Benetton Group Annual Report 2005

Transcription

Directors’ report - Consolidated financial statements
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
orissa
21°17’N 85°59’E
The Benetton Group
8
10
13
15
16
40 years of history
21 22 23 24 25 The product
26 27
Administration, Tax and Corporate
Main consolidated companies as of December 31, 2005
Directors and other officers
Letter to shareholders from the Chairman and Founder of the Benetton Group, Luciano Benetton
Key financial data - highlights
Directors’ report
Production organization
The markets
Human resources
Information Technology
Communication
Investor relations
Corporate Governance
36 Supplementary information
Benetton shares and shareholders
38
41
Performance of Benetton shares
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 51 Business segments
Balance sheet and financial position highlights
Consolidated financial statements
59 60 61 62 63 Consolidated income statement
Consolidated balance sheet - Assets
Consolidated balance sheet - Shareholders’ equity and liabilities
Shareholders’ equity - Statement of changes
Consolidated cash flow statement
são paulo
23°31’S 46°37’W
tehran
35°40’N 51°26’E
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.
2003
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 family takes a step
back in order to give
more responsibility
to managers.
1980
Opening of the first
New York store, in
Madison Avenue.
1989
The Group is listed on
Milan, Frankfurt
and New York Stock
Exchanges.
2005
1985
Group exports 60%
of production.
1986
1985
1978
1977
1974
1994
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.
1991
1989
Opening of the first
store in Tokyo.
Collaboration with
Oliviero Toscani begins.
Sisley enters the Group
brand portfolio.
1983
First Benetton store
outside Italy (Paris).
1982
Creation of Benetton
Group.
1968
1965
40 years of history
40 years of history
Benetton is present in
120 countries with
5,000 stores.
Alessandro Benetton is
appointed Deputy
Chairman of the Group.
The Benetton Group
The Benetton Group
The Benetton Group
Main consolidated companies as of December 31, 2005
Ponzano Veneto (TV)
Benetton International
Property N.V.S.A. Amsterdam
100%
Benetton Realty Spain S.L.
Barcelona
100%
Benetton Retail Italia S.r.l.
Ponzano Veneto (TV)
100%
Benind S.p.A.
Ponzano Veneto (TV)
Benetton Realty France S.A.
Paris
56.31%
S.I.G.I. S.r.l.
Ponzano Veneto (TV)
Benetton Real Estate
International S.A. Luxembourg
100%
Fabrica S.p.A.
Ponzano Veneto (TV)
100%
100%
100%
Buenos Aires 2000 S.r.l.
Ponzano Veneto (TV)
100%
Benetton Realty Russia O.O.O.
Moscow
100%
Benetton Real Estate Spain S.L.
Barcelona
100%
Benetton Real Estate
Belgique S.A. Bruxelles
100%
Benetton Real Estate Austria
GmbH Vienna
97%
Benetton France S.à r.l.
Paris
100%
Benetton Realty Portugal
Imobiliaria S.A. Porto
100%
Benetton Realty Netherlands N.V.
Amsterdam
100%
Real Estate Russia Z.A.O.
St. Petersburg
25%
Shanghai Benetton Trading
Company Ltd. Shanghai
100%
Benetton France Commercial
S.A.S. Paris
100%
Benetton Trading Ungheria Kft.
Nagykallo
100%
Benetton Retail (1988) Ltd.
London
100%
Benetton Retail Spain S.L.
Barcelona
100%
Benetton Retail Deutschland
GmbH München
100%
New Ben GmbH
Frankfurt am Main
51%
10
Benetton 2 Retail Comércio
de Produtos Têxteis S.A. Porto
100%
Bentec S.p.A.
Ponzano Veneto (TV)
100%
Benetton Australia Pty. Ltd.
Sydney
100%
100%
Olimpias S.p.A.
Ponzano Veneto (TV)
Benetton Deutschland GmbH
München
100%
Benetton USA Corp.
Wilmington
100%
Benair S.p.A.
Ponzano Veneto (TV)
100%
Benetton Giyim Sanayi ve
Ticaret A.S. Istanbul
Benetton Asia Pacific Ltd.
Hong Kong
100%
Benetton Argentina S.A.
Buenos Aires
100%
Benetton International S.A.
Luxembourg
100%
Benetton Austria GmbH
Salzburg
50%
United Colors
Communication S.A. Lugano
100%
Benetton Tunisia S.à r.l.
Sahline
95%
Benetton Trading USA Inc.
Lawrenceville
100%
Benetton Japan Co., Ltd.
Tokyo
100%
Benetton Korea Inc.
Seoul
Benrom S.r.l.
Sibiu (Romania)
Benetton Istria D.O.O.
Rijeka
100%
Benetton India Pvt. Ltd.
Gurgaon
100%
100%
50%
Benetton Manufacturing
Tunisia S.à r.l. Shaline
100%
Benetton Ungheria Kft.
Nagykallo
100%
Benetton Manufacturing
Holding N.V. Amsterdam
100%
Benetton Retailing Japan Co. Ltd.
Tokyo
95%
100%
Benetton Holding International
N.V.S.A. Amsterdam
100%
Filatura di Vittorio Veneto S.p.A.
Vittorio Veneto (TV)
50%
Benetton Denmark A.p.S.
Copenhagen
100%
Lairb Property Ltd.
Dublin
The Benetton Group
Bencom S.r.l.
Ponzano Veneto (TV)
100%
100%
United Colors of Benetton
Do Brasil Ltda. Curitiba
100%
Benetton Società di Servizi S.A.
Lugano
100%
Benetton Slovakia s.r.o.
Dolny Kubin
100%
Benetton Beograd D.O.O.
Belgrado
100%
Benetton Textil - Confeçcão
de Têxteis S.A. Porto
100%
Benetton Croatia D.O.O.
Osijek
100%
Benetton Commerciale Tunisie
S.à r.l. Seousse
100%
11
The Benetton Group
manarola
44°04’N 09°55’E
12
The Benetton Group
Directors and other officers
Board of Directors
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
Board of Statutory Auditors
Angelo Casò Chairman
Filippo Duodo Auditors
Antonio Cortellazzo
Marco Leotta Alternate Auditors
Piermauro Carabellese
Independent Auditors
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.
13
canberra
35°17’S 149°08’E
The Benetton Group
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 Benetton
Chairman, Benetton Group S.p.A.
15
Key financial data - highlights
The Benetton Group
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
Gross operating income
770
43.6
775
45.5
(5)
Contribution margin
643
36.4
654
38.4
(11)
205
11.6
225
13.2
(20)
Ordinary operating result (*)
Operating profit
157
8.9
158
9.3
(1)
Net income for the year attributable to the Parent Company and minority interests
114
6.5
108
6.4
6
Net income for the year
attributable to the Parent Company
112
6.3
109
6.4
3
%
3.6
(0.6)
(1.6)
(8.7)
(0.4)
5.3
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.
Key financial data
(millions of euro)
Working capital
Assets held for sale
Net capital employed
Net financial position
Total shareholders’ equity
Free cash flow (normalized)
Net total investments/(disposals) (excluding purchase and sale of securities)
12.31.2005 688
8
1,626
351
1,275
167 (A)
118
(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.
16
12.31.2004
711
8
1,654
441
1,213
182 (B)
95
The Benetton Group
Financial ratios
(in %)
12.31.2005 ROE (Net income / Equity)
8.87
ROI (Operating profit / Net capital employed)
9.67
EBITDA ((Operating profit + depreciation and amortization
+ other non-monetary costs) / Revenues)
16.20
ROS (Operating profit / Revenues)
8.90
Net income / Revenues
6.34
12.31.2004
9.02
9.54
18.30
9.26
6.38
Share and market data
Basic earnings per share (euro)
Shareholders’ equity per share (euro)
Price at period end (euro)
Screen-based market: high (euro)
Screen-based market: low (euro)
Market capitalization (thousands of euro)
Average no. of shares outstanding
Number of shares outstanding
12.31.2005 0.62
6.95
9.62
10.15
7.01
1,746,596
181,558,811
181,558,811
12.31.2004
0.60
6.64
9.74
10.18
8.33
1,768,383
181,558,811
181,558,811
12.31.2005 7,978
12.31.2004
7,424
Number of personnel
Total employees
17
xishuang
27°38’N 100°47’E
Directors’ report
Directors’ report
19
albuquerque
35°06’N 106°36’W
Financial year 2005 worked out at two different speeds, which reflects 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
significant development of business in Mediterranean countries, including Turkey, as well as in
eastern Europe and Korea.
+3.6%
consolidated
revenues
The heightened competitiveness and greater flexibility 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 final consumer.
40
years
of history
In 2006, 40 years after the start of operations and 20 years after the first 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 profitable
growth can be sustained while long-term value for our shareholders, sales partners, and all
our other stakeholders is created.
Directors’ report
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.
20
years of SE
listing
Silvano Cassano
Chief Executive Officer (CEO)
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.
21
“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
Directors’ report
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.
“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 antibacterial 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
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.
22
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.
Directors’ report
“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
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
23
with the French firm Selective Beauty for the development and global distribution of
United Colors of Benetton perfumes, colognes, and fragrances.
“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 five years, thereby significantly 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
Directors’ report
“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 BenettonBarbie 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
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.
24
Information Technology: analysis and reliability
Directors’ report
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.
“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
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
25
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.
Directors’ report
“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
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.
26
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.
Directors’ report
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
27
Benetton Group Governance - 2005
:/(9,/63+,9:
,KPaPVUL/VSKPUN:W(
MYLLMSVH[
05+,7,5+,5;(<+0;69:
7YPJL^H[LYOV\ZL*VVWLYZ:W(
:;(;<;69@(<+0;69:
(*HZ¯-+\VKV(*VY[LSSHaaV
)6(9+6-+09,*;69:
,?,*<;0=,4,4),9:
3)LUL[[VU*
()LUL[[VU+*
:*HZZHUV*,6
.4PVU
Directors’ report
:<7,9=0:69@)6+@
+3NZ
<>LPZZ
3()PHUJOP
7LYZVUYLZWVUZPISL
MVYPU[LYUHSJVU[YVSZ
05;,95(3(<+0;05.
