
10,000
05-23Ex dividend
05-25dividendpayment
05-16500 mEurrevolving credit line
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2001-2005 dividend per share performance (in euro)
2001 2002 2003 2004 2005
0.41
0.35
0.38
0.340.34
2001 2002 2003 2004 2005
3.6
4.8
3.8 3.9
3.5
2001-2005 dividend yield performance (in %)
2001 2002 2003 2004 2005
0.41
0.35
0.38
0.340.34
2001 2002 2003 2004 2005
3.6
4.8
3.8 3.9
3.5
2005 2004 2003(1) 2002(1) 2001(1)
Earnings per share (euro) 0.62 0.60 0.59 (0.05) 0.82 Shareholders’ equity per share (euro) 7.02 6.64 6.47 6.29 6.86 Dividend per share (euro) 0.34 0.34 0.38 0.35 0.41 Pay-out ratio (%) 55 57 64 n.a. 50 Dividend yield 3.5 3.9 3.8 4.8 3.6 Price on Dec. 31 (euro) 9.62 9.74 9.11 8.50 12.72 Screen-based price: high (euro) 10.15 10.18 11.30 15.90 22.44 Screen-based price: low (euro) 7.01 8.33 5.90 8.50 9.75 Price per share/Earnings per share 15.5 16.2 15.4 n.a. 15.5 Price per share/Shareholders’ equity per share 1.4 1.5 1.4 1.4 1.9 Market capitalization (millions of euro) 1,747 1,768 1,654 1,543 2,309 Average no. of shares outstanding 181,558,811 181,558,811 181,558,811 181,341,018 180,720,969 No. of shares comprising share capital 181,558,811 181,558,811 181,558,811 181,558,811 181,558,811(1) Data before transition to IFRS.
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Relations with the parent company, its subsidiaries and other related partiesThe 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 have made a group tax election under Article 117 et seq. of the Tax Consolidation Act DPR 917/86, based on a proposal by the consolidating parent company Edizione Holding S.p.A., which decided to opt for this type of tax treatment on December 30, 2004. The election lasts for three years starting from the 2004 fiscal year. The relationships arising from participation in the group tax election are governed by specific rules, approved and signed by all participating companies. The related details are shown below:
The Group has also undertaken some transactions with companies directly or indirectly controlled by, (or in any case) or under the influence of, managers serving within the Group. The Parent Company’s management believes that such transactions were completed at going market rates. The total value of such transactions was not, in any case, significant in relation to the total value of the Group’s production. No director, manager, or shareholder is a debtor of the Group.
The protection of personal dataThe company has fulfilled the obligations defined by prevailing legislation regarding the handling of sensitive and legal information using information systems.In particular, as far as the information systems of the Benetton Group are concerned, the company has complied with the minimum security measures established, adopting the security policy paper which was required by previous legislation and is now required by the technical annex to Italian legislative decree no. 196 of June 30, 2003 (the consolidated personal data protection act).All Group companies have complied with the data security model adopted by the Parent Group.
(thousands of euro) 12.31.2005 12.31.2004 Receivables 40,959 32,864 - of which related to fiscal consolidation with Edizione Holding S.p.A. 39,567 32,283 Payables 39,110 19,825 - of which related to fiscal consolidation with Edizione Holding S.p.A. 37,466 18,664 Purchase of raw materials 1,773 2,982 Purchase of assets 2,800 - Other costs and services 14,832 13,229 Product sales - 17 Rendering of services and other income 641 937
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DirectorsParent Company directors as of December 31, 2005 were as follows:
Luciano Benetton, Gilberto Benetton, Carlo Benetton and Giuliana Benetton are siblings; Alessandro Benetton is the son of Luciano Benetton.For 2005, the total fees granted by the shareholders to the Board of Directors of Benetton Group S.p.A. amounted to 4,369 thousand euro. Principal organizational and corporate changesEffective as of January 1, 2005, for the purpose of continued simplification of the Group’s corporate structure, Benetton Holding International N.V. S.A. subscribed to an increase in the capital of Benetton International S.A. through a contribution in kind of assets and liabilities, including investments.In May, Benetton International S.A. purchased 50% of a Turkish company from third parties, with the company then being named Benetton Giyim Sanayi ve Ticaret A.S. This company performs the manufacturing and distribution activities previously performed under license by the Turkish partner.At the end of June, given that previous operational requirements no longer exist, Benetton Finance S.A. was absorbed by Benetton International S.A. In October, a commercial company was set up under the name of Benetton Denmark A.p.S. The company is located in Denmark and is a wholly-owned subsidiary of Benetton International S.A.
The subsidiary Benetton Manufacturing Holding N.V. has established the following companies: - in April, Benetton Istria D.O.O., located in Rijeka, Croatia. This company is to begin
operations in 2006 as a decentralized production unit;- in October, the company Benrom S.r.l., located in Romania and also responsible for
production-related activities; - Benetton Beograd D.O.O., located in Serbia and Montenegro.In December, Benetton Manufacturing Holding N.V. also received the shares in Benetton Retail (1988) Ltd., Benetton Retail Spain S.L., Benetton Retail Deutschland GmbH, Benetton Trading Ungheria Kft., and Benetton 2 Retail Comércio de Produtos Têxteis S.A. from Benetton International S.A.
In the first half of the year, the process of setting up Shanghai Benetton Trading Company
Name and surname Date of birth Appointed Office Luciano Benetton 05.13.1935 1978 Chairman Carlo Benetton 12.26.1943 1978 Deputy Chairman Alessandro Benetton 03.02.1964 1998 Deputy Chairman Silvano Cassano 12.18.1956 2003 Chief Executive Officer Giuliana Benetton 07.08.1937 1978 Director Gilberto Benetton 06.19.1941 1978 Director Gianni Mion 09.06.1943 1990 Director Giorgio Brunetti 01.14.1937 2005 Director Ulrich Weiss 06.03.1936 1997 Director Reginald Bartholomew 02.17.1936 1999 Director Luigi Arturo Bianchi 06.03.1958 2000 Director
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Ltd., a retail company located in Shanghai, was completed. In October, the remaining 15% stake in the company was acquired, thereby becoming a wholly-owned subsidiary.
In the area of trade development, at the end of October in Tunisia, a trading company was established under the name Benetton Commerciale Tunisie S.à r.l., a wholly-owned subsidiary of Benetton Manufacturing Tunisia S.à r.l.
Also in October, the subsidiary Olimpias S.p.A. decided to terminate its operations at the production site in Cassano Magnago (Varese). The reason behind this decision was to bring production capacity into line with the Group’s projected lower needs.
With reference to the transfer of tax credits by Edizione Holding S.p.A. to other companies under its control, Edizione Holding S.p.A. granted the Benetton Group’s Italian companies their share of these tax credits. Payment was made in November for a total of roughly 17 million euro.
On December 1, the merger of Colors Magazine S.r.l., the publisher of “Colors” magazine, into its parent Fabrica S.p.A. took effect. This transaction is a part of the ongoing process of streamlining the Benetton Group’s organizational and operational structure. It will also lead to a more direct and effective integrated management of publishing activities, which will continue to be performed by the surviving company.
In December, Bencom S.r.l. established its own stable operations in Sweden in order to manage directly a number of stores. In December, Benetton Real Estate International S.A. established the Dutch firm Benetton Realty Netherlands N.V. and sold its stake in Benetton Realty Russia O.O.O. to S.I.G.I. S.r.l., which then increased share capital in the Russian firm through the transfer in kind of a number of properties in Russia.
During the year, the British companies Denware Ltd. and Opal Link Ltd. and the Tunisian company Benetton Trading S.à r.l. were also liquidated. Significant events following the close of the financial yearAs part of the strategy to expand trade in eastern Europe, Benetton Real Estate International S.A. formalized the acquisition of the entirety of the share capital in the company Real Estate Russia Z.A.O. for the purposes of completing a real estate transaction in St. Petersburg (Russia).
Outlook for 2006The trend in orders for 2006 is showing the positive response of the partners in the various markets to the new products and the new commercial initiatives being undertaken. In line with the trends reported in the second half of 2005, we are also expecting further improvement in the performance of the directly managed stores.The significant increase in volumes and a product mix that is focused on growth in accessories and high-value segments of the various collections, such as jackets and various articles of menswear, should lead to an increase in consolidated revenues for 2006 at least in line with the growth posted in 2005.
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In 2006, the outlook is also for significant growth in markets in the Mediterranean, eastern Europe, Korea, China, and India.Furthermore, the Company will continue to focus on the search for specific competencies and international industrial poles in which to develop our know-how, so as to guarantee the quality of our products and the satisfaction of the consumer. The ongoing quest for efficiency within our manufacturing and commercial systems is expected to result in an operating profit margin on the order of 9.5-10% of consolidated sales and net income of around 6.5%.
Consolidated Group results
Consolidated income statementHighlights from the Group’s income statements for year 2005 are presented below; they are based on a reclassification according to the function of expenses (the percentage changes are calculated with reference to the precise figures). The reconciliation with the income statement by nature of cost is included in the explanatory notes to the consolidated financial statements in the section “Supplementary information”.
(millions of euro) 2005 % 2004 % Change % Revenues 1,765 100.0 1,704 100.0 61 3.6 Materials and subcontracted work 846 47.9 779 45.7 67 8.6 Payroll and related costs 85 4.8 87 5.1 (2) (2.5) Industrial depreciation and amortization 21 1.2 21 1.2 - 0.4 Other manufacturing costs 43 2.5 42 2.5 1 1.5 Gross operating income 770 43.6 775 45.5 (5) (0.6) Distribution and transport 56 3.2 48 2.8 8 18.0 Sales commissions 71 4.0 73 4.3 (2) (4.0) Contribution margin 643 36.4 654 38.4 (11) (1.6) Payroll and related costs 135 7.7 126 7.4 9 7.5 Advertising and promotion 61 3.5 54 3.1 7 13.5 Depreciation and amortization 64 3.6 74 4.4 (10) (13.5) Other income and expenses 178 10.0 175 10.3 3 1.6 Ordinary operating result (*) 205 11.6 225 13.2 (20) (8.7) Non-recurring expenses/(income) 48 2.7 67 3.9 (19) (28.3) Operating profit 157 8.9 158 9.3 (1) (0.4) Share of income of associated companies - - - - - - Financial income/(expenses) (23) (1.3) (22) (1.3) (1) 5.3 Foreign currency hedging gains/(losses) and exchange differences - - - - - - Income before taxes 134 7.6 136 8.0 (2) (1.2) Income taxes 20 1.1 28 1.6 (8) (26.7) Net income/(loss) for the year 114 6.5 108 6.4 6 5.3 attributable to: - shareholders of the Parent Company 112 6.3 109 6.4 3 2.8 - minority shareholders 2 0.2 (1) - 3 n.s.(*) Ordinary operating result is indicated for the purposes of evaluating the performance of the company’s core business and to aid financial analysts in using their models to
analyze the company’s results. This information is not required by either IFRS or US GAAP.
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Revenues amounted to 1,765 million euro, compared with the 1,704 million of 2004, for an increase of 3.6%. Apparel sales to third parties amounted to 1,629 million euro, an annual increase of 3.9% from the 1,568 million of 2004, with a growth in revenues for the fourth quarter of 7.4%. Revenue performance was mainly influenced by the policy of developing the commercial network and the improvement of product mix, along with initiatives for expanding the directly operated network. This growth was also the result of the strong performance of reorders for the 2005 Fall/Winter collections, as well as the positive market response to the 2006 Spring/Summer collections and the contribution of countries in the Mediterranean, including Turkey, as well as in eastern Europe and Korea. In the apparel segment, the new Turkish partnership also played an important role, generating 30 million euro in revenues from May to December. Sales were also influenced by roughly 10 million euro for positive exchange rates trends, equal to 0.6% of revenues.The textile segment, which suffered from a difficult market context, recorded 100 million euro in revenues from third parties, compared with 106 million euro in 2004, for a decline of 6.4%.Revenues in the segment “Other and unallocated”, which includes only the revenues relating to sports equipment, were 36 million euro, compared with 30 million euro in 2004, for an increase of 22%.Cost of sales increased by 66 million euro in absolute terms and represented 56.4% of revenues, compared with 54.5% in 2004. Gross operating income came to 770 million euro, representing 43.6% of revenues, compared with 45.5% in 2004, influenced by the above-mentioned commercial development policies and offset in part by more efficient production. Margins were also somewhat influenced by the lower use of production capacity in the textile segment.Selling costs amounted to 127 million euro, compared with the 121 million of the previous year, representing 7.2% of revenues, compared with the 7.1% of 2004. Distribution and transport costs increased as a result of the increase in volumes, and in particular in relation to the sales growth in Korea. This increase was partially offset by the decrease in commission costs, which benefited from the transfer to the Group of agencies in Italy and Germany in 2004. The contribution margin came to 643 million euro, representing 36.4% of revenues. This compares with 654 million euro in 2004, which represented 38.4% of revenues.General and operating expenses amounted to 438 million euro, compared with 429 million euro in 2004. Payroll and related costs, in the amount of 135 million euro, increased by 7.5%, with the ratio to sales going from 7.4% to 7.7% due to the expansion of the network of directly operated stores and a higher proportionate cost for staff incentives. Advertising and promotion costs were 7 million euro higher, with a percentage on revenues of 3.5%, compared with the 3.1% of the previous year. This increase was due primarily to services provided to third parties.Depreciation and amortization for 2005 came to 64 million euro, down from the 74 million euro of the previous year, with the percentage on revenues going from 4.4% to 3.6%. This decrease is the result of two factors: the adjustment in 2004 to the carrying value of certain assets related to the commercial network and the change in the estimated useful life of the commercial buildings.Other income and expenses, in the amount of 178 million euro, rose by 3 million euro over the previous year, for an increase of 1.6% and representing 10% of revenues, from
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10.3% of the previous year. This item includes overhead costs, provisions, net operating costs, and other income and expenses. Overhead costs, in the amount of 82 million, increased by 4 million euro over 2004, with the percentage on revenues remaining unchanged at 4.6%. Provisions amounted to 25 million euro, compared with 45 million euro in 2004, 17 million euro of which for doubtful accounts, compared with the 39 million in 2004, bringing the related balance-sheet provision to 11.2% of trade receivables from the 12.9% as of December 31, 2004, as a result of the improved quality of receivables outstanding as of the balance sheet date. Net operating and other costs went from the 52 million euro of the previous year to 71 million euro, with the percentage on revenues going from 3.1% to 4%. This increase is due primarily to the rental costs of the commercial network.Net non-recurring costs for 2005 included costs for restructuring and adjustments to the current value of certain assets related to the commercial network in the amount of 25 million euro, write-downs of assets not related to the core business in the amount of 9 million euro, charges connected to the reorganization of the textile sector in the amount of 4 million euro, and other charges of 10 million euro. The decrease of 19 million euro from the previous year is due to the lower charges related to the restructuring of the commercial network.Earnings before interest and taxes came to 157 million euro, compared with 158 million in 2004, going from a margin on revenues of 9.3% to 8.9%. Net financial expenses and exchange differences amounted to 1.3% of revenues, in line with the prior year. This result reflects the combined effect of a decrease in average net indebtedness for the period, the slight increase in interest rates on the debt of certain foreign subsidiaries, and an increase in the time value component of currency hedging.The tax charge amounted to 20 million euro, compared with the 28 million euro of the previous year, representing a tax rate of 15.1%, down from the 20.3% of the previous year. This reduction in tax burden is due primarily to the measurement, based on forecasts of future earnings, of the fiscal benefits connected with the corporate reorganization in 2003. Net income for the year attributable to the Group came to 112 million euro, compared with 109 million euro in 2004, representing 6.3% of revenues, compared with 6.4% in 2004.
Business segmentsThe Group’s activities are divided into three segments in order to provide the basis for effective management and decision-making, and to supply representative and significant information about company performance to financial investors. The business segments are as follows:• apparel, represented by casualwear, carrying the United Colors of Benetton,
Undercolors and Sisley brands, and sportswear, with the Playlife and Killer Loop brands. The information and results relating to the real estate companies are also included in this segment;
• textile, consisting of production and sales activities of raw materials (fabrics, yarns and labels), semi-finished products and industrial services;
• other and unallocated, includes activities relating to sports equipment produced for third parties by a Group manufacturing company.
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2005 revenues from third parties by activity
2005 revenues from third parties by geographic area
2005 sales by brand
millions of euroApparelTextileOther and unallocated
1,62910036
2.0%5.7%
92.3%
millions of euroEuropeAsiaThe AmericasRest of the world
1,481207734 83.8%
11.8%
4.2%0.2%
millions of euroUnited Colors of BenettonSisleyPlaylifeKiller LoopOther sales 73.9%
19.1%
1.2%0.5%
1,232318209
89
5.3%
millions of euroApparelTextileOther and unallocated
1,62910036
2.0%5.7%
92.3%
millions of euroEuropeAsiaThe AmericasRest of the world
1,481207734 83.8%
11.8%
4.2%0.2%
millions of euroUnited Colors of BenettonSisleyPlaylifeKiller LoopOther sales 73.9%
19.1%
1.2%0.5%
1,232318209
89
5.3%
millions of euroApparelTextileOther and unallocated
1,62910036
2.0%5.7%
92.3%
millions of euroEuropeAsiaThe AmericasRest of the world
1,481207734 83.8%
11.8%
4.2%0.2%
millions of euroUnited Colors of BenettonSisleyPlaylifeKiller LoopOther sales 73.9%
19.1%
1.2%0.5%
1,232318209
89
5.3%
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Other and (millions of euro) Apparel Textile unallocated Eliminations Consolidated Revenues from third parties 1,629 100 36 - 1,765 Inter-segment revenues 2 170 - (172) - Total revenues 1,631 270 36 (172) 1,765 Cost of sales 887 243 34 (169) 995 Gross operating income 744 27 2 (3) 770 Selling costs 119 10 - (2) 127 Contribution margin 625 17 2 (1) 643 General and operating expenses 421 15 2 - 438 Ordinary operating result 204 2 - (1) 205 Non-recurring expenses/(income) 44 4 - - 48 Operating profit 160 (2) - (1) 157 Depreciation and amortization 66 18 1 - 85 Non-monetary costs (impairment and stock options) 41 2 - - 43 EBITDA 267 18 1 (1) 285
Other and (millions of euro) Apparel Textile unallocated Eliminations Consolidated Revenues from third parties 1,568 106 30 - 1,704 Inter-segment revenues - 194 - (194) - Total revenues 1,568 300 30 (194) 1,704 Cost of sales 827 264 28 (190) 929 Gross operating income 741 36 2 (4) 775 Selling costs 113 10 - (2) 121 Contribution margin 628 26 2 (2) 654 General and operating expenses 410 17 4 (2) 429 Ordinary operating result 218 9 (2) - 225 Non-recurring expenses/(income) 68 1 (2) - 67 Operating profit 150 8 - - 158 Depreciation and amortization 76 18 1 - 95 Non-monetary costs (impairment and stock options) 59 - - - 59 EBITDA 285 26 1 - 312
For comparative purposes, segment results for years 2005 and 2004 are shown below.
Segment results - 2005
Segment results - 2004
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Apparel segment results
Total segment revenues from third parties were 1,629 million euro, an increase of 3.9% on the figure of 1,568 million euro recorded in 2004. Revenue performance was mainly influenced by the policy of developing the commercial network and improvement of product mix, along with initiatives for expanding the network of directly operated stores. As mentioned above, this growth was also the result of the strong performance of reorders for the 2005 Fall/Winter collections, as well as the positive market response to the 2006 Spring/Summer collections and the contribution of countries in the Mediterranean, including Turkey, as well as in eastern Europe and Korea.Cost of sales increased by 60 million euro to 887 million (up 7.3%), representing 54.4% of revenues, compared with the 52.8% of the previous year. The effect of product enhancements was partially offset by more efficient production. Gross operating income came to 744 million euro, representing 45.6% of revenues, compared with 47.2% in 2004. Selling costs amounted to 119 million euro, compared with the 113 million euro of the previous year. Sales commissions declined due to the Group’s acquisition of agencies in Italy and Germany, which were previously operated by third parties, while distribution costs increased by 9 million euro due to the growth of sales in Korea. This increase had no significant impact on the contribution margin, which settled at 625 million euro, compared with the 628 million of 2004 and a percentage on sales that went from 40.1% to 38.3%.General and operating expenses amounted to 421 million euro in 2005, compared with the 410 million euro of the previous year, improving also as a percentage on sales, going from 26.3% to 25.8%. This item includes payroll and related costs, which increased from 118 million to 127 million euro, particularly due to the development of the network of directly operated stores and a higher proportionate cost for staff incentives. Advertising and promotion costs were slightly higher, up from 54 million to 60 million euro, with the percentage on revenues going from 3.4% to 3.7%. This increase is related primarily to services provided to third parties. Depreciation and amortization amounted to 63 million euro, compared with 73 million euro in 2004, representing 3.8% of revenues, down from the 4.6% of the previous year. This decrease is the result of the adjustment in the carrying value of certain assets related to the commercial network and the change in the estimated useful life of the commercial buildings. Overhead costs came to 78 million euro, compared with the 74 million euro of the previous year, representing 4.8% of revenues, compared
(millions of euro) 2005 % 2004 % Change % Revenues from third parties 1,629 1,568 61 3.9 Inter-segment revenues 2 - 2 n.s. Total revenues 1,631 100.0 1,568 100.0 63 4.1 Cost of sales 887 54.4 827 52.8 60 7.3 Gross operating income 744 45.6 741 47.2 3 0.5 Selling costs 119 7.3 113 7.1 6 6.1 Contribution margin 625 38.3 628 40.1 (3) (0.6) General and operating expenses 421 25.8 410 26.3 11 2.4 Ordinary operating result 204 12.5 218 13.8 (14) (6.2) Non-recurring expenses/(income) 44 2.7 68 4.3 (24) (35.6) Operating profit 160 9.8 150 9.5 10 7.2 EBITDA 267 16.4 285 18.2 (18) (6.2)
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(millions of euro) 2005 % 2004 % Change % Revenues from third parties 100 106 (6) (6.4) Inter-segment revenues 170 194 (24) (12.3) Total revenues 270 100.0 300 100.0 (30) (10.2) Cost of sales 243 90.0 264 87.9 (21) (8.1) Gross operating income 27 10.0 36 12.1 (9) (25.8) Selling costs 10 3.5 10 3.5 - (12.2) Contribution margin 17 6.5 26 8.6 (9) (31.4) General and operating expenses 15 5.6 17 5.5 (2) (6.0) Ordinary operating result 2 0.9 9 3.1 (7) (75.4) Non-recurring expenses/(income) 4 1.6 1 0.4 3 n.s. Operating profit (2) (0.7) 8 2.7 (10) n.s. EBITDA 18 6.6 26 8.6 (8) (31.2)
with 4.7% in 2004. Net operating and other costs went from the 53 million euro of the previous year to 72 million euro, with the percentage on revenues going from 3.4% to 4.4%. Provisions decreased by 18 million euro, primarily in relation to allowances for doubtful accounts.For more information on the non-recurring charges, see the related comments above regarding the consolidated income statement. Earnings before interest and taxes (operating profit) amounted to 160 million euro, compared with the 150 million of the previous year, for a margin on revenues of 9.8% (9.5% in 2004).
The average number of employees in the period was 5,856.
Textile segment results
Textile segment revenues from third parties were down by 6.4% from 106 million to 100 million euro. This was the result of a general decline in the market for fabrics and yarns. Cost of sales, although down in absolute terms, rose to 90% of revenues, compared with the 87.9% of 2004. Gross operating income of 27 million euro represented a margin of 10% of total revenues, compared with the 12.1% of 2004, having been influenced by the lower utilization of production capacity. Selling costs were essentially in line with 2004, representing 3.5% of revenues, while the contribution margin was 17 million euro, going from 8.6% to 6.5% of revenues. General and operating expenses came to 15 million euro, compared with 17 million euro in 2004, with the percentage on revenues going from 5.5% to 5.6%. This item includes 7 million euro in payroll and related costs, which were essentially in line with 2004, as are advertising and promotion costs in the amount of roughly 0.7 million euro. Depreciation and amortization came to 0.5% of revenues. Other operating costs increased by 1 million euro to 6 million, with the percentage on revenues going from 2.3% to 2.2% in 2005.The operating profit loss of 2 million euro compares with the operating profit gain in 2004 of 8 million euro.
The average number of employees in the period was 1,618.
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Other and unallocated segment results
The segment includes the sales of sports equipment, particularly as produced for third parties by one of the Group’s manufacturing companies. Revenues increased by 6 million euro, or 22%, year on year. The percentage on revenues of cost of sales went from 92% to 93.8%.General and operating expenses fell by 2 million euro. The operating result at the operating profit level is essentially breaking-even.
The average number of employees in the period was 227.
Balance sheet and financial position highlightsThe most significant elements of the balance sheet and financial position, compared with December 31, 2004 are as follows:
Despite the 3.6% increase in revenues, working capital fell by 23 million euro, due primarily to an increase in trade and other payables and a decrease in other receivables, which was offset by an increase in inventories. Assets held for sale for 2004 and 2005 refer to two facilities in the textile segment.
