##### Table of Contents

]

As filed with the
Securities and Exchange Commission on June 28, 2005   SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
  
 FORM 20-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2004
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 1-14002
(Commission file number) DE RIGO S.p.A.  DE RIGO S.p.A.  Italy
(Jurisdiction of incorporation or organization) Zona Industriale Villanova,
32013 Longarone (BL), Italy
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Name of each exchangeTitle of each class
    
    on which registeredAmerican Depositary Shares
    
    
    New York Stock ExchangeOrdinary shares with a par value of 0.26 each*
    
    
    New York Stock Exchange*
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None
(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
(Title of Class) Indicate the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report. 42,486,776 ordinary shares Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
    
    No o
 Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o
    
    Item 18 þ
 
 
    
    Not for trading, but only in connection with the registration of the American Depositary Shares.




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##### Table of Contents



TABLE OF CONTENTS PageAccounting Principles and Reporting Currency
    
    
    ivCautionary Statement Regarding Forward-Looking Information
    
    
    vPART I
    
    
    1Item 1. Identity of Directors, Senior Management and Advisors
    
    
    1Item 2. Offer Statistics and Expected Timetable
    
    
    1Item 3. Key Information
    
    
    1THE DE RIGO GROUP
    
    
    1SELECTED FINANCIAL DATA
    
    
    1EXCHANGE RATES
    
    
    3RISK FACTORS
    
    
    3Item 4. Information on the Company
    
    
    8HISTORY AND CORPORATE STRUCTURE
    
    
    8BUSINESS OVERVIEW
    
    
    10COMPANY STRATEGY
    
    
    12PRODUCTS
    
    
    13DESIGN AND MANUFACTURING
    
    
    15MARKETING AND DISTRIBUTION
    
    
    17COMPETITION
    
    
    21ITALIAN GOVERNMENT INCENTIVE PROGRAM
    
    
    21TRADEMARKS
    
    
    22INSURANCE
    
    
    22SEASONALITY AND AVAILABILITY OF RAW MATERIALS
    
    
    22PROPERTY, PLANTS AND EQUIPMENT
    
    
    23Item 5. Operating and Financial Review and Prospects
    
    
    23CRITICAL ACCOUNTING POLICIES
    
    
    23RESULTS OF OPERATIONS
    
    
    27EFFECT OF INFLATION
    
    
    38U.S. GAAP RECONCILIATION
    
    
    38LIQUIDITY AND CAPITAL RESOURCES
    
    
    38OFF-BALANCE SHEET ARRANGEMENTS
    
    
    40CONTRACTUAL OBLIGATIONS
    
    
    40CONCENTRATIONS OF CREDIT RISK
    
    
    41NEW ACCOUNTING STANDARDS
    
    
    41PROCESS OF TRANSITION TO INTERNATIONAL ACCOUNTING STANDARDS
    
    
    41TREND INFORMATION
    
    
    41Item 6. Directors, Senior Management and Employees
    
    
    42DIRECTORS AND SENIOR MANAGEMENT
    
    
    42COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT
    
    
    44EMPLOYEES AND LABOR RELATIONS
    
    
    45Item 7. Major Shareholders and Related Party Transactions
    
    
    46
 i




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PageMAJOR SHAREHOLDERS
    
    
    46RELATED PARTY TRANSACTIONS
    
    
    47Item 8. Financial Information
    
    
    48CONSOLIDATED FINANCIAL STATEMENTS
    
    
    48OTHER FINANCIAL INFORMATION
    
    
    48Item 9. The Offer and Listing
    
    
    48TRADING MARKETS AND SHARE PRICES
    
    
    48Item 10. Additional Information
    
    
    49OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR ITS SUBSIDIARIES
    
    
    49BY-LAWS
    
    
    50SIGNIFICANT DIFFERENCES IN CORPORATE GOVERNANCE PRACTICES FOR PURPOSES OF SECTION
303A.11 OF THE NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL
    
    
    58MATERIAL CONTRACTS
    
    
    61EXCHANGE CONTROLS
    
    
    61TAXATION
    
    
    62DOCUMENTS ON DISPLAY
    
    
    66Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    67RISK ANALYSIS
    
    
    67EXCHANGE RATE RISK
    
    
    68INTEREST RATE RISK
    
    
    68CHANGES IN MARKET RISK EXPOSURE COMPARED TO 2003
    
    
    68Item 12. Description of Securities Other than Equity Securities
    
    
    68PART II
    
    
    68Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    68Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    69Item 15. Controls and Procedures
    
    
    69Item 16. [Reserved]
    
    
    69Item 16A. Audit Committee Financial Expert
    
    
    69Item 16B. Code of Ethics
    
    
    69Item 16C. Principal Accountant Fees and Services
    
    
    69Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    71Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    71PART III
    
    
    71
 ii




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PageItem 17. Financial Statements
    
    
    71Item 18. Financial Statements
    
    
    71Item 19. Exhibits
    
    
    72EXHIBIT 8.1EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 13.1
 iii




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Accounting Principles and Reporting Currency Beginning with the fiscal year ended December 31, 2001, De Rigo S.p.A. (the Company and,
together with its consolidated subsidiaries, DeRigo or the Group) has published its
Consolidated Financial Statements in Euros ( or Euro), the official common currency of twelve
Member States of the European Union (the EU), including Italy. In this annual report, references
to dollars, U.S.$ or $ are to United States dollars and references to lire or Lit. are to
Italian lire. Amounts stated in dollars, unless otherwise indicated, have been translated from
Euros at an assumed rate solely for convenience and should not be construed as representations that
the Euro amounts actually represent such dollar amounts or could be converted into dollars at the
rate indicated. Unless otherwise indicated, such dollar amounts have been translated from Euros at
the noon buying rate in The City of New York for cable transfers in foreign currencies as announced
by the Federal Reserve Bank of New York for customs purposes (the Noon Buying Rate) on December
31, 2004 of $1.3538 per 1.00. Such rate may differ from the actual rates used in the preparation
of the Consolidated Financial Statements included in Item 18 and dollar amounts used in this annual
report may differ from the actual dollar amounts that were translated into Euros in the preparation
of such financial statements. For information regarding recent rates of exchange between Euros and
dollars and between Italian lire (De Rigos historical reporting currency) and dollars, see Key
InformationSelected Financial Data  Exchange Rates in Item 3. The Consolidated Financial Statements included in Item 18 are prepared in conformity with
the Italian Civil Code (as amended by Legislative Decree No. 6 dated January 17, 2003 and
subsequent amendments and integrations) related to consolidated financial statements interpreted
and integrated by the accounting principles established or adopted by the Italian Accounting
Profession (collectively, Italian GAAP). These principles differ in certain respects from
generally accepted accounting principles in the United States (U.S. GAAP). See Note 19 of Notes
to the Consolidated Financial Statements included in Item 18. In addition to focusing on the Groups Italian GAAP results, De Rigos management uses certain
non-GAAP measures in evaluating the financial performance of the Group and its wholesale and
manufacturing and retail business segments. These non-GAAP measures include (a) sales results
calculated on a constant exchange rate basis that seeks to exclude the impact of fluctuations in
currency exchange rates by calculating operating results for both periods being compared on the
basis of the exchange rates used for such purpose in the earlier period, (b) income from operations
before depreciation and amortization, a commonly-used measure of financial performance which is
calculated by adding amortization and depreciation expenses to income from operations, and (c) net
financial position, a commonly-used measure of indebtedness which is calculated as being equal to
cash and cash equivalents minus the sum of bank borrowings and long-term debt (including the
current portion thereof). With respect to 2004, the Group has also calculated comparative results
for 2003 excluding the contribution of EID, in order to illustrate the underlying trends in the
businesses that continue to part of the Group following De Rigos sale of the controlling interest
in EID in July 2003 and allowing a comparison of performance on a consistent consolidation basis.
In each of these cases, management believes that these alternative, non-GAAP figures, when
considered in conjunction with (but not in lieu of) other measures that are calculated in
accordance with Italian GAAP, enhance an understanding of De Rigos results of operations and those
of its business segments. These non-GAAP measures are also commonly used by securities analysts,
credit rating agencies and investors to evaluate the financial performance of De Rigo and its
business segments and to compare its performance to that of its competitors. The Groups method of
calculating these non-GAAP measures may differ from methods used by other companies in calculating
similar measures. In each case in which such a non-GAAP measure is used in this annual report, the
most directly iv




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comparable GAAP measure is presented with equal or greater prominence and a reconciliation of
the non-GAAP measure to such most directly comparable GAAP measure is provided. 
 Cautionary Statement Regarding Forward-Looking Information Except for the historical statements and discussions contained herein, statements contained in
this annual report constitute forward looking statements within the meaning of Section 27A of the
U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. Forward
looking statements may include words such as expect, estimate, project, anticipate,
should, intend and similar expressions or variations on such expressions. Any filing of the
Company with the U.S. Securities and Exchange Commission may include forward looking statements.
In addition, other written or oral statements which constitute forward looking statements have been
made and may in the future be made by or on behalf of the Company, including statements concerning
its future operating and financial performance, the Companys share of new and existing markets,
general industry and economic trends and the Companys performance relative thereto and the
Companys expectation as to requirements for capital expenditures and regulatory matters. The
Companys outlook is predominately based on its interpretation of what it considers to be the key
economic factors affecting its businesses. Forward-looking statements with regard to the Companys
businesses rely on a number of assumptions concerning future events and are subject to a number of
uncertainties and other factors, many of which are outside the Companys control, that could cause
actual results to differ materially from such statements, including: the many interrelated factors
that affect consumers confidence, including worldwide demand for sunglasses and prescription
eyewear; general economic conditions in each of the Companys markets; legislation, particularly
that relating to the reimbursement of eyewear-related expenses; actions of competitors in the
various industries in which the Company competes; production difficulties, including capacity and
supply constraints and excess inventory levels; labor relations; interest rates and currency
exchange rates; political and civil unrest; and other risks and uncertainties. The Company
disclaims any obligation to update or revise any forward looking statements, whether as a result of
new information, future events or otherwise. v




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PART I 
 Item 1.Identity of Directors, Senior Management and Advisors Not applicable. 
 Item 2.Offer Statistics and Expected Timetable Not applicable. 
 Item 3.Key Information 
 THE DE RIGO GROUP De Rigo is a worldwide leader in the design, manufacture and marketing of high-quality eyewear
in the mid- and premium-price categories and one of the largest optical retailers in Europe through
its Dollond & Aitchison (D&A) and General Optica retail chains. Unless otherwise specified or required by the context, references to we, us and our in
this annual report are to De Rigo S.p.A. and its consolidated subsidiaries. 
 SELECTED FINANCIAL DATA The following selected consolidated financial data at December 31, 2004 and 2003, and for each
of the years in the three-year period ended December 31, 2004, have been derived from the audited
Consolidated Financial Statements included in Item 18. Financial data at December 31, 2002, 2001
and 2000, and for each of the years in the two-year period ended December 31, 2001, have been
derived from audited Consolidated Financial Statements not included herein. The financial data at December 31, 2004 and 2003, and for each of the years in the three-year
period ended December 31, 2004, should be read in conjunction with Operating and Financial Review
and Prospects in Item 5 of this annual report, and are qualified in their entirety by reference to
the audited Consolidated Financial Statements and Notes thereto included in Item 18. The Companys audited consolidated financial statements, from which the selected consolidated
financial data set forth below have been derived, were prepared in accordance with Italian GAAP,
which differ in certain respects from U.S. GAAP. For a discussion of the principal differences
between Italian GAAP and U.S. GAAP as they relate to the Companys consolidated net income and
stockholders equity, see Note 19 of Notes to the Consolidated Financial Statements included in
Item 18. Beginning with the fiscal year ended December 31, 2001, the Company has published its
Consolidated Financial Statements in Euros. Prior to January 1, 2001, the reporting currency of De
Rigo S.p.A. and its consolidated subsidiaries was Italian lire. To facilitate a comparison, all
lire-denominated financial data for periods prior to January 1, 2001 included in this annual report
have been restated from Italian lire to Euros at the fixed rate as of December 31, 1998 established
by the European Central Bank of Lit. 1,936.27 = 1.00. The comparative balances for prior years
now reported in Euros depict the same trends as would have been presented had the Group continued
to report such amounts in Italian lire. The Consolidated Financial Statements and other financial
data for periods prior to January 1, 2001 may not be comparable to that of other companies
reporting in Euros if those companies had restated from a reporting currency other than Italian
lire. 1




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Year Ended/AtDecember 31,(thousands ofdollars, except as(thousands of euros, except as indicated)
    
    
    
    
    
    
    indicated)(1)2000(2)
    
    
    2001(2)
    
    
    2002(2)
    
    
    2003(2)
    
    
    2004
    
    
    2004INCOME STATEMENT DATAAmounts in accordance with Italian GAAP:Net sales
    
    
    456,602
    
    
    
    505,250
    
    
    
    512,459
    
    
    
    504,801
    
    
    
    514,384
    
    
    $
    696,373Cost of sales
    
    
    167,613
    
    
    
    184,293
    
    
    
    203,208
    
    
    
    202,040
    
    
    
    198,900
    
    
    
    269,271Gross profit
    
    
    288,989
    
    
    
    320,957
    
    
    
    309,251
    
    
    
    302,761
    
    
    
    315,484
    
    
    
    427,102Operating expenses
    
    
    265,307
    
    
    
    289,897
    
    
    
    292,524
    
    
    
    277,907
    
    
    
    286,659
    
    
    
    388,079Income (loss) from operations
    
    
    23,682
    
    
    
    31,060
    
    
    
    16,727
    
    
    
    24,854
    
    
    
    28,825
    
    
    
    39,023Income before income taxes
    
    
    21,763
    
    
    
    27,200
    
    
    
    9,769
    
    
    
    37,838
    
    
    
    27,649
    
    
    
    37,431Income taxes
    
    
    6,895
    
    
    
    6,551
    
    
    
    46
    
    
    
    14,935
    
    
    
    12,737
    
    
    
    17,243Net income (2)
    
    
    14,136
    
    
    
    21,217
    
    
    
    10,645
    
    
    
    18,478
    
    
    
    14,478
    
    
    
    19,600Number of shares and ADS outstanding (3)
    
    
    44,500,000
    
    
    
    44,651,403
    
    
    
    44,714,255
    
    
    
    44,491,055
    
    
    
    42,486,776
    
    
    
    42,486,776Weighted average number of shares and ADS (3)
    
    
    44,500,000
    
    
    
    44,590,060
    
    
    
    44,688,415
    
    
    
    44,618,230
    
    
    
    43,503,858
    
    
    
    43,503,858Net income per Ordinary Share and ADS (2) (4)
    
    
    0.32
    
    
    
    0.48
    
    
    
    0.24
    
    
    
    0.42
    
    
    
    0.34
    
    
    $
    0.46Dividends per Ordinary Share and ADS (4)
    
    
    
    
    
    
    0.12
    
    
    
    0.13
    
    
    
    
    
    
    
    
    
    
    
    Amounts in accordance with U.S. GAAP:Net sales
    
    
    456,602
    
    
    
    505,250
    
    
    
    512,459
    
    
    
    504,801
    
    
    
    514,384
    
    
    $
    696,373Net sales from continuing operations
    
    
    433,161
    
    
    
    473,269
    
    
    
    481,314
    
    
    
    485,192
    
    
    
    514,384
    
    
    
    696,373Net income (loss)
    
    
    13,282
    
    
    
    18,249
    
    
    
    17,145
    
    
    
    24,250
    
    
    
    23,039
    
    
    
    31,190Net income (loss) from continuing operations
    
    
    13,305
    
    
    
    18,187
    
    
    
    18,383
    
    
    
    16,486
    
    
    
    23,039
    
    
    
    31,190Diluted number of shares and ADS (3)
    
    
    44,630,709
    
    
    
    45,542,182
    
    
    
    45,389,512
    
    
    
    45,223,599
    
    
    
    44,112,010
    
    
    
    44,112,010Net income per Ordinary Share
    
    
    0.30
    
    
    
    0.41
    
    
    
    0.41
    
    
    
    0.54
    
    
    
    0.54
    
    
    $
    0.73Basic earnings per Ordinary Share and per
ADS from continuing operations
    
    
    0.30
    
    
    
    0.41
    
    
    
    0.41
    
    
    
    0.37
    
    
    
    0.53
    
    
    $
    0.72Diluted earnings per Ordinary Share and per
ADS from continuing operations
    
    
    0.30
    
    
    
    0.40
    
    
    
    0.41
    
    
    
    0.37
    
    
    
    0.52
    
    
    $
    0.71Dividends per Ordinary Share and ADS
    
    
    
    
    
    
    0.12
    
    
    
    0.13
    
    
    
    
    
    
    
    
    
    
    
    BALANCE SHEET DATAAmounts in accordance with Italian GAAP:Total current assets
    
    
    166,211
    
    
    
    202,373
    
    
    
    195,483
    
    
    
    156,349
    
    
    
    159,483
    
    
    $
    215,908Property, plant and equipment, net
    
    
    123,194
    
    
    
    128,102
    
    
    
    120,905
    
    
    
    109,083
    
    
    
    108,176
    
    
    
    146,449Total assets
    
    
    420,802
    
    
    
    462,492
    
    
    
    439,901
    
    
    
    376,887
    
    
    
    394,564
    
    
    
    534,161Total current liabilities
    
    
    196,344
    
    
    
    220,813
    
    
    
    199,586
    
    
    
    123,838
    
    
    
    125,637
    
    
    
    170,087Long-term debt, less current portion
    
    
    1,098
    
    
    
    764
    
    
    
    696
    
    
    
    497
    
    
    
    341
    
    
    
    462Total shareholders equity
    
    
    189,374
    
    
    
    210,419
    
    
    
    212,117
    
    
    
    226,884
    
    
    
    241,409
    
    
    
    326,820Capital stock
    
    
    11,491
    
    
    
    11,609
    
    
    
    11,626
    
    
    
    11,626
    
    
    
    11,683
    
    
    
    15,816Amounts in accordance with U.S. GAAP:Total assets
    
    
    420,891
    
    
    
    459,479
    
    
    
    450,147
    
    
    
    392,076
    
    
    
    403,569
    
    
    $
    546,352Total current liabilities
    
    
    196,344
    
    
    
    220,813
    
    
    
    200,342
    
    
    
    123,838
    
    
    
    125,637
    
    
    
    170,087Total shareholders equity
    
    
    189,460
    
    
    
    206,695
    
    
    
    199,470
    
    
    
    221,744
    
    
    
    235,190
    
    
    
    318,400
 
 (1)
    
    The translation of Euros into dollars has been made at the rate of $1.3538 = 1.00, the
Noon Buying Rate on December 31, 2004. See Accounting Principles and Reporting Currency
preceding Part I of this annual report.(2)
    
    Certain amounts in the Companys Consolidated Financial Statements for fiscal years ended
December 31, 2000, 2001, 2002 and 2003 have been reclassified to conform with the
presentation of these amounts in the Companys Consolidated Financial Statements for the
fiscal year ended December 31, 2004. See Note 2 of Notes to the Consolidated Financial
Statements included in Item 18.(3)
    
    Number of Ordinary Shares/ADSs.(4)
    
    Euros/Dollars per Ordinary Share/ADS. 2




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EXCHANGE RATES The following table sets forth the Noon Buying Rate for Euros expressed in U.S. dollars
per Euro (rounded to the nearest one hundredth of a U.S. cent) for the periods indicated. Year:
    
    High
    
    
    Low
    
    
    Average(1)
    
    
    At Period End2000
    
    
    
    
    
    
    
    
    
    
    0.9207
    
    
    
    0.93882001
    
    
    
    
    
    
    
    
    
    
    0.8909
    
    
    
    0.89012002
    
    
    
    
    
    
    
    
    
    
    0.9495
    
    
    
    1.04852003
    
    
    
    
    
    
    
    
    
    
    1.1411
    
    
    
    1.25972004
    
    
    
    
    
    
    
    
    
    
    1.2438
    
    
    
    1.3538
 Month ending:December 31, 2004
    
    
    1.3625
    
    
    
    1.3224
    
    
    
    
    
    
    
    January 31, 2005
    
    
    1.3476
    
    
    
    1.2954
    
    
    
    
    
    
    
    February 28, 2005
    
    
    1.3274
    
    
    
    1.2773
    
    
    
    
    
    
    
    March 31, 2005
    
    
    1.3465
    
    
    
    1.2877
    
    
    
    
    
    
    
    April 30, 2005
    
    
    1.3093
    
    
    
    1.2819
    
    
    
    
    
    
    
    May 31, 2005
    
    
    1.2936
    
    
    
    1.2349
    
    
    
    
    
    
    
    
 
 (1)
    
    Average of the Noon Buying Rate for Euro for the last business day of each month in the
period. On June 22, 2005, the Noon Buying Rate for Euros was 1.00 = $ 1.2134 or $1.00 = 0.8241. The above rates are given for information only, and may differ from the rates used in the
preparation of the Companys Consolidated Financial Statements included in Item 18. 
 RISK FACTORS Holders and prospective purchasers of the American Depositary Shares (ADSs) should consider
carefully the factors set forth below, as well as the other information contained in this filing,
in evaluating an investment in the ADSs. Risk Factors Relating to the Eyewear Industry The eyewear industry is very sensitive to fluctuations in consumers disposable income,
personal preferences and season. Our wholesale and manufacturing and retail operations are each subject to trends affecting the
eyewear industry as a whole, as well as factors affecting individual sectors of the industry in
which we participate, including those for sunglasses, prescription eyewear and fashion eyewear.
The eyewear industry is subject to changes in general economic conditions, which affect disposable
consumer income, as well as to changes in fashion, which affect consumer tastes and general demand
for fashion eyewear. While eyewear has achieved widespread acceptance as a fashion accessory, and
the fashion eyewear industry has grown significantly in recent years, there can be no assurance
that this growth will continue or that consumer preferences will not change in a manner that will
adversely affect the fashion eyewear sector, the eyewear industry as a whole or our business in
particular. In addition, purchases of sunglasses in any given market are subject to fluctuations
due to seasonality. Any event or circumstance resulting in decreased demand for eyewear generally,
or for our products in particular, could adversely affect our business, operating results and
financial condition. 3




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The eyewear industry is highly competitive and we may be unable to compete successfully. The eyewear industry is highly competitive. Some of our competitors have significantly
greater financial, distribution and marketing resources, and significantly greater brand awareness,
than we do in certain important markets. In addition, there can be no assurance that business and
regulatory developments will not encourage the entrance of other direct competitors into our
markets, which may adversely affect our business, operating results and financial condition. The development of vision correction alternatives could harm our business. Our future success could depend to a significant extent on the availability and acceptance of
vision correction alternatives to prescription eyeglasses, such as contact lenses and refractive,
optical surgery. While we do not believe that contact lenses and refractive surgery or other
vision correction alternatives will materially adversely impact our business at the present time,
there can be no assurance that technological advances in, or reductions in the cost of, vision
correction alternatives will not occur in the future, resulting in their more widespread use.
Increased use of vision alternatives could result in decreased use of our prescription eyewear
products, which could have a material adverse impact on our business, results of
operations and financial condition. Risk Factors Relating to De Rigo We may not achieve the expected benefits of acquisitions, joint ventures, restructurings or
other similar corporate transactions. We have engaged in the past and are likely to engage in the future in significant corporate
transactions, such as acquisitions, joint ventures and restructurings, the success of which is
difficult to predict. In late 1998, we acquired D&A; in 2000, we acquired General Optica and began
operations at a joint venture with the Prada Group, which was subsequently terminated in July 2003.
There can be no assurance that we will be able to enter into such transactions in the future or
integrate our existing acquisitions and joint ventures without encountering administrative,
technical, political, financial or other difficulties. There can also be no assurance that we will
be able to carry out any such transactions in accordance with our plans, or that we will succeed in
realizing any potential synergies, cost savings or other expected benefits. Our ability to continue to expand our operations through acquisitions will depend upon our
ability to consummate acquisitions on terms acceptable to us. We face challenges in integrating
any acquisition into our businesses and may need to invest significant capital and resources in the
acquired businesses. Acquisitions of businesses in new markets will also require us to hire and
retain qualified personnel and expose us to uncertainties that are new to us. In addition, because
we may incur additional debt to finance new acquisitions, our financial expense would increase as
we pay interest on that debt. We may experience design and manufacturing difficulties, causing our business to suffer. The mid- and premium-price categories of the prescription eyewear and sunglasses markets in
which we compete are particularly vulnerable to changes in fashion trends and consumer preferences.
Our historical success is attributable, in part, to our introduction of innovative eyewear designs
which are perceived to represent an improvement over products otherwise available in the market.
Our future success will depend on our continued ability to develop and introduce such innovative
products. 4




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In addition, our future success will also depend on our continued access to raw materials and
manufacturing equipment and processes. Production difficulties, including capacity and supply
constraints and excess inventory levels, could have a material adverse impact on our business,
results of operations and financial condition. Further, any disruption in the operations in any of
our facilities, whether due to technical or labor difficulties, destruction of or damage to any
facility or other reasons, could have a material adverse effect on our business, results of
operations and financial condition. We may also experience production, distribution and marketing difficulties that could harm
our business. The mid- and premium-price categories of the prescription eyewear and sunglasses markets in
which we operate are highly competitive. Management believes that, in addition to successfully
introducing new products, responding to changes in the market environment and maintaining superior
production capabilities, our ability to remain competitive is highly dependent on our success in
maintaining an efficient distribution network. If we are unable to maintain an efficient
distribution network, our business, results of operations and financial condition could suffer. Further, we may be unsuccessful at channeling consumer preferences towards our products. Our
business could be adversely affected by such a failure, in addition to the substantial advertising
and marketing costs incurred by the failed marketing efforts. Our future success depends, in part, on our ability to achieve and manage growth. In order to achieve and manage our growth effectively, we will be required to increase and
streamline production and implement manufacturing efficiencies where possible, while maintaining
strict quality control and the ability to deliver products to our customers in a timely and
efficient manner. We must also continuously develop new product designs and features, expand our
information systems and operations, and train and manage an increasing number of management-level
and other employees. If we are unable to manage these matters effectively, our business, results
of operations and financial condition could suffer. Our business is very dependent on our ability to negotiate and maintain favorable license
arrangements. We have entered into license agreements that enable us to manufacture and distribute
prescription eyewear and sunglasses principally under the names Celine, Chopard, Escada, Etro, La
Perla, Loewe, Givenchy, Fila Eyes, Furla, Miniand others. In late 2004, we entered into new
license agreements under which we will be manufacturing and distributing Ermenegildo Zegnaand Jean
Paul Gaultier-branded eyewear by the end of 2005. A majority of the sales of our wholesale and
manufacturing division in recent years have been attributable to licensed brands, which accounted
for 51.7% of such sales in 2004 (55.1% in 2003). These license agreements typically have terms of
between one and five years. In 2004, license agreements under which we manufactured and
distributed eyewear under the Fendiand Onyxbrands expired and were not renewed. We believe that
our ability to maintain and negotiate favorable license agreements or alternative arrangements with
leading designers in the fashion and luxury goods industries is essential to the branding of our
products and, therefore, material to the success of our business. Accordingly, our inability to
negotiate and maintain satisfactory license arrangements with leading designers could have a
material adverse effect on our business, results of operations and financial condition. In addition, each of these licensors has final approval over all eyeglass frames and other
products bearing the licensors proprietary marks, and the frames must meet the licensors general
design specifications and quality standards. Consequently, each licensor may, in the exercise of
its approval rights, delay the distribution of eyeglass frames bearing its proprietary marks.
Accordingly, there can be no assurance that we will not be subject to delays resulting from
disagreements with, or 5




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an inability to obtain approvals from, our licensors. These delays could materially and
adversely affect our business, operating results and financial condition. Some of our licenses limit our right to market and sell products with competing brand names
and/or limit the markets in which we are able to use the licensed brands. We expect that some of
the future licenses we obtain will contain some limitations on competition within market segments.
Our growth, therefore, will be limited to capitalizing on our existing licenses in the markets for
sunglasses and prescription eyewear and to introducing eyewear in other markets. In addition,
there can be no assurance that disagreements will not arise between us and our licensors regarding
whether certain brand-name lines would be prohibited by the license agreements. Disagreements with
licensors may adversely affect sales of our existing products or prevent us from introducing new
eyewear products in market segments we believe are not being served by our existing products. If we are unable to protect our proprietary rights, our business and financial results may
be harmed. We rely on trade secret, unfair competition, trade dress, trademark and copyright law to
protect our rights to certain aspects of our products, including product designs, proprietary
manufacturing processes and technologies, product research and concepts and recognized trademarks,
all of which we believe are important to the success of our products and our competitive position.
However, pending trademark applications may not generate a registered trademark, and any trademark
registration that is granted may be ineffective in thwarting competition and could be held invalid
if subsequently challenged. The actions we take to protect our proprietary rights may be
inadequate to prevent imitation of our products. Our proprietary information could become known to
competitors, and we may not be able to meaningfully protect our rights to proprietary information.
Furthermore, other companies may independently develop substantially equivalent or better products
that do not infringe on our intellectual property rights, or they could assert rights in, and
ownership of, our proprietary rights. Moreover, the laws of certain countries do not protect
proprietary rights to the same extent as the laws of the United States. We devote financial and other resources to defend our proprietary rights. If the level of
potentially infringing activities by others were to increase substantially, we might have to
significantly increase the resources we devote to protecting our rights. Additionally, an adverse
determination in any dispute involving our proprietary rights could require us to grant licenses
to, or obtain licenses from, third parties, or could prevent us from manufacturing or selling our
products or could subject us to substantial liability. Any of these possibilities could have a
material adverse effect on our business, results of operations, financial condition and prospects. Our business is subject to risks relating to international sales and exposure to changing
local conditions. We currently operate in many countries and are therefore subject to various risks inherent in
conducting business internationally. These risks include: exposure to local economic, political
and civil conditions; export and import restrictions; currency exchange rate fluctuations and
currency controls; changes in government regulations, including those relating to payments for
prescription eyewear; withholding and other taxes on remittances and other payments by
subsidiaries, investment restrictions or requirements; and local content laws requiring that
certain products contain a specified minimum percentage of domestically-produced components. For
example, the appreciation of the Euro against the Pound Sterling in 2002 and 2003 reduced the value
in Euro terms of the results of D&A, our British retail chain, while the economic crisis in
Argentina led us to divest our former distribution subsidiary in that country. The likelihood of
such occurrences and their potential effect on us vary from country to country and are
unpredictable, but may have a significant effect on our business, results of operations, financial
condition and prospects. 6




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Our future success depends, in part, on attracting and retaining qualified personnel. Our ability to be competitive will depend, to some degree, on our ability to attract and
maintain highly qualified managerial, manufacturing, sales and marketing personnel. There can be
no assurance that we will be able to continue to recruit and retain such personnel. In particular,
we have been dependent on certain key management personnel in the past, and the loss of any of such
key personnel may have a material adverse effect on our business, results of operations and
financial condition. We are defendants in a number of legal proceedings. We are defendants in a number of legal proceedings incidental to our business activities.
Our pending legal proceedings include various civil and administrative claims and disputes
relating to the termination of distributorship agreements, trademarks, tax issues, and other
matters that arise in the normal course of our business. We have established a reserve for
litigation and other contingent liabilities where we consider it probable that a claim will be
resolved unfavorably and where we can reasonably estimate the potential loss involved. However, we
are not able to predict the ultimate outcome of any of the claims against us, and any material
damages or other costs imposed on us may be in excess of our existing reserves. Unfavorable
outcomes could also require us to make changes in our operations and/or incur additional expenses,
which could affect our future profitability. Since a majority of our outstanding Ordinary Shares are owned by the De Rigo brothers, they
exert significant control over the Company and its operations. At June 1, 2005, Mr. Ennio De Rigo, the Chairman of the Board of Directors and the Chief
Executive Officer of the Company, and Mr. Walter De Rigo, a Director of the Company, together owned
approximately 77.2% of the Companys outstanding ordinary shares (the Ordinary Shares). The De
Rigo brothers will continue to control the election of the members of our Board of Directors and
the outcomes of other matters submitted to a vote of the shareholders. As a result, they will be
able to control the Company and its operations. Because a change of control would be difficult to
achieve without the cooperation of the De Rigo brothers and our Board of Directors, the holders of
the Ordinary Shares and the ADSs may be less likely to receive a premium for their shares upon a
change of control of our company. Risk Factors Relating to the American Depositary Shares Our share price may be volatile. Our share price is likely to fluctuate in the future due to the volatility of the stock market
in general and a variety of factors, many of which are beyond our control, including: quarterly
variations in actual or anticipated results of our operations; changes in financial estimates by
securities analysts; actions or announcements by our competitors; regulatory or legislative
actions; market outlook for the fashion sunglasses and prescription eyewear industry generally;
departures of our key personnel; and future sales of our ADSs.These broad fluctuations may
adversely affect the market price of the ADSs. Since most of our assets are located outside of the United States, you may face difficulties
in bringing and enforcing suits against us. Our executive offices are located in Italy and substantially all of our assets are located in
Italy, the United Kingdom and Spain. In addition, the De Rigo brothers and all of the members of
our management and Board of Directors are citizens of European countries who reside in Europe. As a
result, you may not be able to effect service of process outside of the relevant countries upon the
Company, our directors or other key personnel. 7