*6440;;,,
:6?(<+0;*6440;;,,
(SSPUKLWLUKLU[+PYLJ[VYZ
<>LPZZ
.)Y\UL[[P
3()PHUJOP
565,?,*<;0=,
*)LUL[[VU+*
.)LUL[[VU
.)LUL[[VU
,?,*<;0=,*6440;;,,
3)LUL[[VU
()LUL[[VU
:*HZZHUV
.4PVU
05+,7,5+,5;
9)HY[OVSVTL^
3()PHUJOP
.)Y\UL[[P
<>LPZZ
9,4<5,9(;065
*6440;;,,
;^VPUKLWLUKLU[+PYLJ[VYZ
9)HY[OVSVTL^
<>LPZZ
HUKVULL_LJ\[P]L+PYLJ[VY
.4PVU
7,9:659,:765:0)3,-69
05;,95(3*65;963:
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.
28
+0:*36:<9,*6440;;,,
Directors’ report
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.
29
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:
Directors’ report
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
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.
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
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
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)
30
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.
Directors’ report
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
31
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.
Directors’ report
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.
32
Directors’ report
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
33
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.
Directors’ report
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
34
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.
Directors’ report
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.
35
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.
Directors’ report
Supplementary information
Benetton shares and shareholders
Treasury 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. held as of
Company of shares of shares Name & surname
12.31.2004 held purchased sold Gilberto Benetton 45,000 Benetton Group S.p.A. -
-
Alessandro Benetton 4,000 Benetton Group S.p.A. -
-
Ulrich Weiss 3,500 Benetton Group S.p.A. -
-
36
No. of shares
held as of
Type of
12.31.2005 ownership
45,000 Owned
4,000 Owned
3,500 Owned
Directors’ report
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).
37
2004 stock options plan
(euro)
Options Options Options expired and
outstanding New options exercised not exercised as of granted in the
in the or lost in the
01.01.2005
period
period
period
Options cancelled Options of which
in the period due outstanding exercisable
to termination of as of as of
employment 12.31.2005 12.31.2005
No. of options
3,233,577
-
-
-
-
Allocation ratio
1.781
-
-
-
-
Weighted average exercise price 8.98
-
-
-
-
Market price
9.74
-
-
-
-
3,233,577
1.781
-
8.98
9.62
-
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.
Directors’ report
Shareholder
Institutional investors and banks
Other investors
No. of shareholders
Shareholder structure (1)
From 1 to 4,999 shares
21,807
From 5,000 to 9,999 shares
256
10,000 shares and above
294
Non-classified shares
-
Total
22,357
(1) Based on Spafid data as of January 30, 2006.
Performance of Benetton shares
Benetton 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).
38
%
67.144
9.718
23.138
No. of shares
10,314,682
1,638,047
148,888,512
20,717,570
181,558,811
03-04
2005
10 Benetton Group forecasts
05-04 in 2005
share performance
8
10
6
8
02-01
2004 preliminary
revenues
02-01
2004 preliminary
revenues
4
6
2
4
2
01
02
03-31
BoD for
2004 consol.
03-04
2005 results
forecasts
Barbie05-16
Benetton
1Q results
Group
and
AGM
Partnership
05-16
500 mEur
revolving
credit line
04
05
06
07
7,000,000
results
11-11
2005
nine-months
results
09-21
2005
first half
results
05-04
05-16
Barbie05-16 05-23 500 mEur
03-31
Benetton
revolving
Ex dividend
04-21 Group05-131Q results
BoD for
Unitedand AGM05-25 credit line
JV withPartnership
2004 consol.
dividend
Fragrances
Turkish
results
payment
group Boyner of Benetton
agreement
05-23
Ex dividend
05-13
04-21
05-25
United
JV with
dividend
Fragrances
Turkish
payment
of
Benetton
group Boyner
agreement
03
8,000,000
09-21
2005
first half
results
results
11-11
2005
nine-months
results
8,000,000
6,000,000
7,000,000
5,000,000
6,000,000
4,000,000
5,000,000
3,000,000
4,000,000
2,000,000
3,000,000
1,000,000
08
09
10
11
2,000,000
12 (month)
1,000,000
Benetton Group share (euro)
02
03
04
05
06
07
08
Benetton Group share (euro)
09
10
11
12 (month)
Volumes
Directors’ report
01
Volumes
Benetton Group ADR performance in 2005
60,000
25
50,000
20
60,000
40,000
25
15
50,000
30,000
20
10
40,000
20,000
15
30,000
10,000
5
10
5
20,000
01
02
03
04
05
06
07
08
Benetton Group ADR (Usd)
01
02
03
04
05
06
07
Benetton Group ADR (Usd)
09
10
11
12 (month)
10,000
10
11
12 (month)
Volumes
08
09
Volumes
39
2001-2005 dividend per share performance (in euro)
0.41
0.41
0.38
0.38
0.35
0.35
2001
2001
2002
2002
0.34
0.34
2003
2003
2004
2004
0.34
0.34
2005
2005
2001-2005 dividend yield performance (in %)
4.8
Directors’ report
4.8
3.6
3.6
2001
3.8
3.9
3.8
3.9
3.5
3.5
2002
2003
2004
2005
2001
2002
2003
2004
2005
2005
2004
Earnings per share (euro) 0.62
0.60
Shareholders’ equity per share (euro)
7.02
6.64
Dividend per share (euro)
0.34 0.34
Pay-out ratio (%)
55
57
Dividend yield
3.5
3.9
Price on Dec. 31 (euro)
9.62
9.74
Screen-based price: high (euro)
10.15
10.18
Screen-based price: low (euro)
7.01
8.33
Price per share/Earnings per share
15.5
16.2
Price per share/Shareholders’
equity per share
1.4
1.5
Market capitalization
(millions of euro)
1,747
1,768
Average no. of shares outstanding 181,558,811 181,558,811
No. of shares comprising
share capital
181,558,811 181,558,811
(1)
40
Data before transition to IFRS.
2003(1)
0.59
6.47
0.38
64
3.8
9.11
11.30
5.90
15.4
2002(1)
(0.05)
6.29
0.35
n.a.
4.8
8.50
15.90
8.50
n.a.
2001(1)
0.82
6.86
0.41
50
3.6
12.72
22.44
9.75
15.5
1.4
1.4
1.9
1,654
181,558,811
1,543
181,341,018
2,309
180,720,969
181,558,811
181,558,811
181,558,811
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 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:
12.31.2005
40,959
39,567
39,110
37,466
1,773
2,800
14,832
-
641
12.31.2004
32,864
32,283
19,825
18,664
2,982
13,229
17
937
Directors’ report
(thousands of euro)
Receivables
- of which related to fiscal consolidation with Edizione Holding S.p.A.
Payables
- of which related to fiscal consolidation with Edizione Holding S.p.A.
Purchase of raw materials
Purchase of assets
Other costs and services
Product sales
Rendering of services and other income
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 data
The 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.
41
Directors
Parent Company directors as of December 31, 2005 were as follows:
Name and surname
Luciano Benetton
Carlo Benetton
Alessandro Benetton Silvano Cassano
Giuliana Benetton
Gilberto Benetton
Gianni Mion
Giorgio Brunetti
Ulrich Weiss
Date of birth
05.13.1935
12.26.1943
03.02.1964
12.18.1956
07.08.1937
06.19.1941
09.06.1943
01.14.1937
06.03.1936
02.17.1936
06.03.1958
Appointed
1978
1978
1998
2003
1978
1978
1990
2005
1997
1999
2000
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.
Directors’ report
Principal organizational and corporate changes
Effective 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
42
Office
Chairman
Deputy Chairman
Deputy Chairman
Chief Executive Officer
Director
Director
Director
Director
Director
Director
Director
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.
Directors’ report
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 year
As 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 2006
The 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.
43
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
Highlights 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”.
Directors’ report
(millions of euro)
2005
%
2004
%
Change
Revenues
1,765
100.0
1,704
100.0
61
Materials and subcontracted work
846
47.9
779
45.7
67
Payroll and related costs
85
4.8
87
5.1
(2)
Industrial depreciation and amortization
21
1.2
21
1.2
-
Other manufacturing costs
43
2.5
42
2.5
1
770
43.6
775
45.5
(5)
Distribution and transport
56
3.2
48
2.8
8
Sales commissions
71
4.0
73
4.3
(2)
Contribution margin
643
36.4
654
38.4
(11)
135
7.7
126
7.4
9
Advertising and promotion
61
3.5
54
3.1
7
Depreciation and amortization
64
3.6
74
4.4
(10)
Other income and expenses
178
10.0
175
10.3
3
205
11.6
225
13.2
(20)
Non-recurring expenses/(income)
48
2.7
67
3.9
(19)
Operating profit
157
8.9
158
9.3
(1)
Share of income of associated companies
-
-
-
-
-
Financial income/(expenses)
(23)
(1.3)
(22)
(1.3)
(1)
Foreign currency hedging gains/(losses)
and exchange differences
-
-
-
-
-
Income before taxes
134
7.6
136
8.0
(2)
Income taxes
20
1.1
28
1.6
(8)
Net income/(loss) for the year
114
6.5
108
6.4
6
attributable to:
- shareholders of the Parent Company
112
6.3
109
6.4
3
- minority shareholders
2
0.2
(1)
-
3
%
3.6
8.6
(2.5)
0.4
1.5
(0.6)
18.0
(4.0)
(1.6)
7.5
13.5
(13.5)
1.6
(8.7)
(28.3)
(0.4)
5.3
(1.2)
(26.7)
5.3
2.8
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.
44
Directors’ report
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
45
Directors’ report
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 balancesheet 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 segments
The 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.
46
2005 revenues from third parties by activity
5.7%
5.7%
5.7%
millions of
of euro
euro
millions
Apparel
Apparel
Textile
Textile
millions of euro
Other
and unallocated
unallocated
Other
Appareland
Textile
Other and unallocated
2.0%
2.0%
2.0%
1,629
1,629
100
100
36
36
1,629
100
36
2005 revenues from third parties by geographic area
92.3%
92.3%
92.3%
0.2%
0.2%
4.2%
4.2%
0.2%
4.2%
11.8%
11.8%
millions of
of euro
euro
millions
Europe
Europe
Asia
Asia
millions of euro
The
Americas
The
Americas
Europe
Rest
of the
the world
world
Rest
Asia of
The Americas
Rest of the world
1,481
1,481
207
207
73
73
1,481
44
207
73
4
Directors’ report
11.8%
83.8%
83.8%
83.8%
2005 sales by brand
1.2%
0.5% 1.2%
0.5%
5.3%
5.3%
19.1%
0.5% 1.2%
5.3% 19.1%
millions of
of euro
euro
millions
United
Colors
of Benetton
Benetton
United Colors of
Sisley
Sisley
millions of euro
Playlife
Playlife
United Colors of Benetton
Killer
Loop
Killer
Sisley Loop
Other
sales
Other
Playlifesales
Killer Loop
Other sales
1,232
1,232
318
318
20
20
1,232
99
318
89
89
20
9
89
19.1%
73.9%
73.9%
73.9%
47
For comparative purposes, segment results for years 2005 and 2004 are shown below.