(millions of euro) 2005 % 2004 % Change % Revenues from third parties 36 30 6 22.0 Inter-segment revenues - - - Total revenues 36 100.0 30 100.0 6 22.0 Cost of sales 34 93.8 28 92.0 6 24.5 Gross operating income 2 6.2 2 8.0 - - Selling costs - 0.7 - 1.1 - - Contribution margin 2 5.5 2 6.9 - - General and operating expenses 2 4.8 4 13.1 (2) (55.0) Ordinary operating result - 0.7 (2) (6.2) 2 n.s. Non-recurring expenses/(income) - - (2) (7.3) 2 n.s. Operating profit - 0.7 - 1.1 - (21.4) EBITDA 1 3.1 1 4.2 - (8.1)
(millions of euro) 12.31.2005 12.31.2004 Change Working capital (A) 688 711 (23) Assets held for sale 8 8 - Property, plant and equipment and intangible assets (B) 895 910 (15) Non-current financial assets (C) 25 22 3 Other assets/(liabilities) (D) 10 3 7 Capital employed 1,626 1,654 (28) Net financial position (E) 351 441 (90) Total shareholders’ equity 1,275 1,213 62(A) Working capital includes trade receivables net of allowances for doubtful accounts, inventories, trade payables, and other non-financial receivables and payables (i.e. VAT
receivable and payable, other receivables and payables, Parent Company receivables and payables, taxes payable, deferred tax assets, accruals and prepayments, social security and employee payables, receivables and payables for the purchase of non-current assets, etc.). (B) Property, plant and equipment and intangibles include all categories of assets net of depreciation, amortization, and write-downs. (C) Non-current financial assets include unconsolidated investments and security deposits paid and received. (D) Other assets/(liabilities) include provisions for risks, provisions for goodwill indemnities, other provisions, provisions for the risk of future taxes, provision for current and deferred taxes related to the 2003 corporate reorganization. (E) Net financial position includes cash and cash equivalents and all short and medium-term financial assets and liabilities, as detailed in the table included below.
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In addition to that which was already mentioned above, the change in capital employed is due to the joint effect of the following factors:- increase in property, plant and equipment and intangibles due to investments of 124
million euro;- depreciation and amortization of 85 million, write-downs of 50 million, and disposals of
14 million euro;- decrease in operating provisions of 5 million euro;- increase in deferred tax assets of 7 million euro, essentially related to the corporate
reorganization at the end of 2003, and the decline in taxes payable of 5 million euro;- increase of 3 million euro in non-current financial assets.
2005 balance sheet structure (millions of euro)
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The net financial position was 351 million euro, decreasing by 90 million euro compared with December 31, 2004, and is as follows:
(millions of euro) 12.31.2005 12.31.2004 Change Financial assets Non-current financial assets: - medium-term financial receivables 7 29 (22) Current financial assets: - Italian government securities, monetary funds and bonds - 118 (118) - bank deposits 79 141 (62) - other short-term financial receivables 13 22 (9) Total current financial assets 92 281 (189) Cash and ordinary current accounts 117 119 (2) Total financial assets 216 429 (213)
Financial liabilities Non-current financial liabilities: - bond - - - - syndicated loan (500) (500) - - other medium-term loans (3) (4) 1 - lease financing (10) (18) 8 Total non-current financial liabilities (513) (522) 9 Current financial liabilities: - bond - (300) 300 - financial payables (48) (41) (7) - current portion of medium-term loans (1) (1) - - current portion of lease financing (5) (6) 1 Total current financial liabilities (54) (348) 294 Total financial liabilities (567) (870) 303 Net financial position (351) (441) 90 Non-current net financial position (506) (493) (13) Current net financial position 155 52 103 Net financial position (351) (441) 90
On June 10, 2005, in order to support the seasonal financial needs of the Group business and to meet future commitments, Benetton Group S.p.A. signed a revolving credit line of 500 million euro with a pool of ten banks, maturing in June 2010. This line may be drawn down in the form of one, three or six-month loans and the cost will be one/three/six-month Euribor plus a spread of between 27.5 and 60 basis points, depending on the ratio net debt on EBITDA.This operation calls for compliance with three financial ratios (financial covenants) calculated every six months on the basis of the consolidated financial statements, namely:- minimum ratio of 4 between EBITDA and net financial expenses;- maximum ratio of 1 between net debt and equity;- maximum ratio of 3.5 between net debt and EBITDA.As of December 31, 2005, this credit line was not being used.
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2005 net financial position (millions of euro)
The syndicated loan of 500 million euro, maturing in July 2007, calls for compliance with two financial ratios that have to be calculated every six months based on the consolidated financial statements, namely: - minimum ratio of 2.5 between EBITD (earnings before interest, tax and depreciation of
property, plant and equipment) and net financial expenses;- maximum ratio of 1 between net debt and equity.
Both the revolving credit line and the syndicated loan include covenants for Benetton Group S.p.A. and, in certain cases, for other Group companies, which are typical of international practice, such as:a. negative pledge clauses, which extend to the transactions above, to the same degree,
any present or future collateral on assets in relation to loans, bonds, and other debt securities;
b. pari passu clauses, based on which obligations that are senior to those of the two transactions mentioned above cannot be assumed;
c. periodic reporting obligations;d. cross-default clauses, which entail the immediate payment of the transactions described
above upon certain defaults related to other financial instruments issued by the Group;e. limits to significant sales of assets;f. other clauses generally accepted in transactions of this type.However, these covenants are subject to various exceptions and limitations.
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The bond of 300 million euro was repaid at maturity on July 26, 2005, primarily by using available liquidity, which resulted in part from the sale of the securities.
Cash flows during year 2005 are summarized below with comparative figures for last year:
Further information of an economic and financial nature is provided in the explanatory notes of the consolidated financial statements.
(millions of euro) 2005 2004 Cash flow generated by operating activities 285 141 (B)
Cash flow provided/(used) by investing activities (1) (A) (125) (C)
Free cash flow 284 16 Cash flow provided/(used) by financing activities: - dividends paid (62) (69) - net change in sources of finance (288) (11) - net change in cash and cash equivalents 66 64 Cash flow provided/(used) by financing activities (284) (16)(A) Includes 118 million euro for the sale of financial assets. (B) Includes payment of substitute taxes of 124.5 million euro. (C) Includes 49 million euro relating to the sale of
the sports equipment segment and the purchase of financial assets, in the amount of 90 million euro.
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2005 sources and applications of funds (millions of euro)
107surplus of funds
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Consolidated financial statements
port moresby09°25’S 147°17’E
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Consolidated income statement
(thousands of euro) 2005 2004 Notes Revenues 1,765,073 1,704,124 1 Other operating income and revenues 76,601 91,230 2 Change in inventories of finished products and work in progress 41,339 22,811 3 Purchases of raw materials and consumables 560,374 452,573 4 Payroll and related costs 221,043 214,002 5 Depreciation and amortization: - of property, plant and equipment 62,242 67,995 6 - of intangible assets 23,125 27,332 7 85,367 95,327
Other operating costs: - external services 631,228 638,351 8 - leases and rentals 104,478 86,420 9 - impairment of property, plant and equipment and intangible assets 50,340 49,116 10 - write-downs of doubtful accounts 17,387 39,240 11 - provisions for risks 19,780 37,128 12 - other operating costs 35,842 48,174 13 859,055 898,429
Operating profit 157,174 157,834 Share of income/(loss) of associated companies (60) 161 14 Net financial expenses and exchange differences 22,722 21,988 15
Income before taxes 134,392 136,007 Income taxes 20,288 27,663 16 Net income/(loss) for the year attributable to the Parent Company and minority interests 114,104 108,344 Net income/(loss) attributable to: - shareholders of the Parent Company 111,873 108,795 - minority shareholders 2,231 (451) Basic earnings per share (euro) 0.62 0.60 Diluted earnings per share (euro) 0.62 0.60
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(thousands of euro) 12.31.2005 12.31.2004 Notes Non-current assets Property, plant and equipment 17 Land and buildings 565,205 579,986 Plant, machinery and equipment 68,535 79,658 Office furniture, furnishings and electronic equipment 42,273 38,913 Vehicles and aircraft 10,470 10,583 Assets under construction and advances 10,957 3,724 Assets acquired through finance leases 7,728 11,743 Leasehold improvements 37,835 48,158 743,003 772,765 Intangible assets 18 Goodwill and other intangible assets of indefinite useful life 8,510 5,346 Intangible assets of finite useful life 143,239 131,273 151,749 136,619 Other non-current assets Investments 5,130 5,117 19 Investment securities - 223 Guarantee deposits 21,879 16,715 20 Medium/long-term financial receivables 7,459 28,274 21 Other medium/long-term receivables 46,120 44,435 22 Deferred tax assets 196,998 201,268 23 277,586 296,032 Total non-current assets 1,172,338 1,205,416 Current assets Inventories 287,246 255,436 24 Trade receivables 655,386 657,584 25 Tax receivables 25,173 39,451 26 Other receivables, prepaid expenses and accrued income 49,730 35,640 27 Financial receivables 12,970 21,528 28 Available for sale financial assets - 118,172 29 Cash and cash equivalents 196,327 260,196 30 Total current assets 1,226,832 1,388,007 Assets held for sale 7,826 7,840 31 TOTAL ASSETS 2,406,996 2,601,263
Consolidated balance sheet - Assets
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(thousands of euro) 12.31.2005 12.31.2004 Notes
Shareholders’ equity Shareholders’ equity attributable to the Parent Company Share capital 236,026 236,026 32 Additional paid-in capital 56,574 56,574 33 Fair value and hedging reserve 123 1,114 34 Other reserves and retained earnings 857,314 803,500 35 Net income for the year 111,873 108,795 1,261,910 1,206,009 Minority interests 13,050 6,881 36 Total shareholders’ equity 1,274,960 1,212,890 Liabilities Non-current liabilities Medium/long-term loans 503,163 503,494 37 Other medium/long-term liabilities 24,152 38,659 38 Lease financing 10,096 17,748 39 Retirements benefit obligations 49,767 47,307 40 Other provisions and medium/long-term liabilities 41,603 50,990 41 628,781 658,198 Current liabilities Trade payables 314,953 283,991 42 Other payables, accrued expenses and deferred income 112,662 84,114 43 Current income tax liabilities 9,275 14,112 44 Other current provisions and liabilities 11,830 - 45 Current portion of lease financing 5,390 6,007 46 Current portion of medium/long-term loans 654 1,102 47 Current portion of bonds - 299,878 48 Financial payables 19,587 21,047 49 Bank loans and overdrafts 28,904 19,924 50 503,255 730,175 Total liabilities 1,132,036 1,388,373 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 2,406,996 2,601,263
Consolidated balance sheet - Shareholders’ equity and liabilities
The explanatory notes (pages 5 through 56) are to be considered an integral part of this report.
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Additional Fair value Other Share paid-in and hedging reserves & Translation Net Minority (thousands of euro) capital capital reserve retained earnings differences income interests Total Balances as of January 1, 2004 236,026 56,574 1,525 761,181 - 107,874 12,993 1,176,173 Carryforward of 2003 net income - - - 107,874 - (107,874) - - Dividend distributed as approved by Ordinary Shareholders’ Meeting of May 12, 2004 - - - (68,992) - - - (68,992) Dividends distributed - - - - - - (422) (422) Changes in the period (IAS 39) - - (411) - - - (411) Stock options - - - 722 - - 722 Acquisition of shares - - - - - - (7,314) (7,314) Increase in share capital - - - - - - 1,960 1,960 Other changes - - - - - - (153) (153) Currency translation differences - - - - 2,715 - 311 3,026 Net income for the year - - - - - 108,795 (494) 108,301 Balances as of December 31, 2004 236,026 56,574 1,114 800,785 2,715 108,795 6,881 1,212,890 Carryforward of 2004 net income - - - 108,795 - (108,795) - - Dividend distributed as approved by Ordinary Shareholders’ Meeting of May 16, 2005 - - - (61,730) - - - (61,730) Dividends distributed - - - - - - (631) (631) Changes in the period (IAS 39) - - (991) - - - - (991) Stock options - - - 2,202 - - - 2,202 Increase in share capital - - - - - - 2,002 2,002 Minority interest arising on business combinations - - - - - - 1,002 1,002 Currency translation differences - - - - 4,547 - 1,389 5,936 Net income for the year - - - - - 111,873 2,407 114,280 Balances as of December 31, 2005 236,026 56,574 123 850,052 7,262 111,873 13,050 1,274,960
Shareholders’ equity - Statement of changes
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(thousands of euro) 2005 2004 Operating activities Net income for the year attributable to the Parent Company and minority interests 114,104 108,343 Income taxes expense 20,288 27,663 Income before taxes 134,392 136,006 Adjustments for: - depreciation and amortization 85,367 95,327 - (gains)/losses on disposal of assets 48,336 36,325 - net provisions charged to income statement 32,146 80,635 - use of provisions (10,809) (28,931) - exchange differences (409) 81 - shares of (income)/losses of associated companies 60 (33) - net financial (income)/expenses 23,131 21,829 Cash flow from operating activities before changes in working capital 312,214 341,239 Cash flow from changes in working capital 10,373 (12,556) Payment of taxes (9,403) (160,141) (A)
Interest paid (53,104) (51,597) Interest received 24,842 23,826 Exchange differences 408 114 Cash flow generated by operating activities 285,330 140,885 Investing activities Operating investments (115,621) (122,950) Operating divestments 15,265 61,440 (D)
Purchase of investments (14,390) (14,107) Sale of investment (74) 15,167 (D)
Operations in non-current financial assets 114,374 (B) (64,945) (C)
Cash flow provided/(used) by investing activities (446) (125,395) (C)(D)
Financing activities Change in shareholders’ equity 2,182 1,960 Payment of bond (300,000) - Net change in other sources of finance 9,780 (12,164) Payment of dividends (62,361) (69,414) Cash flow provided/(used) by financing activities (350,399) (79,618) Net decrease in cash and cash equivalents (65,515) (64,128) Cash and cash equivalents at the beginning of the year 260,196 324,825 Cash in companies purchased - - Translation differences and other movements 1,646 (501) Cash and cash equivalents at the end of the year 196,327 260,196
(A) Includes payment of substitute taxes of 124.5 million euro. (B) Includes 118 million euro for the sale of financial assets. (C) Includes the acquisition of subsidiary in the amount of 90 million euro. (D) Includes residual amounts relating to the sale of the sports equipment segment, of 8, 15, and 26 million euro, respectively, for a total of 49 million euro.
Consolidated cash flow statement
shanghai31°13’N 121°28’E
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
Benetton Group Annual Report 2005
Explanatory notes
tokyo35°40’N 139°46’E
Explanatory notes
6 Summary of main accounting principles and policies
17 Supplementary information
20 Comments on the principal items in the income statement
28 Comments on the principal asset items
36 Comments on the principal items in shareholders’ equity and liabilities
44 Supplementary information
Auditors’ report
Supplementary schedules
Annexes
66 2005 and 2004 financials by quarter
67 Risk factors of the Benetton business
71 Transition to IFRS
93 Glossary
rajasthan26°45’N 73°30’E
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Summary of main accounting principles and policies
Group activitiesBenetton Group S.p.A. (the “Parent Company”) and its subsidiary companies (hereinafter also referred to as the “Group”) primarily manufacture and market fashion apparel in wool, cotton and woven fabrics, as well as sportswear and leisurewear. The manufacture of finished articles from raw materials is undertaken partly within the Group and partly using subcontractors, whereas selling is carried out through an extensive commercial network both in Italy and abroad, consisting mainly of stores operated and owned by third parties.
The legal headquarters and other such information are shown on the first page of this document. The Parent Company is listed on the Milan, Frankfurt, and New York stock exchanges.
These consolidated financial statements were approved by the Board of Directors of Benetton Group S.p.A. on March 30, 2006.
Form and content of the consolidated financial statementsThe consolidated financial statements of the Group include the financial statements as of December 31 of Benetton Group S.p.A. and all Italian and foreign companies in which the Parent Company holds, directly or indirectly, the majority of the voting rights. The consolidated financial statements also include the accounts of certain 50%-owned companies over which the Group exercises a significant influence such that it has control over them. In particular:a. Benetton Korea Inc., since the effective voting rights held by Benetton Japan Co., Ltd.
(a company indirectly wholly-owned by Benetton Group S.p.A.) total 51% of all voting rights;
b. Benetton Giyim Sanayi ve Ticaret A.S. (a Turkish company), since the licensing and distribution agreements grant Benetton Group S.p.A. a dominant influence over the company, as well as the majority of risks and rewards linked to its business activities.
Financial statements of 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 reference international accounting and financial reporting standards.These financial statements have been prepared on a “going concern” basis, matching costs and revenues to the accounting periods to which they relate. The reporting currency is the euro and all values have been rounded to thousands of euro.
Consolidation criteriaThe method of consolidation adopted for the preparation of the consolidated financial statements is as follows:a. Consolidation of subsidiary companies’ financial statements according to the line-by-
line method, with elimination of the carrying value of the shareholdings held by the Parent Company and other consolidated companies against the relevant shareholders’ equity.
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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 and liabilities of the subsidiary. The excess of the cost of acquisition over the net assets is recorded as “Goodwill and other intangible assets of indefinite useful life”. Negative differences are recorded in the income statement as income.
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. Minority interests in shareholders’ equity and the result for the period of consolidated subsidiaries are classified separately as “Minority interests” under shareholders’ equity and as “Income attributable to minority interests” in the consolidated income statement.
e. The financial statements of foreign subsidiaries are translated into euro using period-end exchange rates for assets and liabilities and average exchange rates for the period for income statement, with the exception of companies operating in economies subject to hyperinflation. Differences arising from the translation into euro of foreign currency financial statements are reflected directly in consolidated shareholders’ equity as a separate component.
Accounting standards and policiesApplication of IFRS. Up to first quarter 2005, the Group prepared its consolidated financial statements and other periodic information (quarterly and half-yearly) in accordance with Italian accounting standards (Italian GAAP).As from the half-year report for 2005, periodic consolidated reports are being prepared in accordance with IFRS, while, in the case of the annual report of the Parent Company Benetton Group S.p.A. these standards will be adopted as from financial year 2006.Considering this and taking into account the recommendations of the CESR (Committee of European Securities Regulators) published on December 30, 2003 containing the guidelines for listed companies in the EU concerning methods for the transition to IFRS, as well as the Regolamento Emittenti (Issuers’ Regulations), as modified by CONSOB (the Italian Stock Exchange Authority) by Resolution no. 14990 of April 14, 2005, following, among other things, adoption of International Accounting Standards for interim reporting, the information required by IFRS 1 - regarding the impact of adopting IFRS on the 2004 consolidated balance sheet and financial position, the consolidated income statement and consolidated cash flow - are fully discussed in the section entitled “Transition to IFRS”.The financial statements as of December 31, 2005, have been drawn up in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) applicable as of the date of preparation (March 2006) and on the basis of Appendix 3D to the Issuers’ Regulations no. 11971 of May 14, 1999, and subsequent amendments and additions, and in compliance with IAS 1 provisions in particular. No accounting principles or interpretations with effect from January 1, 2005, and resulting in a significant impact on the Group’s consolidated financial statements have been reviewed or issued. Specifically:- in December 2004, the IASB issued an amendment to IAS 19 - Employee Benefits
- allowing the option of recognizing gains and losses in full in the period in which they
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occur, outside profit or loss, in a statement of recognized income and expense. The amendment also provides a guideline for the allocation of a defined benefit plan across the various companies belonging to the Group. This amendment is effective as of January 1, 2006. The Group is currently evaluating its impact;
- in April 2005, the IASB issued an amendment to IAS 39 - Financial Instruments: Recognition and Measurement - which permits the foreign currency risk of a highly probable intragroup transaction to qualify as the hedged item in a cash flow hedge in consolidated financial statements, provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and that the foreign currency risk will affect consolidated financial statements. The amendment also specifies that if the hedge of a forecasted intragroup transaction qualifies for hedge accounting, any gain or loss that is recognized directly in shareholders’ equity in accordance with the rules in IAS 39 must be reclassified onto income statement in the same period during which the foreign currency risk of the hedged transaction affects the consolidated income statement. The Group already uses this approach;
- in June 2005, the IASB issued its final amendment to IAS 39 - Financial Instruments: Recognition and Measurement - to restrict the use of the option to designate any financial asset or any financial liability to be measured at fair value through profit or loss (the fair value option). This revision limits the use of the option to those financial instruments that meet the following conditions: - the fair value option designation eliminates or significantly reduces an accounting
mismatch;- a group of financial assets, financial liabilities, or both are managed and their
performance is evaluated on a fair value basis in accordance with a documented risk management or investment strategy;
- an instrument contains an embedded derivative that meets particular conditions.This amendment to IAS 39 is effective from January 1, 2006. The Group is evaluating any impact this change may have;- in August 2005, the IASB issued the new standard IFRS 7 - Financial Instruments:
Disclosures - and a complementary amendment to IAS 1 - Presentation of Financial Statements: Capital Disclosures. IFRS 7 adds certain new disclosures regarding the relevance of financial instruments to an entity’s performance and financial position. These disclosures include some requirements previously encapsulated in IAS 32 - Financial Instruments: Disclosure and Presentation. The new standard also requires disclosures on the degree of risk exposure linked to the use of financial instruments and a description of financial risk management objectives, policies and procedures implemented by management. The amendment to IAS 1 adds requirements for disclosures of quantitative data as to what the entity regards as capital. IFRS 7 and the amendment to IAS 1 are effective as of January 1, 2007. The Group is evaluating any impact these changes may have;
- in August 2005, the IASB issued an amendment to IAS 39 and IFRS 4 for the accounting treatment of issued financial guarantees. On the basis of the amendment, losses due to issued financial guarantees contracts must be recognized in the guarantor’s financial statements and valued as follows: - initially at fair value;- subsequently at the higher of (a) the amounts determined in accordance with IAS 37 -
Provisions, Contingent Liabilities and Contingent Assets - to fulfill the obligation at the reference
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date, or (b) the amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with IAS 18 - Revenue.
These amendments are effective from January 2006. The Group is evaluating any impact these changes may have.
Valuation criteriaThe financial statements have been prepared on a historical cost basis, with the exception of the valuation of certain financial instruments. The principal accounting policies applied are detailed below:
Revenues. Revenues arise from ordinary company operations and include sales revenues and service revenues.Revenues from product sales net of any discounts are recognized when the company transfers the main risks and rewards associated with ownership of the goods and when collection of the relevant receivables is reasonably certain. Revenues from sales by directly operated stores are recognized when the customer pays. Revenues from services are recorded with reference to the stage of completion of the transaction as of the financial statement date. Revenues are recorded in the financial year in which the service is provided, based on the percentage of completion method. If revenues from the services cannot be estimated reliably, they are only recognized to the extent that the relative costs are recoverable. Recognizing revenues using this method makes it possible to provide suitable information about the service provided and the economic results achieved during the financial year. Royalties are recognized on an accruals basis in accordance with the substance of the contractual agreements.
Interest income. Interest income is recorded on a time-proportion basis, taking account of the effective yield of the asset to which it relates.
Dividends. Dividends from third parties are recorded when the shareholders’ right to receive payment becomes exercisable, following a resolution of the shareholders of the company in which the shares are held. Expense recognition. Expenses are recorded on an accruals basis. Income and costs relating to lease contracts. Income and costs from operating lease contracts are recognized on a straight-line basis over the duration of the contract to which they refer.
Income taxes. Current income taxes are calculated on the basis of taxable income, in accordance with applicable local regulations.Italian Group companies have made a group tax election under Article 117 et seq. of the Tax Consolidation Act DPR 917/86, based on a proposal by the consolidating parent company Edizione Holding S.p.A., which decided to opt for this type of tax treatment on December 30, 2004. The election lasts for three years starting from the 2004 fiscal year.The relationships arising from participation in the group tax election 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
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when the taxable result is negative, recognizing a corresponding receivable due from Edizione Holding S.p.A.; conversely, if the taxable result is positive, the current taxes transferred give rise to a payable in respect of the consolidating parent company Edizione Holding S.p.A.The relationship between the parties, governed by contract, provides for the transfer of the full amount of tax calculated on the taxable losses or income at current IRES (corporation tax) rates. The net balance of deferred tax assets and liabilities is also recorded.Deferred tax assets are recorded for all temporary differences to the extent it is probable that taxable income will be available against which the deductible temporary difference can be utilized. The same principle is applied to the recognition of deferred tax assets on the carryforward of unused tax losses.The carrying value of deferred tax assets is reviewed at every balance sheet date and, if necessary, reduced to the extent that it is no longer probable that sufficient taxable income will be available to recover all or part of the asset. The general rule provides that, with specific exceptions, deferred tax liabilities are always recognized.Deferred tax assets and liabilities are calculated using tax rates which are expected to apply in the period when the asset is realized or the liability settled, using the tax rates and tax regulations which are in force at the balance sheet date.Tax assets and liabilities for current taxes are only offset if there is a legally enforceable right to set off the recognized amounts and if it is intended to settle or pay on a net basis or to realize the asset and settle the liability simultaneously. It is possible to offset deferred tax assets and liabilities only if it is possible to offset the current tax balances and if the deferred tax balances refer to income taxes levied by the same tax authority.
Earnings per share. Basic earnings per share are calculated by dividing income attributable to Parent Company shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share are calculated by dividing the income or loss attributable to Parent Company by the weighted average number of outstanding shares, taking account of all potential ordinary shares with a dilutive effect (for example employee stock option plans).