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We may not pay dividends on the ADSs. Although dividends may be recommended by our Board of Directors for approval by shareholders
at our annual general meeting, we did not pay any dividends in respect of the fiscal year ended
December 31, 2004 and have paid dividends only two times in the past five years. Future sales of Ordinary Shares or ADSs could depress our share price. Sales of substantial numbers of Ordinary Shares or ADSs (including shares issued upon the
exercise of stock options) in the public market, or the perception that such sales could occur,
could adversely affect the prevailing market price of the Ordinary Shares or ADSs or our ability to
raise capital through a public offering of our equity securities. 
 Item 4.Information on the Company 
 HISTORY AND CORPORATE STRUCTURE De Rigo is a worldwide leader in the design, manufacture and marketing of high-quality eyewear
in the mid- and premium-price categories and one of the largest optical retailers in Europe through
its D&A and General Optica retail chains. Designed in Italy, the Groups products are distributed
in about 80 countries worldwide, primarily in Europe, Asia and the Americas. The Company
distributes its products under its own brand names  Police, Sting, Lozza as well as under the
licensed brands Chopard, Escada, Etro, FilaEyes, La Perla, Celine, Givenchy, Loewe, Miniand
Furla.In 2004, the Group recorded net sales of 514.4 million and generated net income of 14.5
million. The Company was incorporated in 1978 as a società a responsabilità limitata, or limited
liability company, in Limana, Italy. Initially, the Company operated as a third party contractor
for the production of sunglasses, prescription eyeglass frames, and eyeglass components. By the
beginning of the 1980s, the Company began to produce its own lines of sunglasses, and, within a
few years, established itself as one of the leading Italian producers of sunglasses in the mid- to
premium-price categories, with its Policebrand attaining particular popularity among the younger
generation. In 1992, the Company merged with Argosol S.r.l., another manufacturer of sunglasses and
prescription eyeglass frames that was wholly owned by the De Rigo brothers. By the early 1990s,
and as a result of the acquisition of the Lozzabrand in 1992, the Company began to produce
sunglasses and eyeglass frames under brand names licensed by renowned fashion houses, such as
Fendi, and soon became one of the world leaders in the mid- to premium price categories of
sunglasses. In early 1995, the Company was converted to its present form as a società per azioni, or
corporation limited by shares, organized under the laws of the Republic of Italy. Under its
current Statuto, or By-laws, De Rigo S.p.A. has a duration of 45 years, expiring on December 31,
2050. Since the late 1990s, the Groups expansion has been focused on its entry into the retail
optical business through its acquisition of D&A in 1998 and General Optica in 2000 and on the
growth of its designer lines, particularly through its 2001 marketing and distribution agreement
with the LVMH Fashion Group. The joint venture that De Rigo formed with the Prada Group in 2000
was terminated in July 2003 by mutual agreement of the parties; as a result the Group sold its 51%
interest in E.I.D. Eyewear International Distribution S.A. (EID) to the Prada Group for total
consideration of 12.3 million. 8




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##### Table of Contents



The Groups former manufacturing subsidiaries, Dierre S.r.l. (Dierre) and Quattro Valli
Italian Flair S.r.l. (Quattro Valli), were merged into De Rigo S.p.A. in January 2002 and October
2003. In 2004, De Rigo signed distribution agreements with Viva International Inc (Viva). Viva,
based in the U.S., distributes fashion-forward eyewear, including the Guess?and Tommy Hilfiger
brands, in more than 50 countries,. As a result of those agreements, De Rigo has become the
distributor of some of Vivas brands (Tommy Hilfigher, Guess?and Gant) in Italy and Greece, while
Viva has become the distributor in the United States and Canada of the Groups licensed brands
Escada, Givenchy, Etro, Filaand Furla(and will begin distributing Ermenegildo Zegna-branded
eyewear in those markets beginning in late 2005). The Companys license agreement with Fendi expired in 2004 and was not renewed. During 2004
De Rigo signed four new license agreements for the production and worldwide distribution of eyewear
under the brands Escada, Chopard, Ermenegildo Zegnaand Jean Paul Gaultier. The Groups initial
collections under the Ermenegildo Zegnaand Jean Paul Gaultierbrands will be introduced in October
2005. On October 30, 2004 De Rigo S.p.A. contributed its wholesale distribution and manufacturing
operations to a new company, De Rigo Vision S.p.A. (De Rigo Vision), a wholly-owned subsidiary.
De Rigo S.p.A. retained ownership of the Police, Stingand Lozzabrands,which De Rigo Vision now
uses under license agreements, as well as its headquarters and manufacturing plants (which De Rigo
Vision now rents from De Rigo S.p.A). De Rigo S.p.A. has therefore become a holding company,
pursuing its operating activities through its subsidiaries. De Rigos wholesale and manufacturing segment (wholesale & manufacturing) consists of De
Rigo Vision, with its foreign distribution subsidiaries Vogart Line España S.A. (Vogart España),
De Rigo France S.a. (De Rigo France), De Rigo UK Ltd. (De Rigo UK), De Rigo Hellas A.E.E. (De
Rigo Hellas), De Rigo Japan Ltd Co. (De Rigo Japan) and De Rigo Hong Kong Ltd. (De Rigo HK).
De Rigo Vision distributes directly certain of the Groups eyewear lines in the Italian, German and
Dutch markets (the Group having sold its interests in its former Dutch and German subsidiaries in
2004), while the subsidiaries noted above distribute certain of the Groups eyewear lines in Spain,
France, the United Kingdom, Greece, Japan and Hong Kong, respectively. In certain other markets,
independent distributors distribute the Groups eyewear lines. The Group also operates as an
optical retailer in the United Kingdom through the Companys subsidiary D&A and in Spain and
Portugal through its subsidiary General Optica, which together form the Groups retail segment (the
retail segment). See Item 5 Operating and Financial Review and Prospects and Notes 3 and 17 to
the Consolidated Financial Statements included in Item 18. The Company indirectly controls, through De Rigo Vision, 59.3% of Vogart España, 100% of De
Rigo France, 100% of De Rigo UK, 81% of De Rigo Hellas, 90% of De Rigo Japan and 80% of De Rigo
Hong Kong. The Company indirectly controls 100% of each of D&A and General Optica through European
Vision Ltd. and General Optica Internacional Sa, respectively. Each of these companies is an
intermediate holding company that is 100% owned by the Company. Each of these companies is
incorporated under the laws of its principal place of business Mr. Ennio De Rigo, the Chairman of the Board of Directors and Chief Executive Officer of the
Company, and Mr. Walter De Rigo, a Director of the Company, own 77.2% of the Companys outstanding
Ordinary Shares (primarily through De Rigo Holding B.V. (De Rigo Holding)). The De Rigo brothers
established De Rigo Holding to hold and manage their interests in the Company and to make
investments in other industrial sectors in which they participate, and also hold a small percentage
of the Companys Ordinary Shares directly. See Item 7 Major Shareholders and Related Party
Transactions and Note 2 of Notes to the Consolidated Financial Statements included in Item 18. 9




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The Companys registered office and the Groups principal executive offices are located at
Zona Industriale Villanova, No. 12, 32013 Longarone (BL), Italy, approximately 110 kilometers north
of Venice and 15 kilometers north of Belluno in the Veneto region of northeast Italy. The
telephone number of the Companys principal executive office is (39)(0437) 77 77. 
 BUSINESS OVERVIEW De Rigo is a worldwide leader in the design, manufacture and marketing of high-quality eyewear
in the mid- and premium-price categories and one of the largest optical retailers in Europe through
its D&A and General Optica retail chains. Currently, and for the year ended December 31, 2004, the
Group has divided its activities into two distinct segments:  
    
    Wholesale and Manufacturingconsists of the design, manufacturing, marketing and
distribution of high-quality eyewear to opticians in Italy, Germany and the Netherlands and
to independent distributors and opticians through the Groups distribution subsidiaries in
other markets. This segment furnishes eyewear to the Groups other business units, to
which the wholesale and manufacturing segment makes sales at prices that include a markup
designed to compensate the unit for its manufacturing activity.
    
    Retailconsists of the sale of optical frames and lenses for prescription eyeglasses and
fashion sunglasses (as well as contact lenses and other optical products), together with
the provision of related professional consulting and aftercare services, through the
network of stores operated by the Groups two retail chains, D&A, a leading retailer in the
British optical market, and General Optica, the leading optical chain in Spain, which also
has a presence in Portugal. In prior years, the Group included a third segment for financial reporting purposes.  
    
    EIDwas the segment consisting of the Groups former joint venture with the Prada Group,
which conducted product development, marketing and distribution activities related to
Prada-branded eyewear, including that sold under the Miu Miu, Helmut Langand Jil Sander
brand names. This joint venture was terminated in July 2003 by mutual agreement of the
parties and as a result the Group sold its 51% interest in EID to the Prada Group.
Accordingly, the data for the former EID segment presented in the tables below and
elsewhere in this annual report includes the results of EID only for the period through the
Groups disposal of its interest as of July 23, 2003. 10




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The following table sets forth De Rigos sales by business segment for each of the years
indicated. Sales by Business Segment
(in millions of Euros) 2002
    
    
    2003
    
    
    2004Wholesale and Manufacturing
    
    
    141.1
    
    
    
    136.2
    
    
    
    134.5Retail
    
    
    359.6
    
    
    
    361.5
    
    
    
    389.8EID
    
    
    31.2
    
    
    
    19.8
    
    
    
    Intersegment Eliminations
    
    
    (19.4
    )
    
    
    (12.7
    )
    
    
    (9.9
    )Total
    
    
    512.5
    
    
    
    504.8
    
    
    
    514.4
 The following table sets forth the percentage of the sales of the wholesale and
manufacturing segment attributable to sales of De Rigos owned brands and licensed brands
(including Pradaproducts marketed by EID prior to De Rigos disposal of its interest in EID in
July 2003) for each of the years indicated. Sales of Owned Brands and Licensed Brands by Wholesale and Manufacturing Segment 2002
    
    
    2003
    
    
    2004Owned brands
    
    
    42.1
    %
    
    
    42.0
    %
    
    
    46.1
    %Licensed brands
    
    
    54.8
    %
    
    
    55.1
    %
    
    
    51.7
    %Other
    
    
    3.1
    %
    
    
    2.9
    %
    
    
    2.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 The following table sets forth sales of the prescription eyewear and sunglasses marketed
by the Group (in units, and as a percentage of unit sales of eyewear) in each of the years
indicated: Unit Sales of Eyewear Marketed by De Rigo
(in thousands) 2002
    
    
    2003
    
    
    2004Sunglass Unit Sales
    
    
    3,040
    
    
    
    55.3
    %
    
    
    2,931
    
    
    
    54.3
    %
    
    
    2,599
    
    
    
    50.9
    %Prescription
Eyewear Unit Sales
    
    
    2,457
    
    
    
    44.7
    %
    
    
    2,462
    
    
    
    45.7
    %
    
    
    2,511
    
    
    
    49.1
    %Total Unit Sales
    
    
    5,497
    
    
    
    100.0
    %
    
    
    5,393
    
    
    
    100.0
    %
    
    
    5,110
    
    
    
    100.0
    %
 In 2004, sales in Europe accounted for 90.8% of the Groups total net sales, with 7.7% of
the total being attributable to sales in the rest of the world and the remaining 1.5% to sales in
the Americas. The following table sets forth the Groups net sales by geographic region during
each of the periods indicated. See also Note 17 of Notes to the Consolidated Financial Statements
included in Item 18. 11




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##### Table of Contents



Net Sales by Geographic Region
(in millions of Euros) 2002
    
    
    2003
    
    
    2004Europe
    
    
    463.9
    
    
    
    90.5
    %
    
    
    453.9
    
    
    
    89.9
    %
    
    
    466.8
    
    
    
    90.8
    %Rest of the World
    
    
    36.6
    
    
    
    7.2
    %
    
    
    39.0
    
    
    
    7.7
    %
    
    
    39.7
    
    
    
    7.7
    %Americas
    
    
    12.0
    
    
    
    2.3
    %
    
    
    11.9
    
    
    
    2.4
    %
    
    
    7.9
    
    
    
    1.5
    %Total net sales
    
    
    512.5
    
    
    
    100.0
    %
    
    
    504.8
    
    
    
    100.0
    %
    
    
    514.4
    
    
    
    100.0
    %
 De Rigo maintains a presence in more than 80 countries and its products are sold in more
than 40,000 stores. The Groups eyewear is sold by independent opticians, retail optical chains (including the
Groups own D&A and General Optica stores) and shops specializing in glasses and eyewear products,
including in several markets, chain stores specializing in sunglasses such as Sunglass Hutand
Solaris. The Groups designer eyewear is sold in the relevant designer boutiques, and, in some
cases, in well-known department stores such as Harrods, Selfridgesand House of Fraserin the
United Kingdom and Galleries Lafayetteand Printempsin France. 
 COMPANY STRATEGY Management believes that De Rigos position within the mid-to premium price categories of the
eyewear market benefits from the following competitive strengths.  
    
    Brand prestige.De Rigo distributes its products under brand
names that management believes benefit from high customer
recognition and significant prestige in its principal markets.
The brand names employed by the Company include owned brand names,
such as Police, Stingand Lozza- which rely on innovative design,
product quality and an effective marketing policy in order to
build brand awareness  and highly regarded designer brand names
licensed to the Group by some of the worlds best known fashion
houses.
    
    Design originality.De Rigo particularly targets customers
attentive to design and fashion trends, and believes its products
are characterized by particularly original and innovative designs
that are carefully tuned to consumer preferences. Management
believes that the Groups stylistic innovations have established
its collections as a point of reference for the entire industry,
while maintaining the specific identity of each of its brands.
    
    Tailored distribution.De Rigo tailors its distribution strategy
to reflect local market conditions. In Italy, the Group
distributes its products directly through its network of sales
representatives. In most of its other principal markets, De Rigo
has developed a network of distribution subsidiaries which it
controls. In the United Kingdom, Spain and Portugal, the Company
has also developed a wide network of retail stores. Management
believes that its direct control of the distribution network in
its major markets allows the Group to improve margins while
enhancing the image and the prestige of the Groups products
through careful selection of points of sale and a focus on
post-sale customer assistance.
    
    Integrated production.De Rigos production process is generally
highly automated, though selected processes also include
handicraft techniques. We have developed a long term relationship
with our principal suppliers, enabling us to quickly react to
changes in market demand while keeping tight control over the
quality of materials and individual production steps used by
outside suppliers in their manufacturing processes. De Rigo seeks to build on these competitive advantages in achieving managements principal
strategic objectives, which include:  
    
    Expansion in the mid- to premium-price eyewear categories.De Rigo plans to expand its
presence in the mid- and premium-price segments of the markets for sunglasses and prescription
eyeglass frames  which management believes offer the most attractive profit margins  by
capitalizing on the quality of the products it markets under both the Groups 12




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owned brand names and licensed designer brand names. To achieve this goal, the Company
intends to:  
    
    Strengthen its brand portfolio.De Rigo intends to strengthen its current brand
portfolio by increasing the visibility of its owned brand names, especially Policeand
Sting,principally through the use of internationally-recognized spokespersons in
advertising, while at the same time consolidating its relationship with the leading
fashion houses that currently license designer brand names to the Group. De Rigo also
intends to enlarge its brand portfolio by entering into new licensing arrangements with
other prestigious fashion houses and launching new brands of its own.
    
    Expand distribution.De Rigo intends to expand its distribution channels in markets
that the Company believes offer the greatest demand for designer mid- and premium-price
eyewear, primarily in Europe, North America, and the Far East. To do so, the Company
expects to form new distribution subsidiaries in certain markets while further
developing its existing subsidiaries in others.
    
    Invest in production.In order to achieve managements goals of increasing
efficiency, reducing costs, and enhancing the technological features of its products
while continuing to maintain its high standards of quality, the Company plans to
continue to invest in the production process, with a particular focus on automation and
the use of innovative new materials.  
    
    Expansion in the retail market.De Rigo plans to continue to expand its presence in the
retail eyewear sector, focusing on salesof prescription eyeglass frames and sunglasses
produced by De Rigo or other manufacturers and of contact lenses. To achieve this goal, the
Company intends to:  
    
    Enhance its existing stores.De Rigo intends to enhance many of its existing retail
stores in order to increase its penetration of local markets and better present to
consumers the quality of its eyewear collections.
    
    Open new stores.De Rigo intends to continue to expand the D&A and General Optica
store networks to achieve greater geographical coverage in key areas through directly
managed stores or franchised stores.
    
    Pursue acquisitions.De Rigo will continue to pursue acquisitions and other
strategic transactions that management believes would afford the Company attractive
opportunities to continue its geographic expansion by enhancing or establishing its
retail presence in those countries in which such a strategy is compatible with the
Companys current distribution network. 
 PRODUCTS The Companys product portfolio is divided into owned brands and designer lines of
prescription eyeglass frames and sunglasses. The Companys traditional lines are produced under
well-established brand names owned by De Rigo and feature conventional and fashion-conscious
styles. De Rigos designer lines are produced under brand names used by the Company under license
agreements or other arrangements and incorporate more contemporary and fashion-forward styling.
The Groups D&A and General Optica retail subsidiaries also sell traditional and designer eyewear
produced by third parties. De Rigo manufactures over 2,500 models of sunglasses and prescription eyeglass frames.
Historically, De Rigo concentrated primarily on the design, production and sale of high-quality, 13




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fashionable sunglasses. Sales of sunglasses bearing brands owned by or licensed to the Group
represented 46.8% of the Groups unit sales of eyewear in 2004, as compared with 49.1% in 2003,
with the Groups branded prescription eyewear representing 30.6% and 29.9% of unit sales,
respectively, in 2004 and 2003. Sales of eyewear bearing brands that do not belong (or are
licensed) to the Group through the retail segment represented the remaining 22.7% of De Rigos unit
sales of eyewear in both 2004 and 2003. Generally, the eyewear sold under each of the Groups
brands, both its owned brands and those licensed from third parties, include collections of both
sunglasses and prescription eyewear. The Groups two core brands, Policeand Sting, together
represented approximately 37.8% and 31.6% of its total eyewear unit sales in 2004 and 2003,
respectively, whereas De Rigos designer lines as a group represented approximately 27.7% and 38.9%
of total unit sales, respectively. Owned Brands Eyewear bearing the Groups owned brands, and conceived and realized by De Rigo, are sold in
all of its principal markets. A detailed description of the Groups most noteworthy owned brands,
Police, Sting, and Lozza, follows. Police. The first of the Groups core brands, was launched in 1983 and was created with the
goal of selling an entire range of models associated with a single strong brand image, introducing
in Europe a product based on a depiction of an aggressive urban American lifestyle. The strength
of the brand has always been in using its solid experience and applying it to the very latest
fashion trends. From 1999 to 2003, Bruce Willis and George Clooney served as spokespersons for the
Policebrand. Since 2004, the Real Madrid and England soccer star David Beckham has been the
brands worldwide spokesperson, having previously represented the brand in the United Kingdom and
Japan. Sting. This brand, which also has an aggressive image, was conceived and designed for the
youth market (ages 14 to 24). The line is characterized by a large number of models ranging from
very minimalist frames and matte colors to brightly colored and elaborate shapes to suit various
tastes. Together with the Policebrand, Stingenabled De Rigo to develop the fashion-conscious
teenage and young adult market, particularly in Italy. Formula One World Champion Michael
Schumacher is currently featured in the latest Stingadvertising campaign. Lozza. The Lozzabrand, the oldest eyewear brand in Italy, offers a wide range of traditional
and classic eyeframes. The brand targets the stylistically more conservative adult market (age 40
and older). Licensed Brands The Group also manufactures and sells eyewear under each of the following designer brands
pursuant to license agreements or other arrangements covering the relevant brands and trademarks.
The Groups license agreements have terms ranging from one to five years. The following is a brief
description of each of the major designer brand names currently marketed by De Rigo. Celine. A collection that is designed to be useful, yet glamorous, based on a modern
aesthetic that is embodied in luxurious detailing that is identifiable, yet subtle. Etro. The Etrocollections embody an innovative vision of the tradition originating in the
Etro philosophy: sophisticated details and exquisite workmanship reflected in high fashion shapes
and materials. The line is aimed at demanding customers in a wide range of age groups. 14




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FilaEyes. A brand comprised primarily of sports/fashion sunglasses and sports shields.
FilaEyesaims to satisfy a broad range of different tastes and needs, from lightweight,
curved-wrap, metal-framed models to resistant, high-performance models. Furla. Furlaproducts are characterised by an essential and distinctive style. The
collections reveal a careful interpretation of trends and are created paying great attention to the
needs of a modern international woman. Givenchy. A modern, yet timeless, collection for women and men, tailored for the fashion
conscious and cosmopolitan Givenchycustomer. La Perla. A collection designed for the sophisticated woman, the details of which have been
conceived to reflect fascination and femininity. Loewe. A luxurious modern collection for women and men inspired by Mediterranean culture. Mini. The BMW Groups Minibrand is both a trendsetter and an automotive legend. The design
and materials of the new range of Minisunglasses are innovative, almost futuristic. Made of
light, high-quality metal and plastic, the models appeal lies in their shape and color. Chopard. Recognized worldwide for its watch and jewelry collections as well as its Haute
Joilleriecreations, Chopardwas founded in Switzerland in 1860. The sunglasses and eyewear
included in the collection fully express Chopards brand identity, standing out for their design
and quality, with a powerfully distinctive look. Escada. The collection is sensual and sophisticated. Color is the main hallmark of Escada.
The luxury is interpreted with innovation esprit and freshness. Escadais joie de vivre, quality
and attention to detail, for a unique and elegant feminine look. In 2004, De Rigo signed distribution agreements with Viva, a U.S. company that distributes
fashion-forward eyewear, including the Guess?and Tommy Hilfigerbrands, in more than 50
countries,. As a result of those agreements, De Rigo has become the distributor of some of Vivas
brands (Tommy Hilfigher, Guess?and Gant) in Italy and Greece, while Viva has become the
distributor in the United States and Canada of the Groups licensed brands Escada, Givenchy, Etro,
Filaand Furla(and will begin distributing Ermenegildo Zegna-branded eyewear in those markets
beginning in late 2005). 
 DESIGN AND MANUFACTURING Every year, the Group introduces two new collections for each of its owned and licensed
brands: one for eyeglasses launched in May in conjunction with MIDO (the major world eyewear
exposition in Milan), and one for sunglasses each summer. Both collections include new models, as
well as the models that enjoyed the greatest success the previous year. In 2004, new models
represented roughly 75% of each collection. It takes about 10 months to develop a new collection,
a process that includes design, creation of prototypes, and production. Design The Group believes that its competitive strengths include the variety of its models designs
and the breadth of its prescription eyewear and sunglasses product lines. The design team
responsible for this broad array of styles includes approximately 27 members, consisting of
designers and prototype engineers; De Rigos design team also collaborates with external designers.
Working very closely with the Groups marketing team, which monitors demand for the Groups
current models as well as general style trends in eyewear, the designers devise new styles
utilizing novel forms, 15




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materials, and colors. In developing new collections for the Groups licensed brand names,
the De Rigo design team works in close contact with the designers own creative staff, who make
suggestions based on the current styles of the designers clothing and accessories, thus ensuring
aesthetic coherence among the designers various collections. The Groups design capacity derives from the use by its design team of computer-aided
design/computer-aided manufacturing, or CAD/CAM, technology in the design and prototype
manufacturing phases. Although the design team, aided by the CAD/CAM system, designs and produces
prototypes of many new models each month, only a selected number of new models are chosen to be
added to the Groups collections each year. Its sophisticated CAD/CAM system enables the Group to
design and produce a fully working metal prototype in under 24 hours, and to produce four to five
metal prototypes per day. The CAD/CAM system also streamlines the conversion from prototype to
production. For example, for the production of metal sunglass or eyeglass frames, the Group makes
its own detailed metal molds, which are inscribed by computer-controlled mills using the data
stored in the CAD/CAM system. For the production of plastic frames, the automated plastic milling
machines used by the Group are programmed by inputting the data stored on the CAD/CAM system. Manufacturing The primary materials utilized in the production of eyeglass frames are metal and plastic (or
a combination thereof). Metal sheets and threads are the primary raw materials used to manufacture
metal frames. The unpolished frames subsequently undergo galvanizing and coloring processes during
which the frames assume the latest colors of the new collection. The final touches, including the
mounting of the lenses, take place at the finishing center. Plastic frames can be manufactured
through a pantographic or injection process. In the case of the former, an acetate sheet is cut,
folded, and polished to form the front of the frame and the two temple pieces. In the case of the
latter, granular plastic is injected into special moulds. The front of the frame and temple pieces
are usually colored before being sent to the finishing center. The Group uses high-quality raw materials in the manufacture of its products. In the
manufacture of its fashion sunglasses, the Group uses high quality lenses produced by several major
lens manufacturers. These lenses provide 100% protection from all ultraviolet rays, are impact
resistant and are certified to be in compliance with the health and safety standards prescribed by
the U.S. Food and Drug Administration (21 C.F.R. §801.410) and the European Union (Directive
89/686/CEE). The Groups manufacturing facilities are located primarily in the Belluno area in northeast
Italy, the region in which most of Italys eyewear industry is based. In Limana, De Rigo operates
two manufacturing facilities for the production of metal frames, while at Longarone, it owns one
facility for the galvanization and coloring of metal frames and another for production of
pantographic plastic frames. The facility for pantographic plastic frames at Longarone also serves
as the finishing center for all of the Groups optical products (including the products of
subcontractors). Many aspects of the manufacturing process have been automated, including the production of
metal and plastic frame components and the galvanization of metal eyeglass frames. In a
traditionally labor-intensive sector, De Rigo has invested in the design and creation of new
proprietary robotics and machinery to automate manufacturing tasks, to increase efficiency and to
maintain high quality. However, some manufacturing steps, such as coloring and finishing, are
still done by hand. De Rigo puts particular emphasis on the quality of its products, beginning with the inspection
of the raw materials and components and continuing with quality control and process control
procedures throughout all manufacturing stages, whether carried out internally or externally by
subcontractors. At the end of the production process, all frames are individually inspected. Less
than 16




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2% of frames manufactured by the Group have even minor defects at the finishing stage. If any
minor defects are detected, frames are repaired or replaced. Despite the high degree of automation
of the Groups production processes, its quality control is for the most part performed manually. De Rigo maintains flexibility and capacity in manufacturing by using specialized
subcontractors for various production functions (production of frame components and details,
galvanizing and coloration, assembly, finishing and production of accessories). Typically, the
Group supplies subcontractors with the primary material and components so as to optimize quality
control. Moreover, Group technicians regularly visit the subcontractors facilities to monitor
production quality and verify the promptness of deliveries. In 2004, the Group produced
approximately 57 % of its production requirements internally, as compared with approximately 60% in
2003. In 2005, the Group expects again to subcontract approximately 35% to 45% of its production
requirements to third parties. 
 MARKETING AND DISTRIBUTION Marketing As a result of the Groups expansion and its increased focus on designer brands and retail
operations, management has decided to increase De Rigos marketing expenditures, while at the same
time integrating and redefining the Groups various marketing activities so as to meet the
challenges of an increasingly competitive global market. In doing so, management is working to
transform De Rigos marketing operation from one traditionally focused on sales support activity
such as point of sale material and consumer advertising into an increasingly strategic part of the
Group that is focused on brand management. The necessary integration of marketing activities,
including the selection of the frames to be included in each brands collection, is followed by the
development and implementation of a strategy focused on the correct positioning of each of the
Groups brands in each of the Groups markets around the world, with differentiated distribution
and pricing. Wholesale and Manufacturing.The Groups marketing team monitors the development of the
collections, a task that includes the selection of the frames to be included in each brands
collection, the development and implementation of a strategy focused on the correct positioning of
each of the Groups brands in each of the Groups markets around the world, and pricing based on
the nature of specific markets, including the degree of awareness of a particular brand in that
market. In Italy, De Rigo advertises its products in the principal fashion publications and magazines
of national interest and sometimes on billboards and television. De Rigo also provides opticians
with promotional and marketing material, including posters, show cards and displays. Outside of
Italy, the Group uses similar channels and exercises a similar degree of control over its marketing
message in those countries in which it operates directly or through affiliated distribution
subsidiaries. In contrast, in countries where the Group operates through independent distributors,
De Rigo generally defers to the judgment of those distributors as to which of the Groups products
should be marketed in the areas they cover. In some cases, however, De Rigo takes part in planning
the independent distributors marketing budget, and, after approving the budget, contributes
towards the distributors marketing expenses. Retail.D&A and General Opticas marketing consists of national television, radio and print
media in their respective home markets. The individual retail stores themselves are
responsible for campaigns to attract customers to a particular retail store. In this manner, the
stores generate direct contact with the client base and develop personal rapport with customers,
with the ultimate goal of educating customers about new products and services and encouraging more
frequent replacement of eyewear. D&A and General Optica also maintain and periodically update
extensive customer databases, which currently contain information on approximately 4.5 million and
1.5 million clients who bought products or services from the respective companies chains in the
last five years. 17




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Distribution The Group distributes its manufactured products through its network of sales representatives
in Italy and the countries in which its distribution subsidiaries are based, through independent
distributors and through the D&A and General Optica retail stores in the United Kingdom, Spain and
Portugal (which also sell eyewear from other manufacturers). De Rigo is present in over 80
countries and its products are sold in over 40,000 retail stores. As part of its strategy, the
Group maintains strict control over its distribution network. The Groups eyewear lines are sold
through independent opticians, optical retail chains and optical specialty stores, including, in
certain markets, sunglass specialty chains such as Sunglass Hutand Solaris. In addition, the
Groups fashion sunglass lines are sold in certain markets through major department stores with
large optical departments, such as Harrods, Selfridgesand House of Fraserin England and Galleries
Lafayetteand Printempsin France. In order to preserve the integrity of its brand images, the
Group encourages sales of its eyewear exclusively through quality retail stores at suggested
manufacturers retail prices, makes every lawful effort to prevent discounting of its products, and
discourages any manner of sale that would degrade its products brand images. Wholesale and Manufacturing Segment Italy.In the fragmented Italian retail eyewear market, the Group distributes its products
through its network of sales representatives, who currently have an aggregate of approximately
6,000 customers selling through roughly 7,200 points of sale. As of December 31, 2004, the Group
had approximately 66 sales representatives in Italy. Each sales representative is assigned to a
particular territory within Italy for which he is the exclusive representative for certain of the
Groups eyewear lines. Customers either order eyewear from their sales representatives or directly
from the Group. Each sales representative works exclusively for the Group and is paid on a
commission basis for sales within their respective territories. The Group believes that this method of distribution has been effective, particularly with
respect to its Policeand Stingbrands, and has enabled the Group to achieve a high degree of
penetration of the Italian market. Export  International Distribution Network.The Groups international distribution network,
comprised of its distribution subsidiaries and its direct distribution activities in certain
markets, is a key element of its distribution strategy. The Group believes that distributing
through its own direct sales network enables it to manage better the image of its brands, sales
efforts and customer service activities in the relevant markets. The Group generally seeks to
establish direct distribution activities only in markets where it believes that direct control
would be most effective in implementing its marketing strategy. As of December 31, 2004, there
were distribution networks in Germany, Spain, France, the Netherlands, the United Kingdom, Greece,
Japan Hong Kong and Taiwan. The international distribution network has the exclusive right to distribute certain of the
Groups brands within a designated territory. As of December 31, 2004, the Groups distribution
network employed approximately 78 sales representatives. Export  Independent Distributors.Outside of Italy, the United Kingdom, Spain, Portugal and
countries covered by the international distribution network, the Group sells its sunglasses and
prescription eyeglass frames through independent distributors in approximately 70 countries.
Pursuant to distribution agreements with the Group, these distributors also have the exclusive
right to sell certain of the Groups lines in designated territories. A distributor may sell one
or more of the Groups lines within its territory, depending on the terms of the relevant
distribution arrangement. The Group maintains close contact with the independent distributors in
order to monitor sales in the relevant markets. Almost all orders for eyewear are given to the
Group by the distributor, and the Group ships the ordered goods to the distributor, who then
delivers them to the retailer. Prices of the 18




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Groups exported products generally are fixed in Euro and vary from market to market, subject
to adjustment for shipping costs and customs duties. The sales of the Groups wholesale and manufacturing segment, including sales to the other
segments, totalled 134.5 million in 2004, as compared with sales of 136.2 million in 2003. Retail Segment The Groups retail business consists of the sale of optical frames and lenses for prescription
eyeglasses and fashion sunglasses (as well as contact lenses and other optical products), together
with the provision of related professional consulting and aftercare services, through the network
of stores operated by the Groups two retail chains, D&A, a leading retailer in the British optical
market, and General Optica, the leading optical chain in Spain, which also has a presence in
Portugal. Dollond & Aitchison In December 1998, the Group acquired 100% of the British optical chain Dollond & Aitchison.
D&A is the longest established optician in the United Kingdom, having been founded in 1750. This
long heritage has allowed D&A to develop a strong reputation for the quality of its professional
eyecare services, and every year D&A recruits around 50 new graduate optometrists for its graduate
training program. D&A operates a retail network across the United Kingdom with 235 company owned
stores and 140 franchised stores as at June 1, 2005. Retail sales through D&A totalled 248.9 million in 2004 and comprised 48.4% of the Groups
total sales compared with sales of 230.8 million (45.7% of total sales) in 2003. In 2004, De Rigo
products  mostly eyeglass frames  accounted for approximately 28.9% of D&As total revenues from
eyeglass sales, up from 22.9% in 2003. Management believes that De Rigos inhouse design expertise
allows D&A to bring the latest innovations on product to market ahead of its competitors. D&A is
one of the largest retail optical chains in the United Kingdom, with a market share of
approximately 8.5%.* D&A is positioning itself to reinforce its service platform and is investing
significantly in training to differentiate itself from its main competitors, who focus on price and
speed. The level of customer service is measured through a mystery shopper program and during
2005 a new measure of customer service for individual employees is being introduced. Both of those
measures provide feedback for stores to help D&As staff continuously improve the experience for
customers. The focus on service is backed up by high quality product ranges, particularly in
relation to eyeglass lenses and contact lenses, where the mix of higher added value products
continues to increase. A key part of D&As service offering is the unique Styleyesconsultation
service, which helps customers find the right eyewear to suit their face shape. D&As Contact
Lenses by Postservice delivers contact lenses direct to the customers door. D&As high quality products are competitively priced and backed up by regular promotions to
encourage multiple purchases (including of contract lenses and sunglasses). D&A is in the process
of implementing a new brand identity to reinforce its focus on service, having converted
approximately 30% of its stores to the new look by the end of May 2005. General Optica General Optica is the leading optical chain in Spain. In February 2000, General Optica became
part of the De Rigo Group. See Note 3 of Notes to the Consolidated Financial Statements included in
Item 18. 
 *
    