Segment results - 2005
Directors’ report
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
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
44
4
-
-
48
Operating profit
160
(2)
-
(1)
157
66
18
1
-
85
Non-monetary costs (impairment
and stock options)
41
2
-
-
43
EBITDA
267
18
1
(1)
285
Segment results - 2004
Other and (millions of euro) Apparel
Textile unallocated Eliminations Consolidated
Revenues from third parties 1,568
106
30
-
1,704
-
194
-
(194)
Total revenues 1,568
300
30
(194)
1,704
Cost of sales
827
264
28
(190)
929
741
36
2
(4)
775
Selling costs
113
10
-
(2)
121
Contribution margin
628
26
2
(2)
654
410
17
4
(2)
429
218
9
(2)
-
225
68
1
(2)
-
67
Operating profit
150
8
-
-
158
76
18
1
-
95
Non-monetary costs (impairment
and stock options)
59
-
-
-
59
EBITDA
285
26
1
-
312
48
Apparel segment results
(millions of euro) Revenues from third parties Inter-segment revenues
Total revenues Cost of sales
Selling costs
Contribution margin
Operating profit
EBITDA
2005 %
1,629
2
1,631
100.0
887
54.4
744
45.6
119
7.3
625
38.3
421
25.8
204
12.5
44
2.7
160
9.8
267
16.4
2004 %
1,568
-
1,568
100.0
827
52.8
741
47.2
113
7.1
628
40.1
410
26.3
218
13.8
68
4.3
150
9.5
285
18.2
Change 61
2
63
60
3
6
(3)
11
(14)
(24)
10
(18)
%
3.9
n.s.
4.1
7.3
0.5
6.1
(0.6)
2.4
(6.2)
(35.6)
7.2
(6.2)
Directors’ report
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
49
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
Directors’ report
Selling costs
Contribution margin
Operating profit
EBITDA
2005 %
100
170
270
100.0
243
90.0
27
10.0
10
3.5
17
6.5
15
5.6
2
0.9
4
1.6
(2)
(0.7)
18
6.6
2004 %
106
194
300
100.0
264
87.9
36
12.1
10
3.5
26
8.6
17
5.5
9
3.1
1
0.4
8
2.7
26
8.6
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.
50
Change (6)
(24)
(30)
(21)
(9)
-
(9)
(2)
(7)
3
(10)
(8)
%
(6.4)
(12.3)
(10.2)
(8.1)
(25.8)
(12.2)
(31.4)
(6.0)
(75.4)
n.s.
n.s.
(31.2)
Other and unallocated segment results
Selling costs
Contribution margin
Operating profit
EBITDA
2005 %
36
-
36
100.0
34
93.8
2
6.2
-
0.7
2
5.5
2
4.8
-
0.7
-
-
-
0.7
1
3.1
2004 %
30
-
30
100.0
28
92.0
2
8.0
-
1.1
2
6.9
4
13.1
(2)
(6.2)
(2)
(7.3)
-
1.1
1
4.2
Change 6
-
6
6
-
-
-
(2)
2
2
-
-
%
22.0
22.0
24.5
(55.0)
n.s.
n.s.
(21.4)
(8.1)
Directors’ report
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 highlights
The most significant elements of the balance sheet and financial position, compared with
December 31, 2004 are as follows:
(millions of euro) Working capital (A)
Property, plant and equipment and intangible assets (B)
Non-current financial assets (C)
Other assets/(liabilities) (D)
Capital employed
Net financial position (E)
12.31.2005 688
8
895
25
10
1,626
351
1,275
12.31.2004 711
8
910
22
3
1,654
441
1,213
Change
(23)
(15)
3
7
(28)
(90)
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.
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.
51
2005 balance sheet structure (millions of euro)
*\YYLU[HZZL[Z
*\YYLU[SPHIPSP[PLZ
5VUJ\YYLU[HZZL[Z
5VUJ\YYLU[SPHIPSP[PLZ
:OHYLOVSKLYZLX\P[`
Directors’ report
(ZZL[Z
3PHIPSP[PLZ
;V[HS!
52
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
;V[HSPU]LZ[TLU[ZUL[
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.
The net financial position was 351 million euro, decreasing by 90 million euro compared
with December 31, 2004, and is as follows:
Financial liabilities
Non-current financial liabilities:
- bond
-
-
- syndicated loan
(500)
(500)
- other medium-term loans
(3)
(4)
- lease financing
(10)
(18)
Total non-current financial liabilities
(513)
(522)
Current financial liabilities:
- bond
-
(300)
- financial payables (48)
(41)
- current portion of medium-term loans
(1)
(1)
- current portion of lease financing
(5)
(6)
Total current financial liabilities
(54)
(348)
Total financial liabilities
(567)
(870)
(351)
(441)
Non-current net financial position
(506)
(493)
Current net financial position
155
52
(351)
(441)
Change
(22)
(118)
(62)
(9)
(189)
(2)
(213)
1
8
9
Directors’ report
(millions of euro) 12.31.2005 12.31.2004 Financial assets
Non-current financial assets:
- medium-term financial receivables
7
29
Current financial assets:
- Italian government securities, monetary funds and bonds
-
118
- bank deposits
79
141
- other short-term financial receivables
13
22
Total current financial assets
92
281
Cash and ordinary current accounts
117
119
Total financial assets
216
429
300
(7)
1
294
303
90
(13)
103
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/sixmonth 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.
53
2005 net financial position (millions of euro)
*\YYLU[HZZL[Z
5VUJ\YYLU[HZZL[Z
Directors’ report
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;
*HZOMSV^MYVT
VWLYH[PUNHJ[P]P[PLZ
d. c ross-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.
54
(ZZL[Z
;
;V[HSPU]LZ[TLU[ZUL
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:
(millions of euro) Cash flow generated by operating activities Cash flow provided/(used) by investing activities
Free cash flow
Cash flow provided/(used) by financing activities:
- dividends paid
- net change in sources of finance - net change in cash and cash equivalents
Cash flow provided/(used) by financing activities
2005 285 (1)(A)
284 2004
141 (B)
(125)(C)
16
(62) (288) 66 (284) (69)
(11)
64
(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.
Directors’ report
Further information of an economic and financial nature is provided in the explanatory
notes of the consolidated financial statements.
55
2005 sources and applications of funds (millions of euro)
Directors’ report
*HZOMSV^MYVT
VWLYH[PUNHJ[P]P[PLZ
;V[HSPU]LZ[TLU[ZUL[
7H`TLU[VM[H_LZ
7H`TLU[VMKP]PKLUKZ
0U[LYLZ[ZWHPKUL[
:\YWS\Z
107
surplus of funds
*OHUNLPU^VYRPUN
JHWP[HS
,X\P[`I`TPUVYP[PLZ
:V\YJLZ
56
(WWSPJH[PVUZ
57
port moresby
09°25’S 147°17’E
(thousands of euro) 2005 2004 Revenues
1,765,073
1,704,124
Other operating income and revenues
76,601
91,230
Change in inventories of finished products and work in progress
41,339
22,811
Purchases of raw materials and consumables
560,374
452,573
221,043
214,002
Depreciation and amortization:
- of property, plant and equipment 62,242
67,995
- of intangible assets
23,125
27,332
85,367
95,327
Other operating costs:
- external services
631,228
638,351
- leases and rentals
104,478
86,420
- impairment of property, plant and equipment and intangible assets
50,340
49,116
- write-downs of doubtful accounts
17,387
39,240
- provisions for risks
19,780
37,128
- other operating costs
35,842
48,174
859,055
898,429
157,174
(60)
22,722
2
3
4
5
6
7
8
9
10
11
12
13
157,834
161
21,988
Income before taxes
134,392
136,007
Income taxes
20,288
27,663
Net income/(loss) for the year attributable to the Parent Company and minority interests
114,104
108,344
Net income/(loss) attributable to:
111,873
108,795
2,231
(451)
Basic earnings per share (euro)
0.62
0.60
Diluted earnings per share (euro)
0.62
0.60
14
15
16
Operating profit
Share of income/(loss) of associated companies
Net financial expenses and exchange differences
Notes
1
59
Consolidated balance sheet - Assets
(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
7,826
7,840
31
TOTAL ASSETS
2,406,996 2,601,263
60
Consolidated balance sheet - Shareholders’ equity and liabilities
12.31.2005 12.31.2004 Notes
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
123
1,114
Other reserves and retained earnings
857,314
803,500
111,873
108,795
1,261,910 1,206,009
Minority interests
13,050
6,881
1,274,960 1,212,890
Liabilities
Non-current liabilities
Medium/long-term loans 503,163
503,494
Other medium/long-term liabilities
24,152
38,659
Lease financing
10,096
17,748
Retirements benefit obligations
49,767
47,307
Other provisions and medium/long-term liabilities
41,603
50,990
628,781
658,198
Current liabilities
Trade payables
314,953
283,991
Other payables, accrued expenses and deferred income
112,662
84,114
Current income tax liabilities
9,275
14,112
Other current provisions and liabilities
11,830
-
Current portion of lease financing
5,390
6,007
Current portion of medium/long-term loans
654
1,102
Current portion of bonds
-
299,878
Financial payables
19,587
21,047
Bank loans and overdrafts
28,904
19,924
503,255
730,175
Total liabilities
1,132,036 1,388,373
TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES
2,406,996 2,601,263
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
(thousands of euro) The explanatory notes (pages 5 through 56) are to be considered an integral part of this
report.
61
Shareholders’ equity - Statement of changes
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
-
-
-
-
-
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
-
-
-
-
-
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
62
Consolidated cash flow statement
(thousands of euro) 2005 2004
Operating activities
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)
(B)
Operations in non-current financial assets
114,374 (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.