Property, plant and equipment. These are recorded at purchase or production cost, including the price paid to buy the asset (net of discounts and rebates) and any costs directly attributable to the purchase and commissioning of the asset. The cost of a commercial property purchased is the purchase price or equivalent of the price in cash including all other directly attributable expenses such as legal costs, registration taxes and other transaction costs. The cost of internally produced assets is the cost at the date of completion of work. Property, plant and equipment are shown at cost less accumulated depreciation and impairment losses, plus any recovery of asset value. Plant and machinery may have components with different useful lives. Depreciation is calculated on the useful life of each individual component. In the event of replacement, new components are capitalized to the extent that they satisfy the criteria for recognition as an asset, and the carrying value of the replaced component is eliminated from the balance sheet. The residual value and useful life of an asset is reviewed at least at every financial year-end and if, regardless of depreciation already recorded, an impairment loss occurs determined under the criteria contained in IAS 36, the asset is correspondingly written down in value;
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if, in future years, the reasons for the write-down no longer apply, its value is restored. Ordinary maintenance costs are expensed in full to the income statement as incurred, while maintenance costs which increase the value of the asset are allocated to the related assets and depreciated over their residual useful lives.The value of an asset is systematically depreciated over its useful life, on a straight-line basis, indicatively as shown below:
Land is not depreciated.From the 2005 financial year, all commercial properties are depreciated over 50 years, following a review of their useful life.Leasehold improvement costs are depreciated over the shorter of the period during which the improvement may be used and the residual duration of the lease contract.Assets acquired under finance leases are recognized at their fair value at the start of the lease, while the corresponding lease installments are recorded as a liability to the leasing company; assets are depreciated at the normal depreciation rate used for similar assets. In the case of sale and leaseback transactions resulting in a finance lease, any gain resulting from the sale and leaseback is deferred and released to income over the lease term. Leaseholds where the lessor effectively maintains all risks and rewards linked to asset ownership are classified as operating leases. Costs pertaining to operating leases are recorded on the income statement on a line-by-line basis throughout the length of the leasing agreement. Intangible assets. Intangible assets are measured initially at cost, normally defined as their purchase price, inclusive of any import duties and non-refundable purchase taxes and less any trade discounts and rebates; also included is any directly attributable expenditure on preparing the asset for its intended use, up until the asset is capable of operating. The cost of an internally generated intangible asset includes only those expenses which can be directly attributed or allocated to it as from the date on which it satisfies the criteria for recognition as an asset. After initial recognition, intangible assets are carried at cost, less accumulated amortization and any accumulated impairment losses calculated in accordance with IAS 36.Goodwill is recognized initially by capitalizing, in intangible assets, the excess of the purchase cost over the fair value of the net assets of the newly acquired, incorporated or merged company. As required by IAS 38, at the time of recognition, any intangible assets that have been generated internally by the acquired entity are eliminated from goodwill.Goodwill not allocated to specific items is not amortized, but is submitted to an impairment test annually to identify any reductions in value, or more often whenever there is any evidence of impairment loss (see impairment of assets).
Useful life (years) Buildings 33 - 50 Plant and machinery 4 - 12 Industrial and commercial equipment 4 - 10 Other assets: - office and store furniture, furnishings and electronic machines 4 - 10 - vehicles 4 - 5 - aircraft 15 - 16
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Research costs are charged to the income statement in the period in which they are incurred.Items which meet the definition of “assets acquired as part of a business combination” are only recognized separately if their fair value can be measured reliably.
Intangible assets are amortized unless they have indefinite useful lives. Amortization is applied systematically over the intangible asset’s useful life, which reflects the period it is expected to benefit. The residual value at the end of the useful life is assumed to be zero, unless there is a commitment by third parties to buy the asset at the end of its useful life or there is an active market for the asset. Management reviews the estimated useful lives of intangible assets at every financial year end.Normally, the amortization period for brands ranges from 15 to 25 years; patent rights are amortized over the duration of their rights of use, while deferred and commercial expenses are amortized over the remaining term of the lease contracts, with the exception of “fonds de commerce” of French and Belgian companies, which are amortized over 20 years. Impairment losses for non-financial assets. The carrying amounts of the Benetton Group’s property, plant and equipment and intangible assets are submitted to impairment testing whenever there are obvious internal or external indicators indicating that the asset or group of assets (defined as Cash-Generating Units or CGUs) may be impaired.In the case of goodwill, other intangible assets with indefinite lives and intangible assets not in use, the impairment test must be carried out at least annually and, anyway, whenever there are indicators of possible impairment.The impairment test is carried out by comparing the carrying amount of the asset or CGU with the recoverable value of the same, defined as the higher of fair value (net of any costs to sell) and its value in use. Value in use is determined by calculating the present value of future net cash flows expected to be generated by the asset or CGU. If the carrying amount is higher than the recoverable amount, the asset or CGU is written down by the difference.The conditions and methods applied by the Group for reversing impairment losses, excluding in any case those relating to goodwill that may not be reversed, are as set out in IAS 36.The Benetton Group has identified assets and CGUs (for example: stores operated directly and by third parties, and textile segment factories) to be submitted to impairment testing as well as the test methodology: for real estate and some categories of asset (for example: “fonds de commerce” associated with French and Belgian stores) fair value is used, while value in use is adopted for most of the other assets.
Financial assets. All financial assets are measured initially at cost, which corresponds to the consideration paid including transaction costs (such as advisory fees, stamp duties and payment of amounts required by regulatory authorities). Classification of financial assets determines their subsequent valuation, which is as follows:- financial assets held for trading: these are recorded at fair value, unless this cannot be
determined reliably, in which case they are valued at cost as adjusted for any impairment losses. Gains and losses associated with these assets are booked to the income statement;
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- held-to-maturity investments, loans receivable and other financial receivables: these are recorded at amortized cost, less any write-downs carried out to reflect impairment losses. Gains and losses associated with this type of asset are recognized in the income statement when the investment is removed from the balance sheet on maturity or if it becomes impaired;
- available for sale financial assets: these are recorded at fair value, and gains and losses deriving from subsequent measurement are recognized in shareholders’ equity. If the fair value of these assets cannot be determined reliably, they are measured at cost, as adjusted for any impairment.
If it is no longer appropriate to classify an investment as “held-to-maturity” following a change of intent or ability to hold it until maturity, it must be reclassified as “available for sale” and remeasured to fair value. The difference between its carrying amount and fair value remains in shareholders’ equity until the financial asset is sold or otherwise transferred, in which case it is booked to the income statement.Investments in subsidiaries that are not consolidated on a line-by-line basis because they are not yet operative or are in liquidation as of the balance sheet date, and investments in associates are valued at cost and adjusted for any impairment losses. The amount by which cost exceeds shareholders’ equity of subsidiary companies at the time they are acquired is allocated on the basis described in paragraph b) of the consolidation methods. Investments of less than 20% in other companies are carried at cost, written down for any permanent losses in value. The original value of these investments is reinstated in future accounting periods should the reasons for such write-downs no longer apply.All financial assets are recorded as of the date of negotiation, i.e. the date on which the Group undertakes to buy or sell the asset. A financial asset is removed from the balance sheet only if all risks and rewards associated with the asset are effectively transferred together with it or, should the transfer of risks and rewards not occur, if the Group no longer has control over the asset.
Inventories. Inventories are valued 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 attributable 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 realizable value.
Trade receivables. These are recorded at estimated realizable value, which is face value less write-downs which reflect estimated losses on receivables; the provisions for doubtful accounts are included among other operating costs on the income statement. Any medium/long-term receivables that include an implicit interest component are discounted to present value using an appropriate market rate. Receivables discounted without recourse, for which all risks and rewards are substantially transferred to the assignee, are derecognized from the financial statements at their nominal value. Commissions paid to factoring companies for their services are included in service costs.
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Accruals and deferrals. These are recorded to match costs and revenues within the accounting periods to which they relate. Cash and cash equivalents. These are liquid funds held to meet short-term cash commitments and are characterized by high liquidity, easily convertible to cash for a known amount, with an insignificant risk of change of value. Cash equivalents are mostly temporary surpluses of liquid funds invested in financial instruments that can be readily converted to cash (maturities of the instrument at time of purchase being less than three months). Retirements benefit obligations. The provision for employee termination indemnities (TFR) falls within the scope of IAS 19 (Employee benefits) being like a defined benefit plan. The amount recorded in the balance sheet is valued on an actuarial basis using the projected unit credit method. The process of discounting to present value uses a rate of interest which reflects the market yield on securities issued by leading companies with a similar maturity to that expected for this liability. The calculation considers TFR to be already mature for employment services already performed and includes assumptions concerning future increases in wages and salaries. Accrued actuarial gains and losses not recognized at the beginning of the financial year which exceed 10% of the Group’s defined benefit obligation are recorded on the income statement in the period in which they occur (the “corridor approach”). Provisions for contingent liabilities. The Group makes provisions only when a present obligation exists for a future outflow of economic resources as a result of a past event, and when it is probable that this outflow will be required to settle the obligation and a reliable estimate can be made of the same. The amount recognized as provision is the best estimate of the expenditure required to settle the present obligation completely, discounted to present value using a suitable pre-tax rate. Any provisions for restructuring costs are recognized when the Group has drawn up a detailed restructuring plan and has announced it to the parties concerned.In the case of onerous contracts where the unavoidable costs of meeting the contractual obligations exceed the economic benefits expected to be received under the contract, the present obligation is recognized and measured as a provision. Trade payables. These are stated at face value. The implicit interest component included in medium/long-term payables is recorded separately using an appropriate market rate. Financial liabilities. Financial liabilities are divided into two categories:- liabilities acquired with the intention of making a profit from short-term price fluctuations
or which form part of a portfolio which has the objective of short-term profit-taking. These are recorded at fair value, with the related gains and losses booked to the income statement;
- other liabilities, which are recorded on the basis of amortized cost.
Foreign currency transactions and derivative financial instruments. Transactions in foreign currencies are recorded using the exchange rates on the transaction dates. Exchange gains or losses realized during the period are booked to the income statement.At the balance sheet date, the Group companies have adjusted receivables and payables
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in foreign currency using exchange rates ruling at period-end, booking all resulting gains and losses to the income statement. Fair value hedge instruments for specific assets and liabilities are recorded in assets and liabilities; the hedging instrument and the underlying item are measured at fair value and the respective changes in value (which generally offset each other) are recognized in the income statement. Cash flow hedge instruments are recorded under assets and liabilities; the hedging instrument is measured at fair value and the effective portion of changes in value are recognized directly in an equity reserve, which is released to the income statement in the financial periods in which the cash flows of the underlying item occur; the ineffective portion of the changes in value is recognized on the income statement.The shareholders’ equity of foreign subsidiaries is subject to hedging in order to protect investments in foreign companies from fluctuations in exchange rates (foreign exchange translation risk). Exchange differences resulting from these hedging transactions are debited or credited directly to shareholders’ equity as an adjustment to the translation differences reserve; which are recognized on the income statement at the time of disposal or settlement.Derivative instruments for managing interest and exchange rate risks, which do not meet the formal requirements to qualify for IFRS hedge accounting, are recorded under financial assets/liabilities with changes in value reported through the income statement. Share-based payments (stock options). The Group stock option plan provides for the physical delivery of the shares on the date of exercise. Share-based payments are measured at fair value on the grant date. This value is booked to the income statement on a straight-line basis over the period during which the options vest and it is offset by an entry to a reserve in shareholders’ equity; the amount booked is based on a management estimate of the stock options which will effectively vest for staff so entitled, taking into account the attached conditions not based on the market value of the shares. Fair value is calculated using the Black & Scholes method.
Capital grants. Any capital grants are presented on the income statement by recording the grant as an adjusting entry for the carrying value of the asset.
Financial risk managementThe Benetton Group has always paid special attention to the identif ication, valuation and hedging of f inancial risk. In November 2005, the Board of Directors of the Benetton Group approved the new “Group Financial Policy” aimed at defining general principles and guidelines on financial management and the management of f inancial risks, such as interest rate risk, foreign exchange rate risk, and financial counterparty credit risk. Foreign exchange rate risk. The Group is exposed to exchange rate fluctuations, which can impact on its economic results and the value of shareholders’ equity. Specifically, based on the type of exposure, the Group identifies the following classes of risk:Exposure to economic exchange risk. The Group’s companies may have:- costs and revenues denominated in currencies other than the reporting currency or
other currency (usually Usd or Eur) normally used in the companies’ reference market and whose exchange rate fluctuations can impact on the operating income;
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- trade payables or receivables denominated in currencies other than the functional currency of the company to which they refer, where an exchange rate fluctuation can determine the realization or the ascertaining of positive or negative exchange rate differences.
Exposure to transaction exchange risk. The Group’s companies may have financial payables or receivables denominated in currencies other than the functional currency of the company to which they refer and whose exchange rate fluctuations can cause the realization or the ascertaining of positive or negative exchange rate differences.Exposure to exchange translation risk. Some of the Group’s subsidiaries are located in countries which do not belong to the European Monetary Union and their functional currency differs from the euro, which is the Group’s reference currency:- the income statements of these companies are translated into euro using the period’s
average exchange rate, and, with revenues and margins being the same in local currency, exchange rate fluctuations can impact on the value in euro of revenues, costs and economic results;
- assets and liabilities of these companies are converted at the year-end exchange rate and therefore can have different values depending on exchange rate fluctuations. As provided for by the accounting standards adopted, the effects of such variations are recognized directly in shareholders’ equity among translation provisions.
It is the Group’s policy to manage foreign exchange risk through derivative financial instruments such as currency forwards, currency swaps, currency spots and currency options; speculative trading is not allowed.
Interest rate risk. The Group’s companies use external financial resources in the form of loans and invest available liquidity in money-market and capital-market instruments. Variations in market interest rates influence the cost and revenue of different funding and investment instruments, thus impacting on the Group’s financial income and expenses. Credit risk. The Group shows different concentrations of credit risk depending on the nature of the activities which have generated the receivables. The Group has policies in place to ensure that wholesale sales of products are made to customers with an appropriate credit history. Sales to retail customers are made in cash or via major credit cards.Receivables which are partially or totally irrecoverable, if sufficiently significant, are written off on an individual basis. The write-off amount takes into account a forecast of recoverable cash flows and their relevant collection date, as well as the fair value of warranties. Collective provisions are made for receivables which are not subject to individual write-off, taking into account bad debt history and statistical data. Financial credit risk lies in the counterpart’s or the issuer’s inability to settle its financial obligations.The Group invests available liquidity in money-market and capital-market instruments. These instruments must have a minimum long-term issuer and/or counterpart rating of S&P’s “A-“ (or equivalent) and/or a minimum short-term issuer and/or counterpart rating of S&P’s “A-2” (or equivalent).With the exception of bank deposits, the maximum investment allowed in all other instruments may not exceed 10% of the Group’s liquidity investments, with a ceiling of 20 million euro for each issuer/counterpart, in order to avoid excessive concentration in
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a single issuer for sovereign issuers with rating lower than “A” (or equivalent) and for all other issuers with rating lower than “AA” (or equivalent).As of December 31, 2005 the Group’s available liquidity was mainly invested in bank deposits with main financial institutions.
Liquidity risk. Liquidity risk can be represented by the inability to access, at economically viable conditions, the financial resources needed to guarantee the Group’s ability to operate.The two main factors influencing the Group’s liquidity position are the resources generated or used by operating and investment activities, and the characteristics maturity and renewal of credit line or the liquidity of financial investments. The classification of financial assets and liabilities by maturity date as of December 31, 2005, is reported in the explanatory notes. Liquidity requirements are monitored by the Parent Company’s central functions in order to guarantee effective access to financial resources or adequate investment of liquidity. As of December 31, 2005, the Group had unutilized “committed” credit lines in the amount of 500 million euro and “uncommitted” credit lines in the amount of 400 million euro.Management feels that currently available funds and credit lines, apart from those which will be generated by operating and financing activities, will allow the Group to satisfy its requirements as far as investment, working capital management, and debt repayment at natural maturity are concerned.
Supplementary information Identification of segments. The Group has identified “business” as the primary reporting basis for its segment information, since this is the primary source of risks and rewards; geographic area is the basis for its secondary segment reporting.The Group’s activities are divided into three segments in order to provide the basis for effective administration and decision-making, and to supply representative and significant information about company performance to financial investors. The business segments are as follows:- apparel, represented by casualwear, carrying the United Colors of Benetton,
Undercolors and Sisley brands, and sportswear, with the Playlife and Killer Loop brands; the information and results relating to the real estate companies are also included in this segment;
- textile, consisting of production and sales activities for raw materials (fabrics, yarns and labels), semi-finished products and industrial services;
- other and unallocated, includes activities relating to sports equipment produced for third parties by a Group manufacturing company.
The geographic areas defined by the Group for the purposes of secondary sector disclosure in compliance with IAS 14 on the basis of significance are as follows:- Italy;- Rest of Europe;- Asia;- The Americas;- Rest of the world.
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Cash flow statement. In compliance with IAS 7, the cash flow statement, prepared using the indirect method, highlights the Group’s ability to generate cash and cash equivalents. Cash equivalents comprise short-term highly liquid financial investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. An investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Bank overdrafts are also part of the financing activity, unless they are payable on demand and form an integral part of an enterprise’s cash and cash equivalents management, in which case they are classified as a component of cash and cash equivalents. Cash and cash equivalents included in the cash flow statement comprise the balance sheet amounts for this item at the reporting date. Cash flows in foreign currencies are translated at the average exchange rate for the period. Income and expenses relating to interest, dividends received and income taxes are included in cash flow from operating activities. The layout adopted by the Group reports separately:- operating cash flow: operating cash flows are mainly linked to revenue-generation
activities and are presented by the Group using the indirect method; this method adjusts, on an accruals basis, net profit or loss for the effects of items which did not result in cash outflows or generate liquidity (i.e. non-cash transactions);
- investing cash flow: investing activities are reported separately because, amongst other things, they are indicative of investments/divestments aimed at the future generation of revenues and positive cash flows;
- financing cash flow: financing activities consist of the cash flows which determine a change in the entity and composition of shareholders’ equity and loans granted.
Use of estimates. The preparation of the consolidated financial statements and related notes under IFRS has required management to make estimates and assumptions regarding assets and liabilities reported in the balance sheet and the disclosure of potential assets and liabilities at the reporting date. The final results could be different from the estimates. The Group has used estimates for valuing assets subject to impairment testing as previously described, for valuing share-based payments, provisions for doubtful accounts, depreciation and amortization, employee benefits, deferred tax assets and other provisions. The estimates and assumptions are reviewed periodically and the effects of any changes are immediately reflected in the income statement. Accounting treatment of enterprises operating in economies subject to hyperinflation (Turkey). The Turkish subsidiary’s financial statements are expressed in new Turkish lira (local currency and reporting currency) at historic cost, in the unit of measurement applicable on the closing date of the reference period. The values relevant to non-cash balance sheet items are revalued applying the variation of the general price index which has occurred between the capture date and the closing date of the reference period. The statements revalued in this way are then converted into the presentation currency of the consolidated income statement (euro) using the method described in the paragraph “Consolidation methods” for companies using a reporting currency other than the euro, with the exception of balance sheet items which are converted at the period-end exchange rate. The profit or loss on the cash position is attributed to the income statement, as financial income or a financial expense.
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Minority shareholders. Transactions between the Group and minority shareholders are regulated in the same way as transactions with parties external to the Group. The sale of shareholding interests to minority shareholders by the Group generates gains or losses recorded on the income statement. The purchase of interests by minority shareholders is translated into goodwill, calculated as the excess of the amount paid over the share of the carrying value of the subsidiary’s net assets.
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Comments on the principal items in the income statement
(1) Revenues
The increase in Group revenues (+3.6% versus 2004) can be attributed to the positive uptake of reorders and of the Fall/Winter collection, a greatly improved product mix, the effects of the development policy for directly operated stores and the significant contribution of the Mediterranean area countries, including Turkey, as well as eastern Europe and Korea.Sales of core products are stated net of trade discounts.Miscellaneous sales relate mainly to sports equipment produced for third parties by a subsidiary in Hungary.Other revenues refer mainly to the rendering of services such as processing, cost recharging and miscellaneous services, including the development of advertising campaigns.Further details on revenues are given in the “Supplementary information” section of this document.
Sales of core products, by product category
Sales of core products, by brand
The “United Colors of Benetton” brand also includes 429,328 thousand euro in sales by the “UCB Bambino” brand (401,164 thousand euro in 2004). “Other sales” include sales of fabrics and yarns.
(thousands of euro) 2005 2004 Sales of core products 1,667,997 1,624,956 Miscellaneous sales 57,380 45,767 Royalty income 15,480 14,419 Other revenues 24,216 18,982 Total 1,765,073 1,704,124
(thousands of euro) 2005 2004 Casual apparel, accessories and footwear 1,551,700 1,479,576 Sportswear 27,714 42,876 Fabrics and yarns 88,583 95,780 Other - 6,724 Total 1,667,997 1,624,956
(thousands of euro) 2005 2004 United Colors of Benetton 1,232,156 1,168,709 Sisley 318,189 310,867 Killer Loop 8,571 11,348 Playlife 20,497 31,526 Other sales 88,584 102,506 Total 1,667,997 1,624,956
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(2) Other operating income and revenues
“Rental income” refers mainly to income from the leasing of commercial premises to be used for the sale of Benetton-label products. The positive variation in “Release of provisions” is attributable primarily to the release of 2004 provisions, specifically for the closure of a number of stores in France, which, however, continued to operate throughout 2005, thus eliminating the need for the related provision. Fixed assets for these shops, however, have been subject to impairment, recognized in the financial year among “Impairment of property, plant and equipment”, and almost completely offset by the amount of income relative to the above-mentioned releases. (3) Change in inventories of finished products and work in progress The change in this item, in the amount of 18,528 thousand euro, is due primarily to the increase in closing inventories of finished products, particularly for companies which manage points of sale directly, as well as of work in progress. (4) Purchases of raw materials and consumables
The change in this balance is mainly due to the increase in production volumes from foreign production sites and to the increase in product sales. The item includes changes in raw materials and consumables inventories.
(thousands of euro) 2005 2004 Reimbursements and compensation payments 2,968 1,691 Rental income 35,410 34,456 Contingent assets 7,255 6,717 Gains on disposal of fixed assets 6,385 27,098 Release of provisions 14,673 3,864 Other operating income 9,910 17,404 Total 76,601 91,230
(thousands of euro) 2005 2004 Raw materials, semi-finished and finished products, and other materials 544,724 438,728 Purchases for advertising and promotion 1,221 881 Other purchases 14,483 13,078 (Discounts and rebates) (54) (114) Total 560,374 452,573
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(5) Payroll and related costsThe change in this item is mainly attributable to the expansion of the direct sales network and to a greater impact of staff incentive policies, and can be detailed as follows:
Further details about the stock options plan and TFR provision calculations are included in the “Supplementary information” section of this document.The number of staff, divided into categories, is reported in the table below:
Depreciation and amortization (6) Property, plant and equipment
The decrease in depreciation is mainly due to the impairment, carried out in 2004, to the carrying value of certain assets linked to the commercial network, which impacted primarily on “Leasehold improvements”.The decrease in the depreciation value of “Buildings” includes 2,159 thousand euro related to a review in the valuation of the useful life of commercial property in 2005 from 33 to 50 years.
(thousands of euro) 2005 2004 Wages and salaries 164,273 159,172 Social security contributions 43,713 44,599 Provision for TFR 8,330 8,182 Stock options’ costs 2,202 722 Other payroll and related costs 2,525 1,327 Total 221,043 214,002
Period 2005 2004 average Management 99 100 100 White collars 4,000 3,674 3,837 Workers 2,400 2,542 2,470 Part-time 1,479 1,108 1,294 Total 7,978 7,424 7,701
(thousands of euro) 2005 2004 Depreciation of buildings 12,611 14,991 Depreciation of plant, machinery and equipment 21,007 20,358 Depreciation of furniture, fittings and electronic devices 17,746 18,900 Depreciation of vehicles and aircraft 1,586 1,619 Depreciation of leased assets 898 622 Depreciation of leasehold improvements 8,394 11,505 Total 62,242 67,995
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(7) Intangible assets
The decrease in amortization is due mainly to the impairment, carried out in 2004, to the carrying value of certain intangible assets linked to the commercial network, which impacted primarily on “Amortization of other charges”. Other operating costs (8) External services
The reduction in the value of subcontracted work is due to a number of factors linked to the operational flexibility of manufacturing operations which, by favoring the operational methods most closely aligned with the markets the Group is active in, have become more efficient and integrated, resulting in a cost decrease of 20,651 thousand euro compared to the previous year.Distribution and transport costs rose due to higher volumes resulting mainly from sales growth in Korea, and to an increase in freight forwarding rates applied by suppliers.Sales commissions decreased as a result of the transfer to the Parent Company of Italian and German retail stores which were managed by third parties during the previous financial year. Advertising and promotion costs increased because of the higher cost incurred to create advertising campaigns for the Group’s brands (United Colors of Benetton in particular) and for third-party customers, where incurred costs generated a respective increase in the other revenues balance.Other services include mainly:- energy costs of 24,798 thousand euro; - consultancy and other fees of 11,744 thousand euro; - insurance premiums of 4,245 thousand euro; - postage and telephone expenses of 4,061 thousand euro;
(thousands of euro) 2005 2004 Amortization of industrial patents and intellectual property rights 249 515 Amortization of licenses, trademarks and similar rights 3,891 3,969 Amortization of deferred charges 12,298 11,370 Amortization of other charges 6,687 11,478 Total 23,125 27,332
(thousands of euro) 2005 2004 Subcontracted work 341,266 361,917 Distribution and transport 56,295 47,653 Sales commissions 69,846 73,564 Advertising and promotion 59,023 51,934 Emoluments to directors and statutory auditors 5,475 6,438 Maintenance costs 11,736 12,342 Other services 87,587 84,503 Total 631,228 638,351
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- personnel travel expenses of 10,168 thousand euro;- other costs for miscellaneous services such as company cafeteria, cleaning, graphic and
design consultancy, and internships. Directors and Statutory Auditors compensation paid.
In 2004, the Chief Executive Officer, Silvano Cassano, was awarded 1,731,966 options which grant the right to subscribe to the same number of Benetton Group S.p.A. shares at a price of 8.984 euro per share. Up to 50% of the options awarded may be exercised, subject to certain conditions being satisfied, two years after grant date. The remaining 50% may be exercised, subject to certain conditions, four years after the grant date. The expiration of the period for exercise of the options is fixed at five years from the exercise date. Further details about the stock options plan are provided in the Directors’ report and in the “Supplementary information” section of this document.
(9) Leases and rentals. The cost of leasing and rentals, in the amount of 104,478 thousand euro (86,420 in 2004), relates mainly to rental costs, which total 92,217 thousand euro and have risen as a result of the opening of new stores and the Group’s acquisition of already operating retail stores.