    All market share data in this annual report
is as of 2002, the most recent year for which such data is available from
public sources, and is taken from the 2003/2004 editions of the Jobson L.L.C.
European Optical Industry Economic Review. 19




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At June 1, 2005, General Opticas network of stores consists of 143 directly owned stores in
Spain, 10 in Portugal and 20 stores in Spain under franchising agreements. Although the name
General Optica is well known throughout Spain thanks to its tradition in the sector since the
companys foundation in 1958, its retail stores are primarily located in northern and eastern
Spain, particularly Catalonia, the Basque Country, Asturias and Galicia. General Opticas recent
expansion has increased its presence in new areas of Spain, as well as those in which it previously
maintained only a minimal presence. General Optica retail stores share a common storefront and
interior design, rendering them easily recognizable to consumers. Typically, General Optica stores
are positioned in the principal shopping districts of major Spanish cities. As in the case of D&A,
management believes that General Opticas success is based on the professionalism of its staff, the
quality and variety of its products and services and a comprehensive program of guarantees designed
to ensure customer satisfaction. In contrast to D&A, General Optica offers service within an hour
for certain styles of lenses in some of its stores. General Optica posted sales of 140.9 million (or 27.4% of the Groups total net sales) during
2004, as compared with sales of 130.7 million (or 25.9% of total sales) in 2003. In recent years, General Optica has renewed and expanded its network of establishments
considerably. In particular, General Optica has demonstrated its ability to adapt by introducing a
new store concept that is notably more spacious and attractive than its predecessors, with a
modern, bright, minimalist design that is intended to set the standard for opticians of the future.
This new type of store has a more modern, open, interactive air, in which prominence is given to a
large display of frames and sunglasses, providing customers with what General Optica believes they
want: the opportunity to look at, try on and choose products in complete freedom. In an effort to
expand its range of services and monitor the interest of its customers in laser eye correction
surgery, General Optica has established a consultation service in certain of its stores in
collaboration with local laser surgery clinics. General Optica benefits from a highly qualified team of professionals who receive ongoing
training, employing approximately 1,450 dedicated individuals who can offer customers excellent
service. The stores that form part of General Opticas retail network employ management software
designed to provide high levels of quality and speed in their delivery of services. This
information system is capable of identifying trends in customer demand, so that the range of
products on offer in the stores may be adapted to customer needs. As a company that is expanding, General Optica plans to acquire or open additional new stores
in Spain and Portugal within the next three years, seeking to further consolidate the leading
position that it holds in Spain. General Optica estimates that it has a share of approximately
10.0% of the Spanish optical market. General Optica also has established itself as a company that is sensitive to the needs of the
communities it serves. Through campaigns conducted in its network of eyecare centers, it has
succeeded in increasing awareness of eye-related problems in Spain, collecting used glasses for
distribution to underprivileged groups and providing support for collaborative ophthalmology
projects via non-governmental organizations in developing countries, which have received
recognition from important national organizations. 20




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COMPETITION De Rigo believes that its quality of products, its control over all aspects of production, its
range of designer brand names, and its carefully selected network of distributors position the
Company to compete successfully in the mid- to premium-price categories of the eyewear product
market. The eyewear industry is highly competitive and fragmented. As the Group has historically
marketed its products primarily in Italy and the rest of Europe and Asia, it competes with
different companies in different markets. The Group believes that its principal competitors in its
major geographic markets include Luxottica (Chanel, Prada, Donna Karan, Vogue, Persol, Versace, Ray
Ban, Killer Loopand Revobrands), Oakley (Oakleybrand), Safilo (Gucci, Diesel, Dior, Armaniand
Polobrands), Marchon (Calvin Kleinand Fendibrands) and Marcolin (Dolce & Gabbanaand Replay
brands). In the retail distribution markets of the United Kingdom, Spain, and Portugal, De Rigo
competes against national and international chains as well as independent opticians. Among the
chain stores, the Group believes that its principal competitors are Specsaver, Boots the Optician,
Vision Express and Optical Expressin the United Kingdom, Multiopticas, Visionlaband Optica 2000
in Spain, and Multiopticasin Portugal. 
 ITALIAN GOVERNMENT INCENTIVE PROGRAM In November 1963, the Italian Government introduced the Vajont Relief Program for the
Longarone area as part of a package of relief measures enacted shortly after the Vajont dam
catastrophe that devastated the area. Two of the Groups companies, Dierre (which was merged into
De Rigo S.p.A. in January 2002) and Quattro Valli, have located their registered offices and
facilities in Longarone and historically benefited from the Vajont Relief Program. See Risk
Factors   We lost all tax benefits in September 2001 and in April 2003; our effective income tax
rate has therefore increased significantly towards the statutory rate. Tax Benefits The Vajont Relief Program provided that new businesses located in the areas affected by the
Vajont dam catastrophe would receive a ten-year exemption, beginning on the date of commencement of
their operations, from the national corporate income tax (Imposta sui Redditi delle Persone
Giuridiche, or IRPEG, then levied at a rate of 36%) and the local income tax (Imposta Locale sui
Redditi, or ILOR, then levied at a 16.2% rate). The programs tax benefits were repealed in
December 1993. However, the Italian Government specified that those companies that had already
accrued the right to the tax exemptions as of January 1, 1994, which included Dierre and Quattro
Valli, could continue to enjoy the tax exemptions through the expiration of their respective
ten-year periods. In 1998, the Italian Government eliminated the ILOR tax along with certain other
minor taxes, replacing them with the new Regional Tax on Productive Activities (Imposta Regionale
sulle Attività Produttive or IRAP), which is currently levied at a 4.25% rate. Companies that
had benefited from an exemption from ILOR continue to enjoy equivalent tax benefits with respect to
the new IRAP tax. See Note 11 of Notes to the Consolidated Financial Statements included in Item
18. Dierres ten-year exemption was granted in 1992, covering income earned during the period
beginning September 2, 1991 and ending September 1, 2001. Quattro Vallis exemption was granted in
1994 and covered income earned from April 21, 1993 to April 20, 2003. The Group does not expect
that new tax benefits will be introduced by the Italian Government with respect to operations in
the Longarone area or the other areas where its facilities are currently located. 21




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TRADEMARKS The Groups products are sold under the Police, Stingand Lozzabrand names, which have been
registered as trademarks of the Company in substantially all of the principal markets in which they
are used by the Group. In Spain, however, the Policename is registered to another manufacturer of
sunglasses and, as a result, the Group markets its Policemodels in Spain under the name Vogart.
Management believes that its established brand identities and trademarks are an important part of
its strategy. See  Company Strategy. The Group also sells products pursuant to license agreements or other arrangements under the
following trademarks: Celine, Chopard, Escada, Etro, Fila Eyes, Givenchy, La Perla, Loewe, Miniand
Furla.The company, by the end of 2005, will start to sell products under the trademarks
Ermenegildo Zegnaand Jean Paul Gaultier .De Rigos license agreements have terms ranging from
one to five years, and some of the licenses limit De Rigos right to market and sell products with
competing brand names and/or limit the markets in which it is able to use the licensed brands.
Early termination or non-renewal of some or all of its license agreements or arrangements could
have a material adverse effect on the Groups operations, since sales of eyewear under such brand
names and trademarks represent a material percentage of the Groups net sales. In 2004, license
agreements under which the Group manufactured and distributed eyewear under the Fendiand Onyx
brands expired and were not renewed. See Risk Factors  Our business is very dependent on our
ability to negotiate and maintain favorable license
arrangements. in Item 3 and  Products. 
 INSURANCE The Group maintains insurance against a number of risks. The Group insures against loss or
damage to its facilities, against theft, loss or damage to its products while they are in transit
to customers when transportation is the Groups responsibility and against general liability to
third parties. Although the Group does not cover 100% of these risks, management believes that the
Groups present level of insurance is adequate in light of its past experience. 
 SEASONALITY AND AVAILABILITY OF RAW MATERIALS In 2004, 50.9% of the Groups unit sales consisted of sunglasses, for which the peak sales
period at the wholesale level is during the first four months of the year. Historically, this
factor has tended to cause the Group to record a higher proportion of its revenues during the first
half of the year. However, the increase over time in the percentage of the Groups sales
represented by prescription frames, which are not subject to seasonal peaks, has mitigated and is
expected to continue to mitigate the seasonality of the Groups sales as a whole. The seasonality
of sales of sunglasses and the timing of the launch of new fashion collections has generally had
the effect of increasing the Groups marketing expenses during the second and third quarters of the
year. Generally, the raw materials and components used in the Groups products are available in
sufficient supply from a number of suppliers. However, certain products with innovative fashion
content, such as lenses with innovative coatings or coloring, or unusual materials, such as special
types of plastics produced only for the Group, are not generally available from a number of
alternative sources. Any interruption of supply from the Groups current sources of such products
could therefore produce delays in production. 22




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DESCRIPTION OF PROPERTY The general location, use and approximate size of the principal properties used by the Group
as of December 31, 2004 are set forth below. Total AreaLocation
    
    Use
    
    (in square meters)Longarone (BL), Italy
    
    Group headquarters,
manufacturing facility and
distribution center
    
    
    16,345Longarone (BL), Italy
    
    Manufacturing facility
    
    
    3,594Longarone (BL), Italy
    
    Manufacturing facility
    
    
    1,213Limana (BL), Italy
    
    Manufacturing facility
    
    
    5,750Barcelona, Spain
    
    Distribution center
    
    
    650Barcelona, Spain
    
    General Optica head office
    
    
    2,139Barcelona, Spain
    
    General Optica warehouse
    
    
    523Barcelona, Spain
    
    General Optica warehouse
    
    
    1,640Barcelona, Spain
    
    General Optica warehouse
    
    
    2,612Barcelona, Spain
    
    General Optica training center
    
    
    820Martignat, France
    
    Distribution center
    
    
    1,144Watford, United Kingdom
    
    Distribution center
    
    
    279Athens, Greece
    
    Distribution center
    
    
    300Birmingham, United Kingdom
    
    D&A head office
    
    
    1,593Birmingham, United Kingdom
    
    Training center
    
    
    924Birmingham, United Kingdom
    
    Distribution center
    
    
    2,435Hong Kong, China
    
    Distribution center
    
    
    324Hong Kong, China
    
    Supply chain service center
    
    
    64Tokio, Japan
    
    Distribution center
    
    
    718Osaka, Japan
    
    Sales office
    
    
    110
 At June 1, 2005, the Group also owned and operated 235 retail stores with an average
retail area of 95 square meters in the United Kingdom and 143 retail stores in Spain and 10 retail
stores in Portugal, which have an average retail area of 181 square meters. As of the same date,
D&A owned a freehold interest in 49 of its properties and General Optica owned a freehold interest
in 38 of its properties. Almost all of the Groups other retail properties (as well as the land on
which its owned stores are located) are leased. All of the listed properties located in Italy are
owned by the Group, except the smaller of the two manufacturing facilities in Limana, which is
leased from third parties. All of the listed properties located outside Italy and the United
Kingdom are leased by the Group pursuant to long-term leases. The Group believes that its current facilities are suitable for its needs and are
well-maintained. See  Design and
Manufacturing  Manufacturing. De Rigo completed construction of
a new plant in Longarone in January 2002. 
 Item 5.Operating and Financial Review and Prospects 
 CRITICAL ACCOUNTING POLICIES Our discussion of the Groups results of operations and liquidity and capital resources in
respect of the fiscal years ended December 31, 2002, 2003 and 2004 is based on the Companys
audited Consolidated Financial Statements and the related Notes thereto included in Item 18. These
financial statements have been prepared in accordance with Italian GAAP, which differ in certain
respects from U.S. GAAP. For a discussion of the principal differences between Italian GAAP and
U.S. GAAP as they relate to the Groups consolidated net income and shareholders equity, see Note
19 of Notes to the Consolidated Financial Statements included in Item 18. De Rigos reported financial condition and results of operations are sensitive to accounting
methods, assumptions and estimates that underlie the preparation of the financial statements. De
Rigo bases its estimates on historical experience and on various other assumptions, the results of
which 23




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form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. The selection of critical accounting policies, the judgments and other uncertainties affecting
application of those policies and the sensitivity of reported results to changes in conditions and
assumptions are factors to be considered when reviewing De Rigos financial statements and the
following discussion of its results of operations and liquidity and capital resources. De Rigo
believes the following critical accounting policies involve the most significant judgments and
estimates used in the preparation of the Consolidated Financial Statements included in Item 18. Accounting for Long-lived Assets.Property, plant and equipment and purchased intangible
assets other than goodwill are recorded at either historical cost or revalued amounts. If such
assets are acquired in a business combination, the purchase price is allocated to the estimated
fair value of the acquired property, plant and equipment and intangible assets. Property, plant and
equipment and intangible assets are depreciated or amortized on a straight-line basis over their
estimated useful lives. Property, plant and equipment are valued at acquisition or construction cost, less accumulated
depreciation. Construction costs include directly allocable costs, an appropriate allocation of
material and production overhead and interest accruing during the construction related to debt
specifically associated with the related construction project. Accounting for long-lived assets and intangible assets involves the use of estimates for
determining the fair value at the acquisition date for assets acquired in a business combination,
and the useful lives of the assets over which the costs of acquiring these assets are charged to
the statement of operations. The useful lives of long-lived assets are subject to such variables
as technological feasibility, obsolescence, changes in consumer demand and strategic management
decisions. When an impairment in the value of assets occurs, nonscheduled write-downs are made. The
Company assesses the impairment of identifiable intangibles and long-lived assets whenever there is
reason to believe that the carrying value may exceed the fair value and where a permanent
impairment in value is anticipated. The determination of impairments of long-lived and intangible
assets involves the use of estimates, which include but are not limited to the cause, the expected
timing and the amount of the impairment. Impairment is based on a broad measure of factors. In
evaluating assets for impairment, the Company typically considers, among other things,
technological obsolescence, discontinuance of services, changes in market prices, significant
negative industry or economic trends, significant underperformance relative to expected historical
or project future operating results and other changes in circumstances that may indicate
impairment. For Italian GAAP purposes, property, plant and equipment and intangible assets are tested for
impairment by comparing the carrying value of the intangible asset to the estimated undiscounted
future cash flows expected to result from the use of the assets and their eventual disposition and,
if required, the impairment loss is measured as the amount that the carrying value of the asset
exceeds the assets fair value if the asset is not recoverable. To assess impairment of property, plant and equipment and amortizing intangible assets for
U.S. GAAP purposes, the Company uses the guidance outlined in SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. If, based on the analysis described above, management
has concluded that impairment indicators exist, the Company will initially review for possible
impairment by assessing the undiscounted cash flows expected to be derived from the asset or group
of assets, comparing the lowest level of total expected undiscounted cash flow to the carrying
value.
If the carrying value of the asset or the group of assets exceeds the sum of the undiscounted
cash flows, an impairment is considered to exist. An impairment charge is assessed by comparing
the assets fair value to the carrying value. Fair value can be calculated by a number of
different 24




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approaches, including discounted cash flow, comparables, market valuations or quoted
market prices. The process and steps required to assess the possible impairment of assets,
including the identification of possible impairment indicators, assessing undiscounted cash flows,
selecting the appropriate discount rate, the calculation of the weighted average cost of capital
and the discounts or premiums inherent in market prices requires a substantial amount of management
discretion and judgment. If actual results differ from these estimates, or if the Company adjusts
these estimates in future periods, operating results could be significantly affected. Valuation of Goodwill.Goodwill resulting from business combinations is amortized on a
straight-line basis over its estimated useful life. The determination of goodwill is dependent on the allocation of the purchase price to the
tangible and intangible assets acquired and liabilities assumed. Such allocation is often based on
judgmental factors and estimates of fair values for assets that may not have a readily determinable
market value. In addition, the useful life assigned to goodwill is an estimate based on the
judgment of management at the time of acquisition. The estimated useful life is subject to
adjustment if facts and circumstances indicate that the acquired assets economic life has been
affected by other variables, including technological feasibility, competitive factors and
contractual rights. Nonscheduled write-downs are provided when an impairment in the value of goodwill occurs. De
Rigo reviews on a regular basis the performance of its subsidiaries. When there is reason to
believe that the goodwill arising from the acquisition of a business is impaired and that the
impairment is of a permanent nature, the Company compares the carrying amount of that subsidiary or
business to its fair value. The determination of the fair value of a subsidiary involves extensive
use of estimates. Methods commonly used by the Company for valuations include discounted cash flow
methods, comparable market multiples and quoted stock market prices, if available. Factors
affecting estimated fair values typically include discount rates, future cash flows, growth rates,
weighted average cost of capital, market prices and control premiums. These estimates, including
the methodologies used, are important in determining fair value and ultimately the amount of any
goodwill impairment. As of January 1, 2002, the Company adopted the requirements of SFAS 142, Goodwill and Other
Intangible Assets, and as a result the Company has ceased amortization of goodwill and
indefinite-lived intangible assets for U.S. GAAP purposes. The requirements of SFAS 142 include
that goodwill be tested for impairment at least annually (and between annual tests when certain
triggering events occur) using a two-step methodology. The first step screens for potential
impairment at the reporting unit level, while the second step measures the impairment, if any.
Under U.S. GAAP, the quoted market price of an asset, if available, should be used. If not
available, then other valuation techniques, including discounted cash flow, comparables, etc., are
acceptable. The selection of the various assumptions that are necessary to arrive at the fair value
of a reporting unit, including the assumptions used in the underlying business plans, require
substantial management judgment and discretion. If actual results differ from these estimates, or
if the Company adjusts these estimates in future periods, operating results could be significantly
affected. Allowance for Doubtful Accounts.The Company makes ongoing estimates relating to the
collectibility of accounts receivable and maintains a reserve for estimated losses resulting from
the inability of customers to make required payments. In determining the amount of the reserve,
management considers the historical level of credit losses and makes judgments about the
creditworthiness of significant customers based on ongoing credit evaluations. This ongoing
evaluation considers such factors such as the overall economic climate, regional strengths and
weaknesses, legal rights and historical relations, among others. Historically, losses from
uncollectible
accounts have not exceeded the reserves. Since management cannot predict future changes in
the financial stability of customers, the actual amount of future uncollectible accounts may differ
from managements estimates. If the financial condition of the customers were to deteriorate,
resulting in 25




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their inability to make payments, a larger reserve might be required. In the event
the Company determined that a smaller or larger reserve was appropriate, a credit or a charge to
selling and administrative expense would be recorded in the period in which such determination is
made. Deferred Taxes.The Company is required to estimate its income taxes in each of the
jurisdictions in which it operates. This process involves a jurisdiction-by-jurisdiction estimation
of actual current tax exposure and the assessment of the temporary differences resulting from
differing treatment of items such as accruals and amortization, among others, for tax and financial
reporting purposes. These differences result in deferred tax assets and liabilities, which are
included within the Companys consolidated balance sheet. The Company must assess in the course of
its tax planning process the ability of the Company and its subsidiaries to obtain the benefit of
deferred tax assets based on expected future taxable income and available tax planning strategies.
If in managements judgment, the deferred tax assets recorded will not be recovered, a valuation
allowance is recorded to reduce the deferred tax asset. Significant management judgment is required in determining the Companys provision for income
taxes, deferred tax assets, deferred tax liabilities and valuation allowances to reflect De Rigos
potential inability to fully recover deferred tax assets. The analysis is based on the estimates
of taxable income in the jurisdictions in which the Company operates and the period over which the
deferred tax assets and liabilities will be recoverable. If actual results differ from these
estimates, or if the Company adjusts these estimates in future periods, the Company may need to
establish an additional valuation allowance that could adversely affect the Companys financial
position and results of operations. Under U.S. GAAP, the Company assesses the recoverability of tax assets based on the criteria
of more likely than not, that is, a probability of recoverability just over 50%. The probability
assessment requires significant judgment regarding the timing of future book and tax reversals,
which could be materially different from the actual results. Inventory obsolescence.The Company has adopted uniform policies across its business to assist
management in the identification, valuation and treatment of inventory that is not current or could
otherwise be considered obsolete. The identification of this inventory is subject to certain
judgments, such as the aging profile of the inventory, the estimated selling prices of the
inventory in an other than retail environment, the estimated costs to dispose of the inventory, the
overall impact on the associated brand of disposing of the inventory at an off retail price and the
requirement of our licensing and branding agreements to maintain replacement inventory. Our ability
to manage our inventory levels, and thus our overall requirements for an obsolescence reserve, are
also highly dependent on several factors, some of which are not in our control, such as the overall
economic environment, changes in tastes and fashion trends and of the market pressure. Management
responds to these factors and others on an ongoing basis, adjusting procurement, delivery and
manufacturing schedules on a continual basis in order to maintain an optimal balance between
inventory, sales and forecasts. Changes to these assumptions or responses could require an
increase or decrease in the inventory reserves in the future, resulting in additional expense or
income being recognized in the income statement. Other Significant Estimates.The application of Italian GAAP requires management to make
other estimates and assumptions. For example, as discussed in more detail in Note 12 of the
Consolidated Financial Statements included in Item 18, accounting for pension and other
post-retirement and post-employment benefits requires estimates of future returns on plan assets
and expected increases in compensation levels. 26




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RESULTS OF OPERATIONS Overview De Rigo posted consolidated net sales of 514.4 million for 2004, a 1.9% increase as compared
with last year. Cost of sales decreased by 1.5% to 198.9 million or 38.7% of total net sales, in
2004, from 202.0 million, or 40.0% of net sales, in 2003. Operating expenses increased by 3.2% to
286.7 million, or 55.7% of total net sales in 2004, as compared to 277.9 million, or 55.1% of net
sales, in 2003. Income from operations increased by 15.7% to 28.8 million, or 5.6% of total net
sales, in 2004, from 24.9 million, or 4.9% of net sales, in 2003. The increase in the Groups
operating income was primarily attributable to the improvement in income from operations in the
wholesale and manufacturing segment, both in absolute terms and as a percentage of sales, that was
itself due to higher gross margins and the expense reductions discussed in more detail below.
Financial and other items contributed net expenses of 1.2 million in 2004, as compared to net
income of 13.0 million in 2003, when this item primarily reflected the capital gain of 11.8
million realized on the sale of Groups interest in EID. Net income decreased by 21.6% to 14.5
million in 2004 from 18.5 million in 2003 and represented 2.8% of net sales, as compared with 3.7%
last year. Earnings per share were 0.34, a decrease of 19.0% as compared with 0.42 per share in
2003. Each of these items is analyzed in more detail in the comparison of the Groups 2003 and
2004 results appearing below. The following table sets forth certain income statement data expressed as a percentage of the
Groups consolidated net sales for the periods indicated: Year Ended December 31,2002
    
    
    2003
    
    
    2004Net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    39.6
    
    
    
    40.0
    
    
    
    38.7Gross profit
    
    
    60.4
    
    
    
    60.0
    
    
    
    61.3Operating expenses
    
    
    57.1
    
    
    
    55.1
    
    
    
    55.7Income (loss) from operations
    
    
    3.3
    
    
    
    4.9
    
    
    
    5.6Income taxes
    
    
    0.0
    
    
    
    3.0
    
    
    
    2.5Net income
    
    
    2.1
    
    
    
    3.7
    
    
    
    2.8
 Distribution Channels Net sales consist primarily of (i) retail sales by the Group to customers of its British
optical retail chain D&A and its Iberian optical retail chain General Optica; (ii) sales by the
Group to opticians in Italy, and through its international distribution network located in major
European markets and the Americas to retailers in those markets; and (iii) export sales by the
Group to independent distributors. For the period prior to the Groups divestiture of its interest
in July 2003, sales by EID of Prada-branded eyewear to opticians, independent distributors and the
Prada retail network in major markets worldwide, were also included in net sales. Retail sales made by D&A and General Optica, subsidiary sales and direct sales to opticians,
due to the various markups included in such sales, generate a greater contribution to net sales
than that of sales to independent distributors. Retail sales are made at prices that include the
retailer markup. Subsidiary sales are made at prices that include the customary distributor
markup, taking into account commissions paid to the distribution subsidiaries sales
representatives. Sales to opticians are made at prices that include a markup that takes into
account commissions paid to the Groups sales representatives. Sales to independent distributors,
however, are made at prices that exclude distributor and retailer markups. As a result, changes in
the relative contributions of the various distribution channels to net sales will affect the
average price per unit sold by the Group. For example, an increase in the proportion of sales to
independent distributors will result in a decrease in 27




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the average price per unit sold, while an increase in the proportion of subsidiary sales will
result in an increase in the average price per unit sold. Conversely, the Groups cost of sales
per unit is unaffected by the distribution channels through which such units are sold.
Consequently, changes in the relative contributions of the distribution channels to net sales will
affect the Groups gross margin. However, operating expenses are higher for retail sales,
subsidiary sales and sales to opticians than for sales to independent distributors, since operating
expenses include commissions, advertising and promotion expenses, other selling expenses and
general and administrative expenses. Thus, while the gross margin on retail sales, subsidiary
sales and sales to opticians may be significantly higher than the gross margin on sales to
independent distributors, this difference in gross margin may not translate into a comparable
difference in profitability. Accordingly, management believes that the Groups operating margin,
which is net of both cost of sales and operating expenses, is more indicative of the profitability
of the Groups sales. Business Segments Currently, and for the year ended December 31, 2004, the Group has divided its activities into
two distinct segments:  
    
    Wholesale and Manufacturingconsists of the design, manufacturing, marketing and
distribution of high-quality eyewear to opticians in Italy, Germany and the Netherlands
and to independent distributors and opticians through the Groups distribution
subsidiaries in other markets. This segment furnishes eyewear to the Groups other
business units, to which the wholesale and manufacturing segment makes sales at prices
that include a markup designed to compensate the unit for its manufacturing activity.
This segment includes De Rigo Vision S.p.A. and all of the distribution subsidiaries in
which it holds a controlling interest.
    
    Retailconsists of the sale of optical frames and lenses for prescription eyeglasses
and fashion sunglasses (as well as contact lenses and other optical products), together
with the provision of related professional consulting and aftercare services, through
the network of stores operated by the Groups two retail chains, D&A, a leading
retailer in the British optical market, and General Optica, the leading optical chain
in Spain, which also has a presence in Portugal. In prior years, the Group included a third segment for financial reporting purposes.  
    
    EIDwas the segment consisting of the Groups former joint venture with the Prada
Group, which conducted product development, marketing and distribution activities
related to Prada-branded eyewear, including that sold under the Miu Miu, Helmut Lang
and Jil Sanderbrand names. This joint venture was terminated in July 2003 by mutual
agreement of the parties and as a result the Group sold its 51% interest in EID to the
Prada Group. Accordingly, the data for the former EID segment presented in the tables
below and elsewhere in this annual report includes the results of EID only for the
period through the Groups disposal of its interest as of July 23, 2003. Non-GAAP Measures In addition to focusing on the Groups Italian GAAP results, De Rigos management uses certain
non-GAAP measures in evaluating the financial performance of the Group and its wholesale and
manufacturing and retail business segments. These non-GAAP measures include (a) sales results
calculated on a constant exchange rate basis that seeks to exclude the impact of fluctuations in
currency exchange rates by calculating operating results for both periods being compared on the
basis 28




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of the exchange rates used for such purpose in the earlier period, (b) income from operations
before depreciation and amortization, a commonly-used measure of financial performance which is
calculated by adding amortization and depreciation expenses to income from operations, and (c) net
financial position, a commonly-used measure of indebtedness which is calculated as being equal to
cash and cash equivalents minus the sum of bank borrowings and long-term debt (including the
current portion thereof). With respect to 2004, the Group has also calculated comparative results
for 2003 excluding the contribution of EID, in order to illustrate the underlying trends in the
businesses that continue to part of the Group following De Rigos sale of the controlling interest
in EID in July 2003 and allowing a comparison of performance on a consistent consolidation basis.
In each of these cases, management believes that these alternative, non-GAAP figures, when
considered in conjunction with (but not in lieu of) other measures that are calculated in
accordance with Italian GAAP, enhance an understanding of De Rigos results of operations and those
of its business segments. These non-GAAP measures are also commonly used by securities analysts,
credit rating agencies and investors to evaluate the financial performance of De Rigo and its
business segments and to compare its performance to that of its competitors. The Groups method of
calculating these non-GAAP measures may differ from methods used by other companies in calculating
similar measures. In each case in which such a non-GAAP measure is used in this annual report, the
most directly comparable GAAP measure is presented with equal or greater prominence and a
reconciliation of the non-GAAP measure to such most directly comparable GAAP measure is provided. Unaudited First Quarter Sales Results De Rigo posted net sales of 130.9 million for the first quarter of 2005, a decrease of 6.0%
as compared with the same period last year. As illustrated in the table below, foreign currency
translation differences had a negative effect of 1.1% on consolidated net sales, particularly with
regard to the translation into Euro of sales made in Japanese Yen, Pounds Sterling and Hong Kong
Dollars, as the average exchange rate for these currencies in the first quarter of 2005 was less
favorable to the Group than that during the first quarter of 2004. The Groups consolidated net sales of 130.9 million in the first quarter of 2005 were broken
down as follows: eyewear sales of 60.2 million, lens sales of 39.6 million, contact lens sales of
18.7 million and other sales and revenues of 12.4 million, as compared with sales of 65.6
million, 42.0 million, 18.6 million and 13.0 million, respectively, for the first quarter of
2004. Analyzing consolidated net sales by geographic area, net sales in Europe amounted to 118.1
million, a decrease of 6.7%, primarily as a result of lower sales through the Groups retail
companies and a decline in wholesale sales in certain markets. Net sales in the Rest of the World
increased by 7.9% to 10,9 million, reflecting the Groups positive results in the Far East. Net
sales in the Americas amounted to 1.9 million, a decrease of 24.0%, primarily as a result of lower
sales in the US market. De Rigos overall consolidated net sales results reflected the contribution of each of the
Groups business segments, as detailed in the table below: 29




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SALES BY BUSINESS SEGMENT (Euro in millions)
(including reconciliations of non-GAAP measures) 1Q 2005Effect of
    
    
    1Q 2005application of
    
    
    Sales at constant1Q 2004
    
    
    1Q 2005
    
    
    
    
    
    
    constant exchange
    
    
    exchange rates
    
    
    %Sales
    
    
    Sales
    
    
    % change
    
    
    rates
    
    
    (Non-GAAP)
    
    
    changeWholesale & Manufacturing
    
    
    42.3
    
    
    
    39.7
    
    
    
    -6.1
    %
    
    
    0.2
    
    
    
    39.9
    
    
    
    -5.7
    %Retail
    
    
    99.9
    
    
    
    95.1
    
    
    
    -4.8
    %
    
    
    1.2
    
    
    
    96.3
    
    
    
    -3.6
    %- D&A
    
    
    63.5
    
    
    
    59.1
    
    
    
    -6.9
    %
    
    
    1.2
    
    
    
    60.3
    
    
    
    -5.0
    %- GO
    
    
    36.4
    
    
    
    36.0
    
    
    
    -1.1
    %
    
    
    0.0
    
    
    
    36.0
    
    
    
    -1.1
    %Elimination of Intercompany Sales
    
    
    -3.0
    
    
    
    -3.9
    
    
    
    +30.0
    %
    
    
    0.0
    
    
    
    -3.9
    
    
    
    +30.0
    %Consolidated net sales
    
    
    139.2
    
    
    
    130.9
    
    
    
    -6.0
    %
    
    
    1.4
    
    
    
    132.3
    
    
    
    -5.0
    %
 Wholesale and manufacturing Wholesale and manufacturing sales amounted to 39.7 million, a decrease of 6.1% from 42.3
million posted in the first quarter of 2004. As illustrated in the table above, foreign exchange
rates had a negative impact of 0.5% on the segments sales before eliminations, reflecting the
appreciation of the Euro against certain currencies in which De Rigo makes sales. Wholesale and manufacturing sales in the first quarter were impacted by the expiry of the
Groups license agreement with Fendi as of the end of 2004. Management expects that the negative
impact on the segments sales of the expiry of the Fendi license will eventually be more than
offset by increased sales under the new license agreements De Rigo has signed with Chopard,
Ermenegildo Zegna, Escada and Jean Paul Gaultier during the last quarter of 2004 and first quarter
of 2005. However, deliveries of Chopardand Escada-branded eyewear have only started recently,
while those of Ermenegildo Zegnaand Jean Paul Gaultier-branded products have not yet started. As
a result, sales of the new brands contributed less to the segments sales during the first quarter
of 2005 than those of Fendi-branded eyewear during the first quarter of last year. Retail Sales through the retail companies amounted to 95.1 million, a decrease of 4.8% from 99.9
million posted in the first quarter of 2004. The following table sets forth certain data on the sales and store network of De Rigos two
retail chains, D&A and General Optica during the periods indicated. 1Q 2004
    