63
shanghai
31°13’N 121°28’E
Explanatory notes
Villa Minelli
Ponzano Veneto (Treviso) - Italy
Share capital: euro 236,026,454.30 fully paid
Tax ID/Treviso Company register: 00193320264
tokyo
35°40’N 139°46’E
Explanatory notes
6
17
20
28
36
44
Summary of main accounting principles and policies
Comments on the principal items in the income statement
Comments on the principal asset items
Comments on the principal items in shareholders’ equity and liabilities
Auditors’ report
Supplementary schedules
Annexes
66
67 71 93 2005 and 2004 financials by quarter
Risk factors of the Benetton business
Transition to IFRS
Glossary
rajasthan
26°45’N 73°30’E
Explanatory notes
Explanatory notes
Explanatory notes
Summary of main accounting principles and policies
Group activities
Benetton 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 statements
The 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 criteria
The method of consolidation adopted for the preparation of the consolidated financial
statements is as follows:
a. C
onsolidation of subsidiary companies’ financial statements according to the line-byline method, with elimination of the carrying value of the shareholdings held by the
Parent Company and other consolidated companies against the relevant shareholders’
equity.
Explanatory notes
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 periodend 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 policies
Application 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
Explanatory notes
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:
- t he 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;
- s ubsequently 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
Explanatory notes
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 criteria
The 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
Explanatory notes
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;
10
Buildings
Plant and machinery
Industrial and commercial equipment
Other assets:
- office and store furniture, furnishings and electronic machines
- vehicles
- aircraft
Explanatory notes
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:
Useful life (years)
33 - 50
4 - 12
4 - 10
4 - 10
4-5
15 - 16
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).
11
Explanatory notes
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:
- f inancial 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;
12
Explanatory notes
- 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 writedowns 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.
13
Explanatory notes
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
14
Explanatory notes
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 management
The Benetton Group has always paid special attention to the identification, valuation
and hedging of financial 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 financial
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;
15
Explanatory notes
- 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
16
Explanatory notes
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.
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.
17
Explanatory notes
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:
- o perating 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;
- f inancing 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 periodend exchange rate. The profit or loss on the cash position is attributed to the income
statement, as financial income or a financial expense.
18
Explanatory notes
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.
19
Explanatory notes
Comments on the principal items in the income statement
(1) Revenues
(thousands of euro) Sales of core products
Miscellaneous sales
Royalty income
Other revenues
Total
2005 1,667,997
57,380
15,480
24,216
1,765,073
2004
1,624,956
45,767
14,419
18,982
1,704,124
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
(thousands of euro) Casual apparel, accessories and footwear
Sportswear
Fabrics and yarns
Other
Total
2005 1,551,700
27,714
88,583
-
1,667,997
2004
1,479,576
42,876
95,780
6,724
1,624,956
2005 1,232,156
318,189
8,571
20,497
88,584
1,667,997
2004
1,168,709
310,867
11,348
31,526
102,506
1,624,956
Sales of core products, by brand
(thousands of euro) United Colors of Benetton
Sisley
Killer Loop
Playlife
Other sales
Total
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.
20
(thousands of euro) Reimbursements and compensation payments
Rental income
Contingent assets Gains on disposal of fixed assets
Release of provisions
Other operating income
Total
2005 2,968
35,410
7,255
6,385
14,673
9,910
76,601
Explanatory notes
(2) Other operating income and revenues
2004
1,691
34,456
6,717
27,098
3,864
17,404
91,230
“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
(thousands of euro) Raw materials, semi-finished and finished products, and other materials
Purchases for advertising and promotion
Other purchases
(Discounts and rebates)
Total
2005 544,724
1,221
14,483
(54)
560,374
2004
438,728
881
13,078
(114)
452,573
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.
21
Explanatory notes
(5) Payroll and related costs
The 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:
(thousands of euro) Wages and salaries
Social security contributions
Provision for TFR
Stock options’ costs
Other payroll and related costs
Total
2005 164,273
43,713
8,330
2,202
2,525
221,043
2004
159,172
44,599
8,182
722
1,327
214,002
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:
2005 2004 Management
99
100
White collars
4,000
3,674
Workers
2,400
2,542
Part-time 1,479
1,108
Total
7,978
7,424
Period
average
100
3,837
2,470
1,294
7,701
(6) Property, plant and equipment
(thousands of euro) Depreciation of buildings
Depreciation of plant, machinery and equipment
Depreciation of furniture, fittings and electronic devices
Depreciation of vehicles and aircraft
Depreciation of leased assets
Depreciation of leasehold improvements
Total
2005 12,611
21,007
17,746
1,586
898
8,394
62,242
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.
22
2004
14,991
20,358
18,900
1,619
622
11,505
67,995
Explanatory notes
(7) Intangible assets
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
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
(thousands of euro) Subcontracted work
Sales commissions
Emoluments to directors and statutory auditors
Maintenance costs
Other services
Total
2005 341,266
56,295
69,846
59,023
5,475
11,736
87,587
631,228
2004
361,917
47,653
73,564
51,934
6,438
12,342
84,503
638,351
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;
23
Explanatory notes
- 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.
(thousands of euro)
Name and surname
Luciano Benetton
Carlo Benetton
Alessandro Benetton
Silvano Cassano
Gilberto Benetton
Giuliana Benetton
Giorgio Brunetti
Gianni Mion
Ulrich Weiss
Angelo Casò Antonio Cortellazzo (3)
Filippo Duodo
Dino Sesani
Position held Duration of office (1) Gross remuneration
Chairman
Year 2005
1,600
Deputy chairman
Year 2005
800
Deputy chairman
Year 2005
300
Year 2005
1,051(2)
Director
Year 2005
100
Director
Year 2005
800
Director
Year 2005
62
Director
Year 2005
81
Director
Year 2005
81
Director
Year 2005
53
Director
Year 2005
85
Chairman of the Board
of Statutory Auditors
Year 2007
62
Statutory Auditor
Year 2007
59
Statutory Auditor
Year 2007
127
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.
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.
24
Explanatory notes
(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
(thousands of euro) Losses on disposal of fixed assets
Indirect taxes and duties
Donations
Returns and discounts relating to sales in previous years
Losses on receivables Other operating expenses
Total
2005 1,952
8,906
2,321
3,082
2,628
16,953
35,842
2004
6,361
7,980
2,307
2,807
2,524
26,195
48,174
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 companies
This 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) Financial income
(Financial expenses)
Foreign currency hedging gains/(losses) and exchange differences
Total
2005 24,139
(47,269)
408
(22,722)
2004
21,984
(43,941)
(31)
(21,988)
25
Explanatory notes
Financial income
(thousands of euro) Interest income from securities amount current assets
Interest income from trade and other receivables
Interest income on bank current accounts
Miscellaneous financial income and income from derivatives
Total
2005 1,607
546
2,513
19,473
24,139
2004
606
832
3,725
16,821
21,984
“Miscellaneous financial income and income from derivatives” mainly includes:
-p
ositive 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
(thousands of euro) Interest expenses on bonds
Interest expenses on bank current accounts
Interest expenses on advances against receivables Interest expenses on short-term loans
Interest on medium/long-term bank loans
Interest expenses on loans from other lenders
Miscellaneous financial expenses and expenses from derivatives Total
2005 (4,636)
(1,030)
(303)
(1,652)
(13,511)
(832)
(25,305)
(47,269)
“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.
26
2004
(8,076)
(379)
(465)
(531)
(11,816)
(814)
(21,860)
(43,941)
Explanatory notes
(16) Income taxes
The total amount includes taxes on income for the year, deferred tax income and expense
as detailed below:
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
The reconciliation of the tax charge is as follows:
(in %) 2005 Italian statutory tax rate
37.25
Effect of statutory tax rates of subsidiaries making a profit
(13.38)
Effect of statutory tax rates of subsidiaries making a loss 11.19
Deferred taxes on profits/reserves distributable by subsidiaries
0.56
Net effect deriving from the transfer of businesses
(21.21)
Amortization/reversal of excess cost deriving from investments acquired
(0.22)
Tax benefit deriving from the impairment of investments
-
Effect of accumulated tax losses
(3.86)
Effect deriving from the write-down of tangible and intangible assets
8.61
Effect of the Italian regional business tax (IRAP)
3.38
Other, net
(7.22)
Effective tax rate
15.10
2004
37.25
(18.12)
10.68
5.85
(9.22)
1.75
(5.91)
(5.25)
3.65
1.70
(2.04)
20.34
27
Explanatory notes
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:
Plant, Land and machinery and (thousands of euro) buildings equipment Net opening balance
Additions
Disposals
Depreciation
Impairment
Reclassification
of assets held for sale
Translation
differences and other
changes
Net closing balance
Furniture,
Assets under
fittings construction and and electronic Vehicles advances for property, Leased Leasehold
devices and aircraft plant and equipment assets improvements 579,986
9,427
(1,980)
(12,611)
(8,782)
79,658
12,456
(1,792)
(21,007)
(2,010)
38,913
27,029
(1,069)
(17,746)
(6,901)
10,583
1,324
(289)
(1,586)
-
(2,802)
(103)
(1,813)
(20)
1,967
565,205
1,333
68,535
3,860
42,273
458
10,470
3,724
9,848
(144)
-
-
-
(2,471)
10,957
11,743
-
-
(898)
-
(3,064)
(53)
7,728
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.
28
Total
48,158 772,765
12,233
72,317
(1,000) (6,274)
(8,394) (62,242)
(11,705) (29,398)
(5)
(7,807)
(1,452)
3,642
37,835 743,003
Explanatory notes
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
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
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
Leased assets include the following:
(thousands of euro) Land and buildings
Accumulated depreciation
Net book amount
12.31.2005 5,959
3,719
(1,950)
7,728
12.31.2004
9,472
3,787
(1,516)
11,743
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.
29
Explanatory notes
(18) Intangible assets
Goodwill and Concessions,
other intangible
licenses,
assets of Patent
trademarks Deferred
(thousands of euro)
indefinite useful life
rights and similar rights
charges
Other
Net opening balance
5,346
1,099
23,934
90,161
16,079
Additions
-
35
1,783
35,798
13,841
Acquisition of subsidiary
5,472
-
-
2,356
-
Disposals
-
-
(7)
(742)
(14)
Amortization
-
(249)
(3,891)
(12,298)
(6,687)
Impairment
(2,551)
-
(4,863)
(11,840)
(1,688)
Translation differences and other changes
243
142
1
(976)
1,265
Net closing balance
8,510
1,027
16,957
102,459
22,796
Total
136,619
51,457
7,828
(763)
(23,125)
(20,942)
675
151,749
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:
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
“Concessions, licenses, trademarks and similar rights” include the net book amount of the
following brands:
(thousands of euro) United Colors of Benetton
Sisley
Killer Loop
Other
Total
30
12.31.2005 3,141
470
8,295
1,015
12,921
12.31.2004
3,046
444
14,273
1,112
18,875
Explanatory notes
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).