(10) Impairment of property, plant and equipment and intangible assets. This item, in the amount of 50,340 thousand euro (49,116 thousand euro in 2004), is detailed in the “Supplementary information” section of the explanatory notes, in the section describing impairment testing.
(thousands of euro) Name and surname Position held Duration of office (1) Gross remuneration Luciano Benetton Chairman Year 2005 1,600 Carlo Benetton Deputy chairman Year 2005 800 Alessandro Benetton Deputy chairman Year 2005 300 Silvano Cassano Chief Executive Officer Year 2005 1,051 (2)
Gilberto Benetton Director Year 2005 100 Giuliana Benetton Director Year 2005 800 Reginald Bartholomew Director Year 2005 62 Luigi Arturo Bianchi Director Year 2005 81 Giorgio Brunetti Director Year 2005 81 Gianni Mion Director Year 2005 53 Ulrich Weiss Director Year 2005 85 Angelo Casò Chairman of the Board of Statutory Auditors Year 2007 62 Antonio Cortellazzo (3) Statutory Auditor Year 2007 59 Filippo Duodo Statutory Auditor Year 2007 127 Dino Sesani Statutory Auditor Year 2004 17 (1) Up to the approval of these financial statements.(2) Including salary for employment and excluding the value of stock options.(3) Statutory Auditor since May 16, 2005.
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(11) Write-downs of doubtful accounts. This item, totaling 17,387 thousand euro (39,240 thousand euro in 2004), relates to the provision for doubtful accounts. For further information, see the note on current receivables.
(12) Provisions for risks. This item mainly includes 4,276 thousand euro of provisions for legal and tax risks, 3,543 thousand euro for the provision for sales agent indemnities, and 11,961 thousand euro for other provisions. The provisions for legal and tax risks refer to disputes which have arisen during the year or in previous financial years, whereas other provisions relate mainly to costs incurred for the closure of stores (“exit costs”). Further comments about this item are in the note on liabilities pertaining to “Other provisions and medium/long-term liabilities”.
(13) Other operating costs
The item “Other operating expenses”, totaling 16,953 thousand euro, includes costs of various nature, such as indemnities paid to third parties, general expenses, and other. The reduction can be attributed to the lower costs incurred for the restructuring of the sales network and for early retirement incentives.
(14) Share of income/(loss) of associated companiesThis item, totaling a loss of 60 thousand euro, refers to dividends distributed by other companies for a total amount of 43 thousand euro net of losses resulting from the sale of certain investments held by the Group. (15) Net financial expenses and exchange differences
(thousands of euro) 2005 2004 Losses on disposal of fixed assets 1,952 6,361 Indirect taxes and duties 8,906 7,980 Donations 2,321 2,307 Returns and discounts relating to sales in previous years 3,082 2,807 Losses on receivables 2,628 2,524 Other operating expenses 16,953 26,195 Total 35,842 48,174
(thousands of euro) 2005 2004 Financial income 24,139 21,984 (Financial expenses) (47,269) (43,941) Foreign currency hedging gains/(losses) and exchange differences 408 (31) Total (22,722) (21,988)
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Financial income
“Miscellaneous financial income and income from derivatives” mainly includes: - positive differentials on interest rate swaps of 4,049 thousand euro (6,481 thousand in 2004);- income from currency swaps and forward exchange contracts established to hedge the
economic and transaction exchange risk of 13,170 thousand euro (7,297 thousand euro in 2004);
- premiums on translation exchange risk hedging transactions of 930 thousand euro (1,887 thousand in 2004).
Financial expenses
“Miscellaneous financial expenses and expenses from derivatives” include mainly:- negative differentials on interest rate swaps of 4,447 thousand euro (4,933 thousand in
2004);- expenses from currency swaps and forward exchange contracts established to hedge the
economic and transaction exchange risk of 13,791 thousand euro (7,099 thousand euro in 2004);
- premiums on translation exchange risk hedging transactions of 1,107 thousand euro (26 thousand euro in 2004);
- discounts allowed for early settlement of trade receivables of 2,217 thousand euro (3,106 thousand euro in 2004);
- bank charges and commissions of 1,798 thousand euro (1,162 thousand euro in 2004).
Foreign currency hedging gains/(losses) and exchange differences. Exchange rate differences originate mainly from receipts from foreign customers and payment to foreign suppliers and from currency hedging transactions, as well as exchange gains and losses on renegotiation of contracts for forward currency sales. This item also includes exchange differences arising from translation of receivables and payables in foreign currency to the year-end exchange rate.
(thousands of euro) 2005 2004 Interest expenses on bonds (4,636) (8,076) Interest expenses on bank current accounts (1,030) (379) Interest expenses on advances against receivables (303) (465) Interest expenses on short-term loans (1,652) (531) Interest on medium/long-term bank loans (13,511) (11,816) Interest expenses on loans from other lenders (832) (814) Miscellaneous financial expenses and expenses from derivatives (25,305) (21,860) Total (47,269) (43,941)
(thousands of euro) 2005 2004 Interest income from securities amount current assets 1,607 606 Interest income from trade and other receivables 546 832 Interest income on bank current accounts 2,513 3,725 Miscellaneous financial income and income from derivatives 19,473 16,821 Total 24,139 21,984
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(16) Income taxes The total amount includes taxes on income for the year, deferred tax income and expense as detailed below:
The reconciliation of the tax charge is as follows:
(thousands of euro) 2005 2004 Current taxes 13,631 22,636 Deferred tax income: - intercompany profits elimination 762 531 - impairment of investments 12,398 8,036 - provisions to write-down and risk reserves 7,090 (6,311) - taxes on a different depreciation/amortization basis for fixed and intangible assets (2,487) 4,424 - losses 582 142 - accumulated tax losses carry-forwards (3,179) (7,094) - fair value of derivatives - 1,194 - others (1,331) (1,964) Total deferred tax income 13,835 (1,042) Deferred tax expenses: - reversal of excess depreciation and the application of finance lease accounting (2,491) 69 - gains 63 (1,866) - profits/reserves distributable by subsidiaries (2,328) 7,957 - fair value of derivatives (2,476) - - others 54 (91) Total deferred tax expenses (7,178) 6,069 Total 20,288 27,663
(in %) 2005 2004 Italian statutory tax rate 37.25 37.25 Effect of statutory tax rates of subsidiaries making a profit (13.38) (18.12) Effect of statutory tax rates of subsidiaries making a loss 11.19 10.68 Deferred taxes on profits/reserves distributable by subsidiaries 0.56 5.85 Net effect deriving from the transfer of businesses (21.21) (9.22) Amortization/reversal of excess cost deriving from investments acquired (0.22) 1.75 Tax benefit deriving from the impairment of investments - (5.91) Effect of accumulated tax losses (3.86) (5.25) Effect deriving from the write-down of tangible and intangible assets 8.61 3.65 Effect of the Italian regional business tax (IRAP) 3.38 1.70 Other, net (7.22) (2.04) Effective tax rate 15.10 20.34
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Comments on the principal asset items
Non-current assets
(17) Property, plant and equipment The following table shows the main changes which affected property, plant and equipment in 2005, which are presented net of depreciation, and total 743,003 thousand euro:
Additions for the year regarded primarily:- the acquisition of real estate for commercial use and the related modernization and
upgrading of stores for development of the sales network;- plant, machinery and equipment purchased to boost production efficiency, particularly at
the Italian manufacturing companies;- the purchase of store furniture and furnishings;- the acquisition of assets under construction refers mainly to investments aimed at
developing the Group’s production facilities and sales network. Leasehold improvements mainly refer to the cost of restructuring and modernizing stores belonging to third parties.Other changes comprise the reclassification of the Cassano Magnago and Pedimonte plants in assets held for sale, for a total of 7,807 thousand euro.The impairment during the financial year as a result of the impairment test are described in the “Supplementary information” section pertaining to impairment testing.
Furniture, Assets under Plant, fittings construction and Land and machinery and and electronic Vehicles advances for property, Leased Leasehold (thousands of euro) buildings equipment devices and aircraft plant and equipment assets improvements Total Net opening balance 579,986 79,658 38,913 10,583 3,724 11,743 48,158 772,765 Additions 9,427 12,456 27,029 1,324 9,848 - 12,233 72,317 Disposals (1,980) (1,792) (1,069) (289) (144) - (1,000) (6,274) Depreciation (12,611) (21,007) (17,746) (1,586) - (898) (8,394) (62,242) Impairment (8,782) (2,010) (6,901) - - - (11,705) (29,398) Reclassification of assets held for sale (2,802) (103) (1,813) (20) - (3,064) (5) (7,807) Translation differences and other changes 1,967 1,333 3,860 458 (2,471) (53) (1,452) 3,642 Net closing balance 565,205 68,535 42,273 10,470 10,957 7,728 37,835 743,003
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Leased assets include the following:
The long-term portion of the outstanding principle balances of lease repayments as of December 31, 2005, is recognized as “Lease financing” among non-current liabilities, while the short-term portion is recorded among current liabilities.A portion of property, plant and equipment has been mortgaged with banking institutions as collateral security for loans whose residual repayments total 744 thousand euro as of December 31, 2005.As of December 31, 2005, a temporarily disused building is recorded with a total value of 10,061 thousand euro. This building used to be the Headquarters for sports equipment and apparel business. It is of considerable historical and artistic importance and has been renovated in order to house corporate offices. Having ascertained in 2005 that there is no viable market for this asset, a valuation based on potential rental income has been made, resulting in the estimate of an expected yield and of a related value for the building of approximately 10 million euro, for a impairment of 7,119 thousand euro.
12.31.2005 12.31.2004 Accumulated Accumulated depreciation and depreciation and (thousands of euro) Gross impairment Net Gross impairment Net Land and buildings 686,096 120,891 565,205 676,971 96,985 579,986 Plant, machinery and equipment 290,442 221,907 68,535 305,450 225,792 79,658 Furniture, fittings and electronic devices 136,901 94,628 42,273 112,638 73,725 38,913 Vehicles and aircraft 22,823 12,353 10,470 22,359 11,776 10,583 Assets under construction and advances for property, plant and equipment 10,957 - 10,957 3,724 - 3,724 Leased assets 9,678 1,950 7,728 13,259 1,516 11,743 Leasehold improvements 123,857 86,022 37,835 113,188 65,030 48,158 Total 1,280,754 537,751 743,003 1,247,589 474,824 772,765
(thousands of euro) 12.31.2005 12.31.2004 Land and buildings 5,959 9,472 Plant, machinery and equipment 3,719 3,787 Accumulated depreciation (1,950) (1,516) Net book amount 7,728 11,743
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(18) Intangible assets
The 5,472 thousand euro change in the “Goodwill and other intangible assets of indefinite useful life” balance is due to the purchase in 2005 of 50% of a Turkish company called Benetton Giyim Sanayi A.S. As far as the write-down of these assets is concerned, see the “Impairment testing” section in “Supplementary information”. ”Intangible assets of finite useful life” include:
“Concessions, licenses, trademarks and similar rights” include the net book amount of the following brands:
Goodwill and Concessions, other intangible licenses, assets of Patent trademarks Deferred (thousands of euro) indefinite useful life rights and similar rights charges Other Total Net opening balance 5,346 1,099 23,934 90,161 16,079 136,619 Additions - 35 1,783 35,798 13,841 51,457 Acquisition of subsidiary 5,472 - - 2,356 - 7,828 Disposals - - (7) (742) (14) (763) Amortization - (249) (3,891) (12,298) (6,687) (23,125) Impairment (2,551) - (4,863) (11,840) (1,688) (20,942) Translation differences and other changes 243 142 1 (976) 1,265 675 Net closing balance 8,510 1,027 16,957 102,459 22,796 151,749
12.31.2005 12.31.2004 Accumulated Accumulated amortization and amortization and (thousands of euro) Gross impairment Net Gross impairment Net Industrial patents and intellectual property rights 3,654 2,627 1,027 3,477 2,378 1,099 Concessions, licenses, trademarks & similar rights 67,660 50,703 16,957 65,890 41,956 23,934 Deferred commercial expenses 159,386 56,927 102,459 136,133 45,972 90,161 Other charges 58,131 35,335 22,796 53,206 37,127 16,079 Total 288,831 145,592 143,239 258,706 127,433 131,273
(thousands of euro) 12.31.2005 12.31.2004 United Colors of Benetton 3,141 3,046 Sisley 470 444 Killer Loop 8,295 14,273 Other 1,015 1,112 Total 12,921 18,875
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At the end of the financial year, the residual useful life of the Killer Loop brand was equal to 13 years. In 2005, this brand was impaired as a result of the impairment test carried out by the Group, as described in the “Supplementary information” section of the explanatory notes.“Deferred commercial expenses” consists mainly of the charges linked to lease surrender payments for obtaining the lease of buildings for use as stores (“key money”), which are amortized over the term of the associated lease contracts (with the exception of French and Belgian “fonds de commerce” which are amortized over 20 years). The increase includes the partial allocation of Benetton Giyim Sanay A.S.’s acquisition cost, for a total of 2,356 thousand euro.“Other” includes costs relating to the purchasing and development of software in the amount of 12,262 thousand euro (of which 1,873 thousand euro are in-house) and costs pertaining to assets under development and advances in the amount of 8,076 thousand euro (of which 1,293 thousand euro for software developed in-house). Other non-current assets (19) InvestmentsInvestments, valued at cost, total 5,130 thousand euro and relate mainly to subsidiaries not included in the consolidation because they were not yet operational or were in liquidation as of the balance sheet date. The detail is as follows:
(20) Guarantee depositsThe increase in guarantee deposits and the closing balance as of December 31 relate primarily to lease contracts entered into by the Japanese subsidiary.
(21) Medium/long-term financial receivablesThe balance, totaling 7,459 thousand euro, includes loans issued primarily by Group subsidiaries to third parties. During the financial year, 23,062 thousand euro were collected early, of which 14,350 thousand euro relating to the sale of the Nordica business, 4,746 thousand euro relating to a loan from the Japanese subsidiary to support commercial activities in the territory, and 3,672 thousand euro for a loan granted by the Parent Company.During the financial year, new loans for a further 3,027 thousand euro were granted. The residual amount refers to financial receivables earning interest at market rates.
(thousands of euro) 12.31.2005 12.31.2004 Benetton Slovakia s.r.o. 3,254 3,195 Chesa Paravicini S.A. 1,479 1,491 Korea Fashion Physical Distribution 169 - Beijing Sunshine Knitwear Co. Ltd. - 252 Other investments 228 179 Total 5,130 5,117
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(22) Other medium/long-term receivablesThis balance, totaling 46,120 thousand euro (of which 904 thousand euro due beyond 5 years), includes 24,026 thousand euro in receivables from Edizione Holding S.p.A. for current taxes calculated on taxable losses, as allowed in the Italian rules governing relations between companies participating in consolidated taxation; these receivables will be due in 2007. This balance also includes 9,089 thousand euro in long-term trade receivables and 6.952 thousand euro in receipts from asset sales, mainly resulting from the sale of an industrial property, and, for the residual amount, other receivables from third parties. (23) Deferred tax assetsThe following table shows a breakdown of net deferred tax assets:
The Group offset deferred tax assets and liabilities for Italian companies as they participate in the national consolidated taxation, and for foreign subsidiaries as allowed by the right to offset as recognized in their respective countries.
Potential tax benefits deriving from tax losses which may be carried forward by Group companies (approx. 137 million euro as of December 31, 2005) have been written down by 119 million euro because their recoverability is not reasonably certain.Deferred taxes on a different amortization basis relate to the valuation carried out, based on expected future taxable income, on the tax benefits deriving from the company’s restructuring in 2003.
(thousands of euro) 12.31.2005 12.31.2004 From 1 to 5 years 5,845 22,458 Beyond 5 years 1,614 5,816 Total 7,459 28,274
Exch. diff. and (thousands of euro) 12.31.2004 Increases Decreases other changes 12.31.2005 Tax effect of eliminating intercompany profits 5,495 4,733 (5,495) - 4,733 Tax effect of provisions, costs and revenues related to future periods for fiscal purposes 91,976 24,377 (44,625) 1,909 73,637 Deferred taxes on reversal of excess depreciation and application of finance lease accounting (15,924) (2,054) 4,545 290 (13,143) Deferred taxes on gains taxable over a number of accounting periods (2,927) (1,169) 1,106 - (2,990) Different basis for amortization/depreciation 115,650 7,000 - - 122,650 Total benefit on losses carried forward 14,360 5,191 (2,012) 200 17,739 Deferred taxes on profits/reserves distributable by subsidiaries (7,957) (751) 3,080 - (5,628) Other 595 - (582) (13) - Total 201,268 37,327 (43,983) 2,386 196,998
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Current assets (24) InventoriesInventories, totaling 287,246 thousand euro (255,436 thousand euro as of December 31, 2004), consist of the following:
Inventories are stated net of the write-down provision. The movement in write-down provisions is as follows:
(25) Trade receivablesAs of December 31, 2005, trade receivables, net of the provision for doubtful accounts, were as follows:
The provision for doubtful accounts at the end of the year brought the total percentage of receivables covered by provisions to 11.2%. The movements during the financial year were as follows:
Trade receivables include receivables from associated companies of 218 thousand euro and from the parent company Edizione Holding S.p.A. in the amount of 266 thousand euro. In 2005, trade receivables were discounted without recourse through a factoring contract for a total of 57,367 thousand euro; of which approximately 25,852 had not yet matured at year-end.
(thousands of euro) 12.31.2005 12.31.2004 Raw materials, other materials and consumables 85,247 101,559 Work in progress and semi-manufactured products 54,413 57,558 Finished goods and goods for sale 146,679 96,099 Advances from customers 907 220 Total 287,246 255,436
Exchange (thousands of euro) 12.31.2004 Additions Uses difference 12.31.2005 Raw materials, other materials and consumables 2,334 2,442 (2,361) 102 2,517 Work in progress 750 750 (750) - 750 Finished goods 14,727 9,284 (8,104) 337 16,244 Total 17,811 12,476 (11,215) 439 19,511
(thousands of euro) 12.31.2005 12.31.2004 Trade receivables 738,214 755,226 (Provision for doubtful accounts) (82,828) (97,642) Total 655,386 657,584
Releases Exch. diff. to income and other (thousands of euro) 12.31.2004 Increases Uses statement changes 12.31.2005 Provision for doubtful accounts 97,642 17,387 (32,391) (722) 912 82,828
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(26) Tax receivables. This balance includes:- VAT recoverable in the amount of 14,203 thousand euro (26,184 thousand euro as of
December 31, 2004);- tax credits of 9,432 thousand euro (9,075 thousand euro as of December 31, 2004);- other taxes receivables of 1,538 thousand euro (4,192 thousand euro as of December
31, 2004).
(27) Other receivables, prepaid expenses and accrued incomeThis balance includes:
The receivables from Edizione Holding S.p.A. relate to the participation in the consolidated taxation in 2004.
(28) Financial receivables
The amount of financial receivables relates mainly to the current portion of medium and long-term receivables. Differentials on forward exchange contracts include the intrinsic value component of derivative instruments as of December 31, 2005, of which: 1,692 thousand euro for economic risk hedging transactions, 2,170 thousand euro for transaction exchange risk hedging transactions, 405 thousand euro for translation exchange risk hedging transactions. Other financial receivables include the time value component of derivative instruments as of December 31, 2005, of which: 762 thousand euro for economic risk hedging transactions, 1,079 thousand euro for transaction exchange risk hedging transactions, 29 thousand euro for translation exchange risk hedging transactions, and 423 thousand euro for interest rate risk hedging transactions.
(thousands of euro) 12.31.2005 12.31.2004 Other receivables 23,926 27,112 Receivables from parent company 15,541 - Total other receivables 39,467 27,112 Accrued income: - other income 1,369 52 - rental income and operating leases 622 104 Total accrued income 1,991 156 Deferred charges: - rental costs and operating leases 5,037 4,690 - other operating charges 190 1,362 - taxes 1,421 1,551 - insurance policies 636 656 - advertising and sponsorships 988 113 Total deferred charges 8,272 8,372 Total 49,730 35,640
(thousands of euro) 12.31.2005 12.31.2004 Short-term financial receivables from third parties 3,997 8,958 Differentials on forward exchange contracts 4,267 7,523 Other short-term financial receivables and assets 4,706 5,047 Total 12,970 21,528
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(29) Available for sale financial assets
Financial assets were sold in full in July 2005.
(30) Cash and cash equivalents
Time deposits in euro are highly liquid funds held by banks. Average interest rates reflect market returns for the various currencies concerned. Checks reflect receipts from customers at year end.
(31) Assets held for saleThis balance, at the lowest of the net carrying value and the fair value net of selling costs, includes the production sites of Cassano Magnago and Pedimonte, which are no longer in operation and are part of a sale plan which will be implemented in 2006. The value of assets held for sale as of December 31, 2004, related to the disposal of the “Manifattura Goriziana” business, which took place in the first half of 2005.
(thousands of euro) 12.31.2004 Increases Decreases 12.31.2005 Government Bonds (BTP) matured in 2005 at interest rates from 2.75% to 4% 32,525 14,200 (46,725) - Treasury Certificates (CCT) maturing between 2008 and 2011 at interest rates from 2.3% to 2.4% 20,590 5,838 (26,428) - Ordinary Government Bonds (BOT) matured in 2005 at interest rates from 2.063% to 2.098% 29,665 19,863 (49,528) - Zero Coupon Treasury Certificates (CTZ) matured in July 2005 at interest rates from 2.064% to 2.068% 29,803 9,975 (39,778) - Amex European Short Term Euro 841 630 (1,471) - Sinopia Alternactiv Eur 619 - (619) - Generali Am-Eu Sty-cd cap 562 - (562) - Vontobel Euro Bond A2 576 - (576) - Morgan Fund-Short Maturity Euro 1,410 - (1,410) - SCH Euro Short Term A Euro 1,581 - (1,581) - Total 118,172 50,506 (168,678) -
(thousands of euro) 12.31.2005 12.31.2004 Current account deposits (euro) 25,789 31,726 Current account deposits (foreign currency) 31,334 26,773 Time deposits (euro) 78,887 141,522 Time deposits (foreign currency) 160 154 Checks 59,601 59,594 Cash in hand 556 427 Total 196,327 260,196
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Comments on the principal items in shareholders’ equity and liabilities
Shareholders’ equity
Shareholders’ equity attributable to the Parent CompanyThe Shareholders’ Meeting of Benetton Group S.p.A. voted on May 16, 2005 to pay a dividend of 0.34 euro per share, totaling 62 million euro and paid on May 26, 2005.Changes in shareholders’ equity during the period are detailed in the statements of changes contained in the “Consolidated financial statements” section.
(32) Share capitalThe share capital of Benetton Group S.p.A. as of December 31, 2005 amounts to 236,026,454.30 euro and consists of 181,558,811 shares with a par value of 1.30 euro each.
(33) Additional paid-in capitalThis item is unchanged from December 31, 2004.
(34) Fair value and hedging reserveThis item includes the changes in fair value of available for sale financial assets and the variation of the effective hedging component of financial instruments measured at fair value.
(35) Other reserves and retained earnings:
Other reserves. This item, which as of December 31, 2005, amounts to 857,314 thousand euro (803,500 thousand euro as of December 31, 2004), includes:- 47,210 thousand euro relating to the statutory reserve of the Parent Company;- 21,452 thousand euro relating to monetary revaluation reserves in compliance with
Italian Law no. 72 of March 19, 1983, and Law no. 413 of December 30, 1991, and, with respect to a Spanish subsidiary, with Italian Royal Decree no. 2607/96;
- 528,424 thousand euro relating to other reserves of the Parent Company (551,000 thousand euro as of December 31, 2004);
- 250,042 thousand euro representing the shareholders’ equity of consolidated companies in excess of their carrying value, together with other consolidation adjustments;
- 2,924 thousand euro of the portion of remuneration based on shares valued at fair value on the grant date, recognized on a line-by-line basis on the income statement as a contra-entry to this reserve;
- 7,262 thousand euro relating to the translation foreign-currency reserve.
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The first of the schedules below is a reconciliation of the shareholders’ equity and net income of the separate financial statements of Benetton Group S.p.A. with the consolidated shareholders’ equity; the second lists the shareholders’ equity percentage of consolidated subsidiaries attributable to minority shareholders.
Reconciliation of the shareholders’ equity and net income of Benetton Group S.p.A. with the corresponding consolidated amounts
(36) Minority interestsAs of December 31, 2005 and 2004, the following consolidated companies had proportions of shareholders’ equity attributable to minority shareholders:
12.31.2005 Shareholders’ Net income/ (thousands of euro) equity (loss) As shown on Benetton Group S.p.A. separate financial statements prepared in accordance to Italian accounting principles 944,667 58,267 Net income and shareholders’ equity of consolidated subsidiaries attributable to the Group, net of their carrying value of the related investments 838,218 129,528 Elimination of intragroup gains on transfer of assets, net of deferred tax assets (544,988) 7,000 Reversal of investments in the Parent Company 13,951 15,153 Reversal of dividends received from consolidated subsidiaries - (99,999) Deferred taxes on profits/reserves distributable by subsidiaries (5,629) 2,328 Purchase price allocation to assets 22,351 (2,043) Effect of the elimination of intercompany profits/losses on the transfer of property, plant and equipment, net of the related tax effect (185) 3,577 Effect of applying finance lease accounting to lease financing transactions, net of the related tax effect 9,725 1,611 Elimination of intercompany profits included in the inventories of consolidated companies, net of the related tax effect (15,566) (2,946) Adjustment to reflect the equity value of associated companies (61) (67) Net effect of other consolidation entries (573) (536) Consolidated financial statements 1,261,910 111,873
(in %) 12.31.2005 12.31.2004 Foreign consolidated companies: - New Ben GmbH (Germany) 49 49 - Benetton Korea Inc. (Korea) 50 50 - Benetton Giyim Sanayi A.S. (Turkey) 50 -
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Liabilities Non-current liabilities
(37) Medium/long-term loansMedium and long-term loans from banks and other lending institutions outstanding as of December 31, 2005, were as follows (net of deferred financial charges related to the loans):
Part of medium/long-term loans, in the amount of 744 thousand euro, is secured by mortgages on property, plant and equipment.