    
    1Q 2005Sales
    
    
    Sales
    
    
    
    
    
    
    31 Mar 04
    
    
    31 Mar 05
    
    
    
    
    
    
    31 Mar 04
    
    
    31 Mar 05in millions
    
    
    in millions
    
    
    % Change
    
    
    Owned stores
    
    
    Owned stores
    
    
    Unit change
    
    
    Franchised stores
    
    
    Franchised stores
    
    
    Unit changeD&A
    
    
    63.5
    
    
    
    59.1
    
    
    
    -6.9
    %
    
    
    232
    
    
    
    234
    
    
    
    +2
    
    
    
    143
    
    
    
    140
    
    
    
    -3GO
    
    
    36.4
    
    
    
    36.0
    
    
    
    -1.1
    %
    
    
    143
    
    
    
    150
    
    
    
    +7
    
    
    
    14
    
    
    
    20
    
    
    
    +6Total Retail
    
    
    99.9
    
    
    
    95.1
    
    
    
    -4.8
    %
    
    
    375
    
    
    
    384
    
    
    
    +9
    
    
    
    157
    
    
    
    160
    
    
    
    +3
 D&As total sales were 59.1 million, a decrease of 6.9% as compared with sales of 63.5
million posted in the first quarter of 2004. Sales declined by 5.0% in Pound Sterling terms, less
than in Euro terms, reflecting the decrease of the Pound Sterlings value against the Euro. Same
store sales per working day decreased by 4.6% in Pound Sterling terms. Sales of franchised stores
during the period amounted to 16.0 million, a decrease of 9.1%; in Pound Sterling terms, sales of
franchised stores decreased by 7.3%. D&As sales were negatively affected by a general slowdown in the British optical market, as
management believes D&A has essentially maintained its market share in value terms; the sales
decline also reflected a reduction in the number of working days during the period due to the
Easter holiday falling in March. At March 31, 2005, D&A operated a network of 234 owned shops and
140 franchised shops. A reduction in the number of working days due to the Easter holiday falling in March was
reflected in a 1.1% decline in General Opticas total sales, which decreased to 36.0 million from
the 36.4 million posted in the first quarter of 2004. The chains sales were also negatively
affected by bad weather conditions during the months of January and February. However, same store
sales per 30




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##### Table of Contents



working day continued to grow, rising by 1.2%, on top of the 8.4% increase posted in the first
quarter of 2004. 2004 compared to 2003 Net sales. De Rigo posted consolidated net sales of 514.4 million for 2004, an increase of
1.9% as compared with last year. The Groups current businesses continued to perform positively, as
comparisons with the prior year were affected by De Rigos sale during July 2003 of the controlling
interest in EID. As detailed in the table below, on the basis of a comparison excluding sales
through EID during the portion of 2003 prior to its sale, the Groups consolidated net sales
increased by 6.1%. In calculating its consolidated net sales and revenues, De Rigo has eliminated the
intercompany sales between the Groups business segments, as detailed in the following table: SALES BY BUSINESS SEGMENT (Euro in millions)
(including reconciliations of non-GAAP measures) Effect of
    
    
    2004 Sales atapplication of
    
    
    constant exchangeconstant exchange
    
    
    rates2003 Sales
    
    
    2004 Sales
    
    
    % change
    
    
    rates
    
    
    (Non-GAAP)
    
    
    % changeWholesale & Manufacturing
    
    
    136.2
    
    
    
    134.5
    
    
    
    -1.2
    %
    
    
    0.5
    
    
    
    135.0
    
    
    
    -0.9
    %Retail
    
    
    361.5
    
    
    
    389.8
    
    
    
    +7.8
    %
    
    
    -4.8
    
    
    
    385.0
    
    
    
    +6.5
    %- D&A
    
    
    230.8
    
    
    
    248.9
    
    
    
    +7.8
    %
    
    
    -4.8
    
    
    
    244.1
    
    
    
    +5.8
    %- GO
    
    
    130.7
    
    
    
    140.9
    
    
    
    +7.8
    %
    
    
    0.0
    
    
    
    140.9
    
    
    
    +7.8
    %Elimination of Intercompany Sales
    
    
    -12.5
    
    
    
    -9.9
    
    
    
    -22.0
    %
    
    
    0.0
    
    
    
    -9.9
    
    
    
    -22.0
    %Consolidated net sales excluding
sales through EID (Non-GAAP)
    
    
    485.2
    
    
    
    514.4
    
    
    
    +6.0
    %
    
    
    -4.3
    
    
    
    510.1
    
    
    
    +5.1
    %EID
    
    
    19.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Elimination of Intercompany Sales
    
    
    -0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EID net sales
    
    
    19.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated net sales
    
    
    504.8
    
    
    
    514.4
    
    
    
    +1.9
    %
    
    
    -4.3
    
    
    
    510.1
    
    
    
    +1.0
    %
 The Groups consolidated net sales of 514.4 million were broken down as follows: eyewear
sales of 224.3 million, lens sales of 160.1 million, contact lens sales of 80.0 million and
other sales and revenues of 50.0 million, as compared with sales of 235.8 million, 143.7
million, 74.7 million and 50.6 million, respectively, for 2003. Foreign currency translation differences had a positive effect on consolidated net sales,
particularly with regard to the translation into Euro of sales made in Pounds Sterling, as the
average exchange rate for this currency in 2004 was more favorable to the Group than that during
2003. This increase in the relative value of the British currency more than offset a decline in
the average Euro exchange rates for Japanese Yen and Hong Kong Dollars. As shown in the table
above, foreign exchange rate differences had an overall positive effect of 0.9% on consolidated net
sales. Analyzing consolidated net sales by geographic area, net sales in Europe increased by 2.8% to
466.8 million, primarily as a result of higher sales through the Groups retail companies. Net
sales in the Rest of the World increased by 1.8% to 39.7 million, as the impact of the
deconsolidation of EID was more than offset by very positive results posted by the Groups Far
Eastern distribution subsidiaries. Net sales in the Americas decreased by 33.6% to 7.9
million primarily as a result of the deconsolidation of EID. 31




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##### Table of Contents



Total sales of the wholesale and manufacturing segment declined by 1.2% to 134.5 million from
136.2 million posted in 2003, primarily as effect of the lost sales to EID. Excluding sales made
by the wholesale and manufacturing business segment to EID prior to its sale in 2003, the segments
sales increased by 0.7% (or 1.0% at constant exchange rates), as detailed in the table below. The
increase in wholesale and manufacturing sales excluding those made to EID reflected strong sales
results in certain Far Eastern markets, particularly Japan and Hong Kong, as well as in certain
European markets, including Greece and Spain. Effect of
    
    
    2004 Sales atapplication of
    
    
    constant exchangeconstant exchange
    
    
    rates2003 Sales
    
    
    2004 Sales
    
    
    % change
    
    
    rates
    
    
    (Non-GAAP)
    
    
    % changeWholesale and manufacturing sales
    
    
    136.2
    
    
    
    134.5
    
    
    
    -1.2
    %
    
    
    0.5
    
    
    
    135.0
    
    
    
    -0.9
    %- of which sales to EID
    
    
    -2.6
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0
    
    
    
    0.0Wholesale and manufacturing
sales excluding net sales to EID
(Non-GAAP)
    
    
    133.6
    
    
    
    134.5
    
    
    
    +0.7
    %
    
    
    0.5
    
    
    
    135.0
    
    
    
    +1.0
    %
 Total sales of the retail segment increased by 7.8% to 389.8 million from 361.5 million
posted in 2003. The following table sets forth certain data on the sales and store network of De Rigos two
retail chains: D&A, one of the leading retailers in the British optical market and General Optica,
the leading retailer in the Spanish optical market. 2003
    
    
    2004
    
    
    
    
    
    
    31 Dec 03
    
    
    31 Dec 04
    
    
    
    
    
    
    31 Dec 03
    
    
    31 Dec 04in millions
    
    
    in millions
    
    
    % Change
    
    
    Owned stores
    
    
    Owned stores
    
    
    Unit change
    
    
    Franchised stores
    
    
    Franchised stores
    
    
    Unit changeD&A
    
    
    230.8
    
    
    
    248.9
    
    
    
    +7.8
    %
    
    
    232
    
    
    
    232
    
    
    
    
    
    
    
    144
    
    
    
    140
    
    
    
    -4GO
    
    
    130.7
    
    
    
    140.9
    
    
    
    +7.8
    %
    
    
    142
    
    
    
    148
    
    
    
    +6
    
    
    
    14
    
    
    
    18
    
    
    
    +4Total Retail
    
    361.5
    
    
    389.8
    
    
    
    +7.8
    %
    
    
    374
    
    
    
    380
    
    
    
    +6
    
    
    
    158
    
    
    
    158
    
    
    
    
 D&As sales grew to 248.9 million, an increase of 7.8% as compared with sales of 230.8
million posted in 2003. Sales grew by 5.8% in Pound Sterling terms, reflecting the increase in its
value against the Euro, while same store sales per working day increased by 6.2% in Pound Sterling
terms. Sales of franchised stores during the period grew by 5.8% to 66.6 million; in Pound
Sterling terms, sales of franchised stores increased by 3.8%. The increase in D&As sales was
primarily attributable to the Companys aggressive marketing campaigns, which drove increased sales
of higher quality products. At December 31, 2004, D&A operated a network of 232 owned shops and 140
franchised shops, having closed four underperforming franchised shops during the course of 2004. General Optica grew sales by 7.8% to 140.9 million from the 130.7 million posted in 2003.
General Optica continued its record of notable sales gains through the expansion of its owned and
franchised store network, as well as registering a 6.0% increase in same store sales per working
day on top of the 4.3% increase recorded in 2003. At December 31, 2004, GO operated a network of
148 owned shops and 18 franchised shops, having opened a net total of 6 owned shops and 4
franchised shops during the last twelve months. Cost of sales.Cost of sales decreased by 1.5% to 198.9 million or 38.7% of total net sales,
in 2004, from 202.0 million, or 40.0% of net sales, in 2003. The decrease in cost of sales was
primarily attributable to the decline in sales by the wholesale and manufacturing segment,
particularly those of 32




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##### Table of Contents



higher cost luxury/designer eyewear (especially EIDs brands), as well as to the realization
of manufacturing efficiencies and an improvement in the product mix sold by the retail chains. Operating expenses.Operating expenses increased by 3.2% to 286.7 million, or 55.7% of total
net sales in 2004, as compared to 277.9 million, or 55.1% of net sales, in 2003. Each of the
components of the Groups operating expenses is discussed below. Commissionsdecreased by 11.2% to 11.9 million, or 2.3% of total net sales, in 2004,
from 13.4 million, or 2.7% of net sales, in 2003, primarily due to a decline in commissions
paid by the wholesale and manufacturing segment to agents (particularly those in Italy) as a
result of the decline in its sales. Advertising and promotion expensesincreased by 5.5% to 34.4 million, or 6.7% of total
net sales in 2004, from 32.6 million, or 6.5% of net sales, in 2003. The increase was
primarily attributable to higher marketing expenses at D&A, reflecting its efforts to
strengthen its competitive position through aggressive promotions. Other selling expensesincreased by 4.6% to 204.4 million, or 39.7% of total net
sales, in 2004, from 195.5 million, or 38.7% of net sales in 2003. The overall increase
reflected higher costs at both D&A (primarily relating to optometrists and the contact
lenses by post program) and General Optica (primarily due to the opening of new stores). General and administrative expensesdecreased by 0.8% to 36.0 million, or 7.0% of
total net sales, in 2004, from 36.3 million, or 7.2% of net sales, in 2003. The decrease
in general and administrative expenses reflected a decline at the wholesale and
manufacturing segment that was mainly due to lower losses on accounts receivable, the
positive effect of which was partially offset by an increase in administrative expenses at
the retail chains, reflecting increased labor and depreciation costs at both General Optica
and D&A. The following table summarizes the Groups principal operating results, on both a consolidated
and segment basis, for the periods indicated. Income fromoperations beforedepreciation andamortization
    
    
    
    
    
    
    Income fromSales
    
    
    
    
    
    
    (Non-GAAP)*
    
    
    
    
    
    
    operations(in millions)
    
    
    
    
    
    
    (in millions)
    
    
    
    
    
    
    (in millions)2003
    
    
    2004
    
    
    % Change
    
    
    2003
    
    
    2004
    
    
    % Change
    
    
    2003
    
    
    2004
    
    
    % ChangeWholesale & Manufacturing
    
    
    136.2
    
    
    
    134.5
    
    
    
    -1.2
    %
    
    
    18.4
    
    
    
    21.3
    
    
    
    +15.8
    %
    
    
    13.6
    
    
    
    16.2
    
    
    
    +19.1
    %Retail
    
    
    361.5
    
    
    
    389.8
    
    
    
    +7.8
    %
    
    
    31.2
    
    
    
    34.4
    
    
    
    +10.3
    %
    
    
    9.6
    
    
    
    12.6
    
    
    
    +31.3
    %- D&A
    
    
    230.8
    
    
    
    248.9
    
    
    
    +7.8
    %
    
    
    10.1
    
    
    
    10.9
    
    
    
    +7.9
    %
    
    
    1.2
    
    
    
    1.9
    
    
    
    +58.3
    %- GO
    
    
    130.7
    
    
    
    140.9
    
    
    
    +7.8
    %
    
    
    21.1
    
    
    
    23.5
    
    
    
    +11.4
    %
    
    
    8.4
    
    
    
    10.7
    
    
    
    +27.4
    %EID
    
    
    19.8
    
    
    
    
    
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    1.7
    
    
    
    Elimination of Intercompany Sales
    
    
    -12.7
    
    
    
    -9.9
    
    
    
    -22.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated net sales
    
    
    504.8
    
    
    
    514.4
    
    
    
    +1.9
    %
    
    
    51.8
    
    
    
    55.7
    
    
    
    +7.5
    %
    
    
    24.9
    
    
    
    28.8
    
    
    
    +15.7
    %
 
 *
    
    See reconciliation table below Income from operationsincreased by 15.7% to 28.8 million, or 5.6% of total net sales,
in 2004, from 24.9 million, or 4.9% of net sales, in 2003. The increase in the Groups operating
income, both in absolute terms and as a percentage of sales, reflected improved results at both of
its segments, which more than offset the loss of operating income from EID. Income from operations
at 33




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##### Table of Contents



the wholesale and manufacturing segment increased by 19.1% to 16.2 million from 13.6 million
in 2003, as the segment enjoyed the benefits of higher gross margins deriving from efficiencies in
the manufacturing and purchasing process and other cost factors discussed above. The retail
segment also recorded a significant increase in income from operations, which grew by 31.3% to
12.6 million from 9.6 million in 2003, reflecting the increase in sales as well as an improved
product mix. Income from operations before depreciation and amortization, a non-GAAP measure calculated by
adding amortization and depreciation expenses to income from operations that is frequently used as
a measure of financial performance and commonly used by securities analysts to evaluate the results
of De Rigo and its business segments and to compare the Companys performance to that of its
competitors, increased by 7.5% to 55.7 million, or 10.8% of total net sales, in 2004, from 51.8
million, or 10.3% of net sales, in 2003. Income from operations before depreciation and
amortization generally reflected the factors described above with respect to income from
operations, with its lower rate of increase as compared with income from operations being primarily
attributable to the fact that amortization expenses for both goodwill and intangibles were higher
in 2003 than in 2004, as illustrated in the table below. On a segment basis, income from
operations before depreciation and amortization at the wholesale and manufacturing segment
increased by 15.8% to 21.3 million from 18.4 million in 2003, while that at the retail segment
increased by 10.3% to 34.4 million from 31.2 million in 2003. The following table reconciles income from operations before depreciation and amortization to
income from operations, the most directly comparable Italian GAAP measure, on both a consolidated
and segment basis, for the periods indicated in millions of Euro. De Rigo Group
    
    2003
    
    
    2004
    
    
    % ChangeIncome from operations
    
    
    24.9
    
    
    
    28.8
    
    
    
    15.7
    %Amortization of goodwill
    
    
    6.8
    
    
    
    6.3
    
    
    
    -7.4
    %Amortization of other intangibles
    
    
    2.4
    
    
    
    2.2
    
    
    
    -8.3
    %Depreciation
    
    
    17.7
    
    
    
    18.4
    
    
    
    4.0
    %Income from operations before depreciation and amortization
    
    
    51.8
    
    
    
    55.7
    
    
    
    7.5
    %
 Wholesale & Manufacturing
    
    2003
    
    
    2004
    
    
    % ChangeIncome from operations
    
    
    13.6
    
    
    
    16.2
    
    
    
    19.1
    %Amortization of goodwill
    
    
    0.8
    
    
    
    0.3
    
    
    
    -62.5
    %Amortization of other intangibles
    
    
    1.0
    
    
    
    1.0
    
    
    
    0.0
    %Depreciation
    
    
    3.0
    
    
    
    3.8
    
    
    
    26.7
    %Income from operations before depreciation and amortization
    
    
    18.4
    
    
    
    21.3
    
    
    
    15.8
    %
 Retail
    
    2003
    
    
    2004
    
    
    % ChangeIncome from operations
    
    
    9.6
    
    
    
    12.6
    
    
    
    31.3
    %Amortization of goodwill
    
    
    6.0
    
    
    
    6.0
    
    
    
    0.0
    %Amortization of other intangibles
    
    
    1.3
    
    
    
    1.2
    
    
    
    -7.7
    %Depreciation
    
    
    14.3
    
    
    
    14.6
    
    
    
    2.1
    %Income from operations before depreciation and amortization
    
    
    31.2
    
    
    
    34.4
    
    
    
    10.3
    %
 Other income (expenses).Financial and other items contributed net expenses of 1.2
million in 2004, as compared to net income of 13.0 million in 2003. Net financial expenses
totalled 0.4 million in 2004, compared to net financial expenses of 1.5 million in 2003,
reflecting the Groups repayment of a significant amount of short-term debt during the year. Net
other expenses of 0.7 million, as compared to net other income of 14.5 million in 2003, accounted
for the remainder of the 34




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##### Table of Contents



total net result in 2004. In 2003, net financial income had primarily reflected the capital
gain of 11.8 million realized on the sale of Groups interest in EID. Income taxes.Income taxes amounted to 12.7 million in 2004, as compared with 14.9 million
in 2003. The 14.8% decrease in income taxes occurred notwithstanding an increase in the Groups
effective tax rate, which was 46.1% in 2004, as compared to 39.5% in 2003. The increase in the
effective tax rate reflected the fact that the tax benefit to the Group of the application of a
more favorable tax rate to the gain recorded on the sale of EID in 2003 was greater than that
arising in 2004 from a one percentage point decrease in Italian statutory tax rates and a step up
in the tax basis of certain assets. See Note 11 of Notes to the Consolidated Financial Statements
included in Item 18. Net income.As a result of these factors, the Groups net income decreased by 21.6% to 14.5
million in 2004 from 18.5 million in 2003 and represented 2.8% of net sales, as compared with 3.7%
last year. Earnings per share.Earnings per share were 0.34 in 2004 on a total of 42.5 million
outstanding shares, a decrease of 19.0% as compared with 0.42 per share on total of 44.5 million
outstanding shares in 2003. The reduction in the number of shares outstanding reflected the
Groups repurchase of shares during the year. 2003 compared to 2002 Net sales. De Rigo posted net sales of 504.8 million for 2003, a 1.5% decrease as compared
with the previous year. The overall sales results were negatively affected by the appreciation of
the Euro against other currencies in which De Rigo makes sales. As detailed in the reconciliation
table below, when calculated on a constant exchange rate basis, De Rigos consolidated net sales
increased by 3.5%. The following table provides details of De Rigos consolidated net sales and the sales of each
of its business segments for the periods presented, as well as providing reconciliations of sales
calculated on a constant exchange rate basis to sales calculated in accordance with Italian GAAP. SALES BY BUSINESS SEGMENT (Euro in millions)
(including reconciliations of non-GAAP measures) 2003Effect of
    
    
    2003application of
    
    
    Sales at constant2002
    
    
    2003
    
    
    
    
    
    
    constant
    
    
    exchange ratesReported sales
    
    
    Reported sales
    
    
    % change
    
    
    exchange rates
    
    
    (Non-GAAP)
    
    
    % changeWholesale & Manufacturing
    
    
    141.1
    
    
    
    136.2
    
    
    
    3.5
    %
    
    
    2.2
    
    
    
    138.4
    
    
    
    1.9
    %Retail
    
    
    359.6
    
    
    
    361.5
    
    
    
    +0.5
    %
    
    
    23.2
    
    
    
    384.7
    
    
    
    +7.0
    % D&A
    
    
    236.2
    
    
    
    230.8
    
    
    
    2.3
    %
    
    
    23.2
    
    
    
    254.0
    
    
    
    +7.5
    % General Optica
    
    
    123.4
    
    
    
    130.7
    
    
    
    +5.9
    %
    
    
    0.0
    
    
    
    130.7
    
    
    
    +5.9
    %EID
    
    
    31.2
    
    
    
    19.8
    
    
    
    36.5
    %
    
    
    0.0
    
    
    
    19.8
    
    
    
    36.5
    %Elimination of Intercompany Sales
    
    
    (19.4
    )
    
    
    (12.7
    )
    
    
    34.5
    %
    
    
    0.0
    
    
    
    (12.7
    )
    
    
    34.5
    %Consolidated net sales
    
    
    512.5
    
    
    
    504.8
    
    
    
    1.5
    %
    
    
    25.4
    
    
    
    530.2
    
    
    
    +3.5
    %
 The Groups consolidated net sales of 504.8 million were broken down as follows: eyewear
sales of 235.8 million, lens sales of 143.7 million, contact lens sales of 74.7 million and
other sales and revenues of 50.6 million, as compared with sales of 245.4 million, 138.7
million, 76.5 million and 51.9 million, respectively, for 2002. Foreign currency translation differences had a negative effect on consolidated net sales,
particularly with regard to the translation into Euro of sales made in Pounds Sterling, Japanese
Yen and Hong Kong Dollars, as the average exchange rates for these currencies in 2003 were less
favorable to the Group than those during 2002. As detailed in the reconciliation table above, when
calculated on a constant exchange rate basis, De Rigos consolidated net sales increased by 3.5%. 35




---



##### Table of Contents



Sales by business segment Wholesale and manufacturingsales amounted to 136.2 million, a decrease of 3.5% as compared
with 141.1 million posted in 2002. The decrease in wholesale and manufacturing sales was
primarily due to lower unit sales in certain European markets, primarily in Italy, as well as to a
decline in the segments sales to EID. As detailed in the reconciliation table above, when
calculated on a constant exchange rate basis, the business segments sales decreased by 1.9%. Softer sales in certain European markets and to EID were partially offset by strong growth in
the Rest of the World area, where the segment posted a 18.8% increase in sales. The increase was
driven by very good results in the Far East region that were primarily attributable to increased
sales of both the Groups owned brands and its licensed designer brands. Retail. Sales through the retail companies amounted to 361.5 million, an increase of 0.5% as
compared with sales of 359.6 million posted in 2002. As detailed in the reconciliation table
above, when calculated on a constant exchange rate basis, net sales through the retail companies
increased by 7.0%. The following table sets forth certain data on the sales and store network of De Rigos two
retail chains: D&A, the Groups British retail chain, and General Optica, the Groups Iberian
retail chain, for each of 2003 and 2002 and as of December 31, 2002 and December 31, 2003. 31 Dec 02
    
    
    31 Dec 032002
    
    
    2003
    
    
    
    
    
    
    Owned
    
    
    Owned
    
    
    
    
    
    
    31 Dec 02
    
    
    31 Dec 03Euro in millions
    
    
    Euro in millions
    
    
    % Change
    
    
    stores
    
    
    stores
    
    
    Unit change
    
    
    Franchised stores
    
    
    Franchised stores
    
    
    Unit changeD&A
    
    
    236.2
    
    
    
    230.8
    
    
    
    2.3
    %
    
    
    233
    
    
    
    232
    
    
    
    1
    
    
    
    147
    
    
    
    144
    
    
    
    -3General Optica
    
    
    123.4
    
    
    
    130.7
    
    
    
    +5.9
    %
    
    
    140
    
    
    
    142
    
    
    
    +2
    
    
    
    5
    
    
    
    14
    
    
    
    +9Total Retail
    
    
    359.6
    
    
    
    361.5
    
    
    
    +0.5
    %
    
    
    373
    
    
    
    374
    
    
    
    +1
    
    
    
    152
    
    
    
    158
    
    
    
    +6
 Sales at D&A grew by 7.5% in Pound Sterling terms, while same store sales per working day
increased by 7.6%. In Euro terms, D&As sales totalled 230.8 million, a decrease of 2.3% as
compared with sales of 236.2 million posted in 2002, reflecting the decline in the value of the
Pound Sterling against the Euro. Sales of franchised stores during the period amounted to 62.9
million, unchanged as compared with 2002; in Pound Sterling terms, sales of franchised stores
increased by 10.1%. The notable increase in D&As sales in Pound Sterling terms, which was achieved
in a very difficult environment marked by a decline in overall demand, was primarily attributable
to D&As aggressive marketing activity. At December 31, 2003, D&A operated a network of 232 owned
shops and 144 franchised shops. General Optica reported sales of 130.7 million, an increase of 5.9% as compared with sales of
123.4 million posted in 2002. This 5.9% increase was achieved on top of the 11.6% sales increase
posted in 2002. Same store sales per working day increased by 4.3%, on top of a 8.5% increase
recorded in 2002. EID. De Rigo sold its 51% interest in EID, the former joint venture for the marketing and
distribution of Prada eyewear, to the Prada Group. As a consequence of this transaction, EID is no
longer one of De Rigos business segments and its results for the third quarter and fourth quarter
of 2003 have not been consolidated in the De Rigo Groups results for those periods. Accordingly,
the 19.8 million in sales reported for the former segment in 2003 only reflects EIDs results for
the first six months of 2003, prior to the Groups sale of its interest. 36




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Net sales by geographic region. Net sales in Europe decreased by 2.2% to 453.8 million,
primarily as a result of the appreciation of the Euro against the Pound Sterling. Net sales in the
Americas decreased by 0.8% to 11.9 million. Net sales in the Rest of the World increased by 6.6%
to 39.0 million, primarily as a result of increased unit sales in the Far East, the positive
effects of which were only partially offset by the unfavorable trend in Japanese Yen and Hong Kong
Dollar exchange rates and by the negative effects on consumption during the first half of the year
due to the impact of the SARS crisis and the war in Iraq. Cost of sales.Cost of sales decreased by 0.6% to 202.0 million or 40.0% of total net sales,
in 2003, from 203.2 million, or 39.6% of net sales, in 2002. The decrease in cost of sales was
attributable to the decline in net sales, especially those of higher margin luxury/designer
eyewear, as well as to the realization of manufacturing efficiencies. Operating expenses.Operating expenses decreased by 5.0% to 277.9 million, or 55.1% of total
net sales, in 2003, as compared to 292.5 million, or 57.1% of net sales, in 2002. The decline in
operating expenses both in absolute terms and as a percentage of sales reflected the
deconsolidation of EID following the Groups sale of its majority interest, as well as lower
operating expenses at D&A as a consequence of the weakness of the Pound Sterling against the Euro. Commissionsdecreased by 18.3% to 13.4 million, or 2.7% of total net sales, in 2003, from
16.4 million, or 3.2% of net sales, in 2002, primarily due to a decline in commissions paid by EID
to the Prada Group for sales of Pradaeyewear through the Prada Groups network of stores during
the six months of the year prior to De Rigos sale of its interest, as well as lower commissions
paid by the wholesale segment to agents as a results of decline in sales particularly in Italy and
a reduction in the level of commissions paid by D&A in Euro terms. Advertising and promotion expensesdecreased by 6.6% to 32.6 million, or 6.5% of total net
sales in 2003, from 34.9 million, or 6.8% of net sales, in 2002. The decrease was attributable to
the deconsolidation of EID, as well as a decline in marketing expenses in the wholesale segment. Other selling expensesdecreased by 3.7% to 195.5 million, or 38.7% of total net sales, in
2003, from 203.0 million, or 39.6% of net sales in 2002. The decline was primarily attributable
to a reduction in the Euro value of expenses incurred at D&A. General and administrative expensesdecreased by 5.2% to 36.3 million, or 7.2% of total net
sales, in 2003, from 38.3 million, or 7.5% of net sales, in 2002. The decrease in general and
administrative expenses both in absolute terms and as a percentage of sales was primarily
attributable to the deconsolidation of EID, as well as a reduction in expenses at D&A as a
consequence of the weakness of the Pound Sterling against the Euro. Income from operationsincreased by 49.1% to 24.9 million, or 4.9% of total net sales, in
2003, from 16.7 million, or 3.3% of net sales, in 2002. The increase in the Groups operating
income was primarily attributable to the improvement in the wholesale and manufacturing segment,
both in absolute terms and as a percentage of sales, primarily attributable to higher gross margins
deriving from efficiencies in the manufacturing and purchasing process and reflecting the cost
factors discussed above. Other income (expenses).Financial and other items contributed net income of 13.0 million in
2003, as compared to net expenses of 7.0 million in 2002. Net financial expenses in 2003 totalled
1.5 million, compared to net financial expenses of 3.4 million in 2002, reflecting the Groups
repayment of a significant volume of short-term borrowing. Net other income of 14.5 million, as
compared to net other expenses of 3.6 million in 2002, accounted for the remainder of the total
net result in 2003, primarily reflecting the capital gain of 11.8 million realized on the sale of
Groups interest in EID. 37




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Income taxes.Income taxes amounted to 14.9 million in 2003, as compared with 0 million in
2002. The Groups income was taxed at an effective rate of 39.4% in 2003. The increase in the
effective tax rate reflected the fact that De Rigo had recognized significant deferred tax assets
relating to tax relief granted to the Group in connection with the expiration of certain tax
incentives in 2002, as well as to the impact of the expiration of these incentives in 2003, when
nearly all of the Groups income was subject to tax. Net income.Net income increased by 74.5% to 18.5 million in 2003 from 10.6 million in 2002
and represented 3.7% of net sales, as compared with 2.1% last year. Earnings per share.Earnings per share were 0.42 on a weighted average total of 44.7 million
outstanding shares, an increase of 75.0% as compared with 0.24 in 2002. 
 Effect of Inflation Management believes that the impact of inflation was not material to the Groups net sales or
income from operations in any of the years ended December 31, 2002, 2003 and 2004. 
 U.S. GAAP Reconciliation The Groups consolidated net income determined in accordance with U.S. GAAP would have been
23.0 million, 24.3 million and 17.1 million for the years ended December 31, 2004, 2003 and
2002, respectively, as compared with net income of 14.5 million, 18.5 million and 10.6 million,
respectively, for the same periods, as determined under Italian GAAP. Differences in goodwill
depreciation principles under Italian GAAP and U.S. GAAP following the Groups adoption of SFAS 142
impacted the results for each of the three years, while differences in the recognition as
compensation expense of expenses related to the Companys stock-based compensation plan under SFAS
148 had an impact on the results for 2004 and 2003. In addition, under U.S. GAAP, EID is presented
as a discontinued operation for 2003 and 2002 in accordance with the guidance of SFAS 144. Based
upon this guidance, the results for all relevant periods, including revenues and costs, of the sold
businesses are removed from the consolidated statements of operations and reported after income
from continuing operations. The Groups total assets determined in accordance with U.S. GAAP would have been 403.6
million and 392.1 million at December 31, 2004 and 2003, respectively, as compared with 394.6
million and 376.9 million, respectively, under Italian GAAP. Shareholders equity determined in
accordance with U.S. GAAP would have been 235.2 million and 221.7 million at December 31, 2004
and 2003, respectively, as compared with 241.4 million and 226.9 million, respectively, under
Italian GAAP. For a discussion of the principal differences between Italian GAAP and U.S. GAAP as they
relate to the Groups consolidated net income and shareholders equity, including the effect of the
adoption of new accounting principles, see Note 19 of Notes to the Consolidated Financial
Statements included in Item 18. 
 Liquidity and Capital Resources De Rigos cash flow from operating activities decreased from 50.8 million in 2003 to 41.4
million in 2004. The decrease in net cash provided by operating activities reflected the fact that
in 2003 this item had included 11.8 million related to the sale of EID (including the portion
attributable to minority interests), as well as the effect of the lower net income, higher payments
of income taxes and value added taxes, and greater investments in working capital recorded in 2004. The Company relies primarily on funds from operations to finance its working capital needs,
including the financing of its inventories and receivables. It also maintains unsecured short-term
lines 38