(19) Investments
Investments, 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:
(thousands of euro) Benetton Slovakia s.r.o.
Chesa Paravicini S.A.
Korea Fashion Physical Distribution
Beijing Sunshine Knitwear Co. Ltd. Other investments
Total
12.31.2005 3,254
1,479
169
-
228
5,130
12.31.2004
3,195
1,491
252
179
5,117
(20) Guarantee deposits
The 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 receivables
The 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.
31
Explanatory notes
(thousands of euro) From 1 to 5 years
Beyond 5 years
Total
12.31.2005 5,845
1,614
7,459
12.31.2004
22,458
5,816
28,274
(22) Other medium/long-term receivables
This 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 assets
The following table shows a breakdown of net deferred tax assets:
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
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.
32
Explanatory notes
Current assets
(24) Inventories
Inventories, totaling 287,246 thousand euro (255,436 thousand euro as of December 31,
2004), consist of the following:
(thousands of euro) Raw materials, other materials and consumables
Work in progress and semi-manufactured products
Finished goods and goods for sale
Advances from customers
Total
12.31.2005 85,247
54,413
146,679
907
287,246
12.31.2004
101,559
57,558
96,099
220
255,436
Inventories are stated net of the write-down provision. The movement in write-down
provisions is as follows:
Exchange
(thousands of euro) 12.31.2004 Additions Uses difference Raw materials, other materials and consumables 2,334
2,442
(2,361)
102
Work in progress
750
750
(750)
-
Finished goods
14,727
9,284
(8,104)
337
Total
17,811
12,476
(11,215)
439
12.31.2005
2,517
750
16,244
19,511
(25) Trade receivables
As of December 31, 2005, trade receivables, net of the provision for doubtful accounts,
were as follows:
(thousands of euro) Trade receivables
(Provision for doubtful accounts)
Total
12.31.2005 738,214
(82,828)
655,386
12.31.2004
755,226
(97,642)
657,584
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:
(thousands of euro)
12.31.2004
Increases
Uses
Provision for doubtful accounts
97,642
17,387 (32,391)
Releases
to income
statement
(722)
Exch. diff.
and other
changes
912
12.31.2005
82,828
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.
33
Explanatory notes
(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 income
This balance includes:
(thousands of euro) 12.31.2005 Other receivables
23,926
Receivables from parent company
15,541
Total other receivables
39,467
Accrued income:
- other income 1,369
- rental income and operating leases
622
Total accrued income
1,991
Deferred charges:
- rental costs and operating leases
5,037
- other operating charges
190
- taxes
1,421
- insurance policies
636
- advertising and sponsorships
988
Total deferred charges
8,272
Total
49,730
12.31.2004
27,112
27,112
52
104
156
4,690
1,362
1,551
656
113
8,372
35,640
The receivables from Edizione Holding S.p.A. relate to the participation in the
consolidated taxation in 2004.
(28) Financial receivables
(thousands of euro) Short-term financial receivables from third parties
Differentials on forward exchange contracts
Other short-term financial receivables and assets
Total
12.31.2005 3,997
4,267
4,706
12,970
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.
34
12.31.2004
8,958
7,523
5,047
21,528
(thousands of euro) 12.31.2004 Increases Decreases 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)
Explanatory notes
(29) Available for sale financial assets
12.31.2005
-
-
-
-
Financial assets were sold in full in July 2005.
(30) Cash and cash equivalents
(thousands of euro) Current account deposits (euro)
Current account deposits (foreign currency)
Time deposits (euro)
Time deposits (foreign currency)
Checks
Cash in hand
Total
12.31.2005 25,789
31,334
78,887
160
59,601
556
196,327
12.31.2004
31,726
26,773
141,522
154
59,594
427
260,196
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 sale
This 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.
35
Explanatory notes
Comments on the principal items in shareholders’ equity and liabilities
Shareholders’ equity attributable to the Parent Company
The 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 capital
The 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 capital
This item is unchanged from December 31, 2004.
(34) Fair value and hedging reserve
This 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.
36
Explanatory notes
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
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)
1,261,910
111,873
(36) Minority interests
As of December 31, 2005 and 2004, the following consolidated companies had
proportions of shareholders’ equity attributable to minority shareholders:
(in %) 12.31.2005 Foreign consolidated companies:
- New Ben GmbH (Germany)
49
- Benetton Korea Inc. (Korea)
50
- Benetton Giyim Sanayi A.S. (Turkey)
50
12.31.2004
49
50
-
37
Explanatory notes
Liabilities
(37) Medium/long-term loans
Medium 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):
(thousands of euro) 12.31.2005 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 499,775
sheet date was 2.434% (1)
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
Loan from Ministry of Industry, Italian Law no. 46/1982
356
Medium/long-term financial payables to
non-consolidated companies at the interest rate of 2.114%
2,742
Other loans 51
Total
503,163
12.31.2004
499,632
708
419
2,684
51
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.
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:
Year 2007
2008
2009
2010
2011 and beyond
Total
38
12.31.2005
502,873
68
71
74
77
503,163
(thousands of euro) Non-current liabilities for the purchase of assets Other liabilities due to parent company
Other liabilities due to third parties
Total
12.31.2005 1,085
20,772
2,295
24,152
Explanatory notes
(38) Other medium/long-term liabilities
12.31.2004
19,191
18,664
804
38,659
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.
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
The reconciliation between the minimum lease payments due to the leasing company and
their present value (principal) is as follows:
(thousands of euro)
Minimum lease payments
(Outstanding financial expenses)
Present value of lease financing
12.31.2005 16,671
(1,185)
15,486
12.31.2004
26,022
(2,267)
23,755
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.
39
Explanatory notes
(40) Retirements benefit obligations
This 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:
(thousands of euro)
Balance at 01.01.2005
Expense charges in the income statement
Indemnities paid during the financial year
Exchange differences and other changes Balance at 12.31.2005
47,307
9,460
(7,119)
119
49,767
The assumptions regarding their valuation method are described in the “Supplementary
information” section.
(41) Other provisions and medium/long-term liabilities
(thousands of euro)
Provisions
Releases
Utilizations and other changes
Provision for
legal and fiscal risks
9,160
2,970
(1,069)
(1,463)
9,598
Sales agents
indemnities
14,298
3,543
(67)
(465)
17,309
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,
40
Other provisions
27,532
4,702
(12,816)
(4,722)
14,696
Total
50,990
11,215
(13,952)
(6,650)
41,603
Explanatory notes
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 payables
This 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
(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
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.
41
Explanatory notes
(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 liabilities
This 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.
(thousands of euro)
Additions Releases
Other changes
Provision for
legal and Other
tax risks
provisions
-
-
1,306
7,259
-
-
836
2,429
2,142
9,688
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 financing
This 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.
42
Total
8,565
3,265
11,830
(thousands of euro) Loan granted by CARI (Gorizia) on April 20, 2001,
repaid in 2005 at an annual rate of 4%
Loan from Efibanca (Ente Finanziario Interbancario S.p.A.) at an annual
rate of 2.8% repaid in half-yearly installments through 2005
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
Loan from Ministry of Industry, Italian Law no. 46/1982
Other foreign-currency loans obtained by consolidated foreign companies,
partly secured by mortgages on property
Total
12.31.2005 12.31.2004
-
202
-
355
470
63
459
60
121
654
26
1,102
Explanatory notes
(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
(thousands of euro) Financial payables due to other lenders
Commercial paper
Finance bill
Negative differentials on forward exchange contracts
Other short-term financial liabilities
Total
12.31.2005 4,570
-
1,161
4,471
9,385
19,587
12.31.2004
1,885
1,700
2,217
15,245
21,047
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) Current account overdrafts
Advances on receivables and other short-term loans
Total
12.31.2005 12,641
16,263
28,904
12.31.2004
8,238
11,686
19,924
43
Explanatory notes
Reconciliation of income statement by nature of expense and by function
(millions of euro) A
B
C
D
E
F
G
Income statement by nature of cost Revenues 1,765 1,765 Other revenues and operating income A 76 (76) Change in inventories
of finished products and work in progress
41 (546) (341) (846) (85) (85) Purchases of raw
materials and consumables
B (560) 560 (21) (21) (7) (35) (1) (43)
770
Payroll and related costs C (221) 221 Depreciation & amortization D
(85) 85 (56) (56) (70) (1) (71) 643 Other operating costs: (135) (135) - services E (631) 1 (1) (1)
572 (1)
(61)
(64) (64) - leases F
(104) 104
- impairment of assets (50) 75 (6) (70) (102) (73) (226) - write-down of receivables G
(17) 17 - provisions for risks G
(20) 20 - other operating costs G
(37) 37 Operating income 157 -
-
-
-
-
-
- 157 Notes:
44
Income statement
by function
Revenues
Consumption of
materials and
subcontracted work
Wages, salaries
and related costs
Operating
depreciation
Other manufact. costs
Gross contribution
margin
Distribution and
transport
Sales commissions
Contribution
margin
Payroll and related
costs
Advertising and
promotion
Deprec. & amort.
Other income
and expenses
Operating income
A Reclassification 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 Reclassification 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 Reclassification 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 Reclassification 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, reclassified in other income and expenses.
G Reclassification of write-downs of receivables, provisions for risks and other operating costs in the “Other income and expenses” item.
Explanatory notes
Segment information
Information by business segment
Financials by business segment - 2005
Other and
(millions of euro) Apparel Textile unallocated Eliminations Consolidated
100
36
-
1,765
2
170
-
(172)
270
36
(172)
1,765
73
3
-
-
76
Purchases and change in inventories
517
132
28
(158)
519
165
54
2
-
221
66
18
1
-
85
796
71
5
(13)
859
Operating profit
160
(2)
-
(1)
157
(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
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.
45
Explanatory notes
Financials by business segment - 2004
Other and
(millions of euro) Apparel Textile unallocated Eliminations Consolidated
106
30
-
1,704
-
194
-
(194)
300
30
(194)
1,704
84
7
-
-
91
458
141
13
(182)
430
154
58
2
-
214
76
18
1
-
95
814
82
14
(12)
898
Operating profit
150
8
-
-
158
(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
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.