The maturity of non-current loans is as follows:
(thousands of euro) 12.31.2005 12.31.2004 Syndicated loan of 500 million euro at variable rate, maturing in 2007, granted by a pool of banks and consisting of a revolving credit line for the first two years and a loan for the subsequent five years repayable on maturity; the interest rate at the balance sheet date was 2.434% (1) 499,775 499,632 Loan granted by Medio Credito del Friuli repayable in half-yearly installments, up to January 1, 2007, at an annual interest rate of 2.5%, secured by mortgages on real estate 239 708 Loan from Ministry of Industry, Italian Law no. 46/1982 356 419 Medium/long-term financial payables to non-consolidated companies at the interest rate of 2.114% 2,742 2,684 Other loans 51 51 Total 503,163 503,494(1) This loan is subject to compliance with two financial covenants, calculated every six months and based on the consolidated financial statements: - ratio of EBITDA (earnings before interest, taxes, depreciation and amortization) to net finance costs of at least 2.5 times; - ratio of net financial position to shareholders’ equity of at least 1. There are also limits on large disposals of assets and on the granting of collateral for new loans.
Year 12.31.2005 2007 502,873 2008 68 2009 71 2010 74 2011 and beyond 77 Total 503,163
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(38) Other medium/long-term liabilities
The item “Other liabilities due to parent company” includes liabilities due to Edizione Holding S.p.A. related to current taxes calculated on the positive taxable results, as provided by the rules for companies participating in consolidated taxation. These liabilities will be due in 2007. “Other liabilities due to third parties” consists mainly of long-term guarantee deposits pertaining to lease contracts entered into by the Japanese subsidiary.
(39) Lease financing This balance shows outstanding lease financing as of December 31, 2005. The short-term portion of lease financing is posted to the current liabilities section of the balance sheet.
The reconciliation between the minimum lease payments due to the leasing company and their present value (principal) is as follows:
The Group has purchased property and machinery using lease financing. The average length of lease contracts is of approximately eight years. The interest rates defined at the date of signing of the contract are indexed to the 3-month Euribor rate. All leasing contracts are repayable through a regular installment plan, and at the time being, no restructuring of the original plan is anticipated. All contracts are denominated in the reporting currency (euro). The fair value of financial leases the Group has entered into approximates the carrying amount. Finance lease is guaranteed to the lessor by virtue of rights on the leased assets.
(thousands of euro) 12.31.2005 12.31.2004 Non-current liabilities for the purchase of assets 1,085 19,191 Other liabilities due to parent company 20,772 18,664 Other liabilities due to third parties 2,295 804 Total 24,152 38,659
Minimum lease payments Principal portion Year 12.31.2005 12.31.2004 12.31.2005 12.31.2004 Within 1 year 5,968 6,940 5,390 6,007 From 1 to 5 years 10,589 18,627 9,984 17,522 Beyond 5 years 114 455 112 226 Total 16,671 26,022 15,486 23,755
(thousands of euro) 12.31.2005 12.31.2004 Minimum lease payments 16,671 26,022 (Outstanding financial expenses) (1,185) (2,267) Present value of lease financing 15,486 23,755
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(40) Retirements benefit obligationsThis item includes provisions for defined benefits for the Group’s employees, including termination indemnities for Italian companies (“TFR”) of 47,466 thousand euro. The movement in the liability recognized in the balance sheet is as follows:
The assumptions regarding their valuation method are described in the “Supplementary information” section.
(41) Other provisions and medium/long-term liabilities
This item relates to the liabilities and probable risks for which the Group does not envisage a resolution by the end of 2006. Since it operates in a number of sectors on a global scale, the Benetton Group is inherently exposed to legal risks. Currently, the areas where exposure is greater relate to claims filed by former commercial partners, former employees, subcontractors, and third parties with industrial property rights in potential conflict with the products distributed by the Benetton Group or with similar rights to those of the Group. There are also certain outstanding tax claims in Italy and France.At the end of 2005, the Group found it prudent to allocate funds to the legal and tax risks provision. In 2005, 1,267 thousand euro of the provision was utilized, and 2,970 thousand euro was added following claims filed during the year. In addition, 1,069 thousand euro set aside in previous years for disputes which had a positive outcome for the Group was released during the year.The provision for sales agents indemnities, which reflects the risk linked to the possible termination of an agency agreement as established by law, was utilized in the amount of 465 thousand euro and increased in the amount of 3,543 thousand euro during the period.The reserve for other provisions relates to charges that the Group will likely have to incur into in order to close a number of directly operated stores. In 2005, the provision increased by 4,702 thousand euro, with utilizations of 2,333 thousand euro. As already discussed in the “Other operating income and revenues” note to the income statement,
(thousands of euro) Balance at 01.01.2005 47,307 Expense charges in the income statement 9,460 Indemnities paid during the financial year (7,119) Exchange differences and other changes 119 Balance at 12.31.2005 49,767
Provision for legal and Sales agents Other (thousands of euro) fiscal risks indemnities provisions Total Balance at 01.01.2005 9,160 14,298 27,532 50,990 Provisions 2,970 3,543 4,702 11,215 Releases (1,069) (67) (12,816) (13,952) Utilizations and other changes (1,463) (465) (4,722) (6,650) Balance at 12.31.2005 9,598 17,309 14,696 41,603
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during the financial year, 12,816 thousand euro was released, which related to provisions made in previous years for the closure of stores which were still operational in 2005, thus making the relevant provision unnecessary.
Current liabilities
(42) Trade payablesThis item represents the Group’s liabilities for the purchase of goods and services as of December 31, 2005.
(43) Other payables, accrued expenses and deferred income
Payables to employees refer to amounts accrued and not settled as of December 31, 2005. The item “Other payables to third parties” refers to non-trade payables. Payables for the purchase of assets include 19,191 thousand euro for the short-term portion of a Spanish subsidiary’s liabilities and 11,287 thousand euro for an Italian subsidiary’s payables for the purchase of assets.Other payables due to the parent company Edizione Holding S.p.A. refer to the payables resulting from the inclusion in the consolidated taxation in 2004.Payables to social security refer to payables matured for social security authorities with respect to Group and employee contributions.
(thousands of euro) 12.31.2005 12.31.2004 Other payables: - other payables to employees 17,830 18,065 - other payables to third parties 12,016 15,610 - other payables for the purchase of assets 41,329 14,795 - VAT 5,455 11,361 - other payables to the parent company 16,694 - - payables due to social security 7,626 9,210 - other payables due to the tax authority 5,697 5,777 Total other payables 106,647 74,818 Accrued liabilities: - other liabilities 1,205 1,848 - rental costs 947 4,859 - consultancies and fees 71 147 Total accrued liabilities 2,223 6,854 Deferred income: - rental income 2,927 984 - revenue from the concession of rights 737 838 - other revenue 128 620 Total deferred income 3,792 2,442 Total 112,662 84,114
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(44) Current income tax liabilities The tax liabilities represent the Group’s payables for current taxes and are recorded net of any advances, tax credits, and withholdings.
(45) Other current provisions and liabilitiesThis balance shows the provisions made by the Group for legal and tax claims or contingent liabilities which may be resolved or finalized in the next year.
Other changes represent, in their entirety, the reclassification of provisions recorded in previous years. The provision for legal and tax risks refers mainly to provisions for legal disputes relating to contingent liabilities which will be settled within one year. The reserve for other provisions includes the charges that the Group will incur for the closure of a number of stores in 2006 and the restructuring charges that an Italian subsidiary will have to pay following the decision to close the Cassano Magnago factory at the end of 2005.
(46) Current portion of lease financingThis item contains the portion of lease financing which is due within the financial year. The reconciliation between the present value of the liability and the minimum lease payments is described in the note related to the non-current portion of the liability.
Provision for legal and Other (thousands of euro) tax risks provisions Total Balance at 01.01.2005 - - - Additions 1,306 7,259 8,565 Releases - - - Other changes 836 2,429 3,265 Balance at 12.31.2005 2,142 9,688 11,830
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(47) Current portion of medium/long-term loans
(48) Current portion of bonds. The bond issued by Benetton Group S.p.A. in July 2002 for a total value of 300,000 thousand euro was repaid on July 26, 2005.
(49) Financial payables
Short-term financial payables due to other lenders refer to the short-term portion of third-party loans.Differentials on forward exchange contracts include the intrinsic value component of derivative instruments as of December 31, 2005, of which: 2,301 thousand euro for economic risk hedging transactions, 1,484 thousand euro for transaction exchange risk hedging transactions, 686 thousand euro for translation exchange risk hedging transactions. Other financial receivables include the time value component of derivative instruments as of December 31, 2005 of which: 1,078 thousand euro for economic risk hedging transactions, 1,646 thousand euro for transaction exchange risk hedging transactions, 567 thousand euro for translation exchange risk hedging transactions, and 1,818 thousand euro for interest rate risk hedging transactions. Other current financial liabilities include interests accrued on loans.
(50) Bank loans and overdrafts
(thousands of euro) 12.31.2005 12.31.2004 Loan granted by CARI (Gorizia) on April 20, 2001, repaid in 2005 at an annual rate of 4% - 202 Loan from Efibanca (Ente Finanziario Interbancario S.p.A.) at an annual rate of 2.8% repaid in half-yearly installments through 2005 - 355 Loan granted by Medio Credito del Friuli repayable in half-yearly installments until January 1, 2007, at an annual rate of 2.5%, secured by mortgages on real estate 470 459 Loan from Ministry of Industry, Italian Law no. 46/1982 63 60 Other foreign-currency loans obtained by consolidated foreign companies, partly secured by mortgages on property 121 26 Total 654 1,102
(thousands of euro) 12.31.2005 12.31.2004 Financial payables due to other lenders 4,570 1,885 Commercial paper - 1,700 Finance bill 1,161 - Negative differentials on forward exchange contracts 4,471 2,217 Other short-term financial liabilities 9,385 15,245 Total 19,587 21,047
(thousands of euro) 12.31.2005 12.31.2004 Current account overdrafts 12,641 8,238 Advances on receivables and other short-term loans 16,263 11,686 Total 28,904 19,924
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Supplementary information
Reconciliation of income statement by nature of expense and by function
(millions of euro) A B C D E F G Income statement Income statement by nature of cost by function
Revenues 1,765 1,765 Revenues Other revenues and operating income A 76 (76) - Change in inventories Consumption of of finished products materials and and work in progress 41 (546) (341) (846) subcontracted work Wages, salaries (85) (85) and related costs Purchases of raw materials and Operating consumables B (560) 560 (21) (21) depreciation (7) (35) (1) (43) Other manufact. costs Gross contribution 770 margin Payroll and related costs C (221) 221 - Depreciation & amortization D (85) 85 - Distribution and (56) (56) transport (70) (1) (71) Sales commissions Contribution 643 margin Payroll and related Other operating costs: (135) (135) costs Advertising and - services E (631) 1 (1) (1) 572 (1) (61) promotion (64) (64) Deprec. & amort. - leases F (104) 104 - Other income - impairment of assets (50) 75 (6) (70) (102) (73) (226) and expenses - write-down of receivables G (17) 17 - - provisions for risks G (20) 20 - - other operating costs G (37) 37 - Operating income 157 - - - - - - - 157 Operating incomeNotes: A Reclassif ication of rental income, gains on disposals of property, plant and equipment and intangible assets and the release of provisions in the “Other income and expenses” item. B Reclassif ication of the purchase of raw materials and finished goods, of the change in inventories of finished products and work in progress in the “Consumption of materials, subcontracted work” and the “Other industrial costs“ items. C+D Reclassif ication of payroll and related costs and of the depreciation of the cost of sales for the operations side and of general expenses for the overhead portion. E Reclassif ication of operating costs for services as: - subcontract work for 341 million euro; - other industrial costs for 35 million euro; - distribution and transport for 56 million euro; - sales commissions for 70 million euro; - other operating costs for 70 million euro. F Costs for leases, essentially rental costs, reclassif ied in other income and expenses. G Reclassif ication of write-downs of receivables, provisions for risks and other operating costs in the “Other income and expenses” item.
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Segment information
Information by business segment
Financials by business segment - 2005
Other non-monetary costs consist of the net impairment for property, plant and equipment and intangible assets following impairment testing in 2005, as well as of stock option expenses in the amount of 2,202 thousand euro allocated to the apparel sector.
Other and (millions of euro) Apparel Textile unallocated Eliminations Consolidated Revenues from third parties 1,629 100 36 - 1,765 Inter-segment revenues 2 170 - (172) - Total revenues 1,631 270 36 (172) 1,765 Other operating income and revenues 73 3 - - 76 Purchases and change in inventories 517 132 28 (158) 519 Payroll and related costs 165 54 2 - 221 Depreciation and amortization 66 18 1 - 85 Other operating costs 796 71 5 (13) 859 Operating profit 160 (2) - (1) 157 Share of income of associated companies - Net financial expenses and exchange differences (23) Income before taxes 134 Income taxes 20 Net income for the year attributable to the Parent Company and minority interests - - - - 114 Depreciation and amortization 66 18 1 - 85 Non-monetary costs 41 2 - - 43 Earnings before interest, taxes, depreciation, amortization and other non-monetary costs 267 18 1 (1) 285 Total revenues 2,235 198 22 (48) 2,407 Total liabilities 1,036 134 10 (48) 1,132 Capital employed 1,511 106 9 - 1,626 Total gross operating investments 114 10 - - 124
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Financials by business segment - 2004
Other non-monetary costs consist of the net impairment for property, plant and equipment and intangible assets following impairment testing in 2004, as well as of stock option expenses in the amount of 722 thousand euro allocated to the apparel sector.
Other and (millions of euro) Apparel Textile unallocated Eliminations Consolidated Revenues from third parties 1,568 106 30 - 1,704 Inter-segment revenues - 194 - (194) - Total revenues 1,568 300 30 (194) 1,704 Other operating income and revenues 84 7 - - 91 Purchases and change in inventories 458 141 13 (182) 430 Payroll and related costs 154 58 2 - 214 Depreciation and amortization 76 18 1 - 95 Other operating costs 814 82 14 (12) 898 Operating profit 150 8 - - 158 Net financial expenses and exchange differences (22) Income before taxes 136 Income taxes 28 Net income for the year attributable to the Parent Company and minority interests - - - - 108 Depreciation and amortization 76 18 1 95 Non-monetary costs 59 - - 59 Earnings before interest, taxes, depreciation, amortization and other non-monetary costs 285 26 1 312 Total revenues 2,453 266 21 (139) 2,601 Total liabilities 1,323 198 6 (139) 1,388 Capital employed 1,567 76 11 - 1,654 Total gross operating investments 138 14 - - 152
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Apparel segment results
Textile segment results
Other and unallocated segment results
Employees by business segment are as follows:
(millions of euro) 2005 % 2004 % Change % Revenues from third parties 1,629 1,568 61 Inter-segment revenues 2 - 2 Total revenues 1,631 100.0 1,568 100.0 63 4.1 Other operating income and revenues 73 4.5 84 5.4 (10) (12.3) Purchases and change in inventories 517 31.7 458 29.2 59 13.0 Payroll and related costs 165 10.1 154 9.8 11 7.5 Depreciation and amortization 66 4.1 76 4.9 (10) (13.6) Other operating costs 796 48.8 814 52.0 (17) (2.2) Operating profit 160 9.8 150 9.5 10 7.2
(millions of euro) 2005 % 2004 % Change % Revenues from third parties 100 106 (6) Inter-segment revenues 170 194 (24) Total revenues 270 100.0 300 100.0 (30) (10.2) Other operating income and revenues 3 1.0 7 2.2 (4) (59.5) Purchases and change in inventories 132 49.1 141 47.1 (9) (6.5) Payroll and related costs 54 19.9 58 19.4 (4) (8.1) Depreciation and amortization 18 6.6 18 5.7 - 3.2 Other operating costs 71 26.1 82 27.3 (11) (13.8) Operating profit (2) (0.7) 8 2.7 (10) n.s.
(millions of euro) 2005 % 2004 % Change % Revenues from third parties 36 30 6 Inter-segment revenues - - - Total revenues 36 100.0 30 100.0 6 22.0 Other operating income and revenues - - - 0.9 - n.s. Purchases and change in inventories 28 77.0 13 43.8 15 n.s. Payroll and related costs 2 6.0 2 6.7 - 9.5 Depreciation and amortization 1 2.4 1 3.0 - (3.2) Other operating costs 5 13.9 14 46.3 (9) (63.4) Operating profit - 0.7 - 1.1 - (21.4)
Period 12.31.2005 12.31.2004 average Apparel 6,271 5,441 5,856 Textile 1,486 1,750 1,618 Other and unallocated 221 233 227 Total 7,978 7,424 7,701
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Revenues by geographic area
Revenues by geographic area and business segment
Revenues are allocated based on the geographic area in which the customers are located.
Other balance sheet data by geographic area for 2005
Total assets are allocated based on the geographic area where the legal entity is located.
Other balance sheet data by geographic area for 2004
Total assets are allocated based on the geographic area where the legal entity is located.
Business combinations. In May 2005, the Group, through Benetton International S.A., a Luxembourg sub-holding company, acquired from third parties 50% of the shares and voting rights in a Turkish company named Benetton Giyim Sanayi A.S. The accounting method used was the “purchase method”.
Rest of The Rest of the (millions of euro) Italy % Europe % Americas % Asia % world % Total Apparel 757 89.1 597 94.7 73 99.4 199 95.8 3 77.7 1,629 Textile 62 7.3 35 5.3 - 0.6 2 1.2 1 22.3 100 Other and unallocated 30 3.6 - - - - 6 3.0 - - 36 Total revenues (year 2005) 849 100.0 632 100.0 73 100.0 207 100.0 4 100.0 1,765 Total revenues (year 2004) 854 596 72 176 6 1,704 Change (5) 36 1 31 (2) 61
Rest of The Rest of (thousands of euro) Italy Europe Americas Asia the world Total Total assets 1,632,147 537,515 50,621 159,538 27,176 2,406,997 Gross operating investments 86,541 22,223 3,559 8,508 2,944 123,775
Rest of The Rest of (thousands of euro) Italy Europe Americas Asia the world Total Total assets 1,835,923 538,705 49,882 152,005 24,778 2,601,293 Gross operating investments 49,005 90,722 162 5,522 6,567 151,978
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The assets acquired and goodwill were as follows:
The fair value of intangible assets refers specifically to the “Deferred charges” category and relates to the fair value of the expenses for fifteen lease contracts for stores with rental charges lower than current market value. An industry-specific appraisal determined, for each contract, the differential between the monthly rental charge paid as per contractual agreements and the potential market value price. This differential was subsequently recorded based on the duration of each contract.The goodwill is attributable to Benetton Giyim Sanayi A.S. production and know-how, which cannot be separately recognized as an intangible asset.Highlights of the company’s income statement at the acquisition date and of the main balance sheet data as of December 31, 2005, are as follows:
Immediately prior to acquisition by Benetton Giyim Sanayi A.S. benefited from the transfer of a business unit from another company of the Boyner Group, BBA Beymen Bogazici Alboy Magazacilik Tekstil Sanay ve Ticaret A.S. This company used to manage activities other than those related to Benetton, and as a result it is impossible to reconstruct a balance sheet relating exclusively to Benetton business for the entire 2005 financial year.
In July 2005, an amount of 7,500 thousand euro was paid for residual liabilities linked to the purchase of the residual 15% interest in Olimpias S.p.A., the first installment of which was paid during 2004. Also in 2005, the Group acquired minority interests for a total amount of approximately 240 thousand euro.
Acquiree’s Fair value (thousands of euro) carrying amount adjustments Fair value Property, plant and equipment 2,536 - 2,536 Intangible assets 155 2,356 2,511 Financial assets 2 - 2 Receivables 6,583 - 6,583 Inventories 3,153 - 3,153 Payables 106 - 106 Net debt 12,323 - 12,323 Total net equity - 2,356 2,356 Share purchased by the Group (50%) 1,178 Goodwill 5,472 Purchase cost 6,650
(thousands of euro) Revenues 17,336 Contribution margin 5,975 Net income for the year 1,414 Working capital 12,193 Capital employed 14,569 Net financial position 8,926 Shareholders’ equity 5,643
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In 2004, the acquisition of subsidiary of 14,107 thousand euro related to:- the payment of the first installment of 7,520 thousand euro for Olimpias S.p.A.;- the acquisition by New Ben GmbH, at a purchase price of 4,066 thousand euro, of 100% of
the share capital of Mari Textilhandels GmbH, which subsequently merged into New Ben GmbH;
- purchase of the residual 50% interest of DCM Benetton India Ltd. for 2,521 thousand euro. Retirements benefit obligations. The amounts recognized on the income statement on the basis of “corridor approach”, with respect to defined benefit plans, are as follows:
The total amount of expenses for defined benefit plans appears in the item “Payroll and related costs”.
The principal actuarial assumptions used were as follows:
Derivative financial instruments. As of December 31, 2005, the notional principal amount of outstanding derivative instruments was as follows:
The notional amounts represent the absolute value sum of all transactions valued at the relevant forward exchange rate.Fair value was calculated by discounting and translating future cash flows using market rates as of the balance sheet date (in particular, interest and exchange rates).
(thousands of euro) 12.31.2005 12.31.2004 Current service cost 7,414 6,137 Interest costs 2,046 2,044 Net actuarial (gains)/losses - - Cost relating to past work/services - - Total 9,460 8,181
12.31.2005 12.31.2004 Discount rate 4.0% 4.5% Rate of inflation 2.0% 2.0% Expected salary increase rate 5%-3.5% 5%-3.5%
(thousands of euro) Notional amounts Fair value Positive Negative Net Economic exchange risk 187,709 736 (1,622) (886) - fair value hedge 121,677 231 (1,325) (1,094) - cash flow hedge 29,403 270 (277) (7) - cash flow hedge - option 36,629 235 (20) 215 Translation exchange risk 115,897 82 (901) (819) - fair value hedge 5,669 48 - 48 - cash flow hedge 110,228 34 (901) (867) Transaction exchange risk - fair value hedge 512,355 1,750 (1,669) 81
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Exchange rate risk is managed with currency forwards, swaps, and options (zero cost collars - shown separately).As of December 2005, interest rate swaps for a notional principal amount of 57 million euro with maturities of 2006-2008 were in place.
Stock options plan. The “Supplementary information” section of the Directors’ report details the stock options plan approved by the Group’s shareholders meeting in September 2004. The estimated fair value of each share option granted by the plan is of 1.874 euro (weighted average price). The fair value was calculated using the Black-Scholes option price valuation method. The data considered for modeling purposes was as follows:
Further details on the stock options plan are given below:
As of December 31, 2005, the weighted average residual life of outstanding stock options was 7.7 years. The cost recorded on the income statement for the 2005 financial year was 2,202 thousand euro (722 thousand euro in 2004).
Year 2005 Year 2004 Weighted Weighted average average exercise exercise No. options price No. options price At the beginning of the year 3,233,577 8.984 - - Granted - - 3,233,577 8.984 Annulled - - - - Exercised - - - - Circulating at year end 3,233,577 8.984 3,233,577 8.984 Exercisable at year end - - - -
Vesting period 2 years 4 years Total Number of options granted 1,616,788.5 1,616,788.5 3,233,577 Grant date 09.09.2004 09.09.2004 First exercise date 09.09.2006 09.09.2008 Expiring date 09.09.2013 09.09.2013 Average exercise date (estimated as mid-point between first exercise and expiring dates) 03.10.2010 03.11.2011 Dividend yield 4.16% 4.16% Expected volatility (historic at 260 days) 27.60% 27.60% Risk-free interest rate 3.493% 3.671% Option life (years) 9 9 Expected average life (years) 5.5 6.5 Unit fair value in euro (Black-Scholes) 1.831042 1.916344 1.873693 Total fair value in thousands of euro 2,960,408 2,850,457 5,810,865
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Impairment test procedure. As required by IAS 36, the Group has made sure to:- verify the existence of possible losses of value of property, plant and equipment and of
intangible assets of finite useful life;- compare the realizable value and the carrying value of intangible assets of indefinite
useful life and of intangible assets not yet available for use. This occurs independently from any intervening factors which may indicate the loss of carrying value as recognized on the financial statements.
The results of the impairment test carried out in 2005 are summarized in the table below, broken down by business segment, which shows the impairment recorded during the financial year and included among “Impairment of assets” on the income statement.
The main impairment identified during the 2005 financial year following impairment testing are as follows:- commercial assets (i.e. assets linked to stores), for a total impairment of 30,446 thousand
euro. These assets include furniture and fittings, deferred commercial expenses (so-called “key money”), leasehold improvements, and “fonds de commerce”. With the exception of the latter, which are subject to external appraisal, all assets were recognized at their value in use, estimated on the basis of future cash flow projections. The pre-tax discount rate used was 7.2%;
- goodwill and trademarks: the goodwill relating to the purchase of Killer Loop was fully impaired for a total of 2,168 thousand euro, whereas brand was impaired by 4,169 thousand euro. The discount rate applied to determine the value in use was 7.2%;
- industrial assets: for Olimpias S.p.A., assets pertaining to Cassano Magnago factory, which is no longer operational, were impaired for a total of 2,009 thousand euro. The valuation was carried out by estimating the assets’ market value;
- land and buildings: Villa Spineda-Gasparini-Loredan, no longer utilized for operational purposes since December 2004, was impaired by 7,119 thousand euro following a valuation based on cash-flow projections of potential rental revenue;
- software and IT licenses: a number of decisions regarding the Group’s IT strategy made in 2005 resulted in the obsolescence of intangible assets linked to information systems which had not yet been fully amortized. The impairment for these assets amounts to 2,344 thousand euro.