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of credit with Italian banks, which have no set term and are payable upon demand. At December
31, 2003 and 2004, the Group had unsecured short-term bank lines of credit aggregating
approximately 137.1 million and 85.5 million, respectively, having cancelled during 2004 a number
of lines that it had not been using. At December 31, 2003 and 2004, approximately 114.5 million,
and 65.1 million, respectively, were available for further borrowings under these lines. At
December 31, 2003 and 2004, the weighted average interest rates for the short-term lines of credit
were 3.48% and 3.56% respectively. Amounts outstanding under these lines of credit are payable upon
demand. None of these facilities contain ratings triggers or financial covenants. For more
information on De Rigos outstanding debt, see Notes 8 and 9 of the Notes to the Consolidated
Financial Statements included in Item 18. At December 31, 2004, the Company had positive net working capital (calculated as our total
current assets less our current liabilities) of 33.8 million, as compared to 32.5 million at
December 31, 2003. The 4.0% increase in net working capital was primarily attributable to a sharp
improvement in the net financial position of the Group, which changed from net indebtedness of 3.6
million at December 31, 2003 to net cash of 6.2 million a year later, reflecting a significant
increase in cash and cash equivalents and the impact of debt repayments during 2004. Net financial position (which we calculate as being equal to cash and cash equivalents minus
the sum of bank borrowings and long-term debt (including the current portion thereof) is a non-GAAP
measure that is frequently used as a measure of indebtedness and is used by securities analysts to
compare the Companys position to that of its competitors. The following table details our net
financial position as at the end of each of 2003 and 2004 and provides a reconciliation of this
non-GAAP measure to cash and cash equivalents the most directly comparable GAAP measure appearing
in our consolidated statements of cash flows. Reconciliation of Net Financial
Position with most directly comparable Italian GAAP measureDecember 31,
    
    
    December 31,(millions of Euro)
    
    2003
    
    
    2004Cash and cash equivalents
    
    
    19.6
    
    
    
    27.1Bank borrowings
    
    
    22.5
    
    
    
    20.4Current portion of long term debt
    
    
    0.2
    
    
    
    0.2Long term debt, less current portion
    
    
    0.5
    
    
    
    0.3Net Financial Position
    
    
    3.6
    
    
    
    6.2
 Net cash used in investing activities totaled 20.5 million in 2004, as compared to cash
provided by such activities of 3.6 million in 2003. The significant difference reflected the fact
that the sale of EID had provided 12.3 million in cash in 2003. The result was also attributable
to a significant increase in cash used for additions to property, plant and equipment, reflecting
an increase in capital expenditures at both General Optica, which opened six new stores, and D&A,
which increased its expenditures on refitting stores. Capital expenditures in 2004 were 17.6
million, as compared to 11.6 million in 2003, and were financed principally with funds from
operations. The Group expects to incur capital expenditures of approximately 20 million in 2005,
essentially for the refitting of existing shops in Spain and the United Kingdom and the opening of
new shops in Spain. The Group believes that the financial resources available to it from funds
from operations, cash on hand and short-term investments held by the Group will be sufficient to
meet the Groups capital expenditure requirements in 2005. Net cash used in financing activities deceased sharply, from 55.6 million in 2003 to 13.4
million in 2004, primarily as a result of a significant decrease in the Groups net short-term
borrowings as compared to the prior year, as well as the fact that dividends were no longer payable
to 39




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##### Table of Contents



holders of former minority interests. The amount invested by the Group to purchase outstanding
ADSs (including those repurchased from Prada) under De Rigos authorized share repurchase program
increased to 11.3 million in 2004 from 0.7 million in 2003. As of December 31, 2004 and 2003, the Groups ratio of long-term debt to shareholders equity
was 0.1% and 0.2%, respectively. The decrease in this ratio between 2004 and 2003 reflects the
increase in the level of the Groups retained earnings, as well as a reduction in the level of its
outstanding debt. The Groups liquidity needs could increase in the event of an extended economic slowdown or
recession that would reduce cash flow from operations and would impair the ability of the Groups
distributors and retail customers to meet their payment obligations. In 2004, the Group again engaged in certain hedging transactions to manage risks relating to
foreign currency exchange rates. See Note 19 of Notes to the Consolidated Financial Statements
included in Item 18 and Quantitative and Qualitative Disclosures About Market Risk in Item 11. 
 Off-Balance Sheet Arrangements De Rigo does not engage in the use of special purpose entities for off-balance sheet financing
or any other purpose which results in assets or liabilities not being reflected in its consolidated
financial statements, nor does it engage in any off-balance sheet financing through other means
that has or is reasonably likely to have a current or future effect on the Groups financial
condition or operational results. 
 Contractual Obligations The following table sets forth the contractual obligations and commercial commitments of the
Group with definitive payment terms that will require significant cash outlays in the future, as of
December 31, 2004: Payments due by period2006
    
    
    2008
    
    
    2010 andTotal
    
    
    2005
    
    
    2007
    
    
    2009
    
    
    thereafter(in millions of Euro)Long-Term Debt
    
    
    0.5
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Operating Leases
    
    
    160.4
    
    
    
    24.6
    
    
    
    42.9
    
    
    
    35.0
    
    
    
    57.9Other Commitments
    
    
    31.4
    
    
    
    6.7
    
    
    
    9.7
    
    
    
    11.4
    
    
    
    3.6Total Obligations
    
    
    192.3
    
    
    
    31.5
    
    
    
    52.7
    
    
    
    46.5
    
    
    
    61.6
 Long-term debt.For information on our long-term debt obligations, see 3⁄4Capital
Resources above and Note 9 to the Consolidated Financial Statements included in Item 18. Operating leases.D&A leases property, computer hardware and cars and General Optica leases
property under non-cancellable operating leases. Other lease commitments relate to the rental of
buildings by distribution subsidiaries. At December 31, 2004, the future lease payments under
these operating leases totalled approximately 160.4 million. For additional information, see Note
16 of Notes to the Consolidated Financial Statements included in this Annual Report. Other commitments.At December 31, 2004, these obligations comprised those arising out
royalty agreements and sponsorship contracts. Royalty agreements.These liabilities relate to royalties due and minimum advertising
expenses required under De Rigos arrangements with certain designers for the use of their
trademarks in the production of fashion eyewear eyeglasses. At December 31, 2004, the
minimum future payments arising out of these agreements totalled approximately 30.1 40




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##### Table of Contents



million, of which approximately 21.0 million related to royalty arrangements and 9.1
million to advertising expenses. Sponsorship agreements. These liabilities relate to the Groups marketing contracts
with actors and athletes serving as spokespersons for De Rigos products. At December 31,
2004, future payments due under these agreements totalled approximately 1.3 million. 
 Concentrations of Credit Risk Financial instruments that potentially subject the Group to concentration of credit risks
consist principally of cash investments and trade accounts receivable. The Group maintains cash
and cash equivalents and short-term investments with financial institutions located in Italy. The
Company selects only financial institutions with high credit standards for use in its investment
strategies. Concentration of credit risks and the risk of accounting loss with respect to trade
receivables is generally limited due to the large number of the Companys end customers and the
diversity of the geographic areas in which the customers are located. The Company generally does
not require collateral with respect to sale orders, but it may require collateral and bank
guarantees with respect to certain customers. No individual customer represented 10% or more of sales in any of the years ended December 31,
2002, 2003 and 2004. 
 New Accounting Standards For a discussion of the impact of the Groups adoption of new accounting standards on its
results of operations under U.S. GAAP, see Note 19(s) of Notes to the Consolidated Financial
Statements included in Item 18. 
 Process of Transition to International Accounting Standards Following the entry into force of European Regulation No. 1606 of July 2002, EU companies
whose securities are traded on regulated markets in the EU are required to adopt international
financial reporting standards (IFRS), formerly known as IAS, in the preparation of their 2005
consolidated financial statements. Given that our securities are only traded on the NYSE, we are
not subject to this requirement and intend to continue to report our financial results in
accordance with Italian GAAP and to provide the required reconciliation of certain items to U.S.
GAAP in our annual reports on Form 20-F. 
 Trend Information The Group competes in the eyewear market as a whole, and in several individual sectors of that
market, including those for sunglasses, prescription eyewear and fashion eyewear. De Rigo believes
that the most significant consumer-related trends in these markets that may affect its business
include the following:  
    
    Consumers are increasingly attracted by products with higher fashion content.
    
    Consumers are also increasingly attracted by eyewear incorporating more
sophisticated technological features and high quality components, particularly those
capable of increasing eye protection (sunglasses lenses) and great comfort (progressive
lenses and multi-coated lenses).
    
    Products bearing brands with high customer appeal have become synonymous with
technology, quality and style. Customers rely on recognized brands to simplify their 41




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##### Table of Contents



purchase decision.
    
    The average age of the population in De Rigos primary markets is increasing and, as
a result, the number of people wearing spectacles in those markets is increasing.
    
    Sunglasses and spectacles are becoming more popular, even in countries with lower
average per capita spending power.
    
    Expected increases in personal income levels could reduce the current length of the
replacement cycle for eyewear in certain of the Companys more developed markets.
    
    Increased use of, and exposure to, computers, televisions and similar instruments
tends to have a negative effect on consumers vision.
    
    Although laser surgery vision correction procedures are becoming more common,
particularly in the United Kingdom and United States, the high cost and sometimes
limited effectiveness are limiting their use. De Rigo believes that the impact of these factors can be seen in a number of current
developments in the eyewear industry, including the following:  
    
    Consumers are increasingly inclined toward purchasing sunglasses with higher fashion
content, particularly if they bear a designer brand. Sunglasses have essentially become
a fashion accessory.
    
    The increased attractiveness of designer-brand sunglasses incorporating high
technology and high quality components, including progressive and multi-coated lenses,
is resulting in an increase in the average retail price for sunglasses.
    
    Higher disposable income and a perceived need for security and protection are
increasingly causing consumers to own more than one pair of spectacles or sunglasses.
    
    The desire for feeling better about ones appearance is leading to an increased
percentage of consumers owning both contact lenses and spectacles; this trend is
particularly evident in the United Kingdom, Northern Europe and United States.
    
    The increasing importance of fashion content is reducing the length of the
replacement cycle for sunglasses.
    
    Increased use of laser surgery techniques could reduce the need for prescription
eyewear, while increasing the use of sunglasses among the same group of consumers. 
 Item 6.Directors, Senior Management and Employees 
 DIRECTORS AND SENIOR MANAGEMENT The following table sets forth the names of the members of the Board of Directors and the
senior management of the Company and each of its principal operating companies. The term of
appointment of the current directors expires upon approval by the Companys shareholders of its
financial statements for the year ending December 31, 2005. The senior management of the Company
and its subsidiaries are appointed by the Board of Directors of the respective company and
serve at the discretion thereof. 42




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##### Table of Contents



Name
    
    Age
    
    Position within Group/CompanyEnnio De Rigo
    
    
    65
    
    
    Chairman of the Board of Directors and Chief Executive OfficerEmiliana De Meio De Rigo
    
    
    61
    
    
    Vice Chairman of the Board of DirectorsWalter De Rigo
    
    
    73
    
    
    DirectorMichele Aracri
    
    
    48
    
    
    Director and Managing DirectorMaurizio Dessolis
    
    
    39
    
    
    Vice-Chairman and Chief Financial Officer (1)Massimo De Rigo
    
    
    36
    
    
    Vice-Chairman and Head of Design Department (1)Enrico Valdani
    
    
    56
    
    
    Outside DirectorJordi Fontcuberta
    
    
    49
    
    
    Managing Director, General OpticaBruno Palmegiani
    
    
    55
    
    
    Art & Creative DirectorMario Sommavilla
    
    
    57
    
    
    Chief Administrative OfficerAndy Ferguson
    
    
    45
    
    
    Managing Director, Dollond & Aitchison (2)
 
 (1)
    
    Mr. Dessolis and Mr. Massimo De Rigo were elected as members of the Board of Directors at
the annual general meeting of shareholders in May 2004 and named Vice-Chairmen by the Board of
Directors at the same meeting.(2)
    
    Mr Ferguson, previously Head of Operations of D&A, replaced Mr. Russel Hardy, who
resigned in September 2004. Mr. Ennio De Rigo has been Chief Executive Officer of the Company since 1980. Mr. De
Rigo held the title of Sole Director of the Company from 1980 until March 1995, when he became
Chairman of the Board of Directors. Mrs. Emiliana De Meio De Rigo has been Sales Manager of the Company since 1980. She became
Vice Chairman of the Board of Directors in 1995. Mr. Walter De Rigo has been a Director of the Company since 1995. He is Chairman of the Board
and Chief Executive Officer of Surfrigo S.r.l., a manufacturer of commercial refrigerators wholly
owned by the De Rigo brothers, and is a Director of Impresa Edile F.lli De Rigo S.r.l., a
construction company wholly owned by Mr. Walter De Rigo. From May 2000 through June 2001, he has
served as President of the Associazione degli Industriali della Provincia di Belluno, the
industrial association for the province of Belluno. In June 2001, Mr. De Rigo was elected to the
Italian Senate. Mr. Michele Aracri has been Managing Director of the Company since early 1995. Prior to 1995,
Mr. Aracri held the position of Chief of Operations of the Company. Mr. Maurizio Dessolis has been Chief Financial Officer of the Company since March 1993 and was
elected as a member of the Board of Directors and one of its Vice-Chairmen in May 2004. He is also
a Managing Director of De Rigo Holding. Mr. Massimo De Rigo has been the Head of the Design Department of the Company since October
2000 and was elected as a member of the Board of Directors and one of its Vice-Chairmen in May
2004. Professor Enrico Valdani has been an Outside Director of the Company since September 2001. He
is a Full Professor of Business Administration and Strategic Marketing at L. Bocconi University in
Milan and a Senior Professor at the SDA Bocconi Business School. In addition to his academic
activities, Professor Valdani was a partner in a major consulting group and in 1992 founded a
consulting company that is currently one of the leading firms in Italy. He is a member of the
executive boards of a number of Italian companies and of the advisory boards of a number of
management journals. He has attended the Graduate School of Business Administration at Harvard
University and served as a Visiting Scholar at the University of Southern California, and is an
appreciated author of many books and articles. Mr. Jordi Fontcuberta has been the Managing Director of General Optica since 2000, having
previously served as the Chief Administrative Officer of General Optica. Trained as an auditor
with Andersen, before joining General Optica in 1997, Mr. Fontcuberta served as Financial Manager
for 43




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Bacardi-Martini Spain and Chief Financial Officer of DArcy Masius Benton Bowles Spanish
operations. Mr. Bruno Palmegiani has been Art & Creative Director of the Company since 1994.
From 1980 to 1994, he was a Senior Designer at the Company. Mr. Mario Sommavilla has been Chief Administrative Officer of the Company since December 1994.
From 1980 through November 1994, he was Chief Administrative Officer at Industria Elettrica Indel
S.p.A., a producer of metal alloys. Mr. Andy Ferguson has been with D&A since 1997, first as Operations Director and then as
Commercial Director before his appointment as Chief Executive in September 2004. Prior to joining
D&A, he worked in the grocery industry for the Argyll Group PLC and Safeway PLC in a number of
senior Operational and Commercial roles, including Specialist Business Director and Chilled Foods
Director. Mrs. Emiliana De Meio De Rigo is the wife of Mr. Ennio De Rigo, Chairman of the Board and
Chief Executive Officer of the Company. Mr. Walter De Rigo and Mr. Ennio De Rigo are brothers.
Mr. Massimo De Rigo is the son of Mr. Ennio De Rigo and Mrs. Emiliana De Meio De Rigo. Mr.
Maurizio Dessolis is the son in law of Mr. Ennio De Rigo and Mrs. Emiliana De Meio De Rigo. There
are no other family relationships among the directors and senior management of the Company. Board of Statutory Auditors Under Italian law, in addition to electing the Board of Directors, the Companys ordinary
shareholders meeting also elects a Board of Statutory Auditors (Collegio Sindacale). The Statutory
Auditors are elected for a term of three years, may be re-elected for successive terms and may be
removed only for cause and with the approval of a competent court. Each member of the Board of
Statutory Auditors must provide certain evidence that he is in good standing and meets certain
professional standards. The Board of Statutory Auditors is required to verify that the Company (i)
complies with applicable law and its By-laws, (ii) respects the principles of correct
administration, (iii) maintains adequate organizational structure, internal controls and
administrative and accounting systems and (iv) adequately instructs its subsidiaries to transmit
information relevant to its disclosure obligations. The following table sets forth the names of the three members of the current Board of
Statutory Auditors and its alternate members and their respective positions. The current Board of
Statutory Auditors was elected for a three-year term at the annual meeting of shareholders on May
24, 2004 to serve until the date of the annual meeting of shareholders that will approve the
accounts for the fiscal year ending December 31, 2006. Name
    
    TitleDr. Mario Bampo
    
    ChairmanDr. Fanio Fanti
    
    Statutory AuditorDr. Dino Sesani
    
    Statutory AuditorRag. Galeazzo Osvaldo DAmbrosi
    
    Alternate Statutory AuditorRag. Sergio Bonacin
    
    Alternate Statutory Auditor
 
 COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT Aggregate compensation paid by the Company and its subsidiaries to the directors and senior
management named above as a group was approximately  1.5 million in 2004, excluding the accrual
for termination indemnities required by Italian law. In addition, such senior managers have been 44




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granted options in respect of a total of 372,600 Ordinary Shares under the Companys stock option
plan, which expired on December 31, 2004. A total of 186,300 of these options have been exercised,
of which 123,051 were exercised during 2004. The remaining unexercised options have expired. For
additional information, see Item 10. Additional Information Options to Purchase Securities from
Registrant or Subsidiaries. The directors of the Company were not eligible to receive options
under such plan. As of June 1, 2005, the directors and senior managers listed in Item 6 as a group (other than
Messrs. Ennio De Rigo, Walter De Rigo and Michele Aracri) owned significantly less than 1% of the
outstanding Ordinary Shares of De Rigo S.p.A. See Item 7. Major Shareholders for information on
the shareholdings of Messrs. De Rigo, De Rigo and Aracri. 
 EMPLOYEES AND LABOR RELATIONS As of December 31, 2004, the Group had approximately 4,760 employees worldwide, of which
approximately 3,800 were sales employees (including about 2,200 at D&A and 1,090 at General
Optica), approximately 870 were manufacturing employees and 50 were employed at central offices.
The Group had approximately 4,800 employees at December 31, 2003. The majority of the Groups sales
employees are located in the United Kingdom and Spain, while the majority of its manufacturing
employees are located in Italy. Substantially all of the Companys Italian employees and certain
of its manufacturing employees in the United Kingdom are covered by collective bargaining
agreements. None of the Groups facilities in Italy is operated on a closed shop basis. The
Group believes that it has excellent relations with its employees and has not experienced any
significant work stoppages. Employment agreements in Italy are generally collectively negotiated between the national
association of companies within a particular industry and the representative national union.
Individual companies must enter into contracts with their employees based on the relevant
collective agreement. The most recent national collective bargaining agreement covering all of the
Groups manufacturing employees in Italy was entered into as of January 1, 2004, and will expire
on December 31, 2005. In addition to the national collective bargaining agreement, the Group
usually enters into separate local contracts with the labor unions representing its employees. Italian law provides that, upon termination of employment, employees are entitled to receive
certain indemnity payments based on their length of employment. As of December 31, 2004, the Group
had accrued 6.9 million in respect of such termination indemnity liabilities, such reserves being
equal to the amounts required by Italian law. D&A operates a defined benefit Final Pensionable Salary Scheme for certain of its eligible
employees. The benefits are based on years of service and the employees compensation during a
period up to the last seven years of employment. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be earned in the future.
Pension expense recognized for the contribution plan amounted to 5.5 million in 2004. This plan
was under-funded by 38.7 million at December 31, 2004. See Note 12 of Notes to the Consolidated
Financial Statements included in Item 18. General Optica has defined benefit plans covering certain of its executives that are not
currently funded. The benefits covered differ depending on the beneficiary. The present value of
these benefit obligations was 2.4 million at December 31, 2004. The net decrease in the benefit
obligation of 0.1 million during 2004 represents the net periodic benefit cost recognized of 0.2
million for the twelve months ended December 31, 2004 less the benefits paid during that period,
which amounted to 0.3 million. See Note 12 of Notes to the Consolidated Financial Statements
included in Item 18. 45




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Item 7.Major Shareholders and Related Party Transactions 
 MAJOR SHAREHOLDERS The following table summarizes the holdings of those shareholders who hold 2% or more of the
Ordinary Shares of the Company as of the dates indicated, based on information available to the
Company. 46




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As of June 1,2005
    
    
    2004
    
    
    2003No. of Shares
    
    
    % of Class
    
    
    No. of Shares
    
    
    % of Class
    
    
    No. of Shares
    
    
    % of ClassEnnio De Rigo and
Walter De Rigo(1).
    
    
    32,787,000
    
    
    
    77.2
    %
    
    
    32,922,000
    
    
    
    74.0
    %
    
    
    32,922,000
    
    
    
    73.6
    %Schroeder Investment Mgmt.
Ltd (2).
    
    
    3,731,530
    
    
    
    8.8
    %
    
    
    3,211,111
    
    
    
    7.2
    %
    
    
    n.a.Prada
    
    
    
    
    
    
    
    %
    
    
    2,225,000
    
    
    
    5.0
    %
    
    
    2,225,000
    
    
    
    5.0
    %Michele Aracri
    
    
    870,000
    
    
    
    2.0
    %
    
    
    870,000
    
    
    
    2.0
    %
    
    
    870,000
    
    
    
    1.9
    %
 
 (1)
    
    Includes shares held directly and those held through De Rigo Holding and another company controlled by Messrs. Ennio De Rigo
and Walter De Rigo. At June 1, 2005, June 1, 2004 and June 1, 2003, De Rigo Holding held 31,869,500, 31,869,500 and 31,869,500
Ordinary Shares, respectively, and the other company held 135,000, 135,000 and 78,500 Ordinary Shares, respectively; with the
remainder at each date held by the De Rigo brothers directly. None of these Ordinary Shares possess any special voting rights. The
increase in the percentage of the class held by the De Rigo Brothers as of June 1, 2005 is attributable to the decrease in the
number of shares outstanding as a result of purchases under the Companys authorized share repurchase program, as described below.(2)
    
    Holdings of ADSs as of December 31, 2004 and 2003, as reported in the Schedules 13G filed with the SEC on February 11, 2005 and
on February 13, 2004, respectively. No more current information on this shareholding is available to the Company. In February 1999, De Rigo Holding (the Companys controlling shareholder) entered into an
agreement with Prada Luxembourg s.a.r.l. pursuant to which De Rigo Holding granted Prada Luxembourg
s.a.r.l a series of three options with respect to a portion of De Rigo Holdings interest in the
Companys share capital, with the maximum aggregate amount of Ordinary Shares being subject to such
options being equal to approximately 15% of the Companys share capital. See Note 19(j) of Notes
to the Consolidated Financial Statements included in Item 18. On June 18, 2001, Prada Luxembourg
s.a.r.l exercised one of the three options, and subsequently purchased 2,225,000 Ordinary Shares of
De Rigo S.p.A. (equal to approximately 5% of the Companys outstanding share capital) for total
consideration of $13.4 million. The two remaining options have expired without being exercised.
In July 2004, the Company repurchased these 2,225,000 Ordinary Shares from Prada for total
consideration of 11.3 million as part of its authorized share repurchase program. See Item 10.
Additional Information By-laws  Purchase of Shares by the Company. These shares are currently
held in treasury and are not considered to be outstanding. As of June 6, 2005, there were 15 record holders of the Companys ADSs (including the
Depositary Trust Company), of which 12 were located in the United States. Since certain of the
ADSs are held by brokers or other nominees, the number of direct record holders in the United
States may not be fully indicative of the number of direct beneficial owners in the United States
or other jurisidictions where the direct beneficial owners of such ADSs are resident. 
 RELATED PARTY TRANSACTIONS Certain of the Companys facilities in Longarone and Limana were constructed in the years 1992
through 2001 by Impresa Edile F.lli De Rigo S.r.l., a construction company which is wholly owned by
Mr. Walter De Rigo. The related construction costs through December 31, 2004, which have been
capitalized as buildings, amounted to 2.4 million. For additional details on transactions by the
Group with affiliated companies, including those between EID and the Prada Group prior to the
Groups sale of its interest in the EID joint venture to Prada, see Note 18 of Notes to the
Consolidated Financial Statements included in Item 18. 47




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Item 8.Financial Information 
 CONSOLIDATED FINANCIAL STATEMENTS Please refer to Item 18. Financial Statements. 
 OTHER FINANCIAL INFORMATION Export Sales Export sales from Italy, which totalled approximately 89.9 million in 2004, as compared with
95.7 million in 2003, represented 17.5% of the Groups net sales (19.0% in 2003). Legal Proceedings We are defendants in a number of legal proceedings incidental to our business activities. Our
pending legal proceedings include various civil and administrative claims and disputes relating to
the termination of distributorship agreements, trademarks, tax issues, and other matters that arise
in the normal course of our business. We have established a reserve for litigation and other
contingent liabilities where we consider it probable that a claim will be resolved unfavorably and
where we can reasonably estimate the potential loss involved. However, we are not able to predict
the ultimate outcome of any of the claims against us, and any material damages or other costs
imposed on us may be in excess of our existing reserves. Unfavorable outcomes could also require
us to make changes in our operations and/or incur additional expenses, which could affect our
future profitability. Dividend Policy Dividends may be recommended by the Companys Board of Directors for approval by shareholders
at the Companys annual general meeting, which is normally held in April or May and must be held by
June 30 of each year. Under Italian law and the Companys by-laws, no interim dividends may be
approved or paid. At the annual general meeting held on May 17, 2005, the Companys shareholders approved the
recommendation of the Board of Directors that no dividend be paid in respect of the fiscal year
ended December 31, 2004. The Company did also not pay dividends in respect of the fiscal years
ended December 31, 2002 and 2003 For the fiscal years ended December 31, 2000 and 2001, the Company paid dividends of 0.12 and
0.13 per Ordinary Share to holders of record as of June 4, 2001 and June 6, 2002, respectively. 
 Item 9.The Offer and Listing 
 TRADING MARKETS AND SHARE PRICES De Rigos Ordinary Shares (in the form of ADSs) are listed on the New York Stock Exchange (the
NYSE) under the symbol DER. Neither the Companys Ordinary Shares nor its ADSs are listed on a
securities exchange outside the United States. The Bank of New York is the Companys Depositary
for purposes of issuing the American Depositary Receipts (ADRs) evidencing ADSs. Each ADS
represents one Ordinary Share. Trading in the ADSs on the NYSE commenced on October 20, 1995. The following table sets
forth, for the periods indicated, the high and low closing prices per ADS as reported by the NYSE. 48




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##### Table of Contents



Price Range of ADSsHigh
    
    
    Low2001:First Quarter
    
    $
    9          
    
    
    $
    7       5/32Second Quarter
    
    $
    8     13/16
    
    
    $
    7     49/64Third Quarter
    
    $
    8     21/32
    
    
    $
    5       3/32Fourth Quarter
    
    $
    6     19/32
    
    
    $
    5     35/642002:First Quarter
    
    $
    7.77
    
    
    $
    4.55Second Quarter
    
    $
    7.95
    
    
    $
    5.60Third Quarter
    
    $
    5.71
    
    
    $
    3.45Fourth Quarter
    
    $
    4.95
    
    
    $
    3.002003:First Quarter
    
    $
    4.20
    
    
    $
    3.20Second Quarter
    
    $
    3.93
    
    
    $
    3.15Third Quarter
    
    $
    4.35
    
    
    $
    3.48Fourth Quarter
    
    $
    5.50
    
    
    $
    4.102004:First Quarter
    
    $
    4.65
    
    
    $
    5.99Second Quarter
    
    $
    5.34
    
    
    $
    6.38Third Quarter
    
    $
    6.00
    
    
    $
    7.50Fourth Quarter
    
    $
    6.62
    
    
    $
    7.90Month EndedJanuary 31, 2005
    
    $
    7.89
    
    
    $
    7.40February 28, 2005
    
    $
    8.49
    
    
    $
    7.60March 31, 2005
    
    $
    8.12
    
    
    $
    6.50April 30, 2005
    
    $
    6.92
    
    
    $
    6.06May 31, 2005
    
    $
    7.53
    
    
    $
    6.70
 The closing price of the ADSs on the NYSE on June 22, 2005 was U.S.$ 6.90 per ADS. As of June 1, 2005, 44,934,976 Ordinary Shares were issued and 42,486,776 were outstanding.
As of the same date, a total of 9,734,916 ADSs (equivalent to the same number of Ordinary Shares)
were issued and outstanding, representing 21.7% of the total number of outstanding Ordinary Shares.
A total of 2,225,000 Ordinary Shares and a total of 223,200 ADSs were owned by the Company and not
considered to be outstanding as of such date, having been repurchased as part of De Rigos
authorized buy-back program. See Item 10. Additional Information
By-laws  Purchase of Shares by
the Company and Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers,
below. 
 Item 10.Additional Information 
 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR ITS SUBSIDIARIES In May 1999, the Board of Directors of De Rigo S.p.A. adopted a new stock option plan (the
1999 Option Plan) whereby the Board was authorized to grant options to purchase up to 2,325,000
Ordinary Shares to be issued by the Company in four annual tranches as part of a capital increase
that had been approved by the shareholders in connection with the adoption of the 1999 Option Plan.
The options, which could have been granted to eligible executives of De Rigo S.p.A. and its
Italian and foreign subsidiaries, were exercisable at a purchase price of $6.00 per Ordinary Share
during the 30-day period following the annual meeting of shareholders that approved the Companys
financial statements for the year in respect of which the grant of options has been made. Between
June and July 1999, the Board had approved the grant of options in respect of 2,325,000 Ordinary
Shares to approximately 20 executives of the Group; a total of 250,000 of these options lapsed
during 1999 due to employee resignations. 49




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##### Table of Contents



At an extraordinary shareholders meeting held on November 17, 2000, the shareholders approved
a new stock option plan (the 2000 Option Plan) to replace the 1999 Option Plan. Holders of
options under the 1999 Option Plan all agreed to convert their grants under the 1999 Option Plan
into grants under the new plan. Between January 1, 2000 and November 17, 2000, 225,000 options
granted under the 1999 Option Plan lapsed due to employee resignations, leaving options in respect
of 1,850,000 ordinary shares outstanding as of November 17, 2000. Under the terms of the 2000
Option Plan, a total of 851,000 options (in respect of an equivalent number of Ordinary Shares)
were granted (the 1,850,000 options outstanding under the old plan were converted into options
under the 2000 Option Plan at a ratio of 0.46 new options for each option held) at an exercise
price of U.S$ 1.00 per share, which was less than the fair value of the stock at the grant date,
and the term of the existing grants was extended by one year. On November 17, 2000, the Companys
shareholders approved a capital increase of 338,000 to allow for the issuance of up to 1,300,000
Ordinary Shares upon the exercise of options granted under the 2000 Stock Option Plan. On the same
date, an additional 348,400 options were granted to approximately nine executives at an exercise
price of U.S.$ 1.00 per share. The number of options that may be exercised by a holder in any
given period varied according to the performance of the Companys ADSs during the relevant period
(see Note 13 of Notes to the Consolidated Financial Statements included in Item 18). In accordance
with the 2000 Option Plan, the Company had registered all Ordinary Shares as to which such options
may be exercised with the U.S. Securities and Exchange Commission, so as to facilitate resales of
such Ordinary Shares in the form of ADSs. The 2000 Option Plan expired as of December 31, 2004 and has not been replaced. As a result,
no stock options are currently outstanding or authorized. In 2004, no additional options were
granted, 227,700 options were forfeited and the 352,200 options outstanding at December 31, 2004
expired. During the period that the plan was in force, a total of 434,976 options were exercised,
with at total of 764,424 options having been forfeited or expiring. For additional information on
these stock options, see Note 13 of Notes to the Consolidated Financial Statements included in Item
18. 
 BY-LAWS The following is a summary of certain information concerning the Companys shares and By-laws
(Statuto) and of Italian law applicable to companies whose shares are not listed in a regulated
market in the European Union, as in effect at the date of this annual report. The summary contains
all the information that the Company considers to be material regarding the shares but does not
purport to be complete and is qualified in its entirety by reference to the By-laws or Italian law,
as the case may be. In January 2003, the Italian government approved a wide-ranging reform of the corporate law
provisions of the Italian Civil Code, which came into force on January 1, 2004. On May 24, 2004,
our shareholders approved a number of amendments to our By-laws dictated or made possible by the
2003 corporate law reform. The following summary takes into account the 2003 corporate law reform
and the consequent amendments to our By-laws. General As of June 1, 2005, the issued share capital of the Company consisted of 44,934,976 Ordinary
Shares, par value Euro 0.26 per share, and the outstanding share capital of the Company consisted
of 42,486,776 Ordinary Shares. The redenomination of the Ordinary Shares from lire into Euro was
approved by the Companys shareholders on May 24, 2001. All the issued and outstanding shares are
fully paid, non-assessable and in registered form. The Company is registered with the Companies Registry of Belluno at n. 2671, with its
registered office at Longarone (BL), Italy. 50