46
(millions of euro) Revenues from third parties
Total revenues Other operating income and revenues
Operating profit
2005 %
1,629
2
1,631
100.0
73
4.5
517
31.7
165
10.1
66
4.1
796
48.8
160
9.8
2004 %
1,568
-
1,568
100.0
84
5.4
458
29.2
154
9.8
76
4.9
814
52.0
150
9.5
Change 61
2
63
(10)
59
11
(10)
(17)
10
2004 %
106
194
300
100.0
7
2.2
141
47.1
58
19.4
18
5.7
82
27.3
8
2.7
Change (6)
(24)
(30)
(4)
(9)
(4)
-
(11)
(10)
2004 %
30
-
30
100.0
-
0.9
13
43.8
2
6.7
1
3.0
14
46.3
-
1.1
Change 6
-
6
-
15
-
-
(9)
-
Explanatory notes
Apparel segment results
%
4.1
(12.3)
13.0
7.5
(13.6)
(2.2)
7.2
Textile segment results
Operating profit
2005 %
100
170
270
100.0
3
1.0
132
49.1
54
19.9
18
6.6
71
26.1
(2)
(0.7)
%
(10.2)
(59.5)
(6.5)
(8.1)
3.2
(13.8)
n.s.
Other and unallocated segment results
Operating profit
2005 %
36
-
36
100.0
-
-
28
77.0
2
6.0
1
2.4
5
13.9
-
0.7
%
22.0
n.s.
n.s.
9.5
(3.2)
(63.4)
(21.4)
Employees by business segment are as follows:
12.31.2005 Apparel
6,271
Textile
1,486
Other and unallocated
221
Total
7,978
12.31.2004 5,441
1,750
233
7,424
Period
average
5,856
1,618
227
7,701
47
Explanatory notes
Revenues by geographic area
Revenues by geographic area and business segment
(millions of euro) Italy
%
Apparel
757 89.1
Textile
62
7.3
Other and unallocated 30
3.6
Total revenues
(year 2005)
849 100.0
Total revenues
(year 2004)
854
Change
(5)
Rest of
The Rest of the
Europe
% Americas
% Asia
%
world
%
597 94.7
73 99.4 199 95.8
3 77.7
35 5.3
-
0.6
2
1.2
1 22.3
-
-
-
-
6
3.0
-
-
632 100.0
73 100.0
207 100.0
596
36
72
1
176
31
4 100.0
Total
1,629
100
36
1,765
6 1,704
(2)
61
Revenues are allocated based on the geographic area in which the customers are located.
Other balance sheet data by geographic area for 2005
(thousands of euro) Italy
Total assets
1,632,147
Gross operating investments
86,541
Rest of Europe
537,515
22,223
The Americas
Asia
50,621
159,538
3,559
8,508
Rest of
the world
27,176
2,944
Total
2,406,997
123,775
Rest of
the world
24,778
6,567
Total
2,601,293
151,978
Total assets are allocated based on the geographic area where the legal entity is located.
Other balance sheet data by geographic area for 2004
(thousands of euro) Total assets
Italy
1,835,923
49,005
Rest of Europe
538,705
90,722
The Americas
Asia
49,882 152,005
162
5,522
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”.
48
Acquiree’s Fair value
(thousands of euro) carrying amount
adjustments
Property, plant and equipment
2,536
-
Intangible assets
155
2,356
Financial assets
2
-
Receivables
6,583
-
Inventories
3,153
-
Payables
106
-
Net debt
12,323
-
Total net equity
-
2,356
Share purchased by the Group (50%)
Goodwill
Purchase cost
Explanatory notes
The assets acquired and goodwill were as follows:
Fair value
2,536
2,511
2
6,583
3,153
106
12,323
2,356
1,178
5,472
6,650
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:
(thousands of euro)
Revenues
Contribution margin
Working capital
Capital employed
17,336
5,975
1,414
12,193
14,569
8,926
5,643
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.
49
Explanatory notes
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:
(thousands of euro) Current service cost
Interest costs
Net actuarial (gains)/losses
Cost relating to past work/services
Total
12.31.2005 7,414
2,046
-
-
9,460
12.31.2004
6,137
2,044
8,181
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:
Discount rate
Rate of inflation
Expected salary increase rate
12.31.2005 4.0%
2.0%
5%-3.5%
12.31.2004
4.5%
2.0%
5%-3.5%
Derivative financial instruments. As of December 31, 2005, the notional principal amount
of outstanding derivative instruments was as follows:
(thousands of euro)
Notional amounts
Positive Economic exchange risk
187,709
736
- fair value hedge
121,677
231
- cash flow hedge
29,403
270
- cash flow hedge - option
36,629
235
Translation exchange risk
115,897
82
- fair value hedge
5,669
48
- cash flow hedge
110,228
34
Transaction exchange risk - fair value hedge
512,355
1,750
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).
50
Fair value
Negative (1,622)
(1,325)
(277)
(20)
Net
(886)
(1,094)
(7)
215
(901)
-
(901)
(819)
48
(867)
(1,669)
81
Explanatory notes
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:
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
Further details on the stock options plan are given below:
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 -
-
-
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).
51
Explanatory notes
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.
Other
(thousands of euro)
Apparel
Textile
and unallocated Property, plant and equipment:
- land and buildings
8,782
-
-
- plant, machinery and equipment
1
2,009
-
- furniture, furnishings and electronic devices
6,901
-
-
- leasehold improvements
11,705
-
-
Total property, plant and equipment
27,389
2,009
-
Intangible assets:
- goodwill and other intangible assets of indefinite useful life 2,551
-
-
- intangible assets of finite useful life
18,391
-
-
Total intangible assets
20,942
-
-
Total
48,331
2,009
-
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 (socalled “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.
52
Total
8,782
2,010
6,901
11,705
29,398
2,551
18,391
20,942
50,340
Explanatory notes
Earnings. The assumptions made to determine basic and diluted earnings per share are as
follows:
12.31.2005 12.31.2004
111,873
108,795
Earnings used to calculate basic earnings per share (*)
-
Effect of dilutive potential ordinary shares (*)
111,873
108,795
Earnings used to calculate diluted earning per share (*)
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.
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:
(thousands of euro) Receivables
- including for participation in the Edizione Holding S.p.A. tax consolidation
Payables
- including for participation in the Edizione Holding S.p.A. tax consolidation
Purchase of raw materials
Purchase of assets
Other costs and services
Sales of products
Revenue from services and other income
12.31.2005 40,959
39,567
39,110
37,466
1,773
2,800
14,832
-
641
12.31.2004
32,864
32,283
19,825
18,664
2,982
13,229
17
937
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.
53
Explanatory notes
Key senior management. Senior management positions within the Group are as follows:
Silvano Cassano
Biagio Chiarolanza
Fabrizio De Nardis
Pier Francesco Facchini
Andrea Negrin
Adolfo Pastorelli
Function
Chief Operations Officer
Commercial Director
Chief Financial Officer
Human Resources Director
Chief Information Technology Officer
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:
(thousands of euro) Short-term benefits
Deferred compensation
Other long-term benefits
Severance indemnity
Stock-based compensation
Total
2005 2,032
-
-
-
2,202
4,234 2004
1,690
722
2,412
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:
(thousands of euro) Less than one year
From 1 to 5 years
Beyond 5 years
Total
12.31.2005
95,288
316,087
283,309
694,684
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:
(thousands of euro) Less than one year
From 1 to 5 years
Beyond 5 years
Total
54
12.31.2005
39,081
82,118
29,299
150,498
Explanatory notes
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
(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
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.
55
Explanatory notes
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.
56
Auditors’ report
Auditors’ report
57
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.
Auditors’ report
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
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)
58
Auditors’ report
59
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:
Auditors’ report
- Consolidated statement of income (using the function of expenses);
- Companies and groups included in the consolidation at December 31, 2005.
60
Consolidated statement of income (using the function of expenses)
2004
1,704,124
438,992
86,802
340,217
21,118
42,046
929,175
Auditors’ report
774,949
47,760
73,582
653,607
125,700
53,710
74,209
242,154
495,773
(thousands of euro) 2005
Revenues
1,765,073
Cost of sales
Materials
525,962
84,636
Subcontracted work
320,271
Industrial depreciation and amortization
21,203
Other manufacturing costs
42,663
994,735
770,338
56,350
Sales commissions
70,651
Contribution margin
643,337
Selling, general and administrative expenses
135,095
60,967
64,164
Other income and expenses
225,937
486,163
Operating profit
157,174
Profit of associated companies before net financial expenses and taxes
157,114
Financial income/(expenses)
(23,130)
Foreign currency hedging gains/(losses)
and exchange differences
408
Income before taxes
134,392
Income taxes
20,288
114,104
111,873
- minority interests
2,231
Earnings per share (euro)
0.62
157,834
157,995
(21,957)
(31)
136,007
27,663
108,344
108,795
(451)
0.60
61
Companies and groups included in the consolidation at December 31, 2005
Name of the company
Location Currency
Share
capital
Auditors’ report
Companies and groups consolidated on a line-by-line basis:
Parent Company
Ponzano Veneto (Tv)
Eur 236,026,454.30
Italian subsidiaries
Benetton Retail Italia S.r.l. Ponzano Veneto (Tv)
Eur
5,100,000
Olimpias S.p.A.
Ponzano Veneto (Tv)
Eur
47,988,000
- Benair S.p.A.
Ponzano Veneto (Tv)
Eur
1,548,000
Benind S.p.A.
Ponzano Veneto (Tv)
Eur
26,000,000
Fabrica S.p.A.
Ponzano Veneto (Tv)
Eur
4,128,000
Bencom S.r.l.
Ponzano Veneto (Tv)
Eur
150,000,000
Società Investimenti e Gestioni Immobiliari (S.I.G.I.) S.r.l.
Ponzano Veneto (Tv)
Eur
36,150,000
- Buenos Aires 2000 S.r.l.
Ponzano Veneto (Tv)
Eur
10,516,456
Bentec S.p.A.
Ponzano Veneto (Tv)
Eur
12,900,000
Foreign subsidiaries
- Benetton Realty Russia O.O.O.
Moscow
Rur
473,518,999
München
Eur
2,812,200
Benetton Deutschland GmbH (1)
Benetton Realty France S.A.
Paris
Eur
94,900,125
Benetton Australia Pty. Ltd. Sydney
Aud
500,000
Benetton USA Corp.
Wilmington
Usd
84,654,000
Benetton Holding International N.V. S.A.
Amsterdam
Eur
92,759,000
- Benetton International S.A.
Luxembourg
Eur
133,538,470
- Benetton Denmark A.p.S.