Other (thousands of euro) Apparel Textile and unallocated Total Property, plant and equipment: - land and buildings 8,782 - - 8,782 - plant, machinery and equipment 1 2,009 - 2,010 - furniture, furnishings and electronic devices 6,901 - - 6,901 - leasehold improvements 11,705 - - 11,705 Total property, plant and equipment 27,389 2,009 - 29,398 Intangible assets: - goodwill and other intangible assets of indefinite useful life 2,551 - - 2,551 - intangible assets of finite useful life 18,391 - - 18,391 Total intangible assets 20,942 - - 20,942 Total 48,331 2,009 - 50,340
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Earnings. The assumptions made to determine basic and diluted earnings per share are as follows:
Relations with 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 its subsidiaries, and with other parties which, directly or indirectly, are linked by common interest with this 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 have applied consolidated taxation pursuant to Article 117 et seq. of the Consolidated Tax Act (DPR 917/86), based on a proposal by the consolidating parent Edizione Holding S.p.A., which opted for this type of tax treatment on December 30, 2004. This method is to last for three years begining with the 2004 financial year. The relationships arising from participation in this consolidated taxation are governed by specific rules, which have been approved and signed by all participating companies. Below is a detail of the related information:
The Group has also undertaken a number of transactions with companies directly or indirectly controlled by or otherwise under the influence of senior managers serving within the Group. The management of Benetton Group S.p.A. (the “Parent Company”) feels that such transactions were completed at going market rates. The total value of such transactions was not, in any event, significant in relation to the total value of the Group’s production. No director, manager, or shareholder is a debtor of the Group.
12.31.2005 12.31.2004 Earnings used to calculate basic earnings per share (*) 111,873 108,795 Effect of dilutive potential ordinary shares (*) - - Earnings used to calculate diluted earning per share (*) 111,873 108,795 Weighted average number of ordinary shares used to calculate diluted earnings per share 181,558,811 181,558,811 Effect of dilutive potential ordinary shares: stock options plan - 23,217 Weighted average number of ordinary shares used to calculate basic earnings per share 181,558,811 181,582,028(*) In thousands of euro.
(thousands of euro) 12.31.2005 12.31.2004 Receivables 40,959 32,864 - including for participation in the Edizione Holding S.p.A. tax consolidation 39,567 32,283 Payables 39,110 19,825 - including for participation in the Edizione Holding S.p.A. tax consolidation 37,466 18,664 Purchase of raw materials 1,773 2,982 Purchase of assets 2,800 - Other costs and services 14,832 13,229 Sales of products - 17 Revenue from services and other income 641 937
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Key senior management. Senior management positions within the Group are as follows:
In March 2006, Fabrizio De Nardis left the Benetton Group by mutual agreement. Compensations (net of that for the CEO, as Director) are shown in the table below:
Research. Research costs incurred by the Group in 2005 for the development of new collections have been fully recognized on the income statement for a total of 21 million euro.
Operating lease contracts. As of the balance sheet date, the amount of rental costs still payable by the Group for lease contracts which cannot be terminated is as follows:
As of the balance sheet date, the amount of rental income payable to the Group for lease contracts which cannot be terminated is as follows:
Function Silvano Cassano Chief Executive Officer Biagio Chiarolanza Chief Operations Officer Fabrizio De Nardis Commercial Director Pier Francesco Facchini Chief Financial Officer Andrea Negrin Human Resources Director Adolfo Pastorelli Chief Information Technology Officer
(thousands of euro) 2005 2004 Short-term benefits 2,032 1,690 Deferred compensation - - Other long-term benefits - - Severance indemnity - - Stock-based compensation 2,202 722 Total 4,234 2,412
(thousands of euro) 12.31.2005 Less than one year 95,288 From 1 to 5 years 316,087 Beyond 5 years 283,309 Total 694,684
(thousands of euro) 12.31.2005 Less than one year 39,081 From 1 to 5 years 82,118 Beyond 5 years 29,299 Total 150,498
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Significant events after December 31, 2005. In line with its commercial expansion strategy in eastern Europe, Benetton Real Estate International S.A. formalized the purchase of the entire shareholding of Real Estate Russia Z.A.O. in order to execute an investment in real estate in St. Petersburg (Russia).
Guarantees, commitments, and other contingent liabilities
Other Group commitments and rights
Benetton Giyim Sanayi A.S. (Turkey)In May 2005, Benetton International S.A. purchased a 50% interest in Benetton Giyim Sanayi A.S. (Turkey).The shareholders’ agreements establish that, in the event of strategic “deadlock” in company management or breach of contract, Benetton should be granted a call option on the remaining 50% of the shares. Conversely, the other shareholder, Boyner Holding A.S., would be granted a “put option” on its 50% share.The option’s exercise price is calculated as follows:- in the event of deadlock, should Benetton wish to exercise its call option, then it would
have to pay a price equal to the fair value of the shares plus a 20% premium. Conversely, should Boyner Holding A.S. wish to exercise its put option, the price collectable would be equal to the fair value of the shares minus 20%;
- in the event of breach of contract, a 30% penalty over the fair value of the shares is payable by the party responsible for the breach.
It is to be noted that, at present, the possibility of these rights being exercised is deemed to be unlikely.
Benetton Korea Inc.Benetton Korea Inc. is a Korean company which is 50%-owned by Benetton Japan Co. Ltd. (a company indirectly wholly-owned by Benetton Group S.p.A.), 25%-owned by Mr. Chang Sue Kim (an individual investor), and 25%-owned by F&F Co., Ltd. (a Korean company).The shareholders’ agreements include a call option in favor of Benetton over the shareholdings held by the Korean partners. This option can be exercised at any time, given that the proposed price formula considers the shareholders’ equity at the exercise date of the option, as well as a perpetuity calculated on the basis of the average net profit over the previous two years.It is to be noted that, at present, the possibility of this option being exercised is deemed to be unlikely.
(thousands of euro) 12.31.2005 Guarantees granted Guarantees 122,953 Commitments Purchase commitments 11,768 Other Currency to be sold forward 522,735 Currency to be purchased forward 293,226 Notes presented for discount - Total 950,682
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Contingent liabilities. With respect to other contingent liabilities linked to pending disputes for an estimated amount of approximately 24 million euro, the Group has not deemed it to be necessary to make related provisions because it believes that the possibility of an outlay is very remote. It is, however, prudent to highlight a dispute generated by a letter of intent signed by Benetton Group S.p.A. and an Argentinean company in 1985 in order to formalize a licensing agreement which was not subsequently converted into a contract. The dispute includes two claims: one in Italy, which was resolved in 1996 with a judgment in Benetton’s favor (which became final the following year), and one in Argentina, which was resolved in 2001 with a judgment against Benetton and damages awarded in the amount of 2.2 million euro. Based on the 1987 Italo-Argentinean agreement of mutual assistance and recognition and execution of sentences related to civil matters, the judgments delivered by Argentinean courts cannot be recognized in Italy if they go against another judgment issued by Italian courts for a dispute on the same issue between the same two parties. This rule was subsequently confirmed by Italian Law no. 218/95, which regulates Italian private international law, establishing that foreign judgments are recognized in Italy only if, among other things, they do not contradict another judgment delivered by an Italian court which has passed in rem judicatem. Therefore, in 2002, the company requested the Venice Court of Appeal, which has jurisdiction over this matter, to issue a declaration of non-enforceability of the Argentinean judgment in Italy. Although the opposing party petitioned for an opposing claim and belatedly appealed against the Italian judgment in 2003, the risk of losing the case is deemed to be remote.
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Auditors’ report in accordance with Article 156 of Law Decree no. 58 dated February 24, 1998
To the Shareholders of Benetton Group S.p.A.
1. We have audited the consolidated financial statements, which comprise the balance sheet, income statement, cash flow statement, statement of changes in shareholders’ equity and the related notes of Benetton Group S.p.A. and its subsidiaries (together “Gruppo Benetton”) as of December 31, 2005. These consolidated financial statements are the responsibility of the Directors of Benetton Group S.p.A. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The aforementioned consolidated financial statements have been prepared for the first time in accordance with the International Financial Reporting Standards (“IFRS”) as adopted by the European Union.
2. We conducted our audit in accordance with the auditing standards and criteria recommended by CONSOB. In accordance with those standards and criteria, the audit has been planned and performed to obtain the necessary assurance about whether the consolidated financial statements are free of material misstatement and, taken as a whole, are reliable. An audit includes examining, on a sample basis, evidence supporting the amounts and disclosures in the financial statements, as well as assessing the appropriateness of the accounting principles used and the reasonableness of the estimates made by the Directors. We believe that our audit provides a reasonable basis for our opinion.
The consolidated financial statements present the prior year corresponding figures prepared in accordance with the same accounting principles. Furthermore, the note ”Transition to IFRS” explains the effects of the transition to IFRS as adopted by the European Union and includes the information related to the Reconciliation Schedules required by IFRS 1, which have been approved and published as a section of the semiannual reports as at June 30, 2005, that we have audited, reference is made to our report dated September 22, 2005.
3. In our opinion, the consolidated financial statements of Benetton Group S.p.A. as of December 31, 2005 comply with IFRS as adopted by the European Union; accordingly, they give a true and fair view of the financial position, the results of operations, the changes in shareholders’ equity and cash flows of Benetton Group S.p.A. for the year then ended.
Treviso, April 7, 2006
PricewaterhouseCoopers S.p.A.Signed by Roberto Adami (Partner)
(This report has been translated from the original which was issued in accordance with Italian legislation.
References in this report to the Financial Statement refer to the Financial Statement in original Italian and not to
their translation)
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Supplementary schedules
The following schedules contain information which is additional to that shown in the explanatory notes to the consolidated financial statements, of which they form an integral part.
The information contained in the following schedules comprises: - Consolidated statement of income (using the function of expenses);- Companies and groups included in the consolidation at December 31, 2005.
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(thousands of euro) 2005 2004 Revenues 1,765,073 1,704,124 Cost of sales Materials 525,962 438,992 Payroll and related costs 84,636 86,802 Subcontracted work 320,271 340,217 Industrial depreciation and amortization 21,203 21,118 Other manufacturing costs 42,663 42,046 994,735 929,175 Gross operating income 770,338 774,949 Distribution and transport 56,350 47,760 Sales commissions 70,651 73,582 Contribution margin 643,337 653,607 Selling, general and administrative expenses Payroll and related costs 135,095 125,700 Advertising and promotion 60,967 53,710 Depreciation and amortization 64,164 74,209 Other income and expenses 225,937 242,154 486,163 495,773 Operating profit 157,174 157,834 Profit of associated companies before net financial expenses and taxes 157,114 157,995 Financial income/(expenses) (23,130) (21,957) Foreign currency hedging gains/(losses) and exchange differences 408 (31) Income before taxes 134,392 136,007 Income taxes 20,288 27,663 Net income for the year attributable to the Parent Company and minority interests 114,104 108,344 Net income/(loss) attributable to: - shareholders of the Parent Company 111,873 108,795 - minority interests 2,231 (451) Earnings per share (euro) 0.62 0.60
Consolidated statement of income (using the function of expenses)
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Companies and groups included in the consolidation at December 31, 2005
Share Group Name of the company Location Currency capital interest
Companies and groups consolidated on a line-by-line basis: Parent Company Benetton Group S.p.A. Ponzano Veneto (Tv) Eur 236,026,454.30 Italian subsidiaries Benetton Retail Italia S.r.l. Ponzano Veneto (Tv) Eur 5,100,000 100.000% Olimpias S.p.A. Ponzano Veneto (Tv) Eur 47,988,000 100.000% - Benair S.p.A. Ponzano Veneto (Tv) Eur 1,548,000 100.000% Benind S.p.A. Ponzano Veneto (Tv) Eur 26,000,000 100.000% Fabrica S.p.A. Ponzano Veneto (Tv) Eur 4,128,000 100.000% Bencom S.r.l. Ponzano Veneto (Tv) Eur 150,000,000 100.000% Società Investimenti e Gestioni Immobiliari (S.I.G.I.) S.r.l. Ponzano Veneto (Tv) Eur 36,150,000 100.000% - Buenos Aires 2000 S.r.l. Ponzano Veneto (Tv) Eur 10,516,456 100.000% Bentec S.p.A. Ponzano Veneto (Tv) Eur 12,900,000 100.000% Foreign subsidiaries - Benetton Realty Russia O.O.O. Moscow Rur 473,518,999 100.000% Benetton Deutschland GmbH (1) München Eur 2,812,200 100.000% Benetton Realty France S.A. Paris Eur 94,900,125 100.000% Benetton Australia Pty. Ltd. Sydney Aud 500,000 100.000% Benetton USA Corp. Wilmington Usd 84,654,000 100.000% Benetton Holding International N.V. S.A. Amsterdam Eur 92,759,000 100.000% - Benetton International S.A. Luxembourg Eur 133,538,470 100.000% - Benetton Denmark A.p.S. Copenhagen Dkk 125,000 100.000% - Benetton Giyim Sanayi ve Ticaret A.S. Istanbul Trl 7,000,000 50.000% - United Colors Communication S.A. Lugano Chf 1,000,000 100.000% - Benetton Austria GmbH (1) Salzburg Eur 3,270,277.54 100.000% - Benetton Ungheria Kft. Nagykallo Eur 89,190.38 100.000% - Benetton Manufacturing Holding N.V. Amsterdam Eur 225,000 100.000% - Benetton Retail Deutschland GmbH München Eur 2,000,000 100.000% - New Ben GmbH Frankfurt Eur 5,000,000 51.000% - Benetton Trading Ungheria Kft. Nagykallo Huf 50,000,000 100.000% - Benetton Retail (1988) Ltd. London Gbp 58,200,000 100.000% - Benetton Retail Spain S.L. Barcelona Eur 10,180,300 100.000% - Benetton 2 Retail Comércio de Produtos Têxteis S.A. Porto Eur 500,000 100.000% - Benrom S.r.l. Sibiu Ron 1,416,880 100.000% - Benetton Istria D.O.O. Rijeka Hrk 4,075,000 100.000%
Share Group Name of the company Location Currency capital interest - Benetton Textil - Confeçcão de Têxteis S.A. Porto Eur 100,000 100.000% - Benetton Manufacturing Tunisia S.à r.l. Sahline Tnd 350,000 100.000% - Benetton Commerciale Tunisie S.à r.l. Sousse Tnd 50,000 100.000% - Benetton Croatia D.O.O. Osijek Hrk 2,000,000 100.000% - Benetton India Pvt. Ltd. Gurgaon Inr 409,241,000 100.000% - Benetton Tunisia S.à r.l. Sahline Tnd 303,900 100.000% - Benetton Trading USA Inc. Lawrenceville Usd 379,147,833 100.000% - United Colors of Benetton Do Brasil Ltda. (2) Curitiba Brl 78,634,578 100.000% - Benetton Japan Co., Ltd. Tokyo Jpy 400,000,000 100.000% - Benetton Retailing Japan Co. Ltd. Tokyo Jpy 160,000,000 100.000% - Benetton Korea Inc. Seoul Krw 2,500,000,000 50.000% - Benetton Asia Pacific Ltd. Hong Kong Hkd 41,400,000 100.000% - Shanghai Benetton Trading Company Ltd. Shanghai Cny 2,482,950 100.000% - Lairb Property Ltd. Dublin Eur 260,000 100.000% - Benetton Società di Servizi S.A. Lugano Chf 80,000,000 100.000% Benetton International Property N.V. S.A. Amsterdam Eur 17,608,000 100.000% - Benetton Real Estate International S.A. Luxembourg Eur 116,600,000 100.000% - Benetton Real Estate Belgique S.A. Bruxelles Eur 14,500,000 100.000% - Benetton Real Estate Austria GmbH Wien Eur 2,500,000 100.000% - Benetton France S.à r.l. Paris Eur 99,495,711.60 100.000% - Benetton France Commercial S.A.S. Paris Eur 10,000,000 100.000% - Benetton Realty Portugal Imobiliaria S.A. Porto Eur 100,000 100.000% - Benetton Realty Spain S.L. Barcelona Eur 15,270,450 100.000% - Benetton Real Estate Spain S.L. Barcelona Eur 150,250 100.000% Investments in associated companies carried at cost: - Benetton Slovakia s.r.o. (1) Dolny Kubin Svk 135,000,000 100.000% - Benetton Beograd D.O.O. (3) Belgrado Eur 500 100.000% - Benetton Argentina S.A. (2) Buenos Aires Arp 500,000 100.000% - Benetton Realty Netherlands N.V. (3) Amsterdam Eur 45,000 100.000% - Real Estate Russia Z.A.O. (3) St. Petersburg Rur 10,000 25.000% Investments in subsidiary companies carried at cost: Consorzio Generazione Forme - Co.Ge.F. S. Mauro Torinese (To) Eur 15,492 33.333%
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Share Group Name of the company Location Currency capital interest
Companies and groups consolidated on a line-by-line basis: Parent Company Benetton Group S.p.A. Ponzano Veneto (Tv) Eur 236,026,454.30 Italian subsidiaries Benetton Retail Italia S.r.l. Ponzano Veneto (Tv) Eur 5,100,000 100.000% Olimpias S.p.A. Ponzano Veneto (Tv) Eur 47,988,000 100.000% - Benair S.p.A. Ponzano Veneto (Tv) Eur 1,548,000 100.000% Benind S.p.A. Ponzano Veneto (Tv) Eur 26,000,000 100.000% Fabrica S.p.A. Ponzano Veneto (Tv) Eur 4,128,000 100.000% Bencom S.r.l. Ponzano Veneto (Tv) Eur 150,000,000 100.000% Società Investimenti e Gestioni Immobiliari (S.I.G.I.) S.r.l. Ponzano Veneto (Tv) Eur 36,150,000 100.000% - Buenos Aires 2000 S.r.l. Ponzano Veneto (Tv) Eur 10,516,456 100.000% Bentec S.p.A. Ponzano Veneto (Tv) Eur 12,900,000 100.000% Foreign subsidiaries - Benetton Realty Russia O.O.O. Moscow Rur 473,518,999 100.000% Benetton Deutschland GmbH (1) München Eur 2,812,200 100.000% Benetton Realty France S.A. Paris Eur 94,900,125 100.000% Benetton Australia Pty. Ltd. Sydney Aud 500,000 100.000% Benetton USA Corp. Wilmington Usd 84,654,000 100.000% Benetton Holding International N.V. S.A. Amsterdam Eur 92,759,000 100.000% - Benetton International S.A. Luxembourg Eur 133,538,470 100.000% - Benetton Denmark A.p.S. Copenhagen Dkk 125,000 100.000% - Benetton Giyim Sanayi ve Ticaret A.S. Istanbul Trl 7,000,000 50.000% - United Colors Communication S.A. Lugano Chf 1,000,000 100.000% - Benetton Austria GmbH (1) Salzburg Eur 3,270,277.54 100.000% - Benetton Ungheria Kft. Nagykallo Eur 89,190.38 100.000% - Benetton Manufacturing Holding N.V. Amsterdam Eur 225,000 100.000% - Benetton Retail Deutschland GmbH München Eur 2,000,000 100.000% - New Ben GmbH Frankfurt Eur 5,000,000 51.000% - Benetton Trading Ungheria Kft. Nagykallo Huf 50,000,000 100.000% - Benetton Retail (1988) Ltd. London Gbp 58,200,000 100.000% - Benetton Retail Spain S.L. Barcelona Eur 10,180,300 100.000% - Benetton 2 Retail Comércio de Produtos Têxteis S.A. Porto Eur 500,000 100.000% - Benrom S.r.l. Sibiu Ron 1,416,880 100.000% - Benetton Istria D.O.O. Rijeka Hrk 4,075,000 100.000%
Share Group Name of the company Location Currency capital interest - Benetton Textil - Confeçcão de Têxteis S.A. Porto Eur 100,000 100.000% - Benetton Manufacturing Tunisia S.à r.l. Sahline Tnd 350,000 100.000% - Benetton Commerciale Tunisie S.à r.l. Sousse Tnd 50,000 100.000% - Benetton Croatia D.O.O. Osijek Hrk 2,000,000 100.000% - Benetton India Pvt. Ltd. Gurgaon Inr 409,241,000 100.000% - Benetton Tunisia S.à r.l. Sahline Tnd 303,900 100.000% - Benetton Trading USA Inc. Lawrenceville Usd 379,147,833 100.000% - United Colors of Benetton Do Brasil Ltda. (2) Curitiba Brl 78,634,578 100.000% - Benetton Japan Co., Ltd. Tokyo Jpy 400,000,000 100.000% - Benetton Retailing Japan Co. Ltd. Tokyo Jpy 160,000,000 100.000% - Benetton Korea Inc. Seoul Krw 2,500,000,000 50.000% - Benetton Asia Pacific Ltd. Hong Kong Hkd 41,400,000 100.000% - Shanghai Benetton Trading Company Ltd. Shanghai Cny 2,482,950 100.000% - Lairb Property Ltd. Dublin Eur 260,000 100.000% - Benetton Società di Servizi S.A. Lugano Chf 80,000,000 100.000% Benetton International Property N.V. S.A. Amsterdam Eur 17,608,000 100.000% - Benetton Real Estate International S.A. Luxembourg Eur 116,600,000 100.000% - Benetton Real Estate Belgique S.A. Bruxelles Eur 14,500,000 100.000% - Benetton Real Estate Austria GmbH Wien Eur 2,500,000 100.000% - Benetton France S.à r.l. Paris Eur 99,495,711.60 100.000% - Benetton France Commercial S.A.S. Paris Eur 10,000,000 100.000% - Benetton Realty Portugal Imobiliaria S.A. Porto Eur 100,000 100.000% - Benetton Realty Spain S.L. Barcelona Eur 15,270,450 100.000% - Benetton Real Estate Spain S.L. Barcelona Eur 150,250 100.000% Investments in associated companies carried at cost: - Benetton Slovakia s.r.o. (1) Dolny Kubin Svk 135,000,000 100.000% - Benetton Beograd D.O.O. (3) Belgrado Eur 500 100.000% - Benetton Argentina S.A. (2) Buenos Aires Arp 500,000 100.000% - Benetton Realty Netherlands N.V. (3) Amsterdam Eur 45,000 100.000% - Real Estate Russia Z.A.O. (3) St. Petersburg Rur 10,000 25.000% Investments in subsidiary companies carried at cost: Consorzio Generazione Forme - Co.Ge.F. S. Mauro Torinese (To) Eur 15,492 33.333%
(1) In liquidation.(2) Non-operative.(3) Recently established company.
anjuna15°35’N 73°44’E
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2005 and 2004 financials by quarter Risk factors of the Benetton business Transition to IFRS Glossary
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2005 and 2004 financials by quarter
The data for the first and second quarter of 2004 were not prepared, as they were not required during the transition to IFRS.
1st 2nd 1st 3rd Nine 4th (millions of euro) quarter quarter half-year quarter months quarter 2005 Net revenues 383 459 842 446 1,288 477 Gross operating income 169 199 368 191 559 211 Contribution margin 142 166 308 160 468 176 Ordinary operating result (*) 37 58 95 45 140 65 Operating profit 37 58 95 43 138 20 Net income attributable to the Group 27 36 63 26 89 23 Earnings per share (euro) - basic earnings per share 0.14 0.20 0.35 0.15 0.50 0.13 2004 Net revenues n.a. n.a. 860 393 1,253 451 Gross operating income n.a. n.a. 380 180 560 215 Contribution margin n.a. n.a. 320 152 472 182 Ordinary operating result (*) n.a. n.a. 116 49 165 60 Operating profit n.a. n.a. 102 50 152 6 Net income attributable to the Group n.a. n.a. 69 35 104 5 Earnings per share (euro) - basic earnings per share n.a. n.a. 0.38 0.19 0.56 0.03
(*) Ordinary operating result is indicated for the purposes of evaluating the performance of the Company’s core business and to aid financial analysts in using their models to analyze the Company’s results. This information is not required by either IFRS or US GAAP.
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Risk factors of the Benetton business In carrying out its business activities, Benetton is subject to the following risks: The Benetton business is subject to competitive pressure. The Group operates in an industry, the apparel sector, which is highly competitive as far as production, sales and distribution are concerned. The number of competitors has grown considerably in the last few years, and companies manufacturing out of countries with a low cost base now play an important role. To contain this risk, the Group maintains a strategic focus on production and organizational efficiency policies related to the process of production decentralization, completion of production cycles in overseas units, and organizational cost reduction. Increased competition could lead to price pressure, which would have a significantly negative impact on the Group’s financial standing and performance.As far as distribution is concerned, competition could increase given that there are few barriers to entry. Benetton competes against local, national and global department stores, specialized retailers, independent retailers and manufacturing companies, as well as against mail order companies which use catalogues to target customers. Benetton focuses mainly on quality, breadth of product range and merchandising, customer service, store ambience, and sales and marketing programs. The Group also competes to secure prime retail sites and the best lease and purchase conditions.
The success of Benetton’s strategies is influenced by the sales network’s buy-in. The substantial incentive scheme in place for the network of commercial partners, in line with the business model, seeks to enable partners to increase their investment capacity in order to open new stores, renew existing ones, and increase competitiveness in terms of price to the final consumer. The success of this strategy depends on the ability to motivate and manage the network by setting specific objectives and monitoring progress on a regular basis.It is to be noted that the Group’s business model is linked to a risk of late payment from customers and, generally speaking, payment collection risk.
Benetton’s future performance depends on its ability to develop the business in emerging markets. The Group is strengthening its new commercial strategies. Special emphasis is being placed on certain emerging markets, such as China and India, including through agreements with large-scale retailers for the opening of “stores in stores” in large department stores in the largest cities. The Group’s initiatives include the creation of new partnerships to manage and develop commercial activities.
Benetton’s business is sensitive to changes in customer spending habits and can be influenced, amongst other things, by business outlook, interest rates, taxation, local economic conditions, uncertainty over future economic prospects and a shift of spending habits towards other goods or services. Consumer preferences and economic conditions may change from time to time in each and every market in which the Group operates.