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As set forth in Article 4 of the By-laws, the Companys corporate purpose is the design,
production, marketing and sale of eyewear, eyewear production machinery and components and/or
accessories, and other activities in the eyewear or related sectors. The Company is generally
authorized to take any actions necessary or useful to achieve its corporate purpose, with the
exclusion of investment services and other financial activities reserved by Italian law to
authorized entities. Authorization of Shares Additional shares may be authorized in connection with capital increases approved by the
Companys shareholders in an extraordinary meeting, but this authorization would generally be given
only after recommendation by the Companys Board of Directors. On November 17, 2000, the Companys
shareholders approved a capital increase of 338,000 to allow for the issuance of up to 1,300,000
Ordinary Shares upon the exercise of options granted under the 2000 Stock Option Plan. As of June
1, 2005, 434,976 of such new Ordinary Shares had been issued and fully paid. The 2000 Stock Option
Plan expired as of December 31, 2004 and has not been replaced. No authorization for the issuance
of additional Ordinary Shares is currently in effect. Form and Transfer of Shares Ordinary Shares are in certificated form and are freely transferable by endorsement of the
share certificate by or on behalf of the registered holder, with such endorsement either
authenticated by a notary in Italy or elsewhere or by a broker-dealer or a bank in Italy. The
transferee must request the Company to enter his name in the register in order to establish his
rights as a stockholder as against the Company. Dividend Rights The payment by us of any annual dividend is proposed by the Board of Directors and is subject
to the approval of the shareholders at the annual shareholders meeting. Before dividends may be
paid out of our unconsolidated net income in any year, an amount equal to 5.0% of such net income
must be allocated to our legal reserve until such reserve is at least equal to one-fifth of the par
value of our issued share capital. If our capital is reduced as a result of accumulated losses,
dividends may not be paid until the capital is reconstituted or reduced by the amount of such
losses. The Company may pay dividends out of available retained earnings from prior years,
provided that after such payment, the Company will have a legal reserve at least equal to the
legally required minimum. No interim dividends may be approved or paid. Dividends will be paid in the manner and on the date specified in the shareholders resolution
approving their payment (usually within 30 days of the annual general meeting). Dividends which are
not collected within five years of the date on which they become payable are forfeited to the
benefit of the Company. Holders of ADSs will be entitled to receive payments in respect of
dividends on the underlying shares through The Bank of New York, as ADR depositary, in accordance
with the deposit agreement relating to the ADRs. Voting Rights Registered holders of the Ordinary Shares are entitled to one vote per Ordinary Share. As a registered shareholder, the Depositary (or its nominee) will be entitled to vote the
Ordinary Shares underlying the ADSs. The Deposit Agreement requires the Depositary (or its
nominee) to accept voting instructions from holders of ADSs and to execute such instructions to the
extent permitted by law. Neither Italian law nor the Companys By-laws limit the right of
non-resident or foreign owners to hold or vote the shares. 51




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Board of Directors Pursuant to the Companys By-laws, the Companys Board of Directors must consist of three to
seven individuals. The Board of Directors is elected at a shareholders meeting for three fiscal
years. In accordance with the By-laws, the directors, who may but are not required to be
shareholders of the Company, may be re-appointed for no more than three terms. The Board of
Directors has complete power of ordinary and extraordinary administration of the Company and in
particular may perform all acts it deems advisable for the achievement of the Companys corporate
purposes, except for the actions reserved by applicable law or the By-laws to a vote of the
shareholders at an ordinary or extraordinary shareholders
meeting. See also  Meetings of
Shareholders. The Board of Directors must appoint a chairman (presidente) and may appoint a vice-chairman.
The chairman of the Board of Directors and the vice-chairman and the managing directors, if any,
are severally the legal representatives of the Company. The Board of Directors may delegate
certain powers to one or more managing directors (amministratori delegati), determine the nature
and scope of the delegated powers of each director and revoke such delegation at any time. Our
executive directors must ensure, under the supervision of the Board of Directors, that our
organizational and accounting structure is appropriate to our business and must report to the Board
of Directors and to the board of statutory auditors at least every six months on the Companys
business and the main transactions carried out by us or by our subsidiaries. In accordance with Italian law and the By-laws, the Board of Directors may not delegate
certain responsibilities, including the preparation and approval of the draft financial statements,
the approval of merger and de-merger plans to be presented to shareholders meetings, increases in
the amount of the Companys share capital or the issuance of convertible debentures (if any such
power has been delegated to the Board of Directors by vote of the extraordinary shareholders
meeting) and the fulfillment of the formalities required when the Companys capital would have to
be reduced as a result of accumulated losses that affect the Companys stated capital by more than
one third. See also  Meetings of Shareholders. The Board of Directors may also appoint a general manager (direttore generale) and one or more
senior managers (direttori) who report directly to the board and confer powers for single acts or
categories of acts to employees of the Company or persons unaffiliated with the Company. Meetings of the Board of Directors are called no less than five days in advance by registered
letter, fax or telegram, or, in case of necessity, one day in advance, by fax or telegram.
Meetings may be called by the chairman on his own initiative and must be called upon the request of
the managing director, two directors or two statutory auditors. Meetings may be held in person, or by audio-conference or tele-conference, in any member state
of the European Union or in the United States. The quorum for meetings of the Board of Directors
is a majority of the directors in office. Resolutions are adopted by the vote of a majority of the
directors present at the meeting. In case of votes being equal, the vote of the chairman will
prevail. Directors having any interest in a proposed transaction must disclose their interest to the
board, even if such interest is not in conflict with the interest of the Company in the same
transaction. The interested director is not required to abstain from voting on the resolution
approving the transaction, but the resolution must state explicitly the reasons for, and the
benefit to the Company of, the approved transaction. In the event that these provisions are not
complied with, or that the transaction would not have been approved without the vote of the
interested director, the resolution may be challenged by a director or by the board of statutory
auditors if the approved transaction may be prejudicial to the Company. A managing director having
any such interest in a proposed transaction within the scope of his powers must solicit prior board
approval of such transaction. The 52




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interested director may be held liable for damages to us resulting from a resolution adopted
in breach of the above rules. Finally, directors may be held liable for damages to the Company if
they illicitly profit from insider information or corporate opportunities. The Board of Directors may transfer the Companys registered office within Italy or resolve
upon other amendments to the By-laws when these amendments are required by law, set up and
eliminate secondary offices, approve mergers by absorption into the Company of its subsidiaries in
which the Company holds at least 90% of the issued share capital and reductions of the Companys
share capital in case of withdrawal of a shareholder. The Board of Directors may also resolve upon
the issuance of shares or convertible debentures if such powers have been previously delegated to
the Board of Directors by vote of the extraordinary shareholders meeting. Under Italian law, directors may be removed from office at any time by the vote of
shareholders at an ordinary shareholders meeting although, if removed in circumstances where there
was no just cause, such directors may have a claim for indemnification against the Company.
Directors may resign at any time by written notice to the Board of Directors and to the chairman of
the board of statutory auditors. The Board of Directors must appoint substitute directors to fill
vacancies arising from removals or resignations, subject to the approval of the board of statutory
auditors, to serve until the next ordinary shareholders meeting. If at any time more than half of
the members of the Board of Directors resign or otherwise cease to be directors, the remaining
members of the Board of Directors (or the board of statutory auditors if all the members of the
Board of Directors have resigned or ceased to be directors) must promptly call an ordinary
shareholders meeting to appoint the new directors. Shareholders determine the remuneration of directors at ordinary shareholders meeting
appointing them. The Board of Directors, after consultation with the board of statutory auditors,
may determine the remuneration of directors that perform management or other special services for
the Company, such as the managing director, within a maximum amount established by the
shareholders. Statutory Auditors In addition to electing the Board of Directors, the Companys shareholders elect a board of
statutory auditors (Collegio Sindacale) from individuals qualified to act in such capacity under
Italian law. At ordinary shareholders meetings of the Company, the statutory auditors are elected
for a term of three fiscal years, may be re-elected for successive terms and may be removed only
for cause and with the approval of a competent court. In the event that a new board of statutory
auditors has not been elected at the time the term of the previous board expires, the previous
board continues to serve unit a new board is elected. Each member of the board of statutory
auditors must provide certain evidence that he is in good standing and meets certain professional
standards. The Companys By-laws currently provide that the board of statutory auditors shall consist of
three statutory auditors and two alternate statutory auditors (who are automatically substituted
for a statutory auditor who resigns or is otherwise unable to serve). If the shares of the Company
are ever listed on a regulated market of a Member State of the European Union (no such listing
currently exists), statutory auditors are to be elected through a list voting mechanism. The Companys board of statutory auditors is required, among other things, to verify that the
Company (i) complies with applicable laws and its By-laws, (ii) respects principles of good
governance, and (iii) maintains adequate organizational structure, internal controls and
administrative and accounting systems. The Companys board of statutory auditors is required to meet at least once each ninety days.
In addition, the statutory auditors of the Company must be present at meetings of the Companys
Board of Directors and shareholders meetings. The statutory auditors may decide to call a meeting
of 53




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the shareholders, the Board of Directors, ask information on the management of the Company to
the directors, carry out inspections and verifications at the Company and exchange information with
the Companys external auditors. Any shareholder may submit a complaint to the board of statutory
auditors regarding facts that such shareholder believes should be subject to scrutiny by the board
of statutory auditors, which must take any complaint into account in its report to the
shareholders meeting. If shareholders collectively representing 5% of the Companys share capital
submit such a complaint, the board of statutory auditors must promptly undertake an investigation
and present its findings and any recommendations to a shareholders meeting (which must be convened
immediately if the complaint appears to have a reasonable basis and there is an urgent need to take
action). The board of statutory auditors may report to the competent court serious breaches of
directors duties. External Auditor The 2003 corporate law reform requires companies to appoint an external auditor or a firm of
external auditors, each of them qualified to act in such capacity under Italian law, that shall
verify (i) during the fiscal year, that the companys accounting records are correctly kept and
accurately reflect the companys activities, and (ii) that the financial statements correspond to
the accounting records and the verifications conducted by the external auditors and comply with
applicable rules. The external auditor or the firm of external auditors express their opinion on
the financial statements in a report that may be consulted by the shareholders prior to the annual
shareholders meeting. The external auditor or the firm of external auditors are appointed for a three-year term by
the ordinary shareholders meeting, having consulted the board of statutory auditors, and may be
removed only for cause and with the approval of a competent court. On May 24, 2004, our shareholders appointed Reconta Ernst & Young, with legal offices at
Padua, Italy, as our external auditors for three-year term expiring at the time of the annual
shareholders meeting to approve the consolidated financial statements for 2006. Meetings of Shareholders Shareholders are entitled to attend and vote at ordinary and extraordinary shareholders
meetings. Votes may be cast personally or by proxy. Shareholders meeting may be called by the
Companys Board of Directors (or the board of statutory auditors) and must be called if requested
by holders of at least 10% of the issued shares. Shareholders are not entitled to request that a
meeting of shareholders be convened to resolve upon matters which as a matter of law shall be
resolved upon the matters which as a matter of law shall be resolved upon on the basis of a
proposal, plan or report by our Board of Directors. If the shareholders meeting is not called
despite the request by shareholders and such refusal is unjustified, the competent court may call
the meeting. The Company may hold general meetings of shareholders at its registered office in Longarone
(BL), or elsewhere within Italy following publication of notice of the meeting in the Gazzetta
Ufficiale della Repubblica Italianaat least 15 days before the date fixed for the meeting. The
Depositary will mail to all record holders of ADSs a notice containing a summary of all information
contained in any notice of a shareholders meeting received by the Depositary. Shareholders meetings must be convened at least once a year. Our annual stand-alone
financial statements are prepared by our Board of Directors and submitted for approval to the
ordinary shareholders meeting which must be convened within 120 days after the end of the fiscal
year to which such financial statements relate. This term may be extended to up to 180 days after
the end of the fiscal year, as long as we are bound by law to draw up consolidated financial
statements or if particular circumstances concerning our structure or our purposes so require. At
ordinary shareholders meetings, shareholders also appoint the external auditors, approve the
distribution of 54




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dividends, appoint the Board of Directors and statutory auditors, determine their remuneration
and vote on any business matter the resolution or authorization of which is entrusted to them by
law. Extraordinary shareholders meetings may be called to pass upon split-ups, dissolutions,
appointment of receivers and similar extraordinary actions. Extraordinary shareholders meetings
may also be called to resolve upon proposed amendments to the By-laws, issuance of convertible
debentures, mergers and de-mergers, capital increases and reductions, where such resolutions may
not be taken by our Board of Directors. Liquidation of the Company must also be resolved upon at
an extraordinary meeting. The notice of a shareholders meeting may specify up to two meeting dates for an ordinary or
extraordinary shareholders meeting; such meeting dates are generally referred to as calls. The
extraordinary meeting may be convened on third call through a new notice if the quorum required for
shareholder action on second call is not reached. The quorum for an ordinary meeting of shareholders is 50% of the Ordinary Shares, and
resolutions are carried by the majority of Ordinary Shares present or represented. At an adjourned
ordinary meeting, no quorum is required, and the resolutions are carried by the majority of
Ordinary Shares present or represented. Certain matters, such as amendments to the By-laws, the
issuance of shares, the issuance of debentures and mergers and de-mergers may only be effected at
an Extraordinary General Meeting, at which special voting rules apply. Resolutions at an
extraordinary meeting of the Company are carried, on first call, by a majority of the Ordinary
Shares. An adjourned extraordinary meeting is validly held with a quorum of one-third of the
issued shares and its resolutions are carried by a majority of at least two-thirds of the holders
of shares present or represented at such meeting. In addition, certain matters (such as a change
in purpose or form of the company, the transfer of its registered office outside Italy, its
liquidation prior to the date set forth in its By-laws and the issuance of preferred shares) must
be carried by the holders of more than one-third of the Ordinary Shares, provided that there is no
dissenting vote by holders of more than one-third of the shares present and represented at such
meeting). To attend any meeting, shareholders must, at least five days prior to the date fixed for the
meeting, lodge their share certificates at the offices of the Company or with such banks as may be
specified in the notice of meeting, in exchange for an admission ticket for the meetings. Owners
of ADRs may make special arrangements with the Depositary for the beneficial owners of such ADRs to
attend shareholders meetings, but not to vote at or formally address such meetings. The
procedures for making such arrangements will be specified in the notice of such meeting to be
mailed by the Depositary to the owners of ADRs. Shareholders may appoint proxies by delivering in writing an appropriate instrument of
appointment to the Company. Directors, auditors and employees of the Company or of any of its
subsidiaries may not be proxies and any one proxy cannot represent more than 20 shareholders. Preemptive Rights Pursuant to Italian law, holders of Ordinary Shares or of debentures convertible into shares
are entitled to subscribe for issuance of shares, debentures convertible into shares and rights to
subscribe for shares in proportion to their holdings, unless such issues are for non cash
considerations or preemptive rights are waived or limited by an extraordinary resolution adopted by
the affirmative vote of holders of more than 50% of the Ordinary Shares (whether at an
extraordinary or adjourned extraordinary meeting) and such waiver or limitation is required in the
interest of the Company. There can be no assurance that the holders of ADSs may be able to
exercise fully any preemptive rights. 55




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Preference Shares; Other Securities Italian companies are permitted in accordance with Italian law to issue preference shares with
limited voting rights, to issue other classes of equity securities with different economic and
voting rights, to issue so-called participation certificates with limited voting rights, as well as
so-called tracking stock, if their by-laws permit such issuances. The Companys By-laws currently
do not provide for any of such issuances and would need to be amended at an extraordinary
shareholders meeting to allow us to issue the abovementioned shares and/or securities. The power to issue debt securities not convertible into shares in vested in our Board of
Directors, while debt securities convertible into shares may be issued pursuant to a resolution of
the extraordinary shareholders meeting. Segregation of Assets and Proceeds The Company, by means of an extraordinary shareholders meeting resolution, may resolve to
segregate assets of the company into one or more separate pools. Such pools of assets may have an
aggregate value not exceeding 10% of the shareholders equity of the company. Each pool of assets
must be used exclusively for the carrying out of a specific business and may not be attached by the
general creditors of the company. Similarly, creditors with respect to such specific business may
only attach those assets of the company that are included in the corresponding pool. Tort
creditors, on the other hand, may always attach any assets of the Company. The board of directors
may issue securities carrying economic and administrative rights relating to a pool. In addition,
financing agreements relating to the funding of a specific business may provide that the proceeds
of such business be used exclusively to repay the financing. Such proceeds may be attached only by
the financing party and such financing party would have no recourse against other assets of the
company. We have no present intention to enter into any such transaction and none is currently in
effect. Liquidation Rights Pursuant to Italian law and subject to the satisfaction of the claims of all other creditors,
shareholders are entitled to a distribution in liquidation that is equal to the nominal value of
their shares (to the extent available out of the net assets of the Company). Holders of preferred
shares, if any such shares are issued in the future by the Company, would be entitled to a priority
right to any such distribution from liquidation up to their par value. Thereafter, all
shareholders would rank equally in their claims to the distribution or surplus assets, if any.
Shares rank pari passu among themselves in liquidation. Purchase of Shares by the Company We are permitted to purchase shares, subject to certain conditions and limitations provided
for by Italian law. Shares may only be purchased out of profits available for dividends or out of
distributable reserves, in each case as appearing on the latest shareholder-approved stand-alone
financial statements. Further, we may only repurchase fully paid-in shares. Such purchases must
be authorized by an ordinary shareholders meeting. The number of shares to be acquired, together
with any shares previously acquired by us or any of our subsidiaries may not (except in limited
circumstances) exceed in aggregate 10% of the total number of shares then issued and the aggregate
purchase price of such shares may not exceed the earnings reserve specifically approved by
shareholders. Shares held in excess of such 10% limit must be sold within one year of the date of
purchase. Similar limitations apply with respect to purchases of our shares by our subsidiaries. A corresponding reserve equal to the purchase price of such shares must be created in the
balance sheet, and such reserve is not available for distribution, unless such shares are sold or 56




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cancelled. Shares purchased and held by us may be resold only pursuant to a resolution of our
shareholders adopted at an ordinary shareholders meeting. The voting rights attaching to the
shares held by us or our subsidiaries cannot be exercised, but the shares can be counted for quorum
purposes in shareholders meetings. Dividends and other rights, including pre-emptive rights,
attaching to such shares will accrue to the benefit of other shareholders, unless the shareholders
meeting authorizes the Company to exercise, in whole or in part, the pre-emptive rights thereof. An authorization from the shareholders for the Company to purchase up to 10% of the
outstanding shares in the form of Ordinary Shares or ADSs was passed as of November 2003 and
renewed as of May 2004; the current authorization will expire in November 2005. As of the date of
this annual report, the Company had repurchased a total of 223,200 ADSs and 2,225,000 Ordinary
Shares pursuant to this authorization (the 2,225,000 Ordinary Shares having been repurchased from
Prada). Notification of the Acquisition of Shares In accordance with Italian antitrust laws, the Italian Antitrust Authority is required to
prohibit the acquisition of control in a company which would thereby create or strengthen a
dominant position in the domestic market or a significant part thereof and which would result in
the elimination or substantial reduction, on a lasting basis, of competition, provided that certain
turnover thresholds are exceeded. However, if the turnover of the acquiring party and the company
to be acquired exceed certain other monetary thresholds, the antitrust review of the acquisition
falls within the exclusive jurisdiction of the European Commission. Minority Shareholders Rights; Withdrawal Rights Shareholders resolutions which are not adopted in conformity with applicable law or our
By-laws may be challenged (with certain limitations and exceptions) within ninety days by absent,
dissenting or abstaining shareholders representing individually or in the aggregate at least 5% of
Companys share capital (as well as by our Board of Directors or our board of statutory auditors).
Shareholders not reaching this threshold or shareholders not entitled to vote at Companys meetings
may only claim damages deriving from the resolution. Dissenting or absent shareholders may require the Company to buy back their shares as a result
of shareholders resolutions approving, among others things, material modifications of the
Companys purpose or of the voting rights of our shares, the transformation of the Company from a
stock corporation into a different legal entity, or the transfer of our registered seat outside
Italy. According to the reform, the buy-back would occur at a price established by directors, upon
consultation with the board of statutory auditors and the Companys external auditor, having regard
for the net asset value of the company, its prospective earnings and the market value of its
shares, if any. The 2003 reform would permit the Companys By-laws to set forth different
criteria for the consideration to be paid to dissenting shareholders in such buy-backs. Each shareholder may bring to the attention of the board of statutory auditors facts or acts
which are deemed wrongful. If such shareholders represent more than 5% of the share capital of the
Company, the board of statutory auditors must investigate without delay and report its findings and
recommendations to the shareholders meeting. Shareholders representing more than 10% of our share
capital have the right to report to the competent court serious breaches of the duties of the
directors which may be prejudicial to us or to our subsidiaries. In addition, shareholders
representing at least 20% of our share capital may commence derivative suits before the competent
court against our directors, statutory auditors and general managers. We may waive or settle the
suit unless shareholders holding at least 20% of the shares vote against such waiver or settlement.
We will reimburse the legal costs of such action in the event that the claim of such shareholders
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and the court does not award such costs against the relevant directors, statutory auditors or
general managers. Liability for Mismanagement of Subsidiaries Pursuant to the 2003 corporate law reform, companies and other entities that, acting in their
own interest or the interest of third parties, mismanage a company subject to their direction and
coordination powers are liable to such companys shareholders and creditors for ensuing damages.
Said liability is excluded if (i) the ensuing damage is fully eliminated, including through
subsequent transactions, or (ii) the damage is effectively offset by the global benefits deriving
in general to the company from the continuing exercise of such direction and coordination powers.
Direction and coordination powers are presumed to exist, among other things, with respect to
consolidated subsidiaries 
 SIGNIFICANT DIFFERENCES IN CORPORATE GOVERNANCE PRACTICES FOR
PURPOSES OF SECTION 303A.11 OF THE NEW YORK STOCK EXCHANGE LISTED
COMPANY MANUAL (THE NYSE MANUAL) Overview Corporate governance rules for Italian stock corporations (società per azioni) like us whose
shares are not listed on a regulated market in the European Union are set forth in the Italian
Civil Code (the Civil Code). As described in more detail below, the Italian corporate governance
rules set forth in the Civil Code differ in a number of ways from those applicable to U.S. domestic
companies under NYSE listing standards, as set forth in the NYSE Manual. As a general rule, our main corporate bodies are governed by the Civil Code and are assigned
specific powers and duties that are legally binding and cannot be derogated from. We follow the traditional Italian corporate governance system, which provides for two main
corporate bodies  the board of directors and the board of statutory auditors. This system
contrasts with the unitary system envisaged for U.S. domestic companies by the NYSE listing
standards, which contemplate the board of directors serving as the sole governing body. See
By-laws  Board of Directors and
By-laws Statutory Auditors above for a description of the powers
and duties of our Board of Directors and our board of statutory auditors, respectively. The
members of our Board of Directors and board of statutory auditors, as well as our external
auditors, are directly and separately appointed by resolutions approved by our shareholders at a
general shareholders meeting. We have set out in the following summary the significant differences between Italian corporate
governance rules and practices, as we have implemented them, and those applicable to U.S. issuers
under NYSE listing standards. Independent Directors NYSE domestic company standards.The NYSE listing standards applicable to U.S. companies
provide that independent directors must comprise a majority of the board. In order for a director
to be considered independent, the Board of Directors must affirmatively determine that the
director has no material direct or indirect relationship with the company. These relationships
can include commercial, industrial, banking, consulting, legal, accounting, charitable and
familial relationship (among others). More specifically, a director is not independent if such
director or his/her immediate family members, has certain specified relationships with the company,
its parent, its consolidated subsidiaries, their internal or external auditors, or companies that
have significant
business relationships with the company, its parent or its consolidated subsidiaries.
Ownership of a significant amount of stock is not a per sebar to independence. In addition, a
three-year cooling off 58




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period following the termination of any relationship that compromised a
directors independence must lapse before that director can again be considered independent. Our practice.The presence of a prescribed number of independent directors on our board is
neither mandated by Italian law nor required by our By-laws. However, Italian law sets forth
certain independence requirements applicable to our statutory auditors. Statutory auditors
independence is assessed on the basis of a few general principles, rather than detailed rules. In
particular, a person who (i) is a director, or the spouse or a close relative of a director, of our
company or any of our affiliates, or (ii) has an employment or a regular consulting or similar
relationship with our company or any of our affiliates, or (iii) has an economic relationship with
us or any of our affiliates which might compromise his/her independence, cannot be appointed to our
board of statutory auditors. Although there is no formal cooling-off requirement, statutory
auditors who are registered chartered accountants and have had a regular or material consulting
relationship with us or our affiliates within two years prior to the appointment, or have been
employed by, or directors of, us or our affiliates, within three years prior to the appointment,
may be suspended or cancelled from the register of chartered public accountants. Executive Sessions NYSE domestic company standards. Non-executive directors (i.e., not members of senior
management) of U.S. companies listed on the NYSE must meet regularly in executive sessions, and
independent directors should meet alone in an executive session at least once a year. Our practice.In Italy, neither non-executive directors nor independent directors are
required to meet in executive sessions. The members of our board of statutory auditors are
required to meet at least every 90 days. Audit Committee and Internal Audit Function NYSE domestic company standards. U.S. companies listed on the NYSE are required to establish
an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act and certain
additional requirements set by the NYSE. In particular, all members of this committee must be
independent and the committee must adopt a written charter. The committees prescribed
responsibilities include (i) the appointment, compensation, retention and oversight of the external
auditors; (ii) establishing procedures for the handling of whistle blower complaints; (iii)
discussion of financial reporting and internal control issues and critical accounting policies
(including through executive sessions with the external auditors); (iv) the approval of audit and
non-audit services performed by the external auditors; and (v) the adoption of an annual
performance evaluation. A company must also have an internal audit function, which may be
out-sourced, except to the independent auditor. Our practice.Rule 10A-3 under the Exchange Act provides that foreign private issuers with a
board of statutory auditors established in accordance with local law or listing requirements and
meeting specified requirements with regard to independence and responsibilities (including the
performance of most of the specific tasks assigned to audit committees by the rule, to the extent
permitted by local law), (the Statutory Auditor Requirements) are exempt from the audit committee
requirements established by the rule. As a foreign private issuer, we must comply with these
requirements or qualify for a valid exemption by July 31, 2005. Our Board of Directors has
determined that our board of statutory auditors meets the Statutory Auditor Requirements and
therefore will qualify for the exemption noted above. We do not have a dedicated internal audit
function at the current time, nor have we out-sourced any such activities. 59




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Compensation Committee NYSE domestic company standards.Under NYSE standards, the compensation of the CEO of U.S.
domestic companies must be approved by a compensation committee (or equivalent) comprised solely of
independent directors. The compensation committee must also make recommendations to the Board of
Directors with regard to the compensation of other officers, incentive compensation plans and
equity-based plans. Disclosure of individual management compensation information for these
companies is mandated by the Exchange Acts proxy rules, from which foreign private issuers are
generally exempt. Our practice.We have not established a compensation committee. Compensation of our directors
vested with particular offices (including our CEO) is either determined by our Board of Directors,
in consultation with our board of statutory auditors, or, according to our By-laws, by a resolution
approved by our shareholders at a general shareholders meeting. Compensation of our executive
officers is determined by our CEO. We do not produce a compensation report. However, we disclose
aggregate compensation of all of our directors (including our CEO) in our annual financial
statements prepared in accordance with Italian GAAP and in Item 6 of our annual reports on Form
20-F. Nominating Committee NYSE domestic company standards.Under NYSE standards, a domestic company must have a
nominating committee (or equivalent) comprised solely of independent directors, which is
responsible for nominating directors. Our practice.We have not established a nominating committee. Directors may be nominated by
any of our shareholders or our Board of Directors. Corporate Governance/Code of Ethics NYSE domestic company standards.Under NYSE standards, a company must adopt governance
guidelines and a code of business conduct and ethics for directors, officers and employees. A
company must also publish these items on its website and provide printed copies on request.
Section 406 of the Sarbanes-Oxley Act requires a company to disclose whether it has adopted a code
of ethics for its principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, and if not, the reasons why it has
not done so. The NYSE listing standards applicable to U.S. companies provide that codes of conduct
and ethics should address, at a minimum, conflicts of interest; corporate opportunities;
confidentiality; fair dealing; protection and use of company assets; legal compliance; and
reporting of illegal and unethical behavior. Corporate governance guidelines must address, at a
minimum, directors qualifications, responsibilities and compensation; access to management and
independent advisers; management succession; director orientation and continuing education; and
annual performance evaluation of the board. Our practice .We are in the process of adopting certain corporate governance guidelines
(including with respect to our internal control system, significant transactions, transactions with
related parties, and internal dealing), a compliance program to prevent certain criminal offenses
and a code of conduct for our directors, employees and others acting on our behalf. As noted in
Item 16B, we have also adopted a code of ethics for our senior executive and financial officers
meeting the requirements of Section 406 of the Sarbanes-Oxley Act. We believe that our codes of conduct and ethics will address the relevant issues contemplated
by the NYSE standards applicable to U.S. companies noted above. Our corporate governance
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Certifications as to Violations of NYSE Standards NYSE domestic company standards.Under NYSE listing standards, the CEO of a U.S. company
listed on the NYSE must certify annually to the NYSE that he or she is unaware of any violation by
the company of the NYSE corporate governance listing standards, and to disclose that such
certification has been made in the companys annual report to shareholders (or, if no annual report
to shareholders is prepared, its annual report on Form 10-K). The CEO must also promptly notify
the NYSE in writing if any executive officer of the company becomes aware of any material
non-compliance with the NYSE corporate governance listing standards. A U.S. company listed on the
NYSE must also submit an annual written affirmation to the NYSE, within 30 days of its annual
shareholders meeting and in a form specified by the NYSE, regarding its compliance with applicable
NYSE corporate governance standards. A U.S. company listed on the NYSE is further required submit
an interim written affirmation to the NYSE upon the occurrence of specified events, including
changes to the Board of Directors or its audit, nominating/corporate governance or compensation
committees and changes in the status of independent directors. Our practice.Under the NYSE rules, as of July 31, 2005, we are required to submit an annual
written affirmation to the NYSE, in a form specified by the NYSE, regarding our compliance with
applicable NYSE corporate governance standards. In 2005, we will be required to submit this
written affirmation by August 30. In subsequent years, we will be required to submit an annual
affirmation within 30 days of the filing of our annual report on Form 20-F with the SEC. Following
submission of our initial annual written affirmation, we will also be required to submit to the
NYSE an interim written affirmation, in a form specified by the NYSE, any time we are no longer
eligible to rely on, or choose to no longer rely on, a previously applicable exemption provided by
Exchange Act Rule 10A-3, or, to the extent we have an audit committee as defined in Rule 10A-3, if
a member of such audit committee who was deemed independent is no longer independent or an audit
committee member had been added. In addition, under NYSE rules, our chief executive officer must
notify the NYSE in writing if any executive officer becomes aware of any material non-compliance by
us with NYSE corporate governance standards. Shareholder Approval of Adoption and Modification of Equity Compensation Plans NYSE domestic company standards.Shareholders of a U.S. company listed on the NYSE must
approve the adoption of and any material revision to the companys equity compensation plans, with
certain exceptions. Our practice.Although our shareholders must authorize (i) the issuance of additional shares
in connection with capital increases, and (ii) the buy-back of our own shares, the adoption of
equity compensation plans does not per serequire prior shareholders approval. 
 MATERIAL CONTRACTS The Company has not entered into any material contract, other than contracts entered into in
the ordinary course of business, during the two years immediately preceding the publication of this
annual report. 
 EXCHANGE CONTROLS Currently, there are no Italian exchange controls that would affect the payment of dividends
or other remittances to holders of the ADSs or Ordinary Shares who reside outside Italy. The
Company is not aware of any plans by the Italian government to institute any exchange controls that
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who reside outside Italy. Neither Italian law nor the Companys By-laws limit the right of
nonresident or foreign owners to hold or vote the Ordinary Shares or the ADSs. 
 TAXATION The following is a summary of certain U.S. federal income and Italian tax matters. The summary
contains a description of the principal United States federal and Italian tax consequences of the
purchase, ownership and disposition of Ordinary Shares or ADSs by a holder who is a citizen or
resident of the United States or a U.S. corporation or who otherwise will be subject to United
States federal income tax on a net income basis in respect of the Ordinary Shares or ADSs. The
summary does not purport to be a comprehensive description of all of the tax considerations that
may be relevant to a decision to purchase or hold Ordinary Shares or ADSs. In particular, the
summary deals only with beneficial owners who will hold Ordinary Shares or ADSs as capital assets
and does not address the tax treatment of a beneficial owner who owns 10% or more of the voting
shares of the Company or who may be subject to special tax rules, such as banks, tax-exempt
entities, insurance companies or dealers in securities or currencies, or persons that will hold
Ordinary Shares or ADSs as a position in a straddle for tax purposes or as part of a
constructive sale or a conversion transaction or other integrated investment comprised of
Ordinary Shares or ADSs and one or more other investments. The summary does not discuss the
treatment of Ordinary Shares or ADSs that are held in connection with a permanent establishment
through which a non-resident beneficial owner carries on business or performs personal services in
Italy. The summary is based upon tax laws and practice of the United States and Italy as in effect on
the date of this annual report, which are subject to change. Investors and prospective investors
in Ordinary Shares or ADSs should consult their own advisors as to the U.S., Italian or other tax
consequences of the purchase, beneficial ownership and disposition of Ordinary Shares or ADSs,
including, in particular, the effect of any state, local or other national tax laws. For purposes of the summary, beneficial owners of ADSs who are considered residents of the
United States for purposes of the current income tax convention between the United States and Italy
(the Income Tax Convention), and are not subject to an anti-treaty shopping provision that
applies in limited circumstances, are referred to as U.S. owners. Beneficial owners who are
citizens or residents of the United States, corporations organized under U.S. law, and U.S.
partnerships, estates or trusts (to the extent their income is subject to U.S. tax either directly
or in the hands of partners or beneficiaries) generally will be considered to be residents of the
United States under the Income Tax Convention. Special rules apply to U.S. owners that are also
residents of Italy. A new tax treaty to replace the current Income Tax Convention was signed on
August 25, 1999, but has not yet been ratified by Italy. The new treaty would not change
significantly the provisions of the current Income Tax Convention that are discussed below (except
that it would clarify the availability of benefits to certain tax-exempt organizations). These
laws are subject to change, possibly on a retroactive basis. For purposes of the Income Tax Convention and the United States Internal Revenue Code of 1986,
beneficial owners of ADRs evidencing ADSs will be treated as the beneficial owners of the Ordinary
Shares represented by those ADSs. Unless otherwise stated, this summary assumes that a U.S. holder
is eligible for the benefits of the Income Tax Convention. Taxation of Dividends Italian Tax Considerations. Italian law provides for the withholding of income tax at a 27% rate on dividends paid by
Italian companies to shareholders who are not residents of Italy for tax purposes. Reduced rates
(normally 15%) may apply to non-resident shareholders who are entitled to, and comply with
procedures for claiming, benefits under an income tax convention. 62