Copenhagen
Dkk
125,000
- Benetton Giyim Sanayi ve Ticaret A.S.
Istanbul
Trl
7,000,000
- United Colors Communication S.A.
Lugano
Chf
1,000,000
Salzburg
Eur
3,270,277.54
- Benetton Austria GmbH (1)
- Benetton Ungheria Kft.
Nagykallo
Eur
89,190.38
- Benetton Manufacturing Holding N.V.
Amsterdam
Eur
225,000
- Benetton Retail Deutschland GmbH
München
Eur
2,000,000
- New Ben GmbH
Frankfurt
Eur
5,000,000
- Benetton Trading Ungheria Kft.
Nagykallo
Huf
50,000,000
- Benetton Retail (1988) Ltd.
London
Gbp
58,200,000
- Benetton Retail Spain S.L.
Barcelona
Eur
10,180,300
- Benetton 2 Retail Comércio de Produtos Têxteis S.A.
Porto
Eur
500,000
- Benrom S.r.l.
Sibiu
Ron
1,416,880
- Benetton Istria D.O.O.
Rijeka
Hrk
4,075,000
62
Group
interest
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
50.000%
100.000%
100.000%
100.000%
100.000%
100.000%
51.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
Group
interest
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
50.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
100.000%
135,000,000
500
500,000
45,000
10,000
100.000%
100.000%
100.000%
100.000%
25.000%
15,492
33.333%
Auditors’ report
Share
capital
100,000
350,000
50,000
2,000,000
409,241,000
303,900
379,147,833
78,634,578
400,000,000
160,000,000
2,500,000,000
41,400,000
2,482,950
260,000
80,000,000
17,608,000
116,600,000
14,500,000
2,500,000
99,495,711.60
10,000,000
100,000
15,270,450
150,250
Name of the company
Location Currency
- Benetton Textil - Confeçcão de Têxteis S.A.
Porto
Eur
- Benetton Manufacturing Tunisia S.à r.l.
Sahline
Tnd
- Benetton Commerciale Tunisie S.à r.l.
Sousse
Tnd
- Benetton Croatia D.O.O.
Osijek
Hrk
- Benetton India Pvt. Ltd.
Gurgaon
Inr
- Benetton Tunisia S.à r.l.
Sahline
Tnd
- Benetton Trading USA Inc.
Lawrenceville
Usd
Curitiba
Brl
- United Colors of Benetton Do Brasil Ltda. (2)
- Benetton Japan Co., Ltd.
Tokyo
Jpy
- Benetton Retailing Japan Co. Ltd.
Tokyo
Jpy
- Benetton Korea Inc.
Seoul
Krw
- Benetton Asia Pacific Ltd.
Hong Kong
Hkd
- Shanghai Benetton Trading Company Ltd.
Shanghai
Cny
- Lairb Property Ltd.
Dublin
Eur
- Benetton Società di Servizi S.A.
Lugano
Chf
Benetton International Property N.V. S.A.
Amsterdam
Eur
- Benetton Real Estate International S.A.
Luxembourg
Eur
- Benetton Real Estate Belgique S.A.
Bruxelles
Eur
- Benetton Real Estate Austria GmbH
Wien
Eur
- Benetton France S.à r.l.
Paris
Eur
- Benetton France Commercial S.A.S.
Paris
Eur
- Benetton Realty Portugal Imobiliaria S.A.
Porto
Eur
- Benetton Realty Spain S.L.
Barcelona
Eur
- Benetton Real Estate Spain S.L.
Barcelona
Eur
Investments in associated companies carried at cost:
Dolny Kubin
Svk
- Benetton Slovakia s.r.o. (1)
Belgrado
Eur
- Benetton Beograd D.O.O. (3)
Buenos Aires
Arp
- Benetton Argentina S.A. (2)
Amsterdam
Eur
- Benetton Realty Netherlands N.V. (3)
St. Petersburg
Rur
- Real Estate Russia Z.A.O. (3)
Investments in subsidiary companies carried at cost:
Consorzio Generazione Forme - Co.Ge.F.
S. Mauro Torinese (To)
Eur
(1) In liquidation.
(2) Non-operative.
(3) Recently established company.
63
anjuna
15°35’N 73°44’E
Annexes
2005 and 2004 financials by quarter
Transition to IFRS
Glossary
Annexes
65
1st
2nd
1st
3rd
Nine
(millions of euro)
quarter
quarter
half-year
quarter
months
2005
Net revenues
383
459
842
446
1,288
169
199
368
191
559
Contribution margin
142
166
308
160
468
37
58
95
45
140
Operating profit
37
58
95
43
138
Net income attributable to the Group
27
36
63
26
89
- basic earnings per share
0.14
0.20
0.35
0.15
0.50
2004
Net revenues
n.a.
n.a.
860
393
1,253
n.a.
n.a.
380
180
560
Contribution margin
n.a.
n.a.
320
152
472
n.a.
n.a.
116
49
165
Operating profit
n.a.
n.a.
102
50
152
Net income attributable to the Group
n.a.
n.a.
69
35
104
- basic earnings per share
n.a.
n.a.
0.38
0.19
0.56
4th
quarter
477
211
176
65
20
23
0.13
451
215
182
60
6
5
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.
The data for the first and second quarter of 2004 were not prepared, as they were not
required during the transition to IFRS.
66
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.
Risk factors
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.
67
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.
Risk factors
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
68
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.
Risk factors
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.
69
Risk factors
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.
70
Transition to IFRS
Key data for year 2004
Italian
GAAP IFRS IFRS (millions of euro) new format reclassifications adjustments Revenues
1,686
18
-
757
18
-
Contribution margin
653
-
-
EBITDA
314
-
(2)
Operating profit
191
-
(33)
Net income/(loss) for the year attributable to the Parent Company and minority interests
123
-
(14)
attributable to the Parent Company
123
-
(14)
Shareholders’ equity:
- Parent Company portion
1,230
-
(24)
- minority interest portion
7
-
-
1,237
-
(24)
431
-
10
Total
under
IFRS
1,704
775
653
312
158
108
109
1,206
7
1,213
441
Transition to IFRS
Developments in the regulatory framework
European 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.
71
IFRS conversion process for the Benetton Group
Up 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.
Transition to IFRS
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.
72
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.
Transition to IFRS
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.
73
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, 2004
The 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
(thousands of euro) Italian GAAP IFRS effects
Shareholders’ equity including:
1,173,861
(10,681)
12,799
193
468,446
(468)
IFRS
1,163,180
12,992
467,978
Consolidated financial statements as of December 31, 2004
Transition to IFRS
(thousands of euro) Italian GAAP
IFRS effects Shareholders’ equity including:
1,230,319
(24,310)
6,840
41
431,034
9,771
Income for the year attributable to the Parent
Company and minority interests:
- Parent Company
123,074
(14,279)
(494)
41
Total
122,580
(14,238)
74
IFRS
1,206,009
6,881
440,805
108,795
(453)
108,342
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
financial
position
12.31.2004
431,034
4,963
150
(294)
Transition to IFRS
Net financial position (thousands of euro) 01.01.2004 Total under Italian GAAP
468,446
Adjustments to financial statements for IFRS:
i) derivatives for interest rate risks (IAS 39)
9,653
l) derivatives for exchange rate risks (IAS 39)
(1,100)
m) securities available for sale (IAS 39)
(255)
Effect of reclassifications
(8,766)
Total under IFRS
467,978
4,952
440,805
75
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 2004
We 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:
positive tax effect of 2,136 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.
Transition to IFRS
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 financial 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
76
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;
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;
Transition to IFRS
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
77
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:
positive tax effect of 3,185 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.
Transition to IFRS
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
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.
78
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
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.
Transition to IFRS
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 noncurrent 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;
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
79
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.
Transition to IFRS
Consolidated IFRS balance sheets at January 1 and December 31, 2004, consolidated
IFRS statement of income for the period ended December 31, 2004
In 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.