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Benetton’s success depends on its ability to anticipate and respond to changing trends. Sales and profitability levels also depend on the ability to anticipate and react immediately to changes in fashion trends and consumer tastes. If Benetton’s collections were not to meet with the customers’ approval, the result would be lower than expected sales, a higher level of discounts, and reduced margins.
The Group’s growth and expansion strategy has led to an increase in fixed and operating costs. To strengthen Benetton’s image and market share, investments have been made in recent years to sell products through directly-owned retail stores, even if the Group has traditionally distributed its products through a capillary network of franchise stores. To date, the Benetton Group manages 280 wholly-owned shops, which are strategic as far as the demographic and commercial profile of their locations is concerned. These retail stores have, however, led to an increase in fixed and operating costs. These investments expose the Group to the additional risk that some of the chosen locations may turn out to be inadequate because of changes in the area’s demographic profile or the location of shopping districts.
Benetton is exposed to risks linked with its strategies. The Group strives to develop the existing commercial network and to strengthen its brand. However, this growth could be compromised were Benetton not able to: 1. identify adequate markets and adequate locations for new stores; 2. maintain the service levels expected by customers; 3. avoid sales and profit margin erosion for stores selling Benetton-branded goods when
directly managed megastores are opened in the same areas or shopping districts; 4. manage inventories on the basis of effective needs;5. deliver goods on time. The Group’s systems, procedures, controls, and resources need to be aligned to support its expansion plans. Should this not be the case, the success of the strategies proposed would not be ensured.
The protection of Benetton’s intellectual property rights is subject to risks. To safeguard the rights on those core product values which are crucial to the Group’s success and market competitiveness - i.e. design, proprietary technologies and manufacturing processes, product and concept research, acknowledged trademarks - Benetton relies on the laws on business secrecy, unfair competition, trade dress, trademarks, patents, and copyrights. Nonetheless, trademark registration requests may not result in effective registrations, and in the same way even registrations granted may be ineffective to fend off competitors and could be subsequently invalidated. Above all, the actions undertaken to protect intellectual property rights may turn out to be ineffective against counterfeiting. The Group’s know-how may become known to competitors, and Benetton may not be able to fully protect its intellectual property rights. Other companies may also develop products independently which are substantially similar or better to Benetton’s, without infringing the Group’s intellectual property rights. In addition, it is to be noted that legislation in some countries does not protect proprietary rights. The already substantial amount of resources allocated to the protection of proprietary rights could be significantly increased should the level of infringement by third parties
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also increase. Furthermore, judgments against us in disputes relating to the Group’s proprietary rights may:1. impose the granting of licenses to third parties or the requesting for licenses from
third parties;2. prevent the production or sale of the Group’s products;3. lead to substantial losses. United Colors of Benetton, Undercolors, Sisley, Playlife, Killer Loop, and other commercial and service trademarks have been registered or are subject to registration requests with the trademarks and patent offices of many foreign countries and are protected by ordinary legislation.
The real estate market for commercial sites is very competitive. The ability of Benetton and its partners to find locations for new stores depends on the availabilility of adequate buildings and the ability to negotiate terms that are in line with established financial targets. Moreover, the Group must ensure that existing rental contracts can be renegotiated effectively.
The Group is implementing a number of changes to its information technology systems which, by their very nature, entail the risk of temporary downtime. In synergy with its strategic development plans, Benetton has begun changing and replacing its IT systems. The changes primarily involve the upgrading of current business systems, the development of system modifications, or the purchase of systems with new features.Benetton is aware of the risks linked to substitution, including the accurate transfer of data and possible system downtime, but we feel we have taken all the necessary steps to contain these risks by means of testing, training and project planning, as well as by entering into related commercial agreements with suppliers of the replacement technologies.The launch of the new versions will be implemented in phases over a three-year timeframe.
Benetton’s sales and operating income may be influenced by foreign exchange rate and interest rate fluctuations. The Group’s sales and operating income will continue to be influenced by foreign exchange rate fluctuations in the sale currencies, which in turn impact on the prices of products sold, the cost of sales, and operating income. Foreign currency exchange rate variations against the euro may have a negative effect on sales, operating results, and the international competitiveness of the production facilities of the various business units. Even an appreciation of the euro could have an adverse effect on the Group’s sales and operating income. Given that Benetton makes use of hedging in order to manage currency exposure, the strategies adopted may not be sufficient to protect income from the negative effects of future fluctuations. Benetton also holds assets and liabilities which are sensitive to interest rate variations and are necessary in managing liquidity and financial needs. These assets and liabilities are exposed to interest rate risk, which is, at times, managed through the use of derivative financial instruments.
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Benetton is exposed to risks associated with the internationalization of its business activities, including risks relating to late payments in some countries or, in general, to credit collection difficulties. The business is also exposed to political and economic instability in some of the countries in which we operate, as well as to changes in legislation, to linguistic and cultural barriers, tariffs or trade barriers, and price or exchange rate controls.
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Transition to IFRS
Key data for year 2004
Developments in the regulatory frameworkEuropean Community Regulation (EC) 1606/2002, implemented by the Italian legislature through Law 306/2003, requires companies quoted in regulated European markets to adopt international accounting and financial reporting standards (IFRS) for preparing their consolidated financial statements as from January 1, 2005. The Italian government subsequently approved, on February 25, 2005, the legislative decree to implement the options allowed by Article 5 of Regulation (EC) 1606/2002, which made it optional for quoted companies to adopt IFRS for their 2005 financial year but mandatory as from the 2006 financial year. As far as 2005 is concerned, the Benetton Group has elected to apply IFRS to its consolidated financial statements only.Except for IAS 32 and 39, all the international accounting standards and related interpretations in existence on September 14, 2002 were ratified by the European Commission upon adopting Regulation 1725 on September 29, 2003. The European Commission adopted a series of Regulations during 2004 to ratify international accounting and financial reporting standards that were subsequently published and revised. In detail, 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 the new IFRS issued in March 2004;- no. 211 of February 4, 2005 which ratified IFRS 2.The version of IAS 39 approved by Regulation (EC) no. 2086/2004 differs from the text approved by the IASB; the Benetton Group will apply IAS 39 in the version published by the IASB.
Italian Total GAAP IFRS IFRS under (millions of euro) new format reclassifications adjustments IFRS Revenues 1,686 18 - 1,704 Gross operating income 757 18 - 775 Contribution margin 653 - - 653 EBITDA 314 - (2) 312 Operating profit 191 - (33) 158 Net income/(loss) for the year attributable to the Parent Company and minority interests 123 - (14) 108 Net income/(loss) for the year attributable to the Parent Company 123 - (14) 109 Shareholders’ equity: - Parent Company portion 1,230 - (24) 1,206 - minority interest portion 7 - - 7 Total shareholders’ equity 1,237 - (24) 1,213 Net financial position 431 - 10 441
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IFRS conversion process for the Benetton GroupUp to and including first quarter 2005, the Group prepared its consolidated financial statements and other periodic information (quarterly and half-yearly) in accordance with Italian accounting standards (Italian GAAP).As from the half-year report for 2005, periodic consolidated reports are being prepared in accordance with IFRS, while, in the case of the annual report of the Parent Company Benetton Group S.p.A., these standards will be adopted as from financial year 2006.Considering this and taking into account the recommendations of CESR (Committee of European Securities Regulators) published on December 30, 2003 containing the guidelines for EU listed companies concerning methods for the transition to IFRS, as well as the Regolamento Emittenti (Issuers’ Regulations), as modified by CONSOB (the Italian SEC) by Resolution no. 14990 of April 14, 2005, following, among other things, adoption of International Accounting Principles for interim reporting, the information required by IFRS 1 is illustrated below. In particular, this information considers the effect resulting from conversion to IFRS on the consolidated balance sheet and financial situation, on the consolidated income statement and the consolidated cash flow statements for year 2004.
The following have been prepared for this purpose:- notes concerning the rules for first-time application of IFRS (IFRS 1) and other selected
IFRS, including management’s assumptions regarding the IFRS and their interpretations which will be in force and the accounting policies which will be adopted for the purposes of preparing the first complete set of IFRS financial statements as of December 31, 2005;
- reconciliations between consolidated shareholders’ equity reported under the previous accounting standards and that under IFRS at the following dates:- date of transition to IFRS (January 1, 2004);- date of last consolidated financial statements drawn up under the previous accounting
standards (December 31, 2004);- reconciliation between the 2004 results in the full year financial statements prepared
under the previous accounting standards and those prepared under IFRS;- comments on the reconciliations;- the comments to the main changes made to the cash flow statement following the
introduction of the new accounting standards;- the IFRS consolidated balance sheet as of January 1 and December 31, 2004, and the
IFRS consolidated income statement for 2004.
As described in greater detail in the sections below, the IFRS consolidated balance sheet and the IFRS consolidated income statement were prepared by applying the relevant IFRS reclassifications and adjustments to consolidated financial data, presented in accordance with Italian accounting standards, in order to reflect the changes to presentation, recognition, and measurement criteria as required by the IFRS.
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With reference to the optional exemptions contained in IFRS 1, the following elections have been followed:
Valuation of property, plant and equipment and intangible assets. IFRS 1 allows the original depreciated/amortized cost to be replaced with the asset’s fair value or, if certain requirements are met, with its revalued cost. The Benetton Group is not making use of this exemption, since it has adopted the criterion of depreciated/amortized historic cost for valuing its property, plant and equipment and intangible assets.
Reserve for net exchange differences arising from the translation of the financial statements of foreign subsidiaries. IAS 21 states that the differences arising from translation of the financial statements of a foreign consolidated company must be classified as a separate item in shareholders’ equity, which is transferred to the income statement when the company is sold. The Group has adopted the option allowed by IFRS 1 to apply IAS 21 on an onward basis, assuming that, at the date of transition to 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” retrospectively to business combinations which took place before the IFRS transition date. The Benetton Group has made use of this exemption and has adopted IFRS 3 on an onward basis, as from January 1, 2004, even though the effects of its application at the transition date would be minimal.
Hybrid financial instruments. IAS 32 “Financial instruments: recognition and measurement” states that the components of hybrid financial instruments must be divided between liabilities and shareholders’ equity. 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 hybrid financial instruments.
Financial instruments accounted for in accordance with previous standards. Even though it is permitted to adopt IAS 32 and 39 “Financial instruments” for annual financial statements of financial years commencing as from January 1, 2005, the Benetton Group has decided to apply this standard earlier with effect from January 1, 2004.
Date of designation of financial instruments as “instruments at fair value with changes through profit and loss” or “available for sale”. IAS 39 allows a financial instrument to be recorded upon initial recognition either in the category “financial assets and liabilities at fair value with changes through income statement” or in the category “available for sale assets”. IFRS 1 allows these designations to be made on the IFRS transition date and the Benetton Group has elected to adopt this option.
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 derecognized under the former accounting standards. However, IFRS 1 provides for an option to apply the principle of “derecognition” on an onward basis, meaning that it is applicable to financial assets and liabilities, other than derivatives, purchased after the transition date. The Benetton Group does not have any cases which would lead to adoption of the exemption in question.
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Share-based payments. IFRS 2 (Share-based payments) may be applied to annual financial statements of years commencing as from January 1, 2005; the Benetton Group has decided to adopt the standard on an onward basis as from the 2004 financial year.
Principal effects of applying IFRS to the opening balance sheet as of January 1, 2004 and to the consolidated financial statements as of December 31, 2004The differences emerging from the application of IFRS compared with Italian GAAP and the elections made by the Benetton Group in relation to the accounting options contained in the IFRS require the restatement of accounting data prepared under the previous Italian regulations governing financial statements, with effects on the Group’s shareholders’ equity, its net financial position and net income, which may be summarized as follows:
Opening balance sheet as of January 1, 2004
Consolidated financial statements as of December 31, 2004
(thousands of euro) Italian GAAP IFRS effects IFRS Shareholders’ equity including: - Parent Company portion 1,173,861 (10,681) 1,163,180 - minority interest portion 12,799 193 12,992 Net financial position 468,446 (468) 467,978
(thousands of euro) Italian GAAP IFRS effects IFRS Shareholders’ equity including: - Parent Company portion 1,230,319 (24,310) 1,206,009 - minority interest portion 6,840 41 6,881 Net financial position 431,034 9,771 440,805 Income for the year attributable to the Parent Company and minority interests: - Parent Company 123,074 (14,279) 108,795 - minority shareholders (494) 41 (453) Total 122,580 (14,238) 108,342
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In particular, the main adjustments, shown before tax and minority interests, are as follows:
Shareholders’ Shareholders’ Net income equity as of equity as of year (thousands of euro) 01.01.2004 12.31.2004 2004 Total amounts (Parent Company portion and minority interest portion) under Italian GAAP 1,186,660 1,237,159 122,582 less - minority interest portion (12,799) (6,840) 492 Parent Company portion under Italian GAAP 1,173,861 1,230,319 123,074 Adjustments to financial statements for IFRS: a) reversal of monetary revaluations (IAS 16) (3,085) (2,896) 189 b) reversal of start-up and expansion costs (IAS 38) (7,361) (3,496) 3,865 c) reversal of goodwill amortization (IFRS 3) - 721 721 d) straight-line lease installments (IAS 17) (4,357) (1,098) 3,308 e) recognition of deferred tax assets (IAS 12) - 7,146 7,146 f) different tax rate for calculation of “profit in stock” (IAS 12) 73 1,334 1,261 g) discounting of employee benefits to present value (IAS 19) 3,825 4,207 373 h) cost of stock options (IFRS 2) - - (722) i) derivatives for interest rate risks (IAS 39) (9,653) (4,963) 4,690 l) derivatives for exchange rate risks (IAS 39) 1,100 139 (264) m) securities available for sale (IAS 39) 262 301 (43) n) impairment loss adjustments for non-current assets (IAS 36) - (35,683) (35,951) o) provisions for risks and future charges (IAS 37) 4,494 - (4,563) p) exchange differences on equity investment disposals (IAS 21) - - 69 Tax effect on reconciling items 4,215 10,019 5,684 Minority interests in reconciling items (194) (41) (41) Parent Company portion under IFRS 1,163,180 1,206,009 108,796
Net Net financial financial position position (thousands of euro) 01.01.2004 12.31.2004 Total under Italian GAAP 468,446 431,034 Adjustments to financial statements for IFRS: i) derivatives for interest rate risks (IAS 39) 9,653 4,963 l) derivatives for exchange rate risks (IAS 39) (1,100) 150 m) securities available for sale (IAS 39) (255) (294) Effect of reclassifications (8,766) 4,952 Total under IFRS 467,978 440,805
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Comments on the main IFRS adjustments to items in the balance sheets as of January 1, 2004 and December 31, 2004 and the statement of income for year 2004We shall now comment on the main changes arising from the application of IFRS compared with the amounts determined under Italian GAAP:
a) Reversal of monetary revaluations (IAS 16). In the past, some categories of property, plant and equipment underwent monetary revaluations which were permitted or obligatory under Italian and Spanish law; the amount of these revaluations did not equate to the fair value of these assets and, so, has been eliminated from the value of assets, as has the corresponding reserve under shareholders’ equity.Effects:- on shareholders’ equity as of January 1, 2004: decrease of 3,085 thousand euro, before a
positive tax effect of 607 thousand euro;- on shareholders’ equity as of December 31, 2004: decrease of 2,896 thousand euro,
before a positive tax effect of 605 thousand euro;- on net income for year 2004: increase of 189 thousand euro (lower depreciation and
other expenses), before a negative tax effect of 2 thousand euro;
b) Reversal of start-up and expansion costs (IAS 38). Start-up and expansion costs do not meet the capitalization requirements under IFRS and must, therefore, be expensed to income.Effects:- on shareholders’ equity as of January 1, 2004: decrease of 7,361 thousand euro, before a
positive tax effect of 2,136 thousand euro;- on shareholders’ equity as of December 31, 2004: decrease of 3,496 thousand euro,
before a positive tax effect of 947 thousand euro;- on net income for year 2004: increase of 3,865 thousand euro (lower amortization),
before a negative tax effect of 1,189 thousand euro.
c) Reversal of goodwill amortization (IFRS 3). IFRS 3 eliminates the concept of goodwill amortization, replacing it with a periodic review, at least once a year, of the validity of the recorded value (impairment test); this provision has had a limited effect on the Benetton Group f inancial statements, since the amounts previously recorded as “Goodwill” in the consolidated balance sheet related mainly to lease surrender payments for obtaining the lease of buildings for use as stores (key money). This key money is amortized over the term of the associated lease contracts with the exception of French and Belgian “fonds de commerce”, which are amortized over 20 years.Effects:- on shareholders’ equity as of January 1, 2004: none, since application is onward-going;- on shareholders’ equity as of December 31, 2004: increase of 721 thousand euro;- on net income for year 2004: increase of 721 thousand euro.
d) Straight-line lease payments (IAS 17). For the purposes of IAS 17, lease payments, both payable and receivable, have been recognized on a straight-line basis over the term of the related contracts. The Benetton Group has entered into lease contracts in the USA and UK with increasing lease payments. For the purposes of determining the income or
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charge for each period in accordance with IFRS, it has therefore been necessary to split these payments into equal amounts over the term of each lease contract.Effects:- on shareholders’ equity as of January 1, 2004: decrease of 4,357 thousand euro;- on shareholders’ equity as of December 31, 2004: decrease of 1,098 thousand euro;- on net income for year 2004: increase of 3,308 thousand euro.The positive impacts in the year 2004 were mainly due to early termination of some lease contracts, with the resulting release to income of the accrued expenses outstanding at the time. e) Recognition of deferred tax assets (IAS 12). Deferred tax assets may only be recorded under Italian GAAP if their recovery is reasonably certain. Under IAS 12 on the other hand, it is sufficient for recovery to be probable. This has resulted in the recognition for IFRS purposes of assets relating to future tax benefits from carried forward tax losses which the Group regards as recoverable.Effects:- on shareholders’ equity as of January 1, 2004: none, since there were no items likely to
be recovered;- on shareholders’ equity as of December 31, 2004: increase of 7,146 thousand euro;- on net income for year 2004: increase of 7,146 thousand euro.
f) Different tax rate for calculation of “profit in stock” (IAS 12). For the purposes of eliminating the intercompany margin contained in the value of goods in stock, the application of IAS 12 within Benetton requires that the tax effect be calculated using the tax rate of the acquirer instead of that of the vendor. Previously that effect was based on the tax rate of the vendor.Effects:- on shareholders’ equity as of January 1, 2004: increase of 73 thousand euro;- on shareholders’ equity as of December 31, 2004: increase of 1,334 thousand euro;- on net income for year 2004: increase of 1,261 thousand euro.
g) Discounting of employee benefits to present value (IAS 19). Italian GAAP requires the liability for TFR (employee termination indemnity) to be recorded at nominal value calculated as provided in the Civil Code; under IFRS, TFR falls into the category of benefit plans subject to actuarial valuation, with recognition at transition date of all actuarial gains and losses.Effects:- on shareholders’ equity as of January 1, 2004: increase of 3,825 thousand euro, before a
negative tax effect of 1,262 thousand euro;- on shareholders’ equity as of December 31, 2004: increase of 4,207 thousand euro,
before a negative tax effect of 1,385 thousand euro;- on net income for year 2004: increase of 373 thousand euro, before a negative tax effect
of 123 thousand euro.
h) Cost of stock options (IFRS 2). Italian GAAP does not lay down any particular accounting treatment for stock option plans; such plans are not reflected in the financial statement numbers, but are only described. IFRS 2 considers stock options to be in the
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category of “share-based payments” and requires them to be measured at fair value at the time of their grant, recognizing an expense in the income statement and a corresponding credit in shareholders’ equity reserves.Effects:- on shareholders’ equity as of January 1, 2004: none (no plan existing at that date);- on shareholders’ equity as of December 31, 2004: none, since the effect on the income
statement offsets the matching effect on shareholders’ equity;- on net income for year 2004: decrease of 722 thousand euro, related to the last four
months of 2004 (the stock options plan approved in September 2004).
i) Derivatives for interest rate risks (IAS 39). The Benetton Group holds Interest Rate Swaps (IRS) to manage the risk of changes in interest rates. IRS qualify for treatment as hedging instruments under Italian GAAP, meaning that only the difference between interest paid and that received was booked directly to the income statement on an accruals basis. For the purposes of IFRS, the derivative instruments in question do not meet all the formal requirements of IAS 39 for recognition as hedges, meaning that outstanding IRS have been measured at fair value at the transition date and at December 31, 2004, with the related differences booked to the income statement. Effects:- on shareholders’ equity as of January 1, 2004: decrease of 9,653 thousand euro, before a
positive tax effect of 3,185 thousand euro;- on shareholders’ equity as of December 31, 2004: decrease of 4,963 thousand euro,
before a positive tax effect of 1,636 thousand euro;- on net income for year 2004: increase of 4,690 thousand euro, before a negative tax
effect of 1,549 thousand euro.
l) Derivative instruments for exchange rate risks (IAS 39). The effects of marking to market the exchange component of currency hedging instruments relating to future sales have been included for IFRS purposes in a specific reserve under shareholders’ equity; changes in the value of these hedges were previously booked to the income statement. In addition, in the case of hedges relating to receivables, the derivative’s total “mark to market” valuation is now recorded in the income statement, whereas, previously, the income statement reflected the exchange component and the portion of the interest component relevant to that period.Effects:- on shareholders’ equity as of January 1, 2004: increase of 1,100 thousand euro, before a
negative tax effect of 378 thousand euro;- on shareholders’ equity as of December 31, 2004: increase of 139 thousand euro, before
a negative tax effect of 46 thousand euro;- on net income for year 2004: decrease of 264 thousand euro, before a positive tax effect
of 103 thousand euro.
m) Securities available for sale (IAS 39). Investments of liquid funds in securities have been reclassified into the IAS 39 category “Available for sale financial assets” and consequently measured at fair value, with any effect booked to shareholders’ equity, whereas, previously, they were valued at the lower of historic cost and market value.
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Effects:- on shareholders’ equity as of January 1, 2004: increase of 262 thousand euro, before a
negative tax effect of 73 thousand euro;- on shareholders’ equity as of December 31, 2004: increase of 301 thousand euro, before
a negative tax effect of 81 thousand euro;- on net income for year 2004: decrease of 43 thousand euro, before a positive tax effect
of 19 thousand euro.
The effects arising from the application of IAS 32 and 39, together with reclassifications of some balance sheet items, had the following consequences on the net financial position:- net financial position as of January 1, 2004: decrease of 468 thousand euro;- net financial position as of December 31, 2004: increase of 9,771 thousand euro.
n) Impairment loss adjustments to non-current assets (IAS 36). In the absence of an Italian accounting standard providing precise guidance on testing coming value of non-current assets, the Benetton Group previously used to write down the value when:a) it was decided to dispose of an asset or a group of assets; a typical example would be the decision to close a store, which involved estimating the costs of closure and adjusting the value of associated investments to their market value; b) there was some indisputable sign of lasting loss in value by a particular fixed asset (for example following an expert valuation).A special valuation mechanism was used to analyze investments in stores, both directly operated (“retail”) and those operated by third parties (“wholesale”). This type of investment (leasehold improvements, key money, furnishings) was tested on a country level, considering all stores in a single country as a whole.The 35.7 million euro adjustment arose from the following:a) adoption of IAS 36, which eliminated the concept of the “lasting nature” of the loss of value and which set stringent rules for assessing the “value in use” of each individual asset and for identifying in commercial terms the individual store as the Cash Generating Unit, with the calculation of the present value of net cash flows generated by that CGU;b) modification of the procedure for analyzing the return on capital employed of individual stores. This resulted in a certain number of write-downs of assets connected with stores which were insufficiently profitable when considered individually. Effects:- on shareholders’ equity as of January 1, 2004: none, because the change is attributable
to 2004;- on shareholders’ equity as of December 31, 2004: decrease of 35,683 thousand euro,
before a positive tax effect of 8,345 thousand euro;- on net income for year 2004: decrease of 35,951 thousand euro, before a positive tax
effect of 8,426 thousand euro.
o) Provisions for risks and future charges (IAS 37). Certain provisions contained in the Italian GAAP financial statements at December 31, 2003, made as a result of the decision for early termination of some lease contracts, did not meet all the formal requirements of IAS 37 for recognition as a liability and so were reversed at the transition date; the
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expense of terminating these contracts was therefore carried forward to the first half of 2004. Effects:- on shareholders’ equity as of January 1, 2004: increase of 4,494 thousand euro;- on shareholders’ equity as of December 31, 2004: no effect;- on net income for year 2004: decrease of 4,563 thousand euro.
p) Exchange differences on equity investment disposals (IAS 21). The Benetton Group has applied IAS 21, which requires exchange differences arising on the settlement of monetary items at rates different from those at which they were initially recorded, to be recorded as income or expenses in the period in which they arise. Effects:- on shareholders’ equity as of January 1, 2004: no effect;- on shareholders’ equity as of December 31, 2004: no effect;- on net income for year 2004: increase of 69 thousand euro. Consolidated IFRS balance sheets at January 1 and December 31, 2004, consolidated IFRS statement of income for the period ended December 31, 2004In addition to the schedules reconciling shareholders’ equity and net income, accompanied by comments on adjustments made to Italian accounting principle values, balance sheets as of January 1 and December 31, 2004 are attached, as well as statement of income for year 2004, with the following information for each category in separate columns: - values under Italian accounting principles reclassified for IFRS;- reclassifications to adapt to IFRS principles;- adjustments to adapt to IFRS principles;- values in accordance with IFRS.