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Under the Income Tax Convention, dividends derived and beneficially owned by U.S. owners are
subject to Italian tax at a reduced rate of 15%. However, the amount initially made available to
the Depositary for payment to U.S. owners will reflect withholding at the 27% rate. U.S. owners
who comply with the certification procedures described below may then claim an additional payment
of 12% of the dividend (representing the difference between the 27% rate and the 15% rate, and
referred to herein as a treaty refund). The certification procedure will require U.S. owners (i)
to obtain from the U.S. Internal Revenue Service (IRS) a form of certification required by the
Italian tax authorities with respect to each dividend payment (Form 6166), unless a previously
filed certification will be effective on the dividend payment date (such certificates are effective
until March 31 of the year following submission),); (ii) to produce a statement whereby the U.S.
owner represents to be a U.S. resident individual or corporation and does not maintain a permanent
establishment in Italy,; and (iii) to set forth other required information. IRS Form 6166 may be
obtained by filing a request for certification on IRS Form 8802. (Additional information, including
IRS Form 8802, can be obtained from the IRS website at www.irs.gov. Information appearing on the
IRS website is not incorporated by reference into this annual report). The time for processing
requests for certification by the IRS normally is six to eight weeks. Accordingly, in order to be
eligible for the procedure described below, U.S. owners should begin the process of obtaining
certificates as soon as possible after receiving instructions from the Depositary on how to claim a
treaty refund. The Depositarys instructions will specify certain deadlines for delivering to the Depositary
the documentation required to obtain a treaty refund, including the certification that the U.S.
owners must obtain from the IRS. In the case of ADSs held by U.S. owners through a broker or other
financial intermediary, the required documentation should be delivered to such financial
intermediary for transmission to the Depositary. In all other cases, the U.S. owners should deliver
the required documentation directly to the Depositary. The Company and the Depositary have agreed that if the required documentation is received by
the Company on or within 30 days after the dividend payment date (the First Delivery Date) and,
in the reasonable judgment of the Company, such documentation satisfies the requirements for a
refund by the Company of Italian withholding tax under the Income Tax Convention and applicable
law, the Company will within 45 days thereafter pay the treaty refund to the Depositary for the
benefit of the U.S. owners entitled thereto. If the Company does not receive a U.S. owners
documentation within 30 days after the dividend payment date, such U.S. owner may for a period of
15 days continue to claim a treaty refund by delivering the required documentation to the
Depositary. The Depositary will deliver such documentation within 15 days of the First Delivery
Date (the Final Delivery Date), but the Company will not necessarily pay the treaty refund to the
Depositary within 45 days of the First Delivery Date. If the Company does not receive the required
documentation during this additional period, or if in the Companys judgment the documentation
fails to satisfy the requirements of Italian law for any reason, U.S. owners will not be entitled
to receive any amounts from the Company and instead must claim the treaty refund directly from the
Italian tax authorities. U.S. residents seeking refunds from the Italian tax authorities have
encountered extensive delays and incurred related expenses. The procedures described in this
paragraph may be modified or withdrawn if the Company determines that its participation in the
refund practice is no longer lawful or practical. Italian law provides an alternative mechanism under which non-resident shareholders can claim
a refund of up to four-ninths of Italian withholding taxes on dividend income, by proving to the
Italian tax authorities that the dividend income was subject to income tax in the jurisdiction of
residence of such holder in an amount at least equal to the total refund claimed. U.S. owners
should consult their own tax advisers with respect to the availability of these refunds, which
traditionally have been paid only after extensive delays. Distributions of profits in kind will be subject to withholding tax. In that case, prior to
receiving the distribution, the owner will be required to provide the Company with the funds to pay
the relevant withholding tax. 63




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United States Tax Considerations. The gross amount of any dividends (that is, the amount before reduction for Italian
withholding tax) paid to a U.S. owner generally will be subject to U.S. federal income taxation as
foreign source dividend income, regardless of whether the tax refund is obtained, and will not be
eligible for the dividends received deduction allowed to domestic corporations. Dividends paid in
Euros will be includible in the income of such U.S. owners in a U.S. dollar amount calculated by
reference to the exchange rate in effect on the day the dividends are received by the Depositary or
the custodian. If the Depositary or the custodian converts the Euros into dollars on the day it
receives them, U.S. owners generally should not realize foreign currency gain or loss in respect of
the dividend income. U.S. owners who receive a treaty refund may be required to recognize foreign
currency gain or loss, which will be treated as ordinary gain or loss, to the extent the amount of
the treaty refund (in dollars) received by the U.S. owner differs from the U.S. dollar equivalent
of the Euro amount of the treaty refund on the date the dividends were received by the Depositary
or the custodian. Italian withholding tax at the 15% rate will be treated as a foreign income tax
which U.S. owners may elect to deduct in computing their taxable income or, subject to the
limitations on foreign tax credits generally, credit against their United States federal income tax
liability. Dividends will generally constitute foreign-source passive income or financial
services income for U.S. tax purposes. Subject to certain exceptions for short-term and hedged
positions, the U.S. dollar amount of dividends received by an individual in respect of the Ordinary
Shares or ADSs after December 31, 2002 and before January 1, 2009 is subject to taxation at a
maximum rate of 15% if the dividends are qualified dividends. Dividends paid on Ordinary Shares
or ADSs will be treated as qualified dividends if (i) the issuer is eligible for the benefits of a
comprehensive income tax treaty with the United States that the IRS has approved for the purposes
of the qualified dividend rules and (ii) we were not, in the year prior to the year in which the
dividend was paid, and are not, in the year in which the dividend is paid, (a) a passive foreign
investment company (PFIC) or (b) for dividends paid prior to the 2005 tax year, a foreign
personal holding company (FPHC) or foreign investment company (FIC). The Income Tax Convention
has been approved for the purposes of the qualified dividend rules. Based on our audited financial
statements and relevant market and shareholder data, we believe that we were not treated as a PFIC,
FPHC or FIC for U.S. federal income tax purposes with respect to our 2003 or 2004 taxable year. In
addition, based on our audited financial statements and our current expectations regarding the
value and nature of our assets, the sources and nature of our income, and relevant market and
shareholder data, we do not anticipate becoming a PFIC for our 2005 taxable year. The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of
ADSs or Ordinary Shares and intermediaries though whom such securities are held will be permitted
to rely on certifications from issuers to establish that dividends are treated as qualified
dividends. Because such procedures have not yet been issued, it is not clear whether the Company
will be able to comply with them. Holders of ADSs and Ordinary Shares should consult their own tax
advisers regarding the availability of the reduced dividend tax rate in the light of their own
particular circumstances. Foreign tax credits may not be allowed for withholding taxes imposed in respect of certain
short-term or hedged positions in securities or in respect of arrangements in which a U.S. owners
expected economic profit is insubstantial. U.S. owners should consult their own advisers
concerning the implications of these rules in light of their particular circumstances. Distributions of additional shares to U.S. owners with respect to their ADSs that are made as
part of a pro rata distribution to all shareholders of the Company generally will not be subject to
U.S. federal income tax. A beneficial owner of Ordinary Shares or ADSs that is, with respect to the United States, a
foreign corporation or a nonresident alien individual generally will not be subject to U.S. federal 64




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income tax on dividends received on Ordinary Shares or ADSs, unless such income is effectively
connected with the conduct by the beneficial owner of a trade or business in the United States. Taxation of Capital Gains Italian Tax Considerations. Capital gains realized by non-resident shareholders on the disposal of a qualified
shareholding held as a capital asset and not in connection with a permanent establishment through
which such shareholders carry on or perform business services in Italy are subject to Italian
personal or corporate income tax, for an amount equal to 40% of the overall gain. Losses can be
offset against taxable gains for a corresponding amount and, if in excess, can be carried forward
for up to four years. A qualified shareholding is constituted by ordinary shares or ADSs and/or
rights representing more than 5% of a listed companys total share capital or more than 2% of its
share capital voting at an ordinary shareholders meeting. A disposal of a qualified shareholding
occurs if in any 12-month period immediately following the date when a shareholding meets one of
the thresholds illustrated above, the shareholder engages in disposals of shares or ADSs that,
individually or in aggregate, constitute a qualified shareholding. The taxable gain realized by a
non-resident shareholder who is an individual would be subject to progressive personal income tax
rates (currently, the marginal tax rate is equal to 43%, plus a surcharge generally of up to 1.9%,
depending on the municipality in which such non-resident shareholder earns the highest
Italian-source income). The taxable gain realized by a non-resident corporate shareholder would be
subject to corporate income tax, currently levied at a rate of 33%. Generally, a capital gains tax (CGT), levied at a rate of 12.5%, is imposed on gains
realized upon the transfer or sale of non-qualified shareholdings whether held within or outside
Italy. A non-qualified shareholding is constituted by an interest in De Rigo which does not reach
the thresholds described above. However, under domestic law, an exemption applies to gains
realized on the disposal of non-qualified shareholdings in an Italian company the shares of which
are listed on a regulated market, such as De Rigo, even when such shareholdings are held in Italy. Furthermore, pursuant to the Income Tax Convention, a U.S. owner will not be subject to
Italian tax on any capital gains unless such U.S. owner has a permanent establishment in Italy to
which Ordinary Shares or ADSs are effectively connected. To this end, U.S. owners that sell
Ordinary Shares or ADSs and claim benefits under the Income Tax Convention may be required to
produce appropriate documentation establishing that the above mentioned conditions of
non-taxability of the capital gains pursuant to the Convention have been satisfied. Other
countries have executed income tax conventions with Italy providing for similar treatment of
Italian tax on capital gains. No tax on capital gains will be imposed by Italy on the deposit or
withdrawal of Ordinary Shares in return for ADSs. United States Tax Considerations. Gain or loss realized by a U.S. owner on the sale or other disposition of Ordinary Shares or
ADSs will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to
the difference between the U.S. owners adjusted basis in the Ordinary Shares or the ADSs and the
amount realized on the disposition (or its dollar equivalent, determined at the spot rate on the
date of disposition, if the amount realized is denominated in a foreign currency). Such gain or
loss will generally be long term capital gain or loss if the U.S. owner holds the Ordinary Shares
or ADSs for more than one year. The net amount of long-term capital gain recognized by an
individual holder after May 5, 2003 and before January 1, 2009 generally is subject to taxation at
a maximum rate of 15%. The net long-term capital gain recognized by an individual holder before May
6, 2003 generally is subject to taxation at a maximum rate of 20%. Deposits and withdrawals of
Ordinary Shares by 65




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U.S. owners in exchange for ADSs will not result in the realization of gain or loss for U.S.
federal income tax purposes. A beneficial owner of Ordinary Shares or ADSs that is, with respect to the United States, a
foreign corporation or a nonresident alien individual will not be subject to U.S. federal income
tax on gain realized on the sale of Ordinary Shares or ADSs, unless (i) such gain is effectively
connected with the conduct by the beneficial owner of a trade or business in the United States or
(ii) in the case of gain realized by an individual beneficial owner, the beneficial owner is
present in the United States for 183 days or more in the taxable year of the sale and certain other
conditions are met. Taxation of Distributions from Capital Reserves Italian Tax Considerations. Special rules apply to the distribution of capital reserves. Under certain circumstances, such
a distribution may be considered as taxable income in the hands of the recipient depending on the
reserves of the distributing company outstanding at the time of distribution and the actual nature
of the reserves distributed. The application of such rules may also have an impact on the tax basis
in the Ordinary Shares or ADSs held and/or the characterization of any taxable income received and
the tax regime applicable to it. Non-resident shareholders may be subject to withholding tax and
CGT as a result of such rules. You should consult your tax advisor in connection with any
distribution of capital reserves. Other Italian Taxes Estate and Gift Tax. As of October 25, 2001, the Italian estate and gift tax has been abolished and consequently
any transfer of shares or ADSs occurring by reason of death or gift as of that date is no longer
subject to any Italian estate and gift tax. However, should a gift of Ordinary Shares or ADSs for a value exceeding 180,759.91 (the
Threshold) occur and the relationship between the donor and the beneficiary not qualify for the
exemption regime applicable to gifts made in favor of certain family members (e.g., spouse,
parents, children, grandchildren), a registration tax of 168.00 would be due insofar as the gift
agreement is either executed or registered in Italy. The materiality threshold is increased to
516,456.91 in case the beneficiary is a person with a handicap recognized pursuant to applicable
law. Transfer Tax. An Italian transfer tax is normally payable on the transfer of shares in an Italian
company. The transfer tax will not be payable with respect to any transfer of Ordinary Shares or
ADSs involving non-Italian residents, provided that such transfer is concluded either
on a regulated market or with a bank or an investment services company. 
 DOCUMENTS ON DISPLAY Copies of De Rigo S.p.A.s Statutoare incorporated by reference as an exhibit to this annual
report and may be examined at its registered office at Zona Industriale Villanova, No. 12, 32013
Longarone (BL), Italy. The Company is subject to the information reporting requirements of the Exchange Act
applicable to foreign private issuers. In accordance therewith, De Rigo is required to file
reports and other information with the U.S. Securities and Exchange Commission (the SEC). In
particular, the Company is required to file annual reports on Form 20-F and periodic reports on
Form 6-K by 66




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electronic means through the SECs EDGAR system. These materials, including this annual
report, are available for inspection and copying at the SECs public reference facilities in
Washington D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. 
 Item 11.Quantitative and Qualitative Disclosures about Market Risk The De Rigo Group is exposed to market risks from fluctuations in foreign currency exchange
and interest rates. The exposure to foreign currency risk arises principally in connection with
the geographical distribution of the Groups sales and retail activities, which generally results
in the Group generating revenues from its operations and sales outside of the Euro zone in
currencies other than the Euro that are in excess of its costs denominated in such currencies,
which are primarily incurred with respect to its operations located in such countries, and, to a
lesser extent, with respect to non-Euro denominated inputs used by its operations in the Euro zone.
As a result, the depreciation of the Euro relative to other currencies generally has a positive
effect on net sales and operating income, while the appreciation of the Euro has adverse effects on
net sales and operating income. Similarly, changes in interest rates affect the Groups net income
by increasing or decreasing borrowing costs and investment income. Prior to the acquisition of D&A
in December 1998, substantially all of the Groups costs and revenues were denominated in lire or
other currencies of countries participating in the third stage of European Monetary Union, as
almost all of its production facilities were in Italy or other participating Member States and its
prices were generally denominated in lire (except for sales to its distribution subsidiaries), so
the average price per unit and operating margins were not significantly affected by foreign
currency exchange rate fluctuations. Since December 1998, the Groups exposure to non-Euro
currencies increased, due to the fact that D&As costs and revenues are almost exclusively
denominated in Pounds Sterling. The Groups acquisition of General Optica in February 2000 did not
have a similar impact on its risk profile, as both Spain and Portugal are participating in the
euro. The Group also makes significant purchases of raw materials and components denominated in
U.S. dollars, and therefore is exposed to fluctuations in the exchange rate between the U.S. dollar
and the euro. The Group regularly assesses its exposure and generally seeks to manage these market risks,
principally through the use of forward exchange contracts and foreign currency options to hedge
certain firm sales/purchases commitments, anticipated but not yet committed sales/purchases and
investments in debt securities denominated in currencies other than the euro. The Group has adopted
a series of guidelines regarding the management of exchange rate and interest rate exposure. De
Rigos policy allows derivative instruments to be used only for managing exchange and interest
rates risks connected to monetary flows and assets and liabilities, and not for speculative
purposes. The Groups consolidated statements of income recognized net foreign exchange gains of 0.3
million and 0.5 million in 2004 and 2003, respectively. For additional information on the
Groups financial instruments, see Note 19 to Notes to the Consolidated Financial Statements
included in Item 18. 
 Risk Analysis The De Rigo Group monitors foreign exchange risk, interest rate risk and related hedge
positions using a variety of analytical techniques including market value and sensitivity analysis.
The following analyses assume instantaneous parallel shifts in exchange rates and interest rate
yield curves. For options that are instruments with non-linear returns, sensitivity analysis
models considering the year-end market volatility are employed. 67




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Exchange Rate Risk At December 31, 2004, the potential loss in fair value of the financial instruments with
exposure to exchange rate risk with regard to non-Euro currencies, principally those relating to
the Pound Sterling and U.S. dollar, primarily financial assets and liabilities denominated in such
currencies and derivative instruments such as foreign forward exchange contracts and currency
options, resulting from a hypothetical 10% change in relevant foreign currency exchange rates would
be approximately 0.3 million. This sensitivity analysis assumes an unfavorable and instantaneous
10% fluctuation in the relevant exchange rates and is generally based on rates at the end of the
year for the relevant currencies against the euro, the Groups reporting currency. As consistently and simultaneously unfavorable movements in all relevant exchange rates are
unlikely, these assumptions may overstate the impact of exchange rate fluctuations on such
financial instruments. In addition, this calculation does not include trade receivables and trade
payables and anticipated cash flows related to the underlying business transactions. Management
believes that it is reasonable to expect that the above movement in foreign exchange rates would
produce an opposite economic impact on the underlying business transactions for which such
financial instruments are used. 
 Interest Rate Risk Although the Group uses derivative instruments to manage its interest rate risk exposure, it
does not attempt to hedge its interest rate risks completely. As a result, the Groups results
could be affected with regard to changes in interest rates, particularly as regards changes in the
values of its floating rate assets and liabilities. The potential loss in fair value of such
assets and liabilities held at December 31, 2004, resulting from a hypothetical, instantaneous and
unfavorable change of 10% in interest rate levels applicable to such financial assets and
liabilities would be approximately 0.1 million. Despite the Groups program to manage exchange rate and interest rate risk, there can be no
assurance that exchange rate or interest rate fluctuations will not adversely affect the Groups
results of operations, cash flows, financial conditions or relative price competitiveness in the
future. Moreover, as with all hedging instruments, there are risks associated with the use of
derivative instruments and other risk management tools. Although the use of such hedging
instruments provides a certain degree of protection from certain fluctuations in currency exchange
and interest rates, the Group may potentially lose benefits resulting from other fluctuations in
currency exchange and interest rates as a result of using such instruments. 
 Changes in Market Risk Exposure Compared to 2003 The Groups policy on financial risk management has not changed from the preceding year.
However, the characteristics and the mix of the Groups financial instruments with exposure to
interest rate and foreign exchange rate risk at December 31, 2004 have changed substantially from
the preceding year. See Note 19 to Notes to the Consolidated Financial Statements included in Item
18. 
 Item 12.Description of Securities Other than Equity Securities Not applicable. 
 PART II 
 Item 13.Defaults, Dividend Arrearages and Delinquencies None. 68




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Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds None. 
 Item 15.Controls and Procedures As of December 31, 2004, the Company carried out an evaluation under the supervision and with
the participation of its management, including its chief executive officer and chief financial
officer, of the effectiveness of the design and operation of the Companys disclosure controls and
procedures. There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control objectives. Based upon
and as of the date of the Companys evaluation, the chief executive officer and chief financial
officer concluded that the disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed in the reports the Company file and submit
under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported as and when required. There has been no change in the Companys internal control over
financial reporting during 2004 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting. 
 Item 16.[Reserved] 
 Item 16A.Audit Committee Financial Expert The Company has determined that, because of the existence and nature of its board of statutory
auditors, it will qualify for an exemption provided by Exchange Act Rule 10A-3(c)(3) from many of
the Rule 10A-3 audit committee requirements, which become applicable to foreign private issuers on
July 31, 2005. See Significant Differences In Corporate Governance Practices For Purposes of
Section 303a.11 of the New York Stock Exchange Listed Company ManualAudit Committee and Internal
Audit Function in Item 10. The board of statutory auditors has determined that each of the
members qualifies as an audit committee financial expert within the meaning of this Item 16A. 
 Item 16B.Code of Ethics The Company has adopted a code of ethics, as defined in Item 16B of Form 20-F under the
Securities Exchange Act of 1934, as amended, that is applicable to the Companys chief executive
officer, chief financial officer, chief accounting officer and controller, as well as to persons
performing similar functions to any of the foregoing in each relevant groups subsidiary. Copies
of this code of ethics are available upon request by writing to us at the address on the cover page
of this annual report; we also expect to post the code of ethics on our website at www.derigo.com.
Material appearing on this website is not incorporated by reference into this annual report. If
the Company amends the provisions of this code of ethics, or if the Company grants any waiver of
such provisions, it will disclose such amendment or waiver on its website at the same address. 
 Item 16C.Principal Accountant Fees and Services Audit and Non-Audit Fees The following table sets forth the fees billed to the Company by its independent auditors,
Reconta Ernst & Young or other Ernst & Young audit
entities, during the fiscal years ended December 31, 2003 and 2004: 69




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Year ended December 31,2004
    
    
    2003(in thousands of euro)Audit fees
    
    
    495
    
    
    
    473Audit-related fees
    
    
    316
    
    
    
    0Tax fees
    
    
    56
    
    
    
    225All other fees
    
    
    5
    
    
    
    4Total fees
    
    
    872
    
    
    
    702
 Audit fees in the above table are the aggregate fees billed by Reconta Ernst & Young or
other Ernst & Young audit entities in connection with the audit of the Companys annual financial
statements and include the annual financial statement audit (including required semi-annual
reviews), subsidiary audits, equity investment audits and other procedures required to be performed
by the independent auditor to be able to form an opinion on the Companys consolidated financial
statements. Audit-related fees in the above table are the aggregate fees billed by Reconta Ernst & Young
or other Ernst & Young audit entities for accounting due diligence services pertaining to potential
business acquisitions or dispositions, as well as internal control reviews and assistance with
internal control reporting requirements. Tax fees in the above table are fees billed by Studio Legale Tributario associato Ernst &
Young, (an affiliate of Reconta Ernst & Young) for tax compliance services and advice on specific
changes in tax regulations. Audit Committee Pre-Approval Policies and Procedures All audit and non-audit services provided by our independent auditors must be pre-approved by
our board of statutory auditors, which serves as the Companys audit committee for purposes of
applicable rules and regulations under the U.S. securities laws and the NYSE listing standards. De
Rigos pre-approval policies provide that such services can either be pre-approved on the basis of
an annual approval of particular types of services within identified categories (general
pre-approval); or require the specific pre-approval of the board of statutory auditors (specific
pre-approval). Any such general pre-approval is based on a detailed description of the particular
types of services to be provided and incorporates limits on the related fees that can be incurred
without triggering a need for a specific pre-approval; the board of statutory auditors is also
informed about each service performed pursuant to a general pre-approval. Unless a service has received general pre-approval, it requires specific pre-approval by the
board of statutory auditors if it is to be provided by the independent auditor. Any proposed
services of a particular type having received general pre-approval, but exceeding the cost levels
or budgeted amounts set forth in such general pre-approval also require specific pre-approval by
the board of statutory auditors. For both types of pre-approval, the board of statutory auditors considers whether such
services are consistent with the SECs rules on auditor independence. The board of statutory
auditors also considers whether the independent auditor is best positioned to provide the most
effective and efficient service, for reasons such as its familiarity with the Companys business,
people, culture,
accounting systems, risk profile and other factors, and whether the service might enhance the
Companys ability to manage or control risk or improve audit quality. All such factors are
considered as a whole, and no one factor should necessarily be determinative. The board of statutory auditors is also mindful of the relationship between fees for audit and
non-audit services in deciding whether to pre-approve any such services and may determine, for each
fiscal year, the appropriate ratio between the total amount of fees for audit, audit-related and
tax 70




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services and the total amount of fees for certain permissible non-audit services classified as
all other services. 
 Item 16D.Exemptions From The Listing Standards For Audit Committees Not applicable. 
 
 Item 16E.Purchases Of Equity Securities By The Issuer And Affiliated Purchasers An authorization from the shareholders for the Company to purchase up to 10% of the
outstanding shares in the form of Ordinary Shares or ADSs was passed as of November 2003 and
renewed as of May 2004 and publicly announced at such time. The authorization of this share
repurchase program will expire in November 2005. As of the date of this annual report, the Company
had repurchased a total of 223,200 ADSs and 2,225,000 Ordinary Shares pursuant to this program (the
2,225,000 Ordinary Shares having been repurchased from Prada in July 2004 and the 223,200 ADSs
having been purchased in market transactions in 2003). Purchases under this program in 2004 are
summarized in the table below. Total Number of
    
    
    Maximum Number ofShares Purchased as
    
    
    Shares that may yetPart of Publicly
    
    
    be Purchased underTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    the Plans orShares Purchased
    
    
    per Share in 
    
    
    Programs
    
    
    Programs2004
    
    (a)
    
    
    (b)
    
    
    (c)
    
    
    (d)Jan. 1-31
    
    
    
    
    
    
    
    
    
    
    223,200
    
    
    
    4,176,800Feb. 1-29
    
    
    
    
    
    
    
    
    
    
    223,200
    
    
    
    4,176,800Mar. 1-31
    
    
    
    
    
    
    
    
    
    
    223,200
    
    
    
    4,176,800Apr. 1-30
    
    
    
    
    
    
    
    
    
    
    223,200
    
    
    
    4,176,800May 1-31
    
    
    
    
    
    
    
    
    
    
    223,200
    
    
    
    4,176,800Jun. 1-30
    
    
    
    
    
    
    
    
    
    
    223,200
    
    
    
    4,176,800Jul. 1-31
    
    
    2,225,000
    
    
    
    5.06
    
    
    
    2,448,200
    
    
    
    1,951,800Aug. 1-31
    
    
    
    
    
    
    
    
    
    
    2,448,200
    
    
    
    1,951,800Sep. 1-30
    
    
    
    
    
    
    
    
    
    
    2,448,200
    
    
    
    1,951,800Oct. 1-31
    
    
    
    
    
    
    
    
    
    
    2,448,200
    
    
    
    1,951,800Nov. 1-30
    
    
    
    
    
    
    
    
    
    
    2,448,200
    
    
    
    1,951,800Dec. 1-31
    
    
    
    
    
    
    
    
    
    
    2,448,200
    
    
    
    1,951,800Total
    
    
    2,225,000
    
    
    
    5.06
    
    
    
    2,448,200
    
    
    
    1,951,800
 
 PART III 
 Item 17.Financial Statements Not applicable. 
 Item 18.Financial Statements Index to Financial Statements and Schedule filed with this Report PageReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Balance Sheets as of December 31, 2003 and 2004
    
    F-2Consolidated Statements of Income for the Years Ended December 31, 2002, 2003 and 2004
    
    F-4Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and 2004
    
    F-5Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2002,
2003 and 2004
    
    F-6Notes to the Consolidated Financial Statements
    
    F-7
 71




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Item 19.Exhibits Index to Exhibits filed with this Report  1.1
    
    Bylaws of De Rigo S.p.A. (incorporated by reference to the Annual Report on Form 20-F for the
fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission by De
Rigo S.p.A. on June 30, 2004, file no. 1-14002).1.2
    
    The total amount of long-term debt securities of De Rigo S.p.A. authorized under any
instrument does not exceed 10% of the total assets of the Group on a consolidated basis. De
Rigo S.p.A. hereby agrees to furnish to the Securities and Exchange Commission upon request a
copy of any instrument defining the rights of holders of long-term debt of the registrant or
of its subsidiaries for which consolidated or unconsolidated financial statements are required
to be filed.8.1
    
    List of subsidiaries of the registrant.12.1
    
    CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    
    CFO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 72




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of
De Rigo S.p.A. We have audited the accompanying consolidated balance sheets of De Rigo S.p.A. and subsidiaries as
of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders
equity and cash flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of De Rigo S.p.A. and subsidiaries at December 31,
2004 and 2003, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in Italy, which differ in certain respects from U.S. generally accepted
accounting principles (see Note 19 of the Notes to Consolidated Financial Statements). Padua, Italy
May 2, 2005
except for note 19, as to which the date is
June 1, 2005 F-1




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DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of Euro (), unless otherwise noted) December 31,2003
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    
    19,634
    
    
    
    27,146Accounts receivable, trade, net of allowances
for doubtful accounts of
 7,383 in 2003
and  7,187 in 2004
    
    
    61,938
    
    
    
    61,271Inventories (Note 4)
    
    
    49,366
    
    
    
    51,232Deferred income taxes (Note 11)
    
    
    13,018
    
    
    
    5,443Prepaid expenses and other current assets (Note 5)
    
    
    12,393
    
    
    
    14,391Total current assets
    
    
    156,349
    
    
    
    159,483Property, plant and equipment (Note 9):Land
    
    
    16,848
    
    
    
    16,874Buildings
    
    
    54,587
    
    
    
    54,658Machinery and equipment
    
    
    25,491
    
    
    
    24,475Office furniture and equipment
    
    
    82,800
    
    
    
    94,955Construction in progress
    
    
    
    
    
    
    19179,726
    
    
    
    190,981Less: Accumulated depreciation
    
    
    (70,643
    )
    
    
    (82,805
    )Property, plant and equipment, net
    
    
    109,083
    
    
    
    108,176Goodwill and intangible assets net (Note 6)
    
    
    103,891
    
    
    
    97,574Deferred income taxes (Note 11)
    
    
    1,407
    
    
    
    11,927Other non current assets (Note 7)
    
    
    6,157
    
    
    
    17,404TOTAL ASSETS
    
    
    376,887
    
    
    
    394,564
 See accompanying notes F-2




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##### Table of Contents



DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of Euro (), unless otherwise noted) December 31,2003
    
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term bank borrowings (Note 8)
    
    
    22,569
    
    
    
    20,410Current portion of long-term debt (Note 9)
    
    
    166
    
    
    
    184Accounts payable, trade
    
    
    66,141
    
    
    
    70,875Commissions payable
    
    
    895
    
    
    
    212Income taxes payable
    
    
    5,452
    
    
    
    4,219Deferred income taxes (Note 11)
    
    
    1,392
    
    
    
    767Accrued expenses and other current liabilities (Note 10)
    
    
    27,223
    
    
    
    28,970Total current liabilities
    
    
    123,838
    
    
    
    125,637Termination indemnities and other employee benefits
(Note 12)
    
    
    9,755
    
    
    
    10,142Deferred income taxes (Note 11)
    
    
    8,670
    
    
    
    9,835Long-term debt, less current portion (Note 9)
    
    
    497
    
    
    
    341Other non-current liabilities (Note 14)
    
    
    7,243
    
    
    
    7,200Shareholders equity (Note 15):Capital
stock,  0.26 par value, 45,800,000 and 45,800,000 shares authorized; 44,714,255 and 44,934,976
issued; 44,491,055 and 42,486,776 outstanding at
December 31, 2003 and 2004, respectively
    
    
    11,626
    
    
    
    11,683Additional paid-in capital
    
    
    54,490
    
    
    
    54,599Retained earnings
    
    
    161,413
    
    
    
    175,891Foreign currency translation adjustments
    
    
    (5,682
    )
    
    
    (5,801
    )Revaluation reserve
    
    
    5,037
    
    
    
    5,037Total shareholders equity
    
    
    226,884
    
    
    
    241,409TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    376,887
    
    
    
    394,564
 See accompanying notes F-3




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##### Table of Contents



DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of Euro (), unless otherwise noted) For the years ended December 31,2002
    
    
    2003
    
    
    2004NET SALES (Note 17)
    
    
    512,459
    
    
    
    504,801
    
    
    
    514,384COST OF SALES
    
    
    203,208
    
    
    
    202,040
    
    
    
    198,900GROSS PROFIT
    
    
    309,251
    
    
    
    302,761
    
    
    
    315,484COSTS AND EXPENSESCommissions
    
    
    16,381
    
    
    
    13,432
    
    
    
    11,869Advertising and promotion expenses
    
    
    34,854
    
    
    
    32,644
    
    
    
    34,393Other selling expenses
    
    
    203,011
    
    
    
    195,532
    
    
    
    204,442General and administrative expenses
    
    
    38,278
    
    
    
    36,299
    
    
    
    35,955292,524
    
    
    
    277,907
    
    
    
    286,659INCOME FROM OPERATIONS
    
    
    16,727
    
    
    
    24,854
    
    
    
    28,825OTHER (INCOME) EXPENSESInterest expense
    
    
    4,025
    
    
    
    2,217
    
    
    
    1,126Interest income
    
    
    (633
    )
    
    
    (718
    )
    
    
    (675
    )Other (income) expenses, net
    
    
    3,566
    
    
    
    (14,483
    )
    
    
    7256,958
    
    
    
    (12,984
    )
    
    
    1,176INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS
    
    
    9,769
    
    
    
    37,838
    
    
    
    27,649INCOME TAXES (Note 11)
    
    
    46
    
    
    
    14,935
    
    
    
    12,737INCOME BEFORE MINORITY INTERESTS
    
    
    9,723
    
    
    
    22,903
    
    
    
    14,912MINORITY INTERESTS (Note 18)
    
    
    (922
    )
    
    
    4,425
    
    
    
    434NET INCOME
    
    
    10,645
    
    
    
    18,478
    
    
    
    14,478
 See accompanying notes F-4




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##### Table of Contents



DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Euro (), unless otherwise noted) 2002
    
    
    2003
    
    
    2004Cash flows from operating activitiesNet income
    
    
    10,645
    
    
    
    18,478
    
    
    
    14,478Adjustments to reconcile net income to net
cash provided by operating activitiesDepreciation
    
    
    18,339
    
    
    
    17,735
    
    
    
    18,436Amortization
    
    
    9,213
    
    
    
    9,216
    
    
    
    8,463Provision for doubtful accounts
    
    
    2,821
    
    
    
    2,545
    
    
    
    1,380Provision for inventory obsolescence
    
    
    4,480
    
    
    
    5,325
    
    
    
    3,875Gain on sale of investments in debt securities
    
    
    (111
    )
    
    
    (86
    )
    
    
    Deferred income taxes
    
    
    (8,479
    )
    
    
    (1,969
    )
    
    
    (2,454
    )Gain on disposal of EID in 2003 and De Rigo Nederland in 2004
    
    
    
    
    
    
    (11,751
    )
    
    
    (62
    )Other, non-cash items
    
    
    622
    
    
    
    489
    
    
    
    227Provision for termination indemnities and pension costs
    
    
    8,103
    
    
    
    8,467
    
    
    
    8,150Minority interest in income (loss)
    
    
    (922
    )
    
    
    4,425
    
    
    
    434Changes in operating assets and liabilities:Accounts receivable
    
    
    (14,945
    )
    
    
    (2,986
    )
    
    
    (2,132
    )Inventories
    
    
    6,698
    
    
    
    (3,582
    )
    
    
    (5,864
    )Accounts payable
    
    
    (3,451
    )
    
    
    6,333
    
    
    
    5,813Income taxes payable
    
    
    (6,666
    )
    
    
    2,829
    
    
    
    (1,212
    )Value added tax
    
    
    1,799
    
    
    
    126
    
    
    
    (1,775
    )Other  net
    
    
    (150
    )
    
    
    201
    
    
    
    (1,289
    )Payments of termination of indemnities and pension contributions
    
    
    (5,656
    )
    
    
    (4,965
    )
    
    
    (5,038
    )Net cash provided by operating activities
    
    
    22,340
    
    
    
    50,830
    
    
    
    41,430Cash flows from investing activitiesNet proceeds from sale of EID (Note 3)
    
    
    
    
    
    
    12,341
    
    
    
    Net proceeds from sale of De Rigo Nederland and Deutschland (Note 3)
    
    
    
    
    
    
    
    
    
    
    (202
    )Acquisition of minority interests in Dierre, De Rigo France, De Rigo
Deutschland
and De Rigo UK
    
    
    (304
    )
    
    
    
    
    
    
    (739
    )Net proceeds from sale of Ranieri Argentina and Vogart S.r.l.
    