80
Consolidated balance sheet - Assets as of January 1, 2004
IFRS
principles
528,624
88,550
44,325
11,512
17,019
12,336
86,871
789,237
6,842
137,465
144,307
5,514
8
42,332
45,616
8,662
206,545
308,677
1,242,221
233,735
752,638
26,004
54,467
22,238
27,545
324,835
1,441,462
Transition to IFRS
Italian GAAP IFRS IFRS (thousands of euro) new format reclassifications adjustments Notes Non-current assets
Property, plant and equipment Land and buildings
540,099
(8,390)
(3,085)
1
88,550
-
-
Office furniture, furnishings
and electronic equipment
44,325
-
-
11,512
-
-
Assets under construction and advances
17,019
-
-
12,336
-
-
-
86,871
-
4
713,841
78,481
(3,085)
Intangible assets
Goodwill and other intangible assets
of indefinite useful life
90,078
(83,236)
-
5
140,947
3,879
(7,361)
6
231,025
(79,357)
(7,361)
Investments
20,514
(15,000)
-
7
8
-
-
Guarantee deposits
42,332
-
-
30,616
15,000
-
7
8,662
-
-
Deferred tax assets
202,250
-
4,295
8
304,382
-
4,295
1,249,248
(876)
(6,151)
Current assets
Inventories
233,735
-
-
-
-
Tax receivables
26,004
-
-
Other receivables, prepaid expenses
and accrued income
58,307
(3,840)
-
10
17,298
3,840
1,100
11
Available for sale financial assets 27,290
255
12
324,835
-
-
1,440,107
-
1,355
8,088
-
-
TOTAL ASSETS
2,697,443
(876)
(4,796)
8,088
2,691,771
81
Consolidated balance sheet - Shareholders’ equity and liabilities as of January 1, 2004
Transition to IFRS
Italian GAAP IFRS IFRS IFRS
(thousands of euro) new format reclassifications adjustments Notes principles
Shareholders’ equity attributable
to the Parent Company
Share capital
236,026
-
-
236,026
56,574
-
-
56,574
-
-
1,525
1,525
773,387
-
(12,206)
761,181
107,874
-
-
107,874
1,173,861
-
(10,681) 1,163,180
Minority interests
12,799
-
193
12,992
1,186,660
-
(10,488) 1,176,172
Liabilities
Bonds
300,000
(336)
-
13
299,664
(540)
-
13
504,354
705
-
-
705
Lease financing 21,834
-
-
21,834
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
91,263
(10,950)
4,358
17
84,671
126,514
-
-
126,514
4,977
-
-
4,977
1,567
-
-
1,567
-
-
-
Financial payables
1,340
10,950
9,653
19
21,943
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
82
Transition to IFRS
Consolidated statement of income using the nature of expense method - year 2004
Revenues
1,686,351
17,773
-
20 1,704,124
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
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
161
-
-
161
(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
123,074
-
(14,279)
108,795
(492)
-
41
(451)
83
Transition to IFRS
Consolidated balance sheet - Assets as of December 31, 2004
Italian GAAP IFRS IFRS (thousands of euro) new format reclassifications adjustments Notes Non-current assets
Property, plant and equipment Land and buildings
590,184
(7,303)
(2,895)
1
80,381
-
(723)
2
Office furniture, furnishings and electronic equipment
45,180
-
(6,267)
3
10,583
-
-
Assets under construction and advances
3,724
-
-
11,743
-
-
-
72,289
(24,131)
4
741,795
64,986
(34,016)
Intangible assets
Goodwill and other intangible assets of indefinite useful life
90,285
(85,660)
721
5
119,148
20,183
(8,058)
6
209,433
(65,477)
(7,337)
Investments 5,117
-
-
223
-
-
Guarantee deposits
16,715
-
-
28,274
-
-
44,435
-
-
Deferred tax assets
182,765
-
18,503
8
277,529
-
18,503
1,228,757
(491)
(22,850)
Current assets
Inventories
255,436
-
-
-
144
9
Tax receivables
39,451
-
-
Other receivables, prepaid expenses and accrued income
40,478
(4,838)
-
10
16,024
4,838
666
11
Available for sale financial assets 117,878
-
294
12
260,196
-
-
1,386,903
-
1,104
7,840
-
-
TOTAL ASSETS
2,623,500
(491)
(21,746)
84
IFRS
principles
579,986
79,658
38,913
10,583
3,724
11,743
48,158
772,765
5,346
131,273
136,619
5,117
223
16,715
28,274
44,435
201,268
296,032
1,205,416
255,436
657,584
39,451
35,640
21,528
118,172
260,196
1,388,007
7,840
2,601,263
Consolidated balance sheet - Shareholders’ equity and liabilities as of December 31, 2004
Shareholders’ equity attributable
to the Parent Company
Share capital
236,026
-
-
236,026
56,574
-
-
56,574
-
-
1,114
1,114
814,645
-
(11,145)
803,500
123,074
-
(14,279)
108,795
1,230,319
-
(24,310) 1,206,009
Minority interests
6,840
-
41
6,881
1,212,890
503,494
38,659
17,748
47,307
50,990
658,198
283,991
84,114
14,112
6,007
1,102
299,878
21,047
19,924
730,175
1,388,373
Transition to IFRS
1,237,159
-
(24,269)
Liabilities
(369)
-
13
38,659
-
-
Lease financing
17,748
-
-
51,518
-
(4,211)
14
Other provisions and medium/long-term liabilities
50,990
-
-
662,778
(369)
(4,211)
Current liabilities
Trade payables
284,137
-
(146)
16
93,296
(10,280)
1,098
17
14,112
-
-
6,007
-
-
1,102
-
-
300,000
(122)
-
18
Financial payables
4,985
10,283
5,779
19
19,924
-
-
723,563
(119)
6,731
Total liabilities
1,386,341
(488)
2,520
TOTAL SHAREHOLDERS’ EQUITY
AND LIABILITIES
2,623,500
(488)
(21,749)
2,601,263
85
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:
- A s 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.
- A s 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.
Transition to IFRS
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.
86
- A s 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:
- A s 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.
- A s 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.
Transition to IFRS
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.
87
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.
Transition to IFRS
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.
88
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 startup 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.
Transition to IFRS
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.
89
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.
Transition to IFRS
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:
- c ash 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);
- c ash 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;
- c ash flow from financing activities: financing activities are activities that result in changes
in the size and composition of contributed equity and borrowings obtained.
90
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.
Transition to IFRS
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.
91
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
Signed by
Roberto Adami
(Partner)
“This report has been translated into the English language solely for the convenience of international readers. The
Transition to IFRS
original report was issued in accordance with Italian legislation.”
92
Glossary
Style and operations
Base collection
The base collection is the fundamental part within each collection (Spring, Summer,
Autumn, Winter), the first one to be designed and presented to clients. The base
collection includes both basic and Benetton classic items and fashion items which identify
the brand.
Commercial network
Benetton Group commercial network includes stores mainly managed by independent
partners for the distribution of Benetton products in 120 countries. The relationship with
the partners consists in the sale of goods and the authorization to use the brand name,
free of charge, as signage in the stores.
Continuative collection
This 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 integrations
The flash collection is a smaller collection than the base collection and with the main aim
of completing the base collection with specific fashion themes and presented after the
base collection.
Integrations
Additions of product items not included in the collection.
Lead time
Time period from the collection of the orders to the products shipment.
Glossary
Manufacturing delocalization
Benetton 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.
93
Reassortments
Reassortments include replenishments of products included in the collection, mainly in
terms of colors and sizes.
Time to market
Time period from the idea and design of the products to the arrival on the market
(delivery to stores).
Administration and finance
Business combination
The 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 yield
Ratio between the last dividend per share paid and the share price. This ratio is used
as immediate expression of the stock return. For Benetton Group dividend yield, see
Financial Highlights, where the ratio is calculated as dividend paid (referred to the
previous year) and price at period end.
EBITDA
Acronym 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.
Glossary
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.
94
Fair value
The price at which an asset or liability could be exchanged in a current transaction
between knowledgeable, unrelated willing parties.
Form 20-F
In 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 flow
This item on the cash flow statement represents the sum of cash flows generated by
operating and investment activities.
This 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.
Investments 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 / IFRS
Acronyms for International Accounting Standards and International Financial Reporting
Standards, respectively, adopted by Benetton Group.
Impairment testing
The 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 longterm 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.
Glossary
Net Financial Position
Balance 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 noncurrent).
95
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 ratio
Ratio 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.
WACC
Acronym of Weighted Average Cost of Capital, WACC represents the average cost of the
different sources of capital of the company, both as debt and equity. WACC is commonly
used as discount rate for the operating cash flow of a company and to calculate EVA.
Working capital
This 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
Glossary
ADR
Acronym of American Depositary Receipt. The ADR is negotiable certificate that
represents ownership of shares in a non-US company. In 1989 Benetton Group was listed
on the New York Stock Exchange, NYSE, through a Level III Program. Each Benetton ADR
represents two Benetton ordinary shares.
96
ADR - Level III Program
In 1989 Benetton Group was listed on the New York Stock Exchange, NYSE, through an
ADR issue structured as a Level III Program: the ADR were distributed through a public
offering (with capital issue) with a ratio of 1 ADR corresponding to 2 ordinary shares,
were registered under the 1933 Securities Act and under the 1934 Exchange Act and were
listed on the NYSE. In addition, Benetton Group provides a full reconciliation of its annual
report to US GAAP, filing a Form 20 - F and meets the NYSE listing requirements.
CUSPID
Acronym of Committee 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 float
Free float identifies the percentage of outstanding shares of a listed company which
are available for negotiation, and are not under the control of a strategic reference
shareholder.
Benetton Group free float includes 59,653,172 shares, equal to 32.856% of outstanding
shares. The remaining 67.144% is hold by Edizione Holding S.p.A., holding company,
wholly owned by the Benetton family.
ISIN
Acronym of International Securities Identification Number, a unique international code
which identifies a securities issue. Each country has a national numbering agency which
assigns ISIN numbers for securities in that country. Benetton ordinary shares ISIN is
IT0003106777.
Sedol
Acronym of Stock Exchange Daily Official List number, a code used by the London Stock
Exchange to identify foreign stocks (London Stock Exchange). Benetton Group ordinary
shares Sedol is 7128563, while for Benetton Group ADR is 2091671.
Glossary
Board of Directors
Main 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.
97
Code of Ethics
Official document of the Company and its subsidiaries, directly or indirectly controlled.
The Code contains a set of principles according to which the Company conducts its
activity and that of the parties who operate on its behalf.
For Benetton Code of Ethics, see Corporate Governance.
Set of rules and relations referring to the company administration, ownership structure
and management efficiency to reach the company targets.
For information on Benetton Corporate Governance, see Corporate Governance.
Executive Committee
Governing body for the administration of a company.
Benetton Executive Committee was set up in 2003 to ease and quicken the decisional
processes of the Group. One of the Executive Committee’s tasks is to define, upon
proposal by the 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 Auditors
Internal body of a company, which is responsible for the control of the company
management activities. The Statutory Auditors monitor the compliance of the other
governing bodies, in particular the Board of Directors, with the law and the 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 office
for three financial years to the date of the General Meeting for the approval of the
latest financial year results.
For information on Benetton Statutory Auditors members, see Corporate
Governance.
Glossary
Stock options
Right for the option beneficiary to subscribe a certain number of shares per option, at
a predetermined price (exercise price) at or by a certain date (Vesting period).
In September 2004, Benetton Board of Directors, in application of the powers
authorized by the Extraordinary Shareholders’ Meeting, approved a capital increase
to service a Stock option plan for Benetton top management, subject to achievement
of the objectives for creation of accumulated value envisaged in the 2004-2007
Guidelines.
For information on Benetton Group stock option plan, see Corporate Governance.
98
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.
Glossary
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.
99
Corporate information
Headquarters
Villa Minelli
31050 Ponzano Veneto (Treviso) - Italy
Tel. +39 0422 519111
Legal data
Share capital: euro 236,026,454.30 fully paid-in
R.E.A. (register of Commerce) no. 84146
Tax ID/Treviso Company Register no. 00193320264
Media & communications department
E-mail: [email protected]
Tel. +39 0422 519036
Fax +39 0422 519930
Investor relations
E-mail: [email protected]
Tel. +39 0422 519412
Fax +39 0422 519740
TV Conference +39 0422 510623/24/25
www.benettongroup.com
Graphic design: Fabrica - Catena di Villorba (Treviso - Italy)
Photographies: Getty Images
Consultancy and co-ordination: Ergon Comunicazione (Rome - Italy)
Printing: Grafiche Tintoretto (Treviso - Italy)

Benetton Group Annual Report 2005

Transcription

Similar documents

COMPANY PRESENTATION

Come and see the restoration of the Ghent Altarpiece!

Introduction to European Standards and Euro Codes

1-7 August 2016 ITINERARY

Euro Space Center

Untitled

avinor - Route Shop

Presentation Annual report

Agriculture in Romania