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Consolidated balance sheet - Assets as of January 1, 2004
Italian GAAP IFRS IFRS IFRS (thousands of euro) new format reclassifications adjustments Notes principles Non-current assets Property, plant and equipment Land and buildings 540,099 (8,390) (3,085) 1 528,624 Plant, machinery and equipment 88,550 - - 88,550 Office furniture, furnishings and electronic equipment 44,325 - - 44,325 Vehicles and aircraft 11,512 - - 11,512 Assets under construction and advances 17,019 - - 17,019 Assets acquired through finance leases 12,336 - - 12,336 Leasehold improvements - 86,871 - 4 86,871 713,841 78,481 (3,085) 789,237 Intangible assets Goodwill and other intangible assets of indefinite useful life 90,078 (83,236) - 5 6,842 Intangible assets of finite useful life 140,947 3,879 (7,361) 6 137,465 231,025 (79,357) (7,361) 144,307 Other non-current assets Investments 20,514 (15,000) - 7 5,514 Investment securities 8 - - 8 Guarantee deposits 42,332 - - 42,332 Medium/long-term financial receivables 30,616 15,000 - 7 45,616 Other medium/long-term receivables 8,662 - - 8,662 Deferred tax assets 202,250 - 4,295 8 206,545 304,382 - 4,295 308,677 Total non-current assets 1,249,248 (876) (6,151) 1,242,221 Current assets Inventories 233,735 - - 233,735 Trade receivables 752,638 - - 752,638 Tax receivables 26,004 - - 26,004 Other receivables, prepaid expenses and accrued income 58,307 (3,840) - 10 54,467 Financial receivables 17,298 3,840 1,100 11 22,238 Available for sale financial assets 27,290 255 12 27,545 Cash and cash equivalents 324,835 - - 324,835 Total current assets 1,440,107 - 1,355 1,441,462 Assets held for sale 8,088 - - 8,088 TOTAL ASSETS 2,697,443 (876) (4,796) 2,691,771
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Consolidated balance sheet - Shareholders’ equity and liabilities as of January 1, 2004
Italian GAAP IFRS IFRS IFRS (thousands of euro) new format reclassifications adjustments Notes principles Shareholders’ equity Shareholders’ equity attributable to the Parent Company Share capital 236,026 - - 236,026 Additional paid-in capital 56,574 - - 56,574 Fair value and hedging reserve - - 1,525 1,525 Other reserves and retained earnings 773,387 - (12,206) 761,181 Net income for the year 107,874 - - 107,874 1,173,861 - (10,681) 1,163,180 Minority interests 12,799 - 193 12,992 Total shareholders’ equity 1,186,660 - (10,488) 1,176,172 Liabilities Non-current liabilities Bonds 300,000 (336) - 13 299,664 Medium/long-term loans 504,894 (540) - 13 504,354 Other medium/long-term liabilities 705 - - 705 Lease financing 21,834 - - 21,834 Retirements benefit obligations 49,774 - (3,825) 14 45,949 Other provisions and medium/long-term liabilities 42,373 - (4,494) 15 37,879 919,580 (876) (8,319) 910,385 Current liabilities Trade payables 331,663 - - 331,663 Other payables, accrued expenses and deferred income 91,263 (10,950) 4,358 17 84,671 Current income tax liabilities 126,514 - - 126,514 Current portion of lease financing 4,977 - - 4,977 Current portion of medium/long-term loans 1,567 - - 1,567 Current portion of bonds - - - - Financial payables 1,340 10,950 9,653 19 21,943 Bank loans and overdrafts 33,879 - - 33,879 591,203 - 14,011 605,214 Total liabilities 1,510,783 (876) 5,692 1,515,599 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 2,697,443 (876) (4,796) 2,691,771
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Consolidated statement of income using the nature of expense method - year 2004 Italian GAAP IFRS IFRS IFRS (thousands of euro) new format reclassifications adjustments Notes principles Revenues 1,686,351 17,773 - 20 1,704,124 Other operating income and revenues 90,644 - 586 21 91,230 Change in inventories of finished products and work in progress 22,811 - - 22,811 Purchases of raw materials and consumables 452,573 - - 452,573 Payroll and related costs 213,654 - 348 22 214,002 Depreciation and amortization: - of property, plant and equipment 58,671 9,347 (23) 23 67,995 - of intangible assets 40,894 (9,347) (4,215) 24 27,332 99,565 - (4,238) 95,327 Other operating costs: - external services 620,578 17,773 - 20 638,351 - leases and rentals 89,728 - (3,308) 25 86,420 - impairment of property, plant and equipment and intangible assets 13,332 - 35,784 26 49,116 - write-downs of doubtful accounts 39,240 - - 39,240 - provisions for risks 32,565 - 4,563 27 37,128 - other operating costs 47,957 - 217 28 48,174 843,400 17,773 37,256 898,429 Operating profit 190,614 - (32,780) 157,834 Share of income of associated companies 161 - - 161 Net financial expenses and exchange differences (26,439) - 4,451 29 (21,988) Income before taxes 164,336 - (28,329) 136,007 Income taxes 41,754 - (14,091) 30 27,663 Net income/(loss) for the year attributable to the Parent Company and minority interests 122,582 - (14,238) 108,344 Net income/(loss) attributable to: - shareholders of the Parent Company 123,074 - (14,279) 108,795 - minority shareholders (492) - 41 (451)
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Consolidated balance sheet - Assets as of December 31, 2004 Italian GAAP IFRS IFRS IFRS (thousands of euro) new format reclassifications adjustments Notes principles Non-current assets Property, plant and equipment Land and buildings 590,184 (7,303) (2,895) 1 579,986 Plant, machinery and equipment 80,381 - (723) 2 79,658 Office furniture, furnishings and electronic equipment 45,180 - (6,267) 3 38,913 Vehicles and aircraft 10,583 - - 10,583 Assets under construction and advances 3,724 - - 3,724 Assets acquired through finance leases 11,743 - - 11,743 Leasehold improvements - 72,289 (24,131) 4 48,158 741,795 64,986 (34,016) 772,765 Intangible assets Goodwill and other intangible assets of indefinite useful life 90,285 (85,660) 721 5 5,346 Intangible assets of finite useful life 119,148 20,183 (8,058) 6 131,273 209,433 (65,477) (7,337) 136,619 Other non-current assets Investments 5,117 - - 5,117 Investment securities 223 - - 223 Guarantee deposits 16,715 - - 16,715 Medium/long-term financial receivables 28,274 - - 28,274 Other medium/long-term receivables 44,435 - - 44,435 Deferred tax assets 182,765 - 18,503 8 201,268 277,529 - 18,503 296,032 Total non-current assets 1,228,757 (491) (22,850) 1,205,416 Current assets Inventories 255,436 - - 255,436 Trade receivables 657,440 - 144 9 657,584 Tax receivables 39,451 - - 39,451 Other receivables, prepaid expenses and accrued income 40,478 (4,838) - 10 35,640 Financial receivables 16,024 4,838 666 11 21,528 Available for sale financial assets 117,878 - 294 12 118,172 Cash and cash equivalents 260,196 - - 260,196 Total current assets 1,386,903 - 1,104 1,388,007 Assets held for sale 7,840 - - 7,840 TOTAL ASSETS 2,623,500 (491) (21,746) 2,601,263
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Consolidated balance sheet - Shareholders’ equity and liabilities as of December 31, 2004 Italian GAAP IFRS IFRS IFRS (thousands of euro) new format reclassifications adjustments Notes principles Shareholders’ equity Shareholders’ equity attributable to the Parent Company Share capital 236,026 - - 236,026 Additional paid-in capital 56,574 - - 56,574 Fair value and hedging reserve - - 1,114 1,114 Other reserves and retained earnings 814,645 - (11,145) 803,500 Net income/(loss) for the year 123,074 - (14,279) 108,795 1,230,319 - (24,310) 1,206,009 Minority interests 6,840 - 41 6,881
Total shareholders’ equity 1,237,159 - (24,269) 1,212,890 Liabilities Non-current liabilities Medium/long-term loans 503,863 (369) - 13 503,494 Other medium/long-term liabilities 38,659 - - 38,659 Lease financing 17,748 - - 17,748 Retirements benefit obligations 51,518 - (4,211) 14 47,307 Other provisions and medium/long-term liabilities 50,990 - - 50,990 662,778 (369) (4,211) 658,198 Current liabilities Trade payables 284,137 - (146) 16 283,991 Other payables, accrued expenses and deferred income 93,296 (10,280) 1,098 17 84,114 Current income tax liabilities 14,112 - - 14,112 Current portion of lease financing 6,007 - - 6,007 Current portion of medium/long-term loans 1,102 - - 1,102 Current portion of bonds 300,000 (122) - 18 299,878 Financial payables 4,985 10,283 5,779 19 21,047 Bank loans and overdrafts 19,924 - - 19,924 723,563 (119) 6,731 730,175 Total liabilities 1,386,341 (488) 2,520 1,388,373 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 2,623,500 (488) (21,749) 2,601,263
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There now follow comments on the main reclassifications and adjustments made, due to application of IFRS, to items in the balance sheets as of January 1 and December 31, 2004 and of statement of income for year 2004. Balance sheet - Assets 1. Land and buildings:The adjustments comprise the reversal of monetary revaluations, made in previous years in conformity with the law, which are no longer permitted by IAS 16. The item also shows a reclassification of leasehold improvements.
2. Plant, machinery and equipment:This item includes all the adjustments made following impairment tests performed on stores on the basis of IAS 36. 3. Office furniture, furnishings and electronic equipment:This item includes all the adjustments made following impairment tests performed on stores on the basis of IAS 36.
4. Leasehold improvements:- As of January 1, 2004: this item has been reclassified from intangible fixed assets of
definite life to tangible fixed assets, in application of IAS 16 and there has also been a reclassification from land and buildings.
- As of December 31, 2004: this item, as described for preceding periods, has been increased due to reclassifications from intangible fixed assets of definite life to tangible fixed assets on the basis of IAS 16 and from land and buildings; it was also reduced by adjustments following impairment tests made in application of IAS 36.
5. Goodwill and other intangible assets of indefinite useful life:The Benetton Group has chosen to reclassify the value of lease surrender payments paid for lease of buildings, for use as stores, which were previously classified in goodwill, to intangible fixed assets of definite life, and to depreciate them on the basis of the residual duration of the contracts to which they refer; “fonds de commerce” are an exception to this and are depreciated over 20 years. Also, following suspension of amortization of the residual goodwill due to the application of IFRS 3 and IAS 38 as of December 31, 2004, a positive adjustment has been made to amortization of 721 thousand euro.
6. Intangible assets of finite useful life:- As of January 1, 2004: changes to this item are attributable to: a) change of classification of leasehold improvements to tangible fixed assets, as
described in note 4; b) the reclassification of deferred commercial expenses as described in note 5; c) the reclassification of deferred expenses associated with financial operations reducing
medium/long-term loans, as required by IAS 39, which provides for them to be recorded at amortized cost.
Adjustments made to this item were entirely due to the reversal of start-up and expansion costs which, based on IAS 38, are not capitalizable.
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- As of December 31, 2004: in addition to the reclassifications and adjustments made at the earlier dates, this movement also includes adjustments resulting from impairment tests per IAS 36, mainly relating to deferred commercial expenses (key money).
7. Investments and medium/long-term financial receivables:The reclassification of 15,000 thousand euro from investments to medium/long-term financial receivables related to shares in Tecnica S.p.A. purchased during the disposal of part of the sports equipment business. This reclassification reflects the substance of the operation (shares to guarantee a financial receivable). In the second half of 2004, the equity investment was sold following early exercise of the call option held by Tecnica S.p.A.
8. Deferred tax assets: - As of January 1, 2004: the change in this item resulted from the reclassification of
deferred tax liabilities; it includes the tax effects of adjustments to various items following application of IFRS, as well as the effect of applying IAS 12 to determine the tax rate for the “profit in stock” calculation.
- As of December 31, 2004: the item includes the same type of adjustments made at the earlier dates as well as a positive adjustment of 7,146 thousand euro resulting from recording of the future benefit of prior year tax losses which the Group believes to be recoverable; this complies with IAS 12 (probability of recovery requirement).
9. Trade receivables: This item includes the effects of the change due to application of IAS 39 to exchange risk hedges relative to the amount attributable to trade receivables.
10. Other receivables, prepaid expenses and accrued income: Changes in this item are attributable to reclassification of amounts previously included as accruals and deferrals in financial receivables.
11. Financial receivables: Changes in this item are attributable to reclassification of amounts previously included as accruals and deferrals as indicated in point 10; this item has also been adjusted following application of IAS 39 to currency hedge transactions.
12. Available for sale financial assets: This item has been adjusted for the effect of valuation of securities available for sale at fair value as required by IAS 39.
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Balance sheet - Shareholders’ equity Changes and adjustments made to items in shareholders’ equity have been described in previous tables.
Balance sheet - Liabilities 13. Bonds and medium/long-term loans:Changes in these items relate to the reclassification, as required by IAS 39, of deferred expenses of financial operations, previously classified to intangible fixed assets. 14. Retirements benefit obligations: Changes in this item are attributable to the actuarial valuation of TFR resulting from the application of IAS 19.
15. Other provisions and medium/long-term liabilities: This item was adjusted due to the change in timing, from 2003 to 2004, of the costs of terminating some rental contracts early, as required by IAS 37.
16. Trade payables:This item includes the effects of the change due to the application of IAS 39 to exchange risk hedges relative to the amount attributable to trade payables.
17. Other payables, accrued expenses and deferred income: This item includes the effect of the change due to reclassification of accrued expenses and deferred income of a financial nature to financial payables; the adjustments relate to the application of IAS 17 to put lease installments on a straight-line basis over the duration of the contract.
18. Current portion of bonds:Changes in this item relate, as required by IAS 39, to reclassification of deferred expenses of medium/long-term loans, previously recorded in intangible fixed assets.
19. Financial payables: This item includes the effects of the change due to the reclassification of accrued expenses and deferred income as per note 17; the adjustments result from the valuation of hedging contracts at fair value as required by IAS 39.
Statement of income adjustments 20. Revenues and other operating costs for services: This item has been modified due to the application of IAS 18 which establishes recognition of revenues as occurring at the moment of transfer of the risks and rewards associated with ownership of the goods; in particular, revenues from sales in Korea are treated as retail sales.
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21. Other operating income and revenues:This item has mainly been adjusted in respect of gains on sale of capitalized assets which were subject to reversal of monetary revaluations, as required by IAS 16. The most significant effect related to a Spanish company of the Group. 22. Payroll and related costs:Changes in this item relate to the treatment of stock options according to IFRS 2 and adjustment of TFR (employee termination indemnities reserve) to present value in accordance with IAS 19. 23. Depreciation and amortization of property, plant and equipment:Adjustments has mainly been changed by the reclassification of depreciation of leasehold improvements from intangible to tangible fixed assets.
24. Depreciation and amortization of intangible assets: Changes in balance are attributable to the reclassifications in the previous point 23; the adjustments, on the other hand, were due to reversal of amortization for the year of start-up and expansion expenses, which, based on IAS 38, are not capitalizable.
25. Other operating costs for leases and rentals: Changes in balance are wholly attributable to the application of IAS 17, which requires lease installments to be applied on a straight-line basis over the duration of the contract; the positive effect is due to the release of costs accrued in the transitional financial statements for lease contracts with increasing installments but then terminated early during 2004.
26. Impairment of property, plant and equipment and intangible assets: This item is mainly affected by write-downs resulting from impairment tests on capitalized assets as required by IAS 36. These write-downs mainly relate to furniture and furnishings, leasehold improvements and deferred commercial expenses (key money).
27. Provision for risks:This amount refers to expected charges to be paid for the early termination of rental agreements.
28. Other operating costs:As of December 31, 2004: the adjustments are attributable, in addition to the above, to the recognition of start-up and expansion expenses as chargeable in the period.
29. Net financial expenses and exchange differences: The adjustments relate to the application of IAS 39 relating to the valuation of securities at fair value of interest rate hedges and to hedge exchange rate risks for securities and derivative instruments.
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30. Income taxes:This item has been modified by the effect of deferred tax income and expenses on all impacts arising from application of IFRS, as well as by the effect of application of IAS 12 which impacts directly on the subject item. In particular:a) deferred tax income on intercompany income, calculated so that the tax effect is the same as if realized at the moment when the relative asset or liability is eliminated;b) recognition of the future benefit of prior losses of Bentec S.p.A.
Main changes to the statement of cash flow The statement of cash flow prepared by the Group up to the financial statements for the year to December 31, 2004 had the objective of showing the net financial deficit and surplus of the Group resulting from the change in the net financial position at the end of the year, while the statement of cash flow per IAS 7 aims to show the capacity of the Group to generate “cash and equivalent liquid funds”. According to this principle, other equivalent liquid funds represent short-term financial investments and other highly liquid funds which are readily convertible to cash and which are subject to an insignificant risk of changes in value. Therefore, a financial investment is normally classified as equivalent liquid funds if it is short-dated, defined as within three months or less from the date of purchase. Current account overdrafts, normally, form part of financing assets, except where they are repayable at sight and are an integral part of the management of cash and equivalent liquid funds of a company, in which case they are classified as reducing equivalent liquid funds.According to IAS 7, the statement of cash flow must indicate separately cash flows deriving from operating, investing and financing activities:- cash flow from operating activities: cash flows from operating activities are mainly
associated with revenue-producing activities and are shown by the Group using the indirect method; under this method, income for the period is adjusted for non-cash items, or items which did not generate liquidity (non-monetary operations);
- cash flow from investing activities: investing activity is shown separately because, among other things, it is indicative of acquisitions/disposals made with the objective of generating future revenues and positive cash flows;
- cash flow from financing activities: financing activities are activities that result in changes in the size and composition of contributed equity and borrowings obtained.
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Auditors’ report on the IFRS reconciliation schedules illustrating the impact of the transition to International Financial Reporting Standards (IFRS)
To the Board of Directors of Benetton Group S.p.A.
1. We have audited the accompanying Reconciliation Schedules of the consolidated balance sheets at January 1, 2004 and at December 31, 2004 and of the consolidated income statement for the year ended December 31, 2004 (hereinafter the “IFRS Reconciliation Schedules”) of Benetton Group S.p.A. and related explanatory notes, as presented in the section “Transition to IFRS” included in the interim consolidated financial reporting for the six-month period ended June 30, 2005.
The aforementioned IFRS Reconciliation Schedules derive from the consolidated financial statements of Benetton Group S.p.A. as of December 31, 2004 prepared in compliance with the laws governing the criteria for the preparation of financial statements, which we audited and on which we issued our report on April 8, 2005. The IFRS Reconciliation Schedules have been prepared in connection with the process of transition to the International Financial Reporting Standards (IFRS) endorsed by the European Commission. The IFRS Reconciliation Schedules are the responsibility of the Directors of Benetton Group S.p.A. Our responsibility is to express an opinion on the IFRS Reconciliation Schedules based on our audit.
2. We conducted our audit in accordance with auditing standards generally accepted in Italy. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the IFRS Reconciliation Schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the IFRS Reconciliation Schedules. An audit also includes assessing the accounting principles used and the estimates made by the Directors. We believe that our audit provides a reasonable basis for our opinion.
3. In our opinion, the IFRS Reconciliation Schedules, identified in paragraph 1 of this report, have been prepared in compliance with the criteria and standards established by Article 81 of Regulation for Issuers no. 11971/1999 adopted by CONSOB with its Resolution no. 14990 dated April 14, 2005.
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4. We draw to your attention that the IFRS Reconciliation Schedules, having been prepared for sole purpose of the transition project for the preparation of the interim consolidated financial reporting at June 30, 2005 and of the consolidated financial statements at December 31, 2005 prepared in accordance with the IFRS endorsed by the European Commission, do not include the comparative financial information and explanatory notes that would be required in order to present fairly the consolidated financial position and the consolidated result of operations of Benetton Group S.p.A. in compliance with IFRS. Furthermore, we point out that the data reported in the IFRS Reconciliation Schedules could be subject to adjustment should the European Commission alter its stance with respect to approval of IFRS or should the IASB or IFRIC issue new pronouncements.
Treviso, September 22, 2005
PricewaterhouseCoopers S.p.A.Signed byRoberto Adami(Partner)
“This report has been translated into the English language solely for the convenience of international readers. The
original report was issued in accordance with Italian legislation.”
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Glossary
Style and operations
Base collectionThe 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 networkBenetton 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.
Continuative collectionThis is a collection consisting of a very select range of articles that clearly communicate the brand’s personality, while defining its values and market positioning. Articles therefore remain in the collection for at least 18 months.Replenishable on-line.
Directly operated stores (DOS)Directly operated stores are those stores that are managed directly by Benetton Group, as opposed to the wholesale stores with Benetton brands, which are managed by independent businesspeople who buy Benetton Group products.
Flash collection and integrationsThe 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.
IntegrationsAdditions of product items not included in the collection.
Lead timeTime period from the collection of the orders to the products shipment.
Manufacturing delocalizationBenetton Group works throughout the world in the search for specific competencies and international industrial districts in which to take our know-how, so as to guarantee the quality of our products and the satisfaction of our customers. As such, our manufacturing has evolved into a “network of skills”, which, in turn, depends on the best industrial capabilities available in the international marketplace.
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ReassortmentsReassortments include replenishments of products included in the collection, mainly in terms of colors and sizes.
Time to marketTime period from the idea and design of the products to the arrival on the market (delivery to stores).
Administration and finance
Business combinationThe bringing together of separate entities or businesses into one for the purposes of financial reporting.
Cash-generating unit (CGU)A cash-generating unit is defined as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Dividend yieldRatio 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 (referred to the previous year) and price at period end.
EBITDAAcronym for Earnings Before Interests, Taxes, Depreciation and Amortization, EBITDA is a measurement of operating profit before non-monetary items and is equal to operating income (EBIT) plus depreciation, amortization, and other non-monetary costs.
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 Invested Capital 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 options to the top management. For Benetton Group Stock option plan, see Corporate Governance.
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Fair valueThe price at which an asset or liability could be exchanged in a current transaction between knowledgeable, unrelated willing parties.
Form 20-FIn accordance with U.S. law, non-U.S. companies listed on regulated markets in the U.S. are required to submit annual financial statements to the Securities and Exchange Commission (SEC) using Form 20-F, on which consolidated net income and equity, measured in accordance with IFRS, are reconciled with the U.S. generally accepted accounting principles (GAAP). Benetton Group, which has been listed on the New York Stock Exchange since 1989, files this form by June 30 of the year following the fiscal year in question.
Free cash flowThis item on the cash flow statement represents the sum of cash flows generated by operating and investment activities.
Gross operating incomeThis item on the income statement by function of cost is equal to revenues less materials and subcontracted work, employee benefit costs, industrial depreciation and amortization, and other manufacturing costs.
Gross operating investmentsInvestments in intangible assets, property, plant, and equipment, excluding gains on the acquisition of business combinations, which are allocated to intangible assets, property, plant, and equipment.
IAS / IFRSAcronyms for International Accounting Standards and International Financial Reporting Standards, respectively, adopted by Benetton Group.
Impairment testingThe activity by which the Group determines whether there is, as of the closing date of each financial reporting period, objective evidence that an asset has undergone a long-term loss in value, including a measurement of the asset’s recoverable value.
Invested capital This balance sheet term is used to indicate the total resources employed and includes the following: working capital; property, plant and equipment; intangible assets; assets held for sale; equity investments; and other assets and liabilities.
Net Financial PositionBalance sheet item which represents the financial indebtedness net of cash. Benetton Group net financial position 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 long-term portion); - assets: cash and banks, marketable securities, financial receivable (current and non-
current).
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NOPAT Acronym of Net Operating Profit After Taxes. The NOPAT is calculated as Operating profit net of taxes calculated on Operating profit. NOPAT is used to calculate EVA.
Pay out ratioRatio between dividends and Net income/(loss)for the year which represents the percentage of net income distributed to the shareholders as dividend.
Revenues This income statement item includes: sales of core products, other sales, royalty income, and other revenues, less discounts.
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 Operating profit and average Invested capital. The ROIC measures the return on the capital invested to service both shareholders and creditors.
Total net investment/(divestment)Investments in and divestments of property, plant and equipment, intangible assets, equity investments, and other net non-operating investments.
WACCAcronym 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.
Working capitalThis balance sheet term is used to indicate the capital used in the company’s ordinary operations and includes trade receivables, inventories, and the net of other receivables and payables, less trade payables.
Market
ADRAcronym 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.
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ADR - Level III ProgramIn 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.
CUSPIDAcronym of Committee on Uniform Securities and Identification Procedures, standards body which creates and maintains a classification system for securities. The Cuspid is a nine-character number that uniquely identifies a particular security in the US. Benetton Group ADR CUSPID is 081795403.
Free floatFree 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.
ISINAcronym 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.
SedolAcronym 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 DirectorsMain governing body for the administration of a company. The functionality of the Board of Directors is disciplined by the Articles of Association 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 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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Code of EthicsOfficial 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 GovernanceSet 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 CommitteeGoverning 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 Chief Executive Officer, 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 AuditorsInternal 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 Articles of Association. Benetton Board of Statutory Auditors consists of three standing members and two alternate members, who can be re-appointed. The members remain in off ice for three f inancial years to the date of the General Meeting for the approval of the latest f inancial year results.For information on Benetton Statutory Auditors members, see Corporate Governance.
Stock optionsRight 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.
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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.
Corporate information
HeadquartersBenetton Group S.p.A.Villa Minelli31050 Ponzano Veneto (Treviso) - ItalyTel. +39 0422 519111
Legal dataShare capital: euro 236,026,454.30 fully paid-inR.E.A. (register of Commerce) no. 84146Tax ID/Treviso Company Register no. 00193320264
Media & communications departmentE-mail: [email protected] Tel. +39 0422 519036 Fax +39 0422 519930
Investor relationsE-mail: [email protected]. +39 0422 519412 Fax +39 0422 519740 TV Conference +39 0422 510623/24/25
www.benettongroup.com
Graphic design: Fabrica - Catena di Villorba (Treviso - Italy)Photographies: Getty ImagesConsultancy and co-ordination: Ergon Comunicazione (Rome - Italy)Printing: Grafiche Tintoretto (Treviso - Italy)