    
    386
    
    
    
    
    
    
    
    Acquisition (proceeds) of interests in other companies
    
    
    
    
    
    
    
    
    
    
    (53
    )Additions to property, plant and equipment
    
    
    (16,075
    )
    
    
    (11,548
    )
    
    
    (17,624
    )Proceeds from disposal of equipment and other assets
    
    
    1,354
    
    
    
    1,870
    
    
    
    246Additions to intangible assets
    
    
    (2,086
    )
    
    
    (1,009
    )
    
    
    (2,087
    )Proceeds from sale of investments
    
    
    
    
    
    
    1,993
    
    
    
    Net cash used in investing activities
    
    
    (16,725
    )
    
    
    3,647
    
    
    
    (20,459
    )Cash flows from financing activitiesNet change in short-term borrowings from lines of credit
    
    
    (3,241
    )
    
    
    (50,169
    )
    
    
    (2,107
    )Dividends paid by subsidiaries to minority interests
    
    
    
    
    
    
    (4,429
    )
    
    
    (14
    )Proceeds from long-term debt
    
    
    151
    
    
    
    
    
    
    
    35Repayment of long-term debt and non current liability
    
    
    (494
    )
    
    
    (251
    )
    
    
    (173
    )Share capital increase
    
    
    68
    
    
    
    
    
    
    
    92Purchase of treasury shares
    
    
    
    
    
    
    (753
    )
    
    
    (11,266
    )Payment of dividends
    
    
    (5,805
    )
    
    
    
    
    
    
    Net cash provided (used) by financing activities
    
    
    (9,321
    )
    
    
    (55,602
    )
    
    
    (13,433
    )Effect of exchange rate changes on cash
    
    
    (241
    )
    
    
    (269
    )
    
    
    (26
    )Increase (Decrease) in cash and cash equivalents
    
    
    (3,947
    )
    
    
    (1,394
    )
    
    
    7,512Cash and cash equivalents at beginning of the year
    
    
    24,975
    
    
    
    21,028
    
    
    
    19,634Cash and cash equivalents at end of the year
    
    
    21,028
    
    
    
    19,634
    
    
    
    27,146Supplemental disclosures:Interest paid
    
    
    3,871
    
    
    
    2,430
    
    
    
    925Income taxes paid
    
    
    18,147
    
    
    
    9,701
    
    
    
    18,060
 See accompanying notes F-5




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##### Table of Contents



DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2002, 2003 and 2004
(In thousands of Euro (), unless otherwise noted) ForeignAdditional
    
    
    
    
    
    
    currencyShare
    
    
    paid-in
    
    
    Retained
    
    
    translation
    
    
    RevaluationCapital
    
    
    capital
    
    
    earnings
    
    
    adjustments
    
    
    reserve
    
    
    TotalBalance at January 1, 2002
    
    
    11,609
    
    
    
    54,439
    
    
    
    138,095
    
    
    
    1,239
    
    
    
    5,037
    
    
    
    210,419Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,210
    )
    
    
    
    
    
    
    (3,210
    )Share capital increase exercise of 62,852 stock
options
    
    
    17
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68Net income for 2002
    
    
    
    
    
    
    
    
    
    
    10,645
    
    
    
    
    
    
    
    
    
    
    
    10,645Dividends paid
    
    
    
    
    
    
    
    
    
    
    (5,805
    )
    
    
    
    
    
    
    
    
    
    
    (5,805
    )Balance at December 31, 2002
    
    
    11,626
    
    
    
    54,490
    
    
    
    142,935
    
    
    
    (1,971
    )
    
    
    5,037
    
    
    
    212,117Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,711
    )
    
    
    
    
    
    
    (3,711
    )Net income for 2003
    
    
    
    
    
    
    
    
    
    
    18,478
    
    
    
    
    
    
    
    
    
    
    
    18,478Balance at December 31, 2003
    
    
    11,626
    
    
    
    54,490
    
    
    
    161,413
    
    
    
    (5,682
    )
    
    
    5,037
    
    
    
    226,884Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (119
    )
    
    
    
    
    
    
    (119
    )Share capital increase exercise of 220,721 stock
options
    
    
    57
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166Net income for 2004
    
    
    
    
    
    
    
    
    
    
    14,478
    
    
    
    
    
    
    
    
    
    
    
    14,478Balance at December 31, 2004
    
    
    11,683
    
    
    
    54,599
    
    
    
    175,891
    
    
    
    (5,801
    )
    
    
    5,037
    
    
    
    241,409
 See accompanying notes F-6




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  1.

BACKGROUND AND ORGANIZATION De Rigo S.p.A. (De Rigo or the Company) is incorporated in Italy, and on December 31, 2003 and
2004, respectively, was 74.0% and 77.2% directly and indirectly owned by the De Rigo brothers. On
December 31, 2004, a portion of the De Rigo brothers interest equal to 75.0% of the Company was
indirectly owned through De Rigo Holding B.V., with the remaining 2.2% being directly owned by the
De Rigo brothers. The remaining 22.8% of the Company was owned as follows: Managing Director
    
    
    2.0
    %Publicly owned
    
    
    20.8
    %22.8
    %
 A total of 22.4% of the shares are listed on the New York Stock Exchange (NYSE) in the form of
American Depositary Shares (each American Depositary Share represents one Ordinary Share) under
the symbol DER. This is comprised of the 20.8% publicly owned shares with the other 1.6% being
owned directly and indirectly by the Managing Director and the De Rigo brothers. The principal activities of the De Rigo S.p.A. and its subsidiaries (the Company or the Group)
include the design, manufacture, distribution, marketing and retailing of premium-priced fashion
sunglasses and prescription eyeglass frames and the sale of eyeglass lenses. Information on the
Groups operations by business segment and the expiration dates of certain tax exemption grants
are disclosed in Notes 17 and 11, respectively.  2.

SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of De Rigo and its subsidiaries (collectively the Group)
are prepared on the basis of the accounts of De Rigo and the financial statements of the individual
companies consolidated as of December 31, 2004 as approved by their respective Boards of Directors,
adjusted, where necessary, to conform with the accounting policies adopted by De Rigo. The
accounting policies are consistent with the Italian Civil Code (as amended by Legislative Decree
No. 6 dated January 17, 2003 and subsequent amendments and integrations) related to consolidated
financial statements interpreted and integrated by the accounting principles established or adopted
by the Italian Accounting Profession (collectively, Italian GAAP). Italian GAAP differs in certain material respects from U.S. generally accepted accounting
principles (U.S. GAAP). The effects of these differences on stockholders equity as of December
31, 2003 and 2004 and on the consolidated net income for each of the three years in the period
ended December 31, 2004 are set forth in Note 19. The consolidated financial statements and related notes are presented in a reclassified format,
which differs from De Rigos financial statements and disclosures which are prepared in accordance
with Italian legal requirements. The format presented does not result in any modification of the
portions attributable to De Rigo stockholders equity and net income (loss) as reported on an
Italian GAAP basis. Principles of consolidation F-7




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DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) All majority-owned subsidiaries are consolidated. The financial statements used for the consolidation are those prepared for approval by the
shareholders of the respective companies forming part of the De Rigo Group. Such financial
statements are adjusted, where necessary, to conform with the Companys accounting policies that
are in conformity with the Italian law governing consolidated financial statements interpreted and
integrated by the accounting principles established or adopted by the Italian Accounting
Profession (Italian GAAP). All significant intercompany transactions and balances are eliminated. Unrealized intercompany
profits and the gains and losses arising from transactions between Group companies are also
eliminated. Use of estimates The preparation of the financial statements in conformity with Italian and U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ
from those estimates. Foreign currency translation The financial statements of foreign subsidiaries expressed in foreign currencies are translated
into Euro, the Companys functional and reporting currency, using the year-end exchange rate for
balance sheet items and the average exchange rate for the year for statement of income items. The
translation differences resulting from the changes in exchange rates from year to year have been
reported separately as a component of shareholders equity. Foreign currency transactions Monetary assets and liabilities denominated in foreign currencies have been recorded at the
exchange rate in effect at the date of the transaction; such assets and liabilities denominated in
foreign currencies are remeasured at the prevailing rate at the balance sheet date, taking into
consideration relevant hedging contracts, and any resulting unrealized gain or losses are
recognized in income. Cash and Cash equivalents The Company considers all highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents. Accounts receivable Accounts receivable are carried at their net realizable value. The allowance for doubtful accounts
is estimated based on the aging of accounts receivable balances and historical write-off
experience. Accounts receivable are written-off when they are considered finally uncollectible and
collection efforts have ceased. Inventories Inventories are carried at the lower of cost or market using the weighted average cost method. Investments in debt securities F-8




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DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) When the Company invests in debt securities, such investments are stated at the lower of cost or
market. Property, plant and equipment Property, plant and equipment is recorded at either historical cost or revalued amounts. The
Company revalued certain assets in years prior to 1992 to fair value, in accordance with Italian
law. The applicable revaluation laws contained provisions limiting the amount of any such
revaluation to the fair value of the respective assets. The adjustments resulting from these
revaluations have been recorded as a component of shareholders equity. Depreciation of property, plant and equipment is computed on the historical cost or revalued basis
of the relevant asset, using the straight-line method over the estimated useful lives of the
related assets, as follows: Buildings
    
    33-50 yearsMachinery and equipment
    
    4-10 yearsOffice, furniture and equipment
    
    4-8 yearsLeasehold improvements
    
    lesser of useful life
or lease term
 Maintenance and repairs are expensed as incurred while replacement and improvements are
capitalized. The cost and accumulated depreciation of assets sold or retired are removed from the
accounts, and any resulting gain or loss is included in income from operations. The Group periodically evaluates potential impairment loss relating to property plant and
equipment, when a change in circumstances occurs by assessing whether permanent diminution in value
has occurred. Impairment is recognized if the recoverable amount falls below its carrying value. In
that event, an impairment loss is recognized based on the amount by which the net carrying value
exceeds the recoverable amount, pursuant to Article 2426, Section 1, item 3 of the Italian Civil
Code. Write-downs are reversed if the reason for the write-down no longer exists. Goodwill Goodwill represents the excess of the purchase price paid over the fair value assigned to tangible
and identifiable intangible assets less the fair value assigned to liabilities assumed.
Amortization is provided on a straight line basis over 5 to 20 years, the estimated future periods
to be benefited. On an annual basis, management evaluates recorded goodwill for potential
impairment. The Company measures impairment by comparing the fair value of a reporting unit with
its carrying value, including goodwill. The fair value of a reporting unit is measured based on
the present value of future cash flows and the result is compared to the fair value based on other
valuation techniques (multiples of earnings before interest, taxes, depreciation and amortization,
trading multiple and comparable transaction) to assess the overall reasonableness of the valuation
range. Intangible assets Intangible assets are recorded at either historical cost or revalued amounts and are amortized,
using the straight-line method, over 5 to 10 years. In 2001 the Company revalued certain
trademarks to fair value, in accordance with Italian law. The applicable revaluation laws contain
provisions limiting the amount of any such revaluation to the fair value of the respective assets.
The adjustments resulting from these revaluations have been recorded as a revaluation reserve that
is reported as a separate component of shareholders equity. The taxes payable on these F-9




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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) revaluations were charged to the revaluation reserve. Intangible assets are tested for impairment
whenever events or changes in circumstances indicate that the net carrying amount may not be
recoverable. When such events occur, the Company measures impairment by comparing the carrying
value of the intangible asset to the estimated undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition and, if required, the impairment loss is
measured as the amount that the carrying value of the asset exceeds the assets fair value if the
asset is not recoverable. Treasury Shares Treasury shares are recorded at historical cost within long-term assets. Treasury shares are
written down in cases where there is a permanent diminution in value. Write-downs are reversed if
the reason for the write-down no longer exists. Income taxes Income taxes are provided for by each entity included in the consolidation in accordance with
applicable local laws. Deferred income taxes are accounted for under the liability method and
reflect the tax effects of all significant temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements and tax loss carry forwards
(NOLs). Valuation allowances are provided against deferred tax assets for amounts that are not
expected to be realized. The Company has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for valuation allowances. However, if the
Company were to determine that it would be able to realize its deferred tax assets in the future,
in amounts in excess of their net recorded values, an adjustment to the deferred tax assets would
increase income in the period such determination was made. Likewise, should the Company determine
that it would not be able to realize all or part of the net recorded value of its deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged against income in
the period such determination was made. Investment tax credits and tax deductions Investment tax credits and investment tax deductions are accounted for as a reduction in current
income taxes in the year in which the credit arises or the deduction is taken. Revenue recognition Revenues from the sale of products are recorded net of discounts upon shipment, which is generally
when title passes. It is not the Companys policy to accept returns; however in specific cases
returns are accepted. The Company records an accrual based on an estimate of anticipated returns
of merchandise by customers in subsequent periods. Retail sales consists of the sale of optical frames and lenses for prescription eyeglasses and
fashion sunglasses (as well as contact lenses and other optical products), together with the
provision of related professional consulting and aftercare services, through the network of stores
operated by the Groups two retail chains, D&A, a leading retailer in the British optical market,
and General Optica, the leading optical chain in Spain, which also has a presence in Portugal.
Revenue is recognized when the service is provided or the goods are delivered. Shipping and handling costs Shipping and handling costs are included in cost of sales. F-10




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) Derivative products The Company uses derivative products to manage its exposure to fluctuations in interest rates and
in foreign currency exchange rates relating to certain receivables and payables. If a derivative is designated as a fair value hedge, changes in the fair value of the derivative
and the related change in the hedged item are recognized in other income or expenses. If a
derivative is designated as a cash flow hedge, changes in the fair value of the derivative are
recognized in other income or expenses when the hedged item effects operations. Changes in fair
value of derivatives that do not qualify as a hedge are recognized in other income or expenses.
Unrealized gains related to the remeasurement at fair value of long-term derivative contracts are
deferred until realized. For financial instruments used to hedge interest rate risks, the interest differentials are
recorded in the statement of income in financial income or financial expense based on the
accrual principle; the fair values of the outstanding contracts at year-end are not reflected in
the accompanying financial statements. For financial instruments used to hedge exchange rate risks, the cost (or financial component
calculated as the difference between the rate at the date of entering into the contract and the
forward rate) is recorded in the statement of income in financial income or financial expense
based on the accrual principle. Premiums collected (paid) on the sale or purchase of put and call
options are classified under other payables or receivables due from others. If the option is
exercised, the premium collected (paid) is treated as an accessory component of the strike price
of the underlying instruments; if the option is not exercised, the premium collected (paid) is
recorded under financial income (financial expense). Put and call options are valued consistently
with the underlying asset and liability positions and any net expense connected with each single
transaction is recognized in the statement of income. Put and call options outstanding at year-end
are stated at the lower of cost or market value at the balance sheet date. Advertising and promotion Advertising costs are charged to earnings the first time the advertisement appears. Media (TV and
print advertisement) placement costs are charged to earnings in the month the advertisement first
appears. The Company has sponsorship agreements with certain movie stars and athletes that are generally
cancelable only for cause. The Companys accounting for these sponsorship contracts is based upon
the specific contract provisions. Generally, sponsorship payments are expensed uniformly over the
term of the agreement, provided that certain future performance obligations exist. Share-based compensation From time to time the Company grants stock options to qualified employees as incentive
compensation. Awards of stock based compensation schemes are treated as equity movements at the
time of acquisition by the recipient. Neither the fair value nor the intrinsic values of the stock
based compensation schemes are included in the statement of income under Italian GAAP. Statements of cash flows Short-term borrowings arise primarily under the Groups short-term lines of credit with its banks.
These short-term obligations are payable on demand. The cash flows from these items are included
under the caption Net change in short-term borrowings in the consolidated statements of cash
flows. F-11




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) Reclassifications Certain amounts in the financial statements in 2002 and 2003 have been reclassified to conform to
the 2004 presentation. Other information The following table discloses the year-end exchange rates for the balance sheet items and the
average exchange rates for the statement of income items used to change foreign currency of
subsidiaries outside of the Euro area into Euros for years 2004 and 2003, respectively: Average
    
    
    
    
    
    
    Average
    
    
    
    

    
AverageExchange rate
    
    31/12/04
    
    
    2004
    
    
    31/12/03
    
    
    2003
    
    
    31/12/02
    
    
    2002US $ (1)
    
    
    1.3621
    
    
    
    1.2439
    
    
    
    1.2630
    
    
    
    1.1312
    
    
    
    1.0487
    
    
    
    0.9456GB Pound
    
    
    0.7051
    
    
    
    0.6787
    
    
    
    0.7048
    
    
    
    0.6920
    
    
    
    0.6505
    
    
    
    0.6288Japanese Yen
    
    
    139.6500
    
    
    
    134.4400
    
    
    
    135.0500
    
    
    
    130.9710
    
    
    
    124.3900
    
    
    
    118.0625Singapore $
    
    
    
    
    
    
    
    
    
    
    2.1450
    
    
    
    1.9703
    
    
    
    1.8199
    
    
    
    1.6912Hong
Kong $
    
    
    10.5881
    
    
    
    9.6881
    
    
    
    9.8049
    
    
    
    8.8079
    
    
    
    8.1781
    
    
    
    7.3750
 Note 1:
    In 2003, the financial statements of Eid L.L.C were expressed into Euro with the
average exchange rate for the period 1
January 2003  23 July 2003 of
1.1049 US$ for 1 .
  3.

BUSINESS ACQUISITIONS AND DISPOSALS 2004 Acquisitions and disposals On June 30, 2004, the Group sold to De Rigo Holding BV its 100% interest in De Rigo Nederland and
De Rigo Singapore for cash consideration of  580 realizing a gain of  62. Since May 1, 2004 the
Group distributes its products in the Dutch market directly from Italy. On October 22, 2004, the Group acquired the outstanding 20% minority interest in its subsidiary De
Rigo UK for cash consideration of  739. The acquisition has been accounted for under the purchase
method. Prior to the acquisition of this outstanding minority interest, the Company held 80% of the
outstanding shares and was fully consolidating De Rigo UKs results. The amount paid over the book
value was not significant. On December 16, 2004, the Group sold its 100% interest in De Rigo GmbH for a nominal amount
equivalent to book value. Since January 1, 2004 the Group distributes its products in the German
market directly from Italy. F-12




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) 2003 Disposals On July 23, 2003 the joint venture that the Group formed with the Prada Group in 2000 was
terminated under a mutual agreement between the parties and as a result the Group sold its 51%
interest in EID to the Prada Group for cash consideration of  12,341 realizing a gain of 
11,751, which is included in other (income) expenses. 2002 Acquisitions and disposals On June 25, 2002, the Group sold its 51% interest in Ranieri Argentina for cash consideration of
 367 realizing a gain of  78. The recent economic crisis in Argentina led the Group to divest
its former distribution subsidiary in that country. On July 24, 2002, the Group acquired the outstanding 40% minority interest in its subsidiary
De Rigo Deutschland for cash consideration of
 51. The acquisition has been accounted for under
the purchase method. Prior to the acquisition of this outstanding minority interest, the Company
held 60% of the outstanding shares and was fully consolidating De Rigo Deutschlands results. The
excess of the purchase price paid over the corresponding portion of the fair values assigned to
tangible and identifiable intangible assets less the fair value assigned to liabilities assumed has
been allocated to goodwill, which is being amortized over 5 years on a straight-line basis.  4.

INVENTORIES Inventories consisted of the following: December 31,2003
    
    
    2004Raw materials and supplies
    
    
    5,068
    
    
    
    6,021Semi-finished goods
    
    
    5,077
    
    
    
    5,300Finished goods
    
    
    39,221
    
    
    
    39,91149,366
    
    
    
    51,232
 Inventories are net of allowances for obsolete and slow moving items of  24,355 and  24,055 at
December 31, 2003 and 2004, respectively. F-13




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  5.

PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consisted of the following: December 31,2003
    
    
    2004Prepaid shop rentals
    
    
    5,060
    
    
    
    5,291Prepaid pension benefit costs (Note 12)
    
    
    1,883
    
    
    
    Value added tax receivable
    
    
    1,630
    
    
    
    3,403Income tax receivable
    
    
    245
    
    
    
    1,989Advances to suppliers and agents
    
    
    390
    
    
    
    415Franchise prepayments
    
    
    868
    
    
    
    719Prepaid other taxes
    
    
    606
    
    
    
    814Other
    
    
    1,711
    
    
    
    1,76012,393
    
    
    
    14,391
  6.

GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets consisted of the following: December 31,2003
    
    
    2004Goodwill, net of accumulated
amortization of
 26,508 in 2003 and
 32,017 in 2004
    
    
    94,532
    
    
    
    88,327Trademarks, net of accumulated amortization
of
 2,420
in 2003 and
 3,051 in 2004
    
    
    4,368
    
    
    
    3,989Other intangibles, net of accumulated amortization
of
 12,373
in 2003 and
 14,617 in 2004
    
    
    4,991
    
    
    
    5,258103,891
    
    
    
    97,574
 In accordance with Italian tax law n. 448 dated December 28, 2001, at the end of 2001, the Company
revalued certain of its trademarks from
 436 to
 5,479. This revaluation was subject to a tax
in the amount of  958, which was payable over three years. The carrying value of the trademark
assets was adjusted to the revalued amount of 5,479; the amount of the revaluation was credited
to a separate component of shareholders equity (revaluation reserve) net of the tax liability
attributable to the revaluation reserve. No provision has been made for the tax to be paid upon
distribution of the revaluation reserve because management does not intend to distribute the
revaluation reserve arising from this revaluation. F-14




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  7.

OTHER NON CURRENT ASSETS Other non-current assets consisted of the following: December 31,2003
    
    
    2004Advance payment of withholding tax on termination
indemnities
    
    
    71
    
    
    
    12Income tax receivable
    
    
    4,154
    
    
    
    3,834Long-term deposits
    
    
    1,154
    
    
    
    1,372Treasury shares
    
    
    753
    
    
    
    12,019Other
    
    
    25
    
    
    
    1676,157
    
    
    
    17,404
 Included in income tax receivable is an amount of  3,830 related to an Italian tax credit,
originating from the distribution of dividends to a foreign subsidiary. Although, a tax refund
request was rejected by the First Tax Court of Italy in late 2004, the Company has not removed the
related receivable amount as, based on the opinion of its tax and legal advisors, the reasons for
the courts rejection of the refund are considered to be groundless; accordingly, the
recoverability of this receivable is considered probable.  8.

SHORT-TERM BANK BORROWINGS Short-term bank borrowings consisted of: December 31,2003
    
    
    2004Borrowings under lines of credit payable on demand
    
    
    22,569
    
    
    
    20,410
 Borrowings under lines of credit payable on demand At December 31, 2003 and 2004, the Group had unsecured short-term bank lines of credit aggregating
approximately  137,103 and  85,498, respectively. At December 31, 2003 and 2004, approximately
 114,534, and  65,088, respectively, were available for further borrowings. At December 31,
2003 and 2004, the weighted average interest rates for the short-term lines of credit were 3.48%
and 3.56% respectively. Amounts outstanding under these lines of credit are payable upon demand. F-15




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  9.

LONG-TERM DEBT Long-term debt consists of the following: December 31,2003
    
    
    2004Subsidized by the Italian Government:   Mortgage loan payable to bank, bearing
interest at an effective annual rate of 1.0875%
for first three years and 2.61% for remaining
10 years, payable yearly from 2003 through 2012
    
    
    351
    
    
    
    316Subsidized by the European Investment Bank:   Mortgage loan payable to bank, bearing
variable interest at 3 month Euribor rate plus
1.00% margin payable yearly from 1998 through
2005 (3.11% and 3.17% at December 31, 2003 and
2004, respectively)
    
    
    194
    
    
    
    97Mortgage loans payable to banks bearing interest at
annual rate of 5.20% and 3.55%, due in installments to
2005 and 2006
    
    
    118
    
    
    
    112Total long-term debt
    
    
    663
    
    
    
    525Less: current portion
    
    
    (166
    )
    
    
    (184
    )497
    
    
    
    341
 The interest paid by the Italian Government and European Investment Bank amounted to  26,  5 and
nil in 2002, 2003, and 2004 respectively. The subsidy on the European Investment Bank loan
eliminated the 75 percentage points of the margin, reducing the effective interest rate to the 3
month Euribor rate plus 0.25%. The mortgage loans are secured by liens on property, plant and equipment that have a carrying
value of approximately  3,670 at December 31, 2004. The maturities of long-term debt over the
next five years as at December 31, 2004 are as follows: 2005
    
    
    
    1842006
    
    
    
    812007
    
    
    
    552008
    
    
    
    392009
    
    
    
    40Thereafter
    
    
    
    126Total
    
    
    
    525
 F-16




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  10.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: December 31,2003
    
    
    2004Salaries payable and related social security contributions
    
    
    12,601
    
    
    
    13,755Employee taxes withheld
    
    
    3,545
    
    
    
    4,003Customer advances
    
    
    2,255
    
    
    
    1,917Property expense accruals
    
    
    853
    
    
    
    367VAT taxes payable
    
    
    3,083
    
    
    
    3,407Warranty provision
    
    
    1,685
    
    
    
    2,193Other accrued expenses
    
    
    3,201
    
    
    
    3,32827,223
    
    
    
    28,970
  11.

INCOME TAXES Income before income taxes and the provision for income taxes consist of the following: 2002
    
    
    2003
    
    
    2004Income before income taxes:Italy
    
    
    1,299
    
    
    
    21,227
    
    
    
    11,981United Kingdom
    
    
    2,072
    
    
    
    1,968
    
    
    
    2,467Spain
    
    
    8,864
    
    
    
    9,087
    
    
    
    11,398Other
    
    
    (2,466
    )
    
    
    5,556
    
    
    
    1,803Total
    
    
    9,769
    
    
    
    37,838
    
    
    
    27,649Provision for income taxes:Current:Italy
    
    
    1,749
    
    
    
    9,314
    
    
    
    6,352United Kingdom
    
    
    1,764
    
    
    
    2,224
    
    
    
    2,531Spain
    
    
    4,459
    
    
    
    4,489
    
    
    
    5,769Other
    
    
    553
    
    
    
    877
    
    
    
    539Total
    
    
    8,525
    
    
    
    16,904
    
    
    
    15,191Deferred:Italy
    
    
    (8,014
    )
    
    
    (820
    )
    
    
    (1,343
    )United Kingdom
    
    
    (153
    )
    
    
    (999
    )
    
    
    (948
    )Spain
    
    
    (311
    )
    
    
    210
    
    
    
    (389
    )Other
    
    
    (1
    )
    
    
    (360
    )
    
    
    226Total
    
    
    (8,479
    )
    
    
    (1,969
    )
    
    
    (2,454
    )Total tax provision
    
    
    46
    
    
    
    14,935
    
    
    
    12,737
 F-17




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  The reconciliation between the Italian statutory tax rates and the consolidated effective tax
rates is as follows: 2002
    
    
    2003
    
    
    2004Tax at Italian statutory rate of 40.25% in 2002,
38.25% in 2003 and 37.25% in 2004
    
    
    3,932
    
    
    
    14,473
    
    
    
    10,300Investment tax credit and deductions
    
    
    (245
    )
    
    
    
    
    
    
    Non-taxed gains on business disposal
    
    
    (123
    )
    
    
    (3,926
    )
    
    
    Effect of a change in tax rate:·   In Italy
    
    
    (7,042
    )
    
    
    303
    
    
    
    ·   Other countries
    
    
    16
    
    
    
    (9
    )
    
    
    28Effect of different tax rates of foreign jurisdictions
    
    
    (785
    )
    
    
    (808
    )
    
    
    (610
    )Change in valuation allowance
    
    
    1,026
    
    
    
    (168
    )
    
    
    (12
    )Amortization of non-deductible goodwill
    
    
    2,384
    
    
    
    2,435
    
    
    
    2,178Other permanent differences:·   ItalyIRPEG
    
    
    (460
    )
    
    
    1,325
    
    
    
    745IRAP  (primarily payroll, interest
and gain on business assignment in 2004)
    
    
    1,413
    
    
    
    981
    
    
    
    (156
    )·   Other countries
    
    
    (70
    )
    
    
    329
    
    
    
    264Provision for income taxes
    
    
    46
    
    
    
    14,935
    
    
    
    12,737Effective consolidated tax rate
    
    
    0.5
    %
    
    
    39.5
    %
    
    
    46.1
    %
 The Italian statutory tax rate for 2002 was 40.25%, comprised of a 36% national corporate income
tax (IRPEG) and a 4.25% Regional Tax on Productive Activities (IRAP). A new tax law was
enacted in December 2002 to be effective January 1, 2003 with the effect of reducing the IRPEG tax
rate from 36% to 34% for the year 2003. A further tax law was enacted in December 2003 with the
effect of reducing the IRPEG (now called IRES) tax rate from 34% to 33% effective January 1, 2004. The Company decreased its Italian deferred tax assets and liabilities as of December 31, 2002 and
2003 to reflect changes in the tax law enacted in December 2002 and 2003. In 2002, the Company
recognized, as a change in tax rate, deferred taxes on temporary differences of the tax exempt
companies together with the effect of IRPEG reduced tax rate from 36% to 34%. The effect of
applying the enacted tax rate in 2003 to existing temporary differences was to increase income tax
expense by  303. F-18




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) Components of deferred income tax assets and liabilities were: December 31,2003
    
    
    2004Total deferred tax assets
    
    
    14,425
    
    
    
    17,370Total deferred tax liabilities
    
    
    (10,062
    )
    
    
    (10,602
    )Net deferred tax assets
    
    
    4,363
    
    
    
    6,768Of which:Current deferred tax assets
    
    
    13,018
    
    
    
    5,443Non-current deferred tax assets
    
    
    1,407
    
    
    
    11,927Current deferred tax liabilities
    
    
    (1,392
    )
    
    
    (767
    )Non-current deferred tax liabilities
    
    
    (8,670
    )
    
    
    (9,835
    )Net deferred tax assets
    
    
    4,363
    
    
    
    6,768
 Principal items comprising net deferred income tax assets were as follows: December 31,2003
    
    
    2004Assets (Liabilities)Equalization tax on dividends
    
    
    (475
    )
    
    
    (647
    )Tax revaluation on certain assets, net of
accumulated depreciation
    
    
    188
    
    
    
    188Allowance for doubtful accounts
    
    
    1,939
    
    
    
    1,035Inventory obsolescence
    
    
    8,041
    
    
    
    544Intercompany profits in inventory
    
    
    1,531
    
    
    
    1,572Accumulated accelerated depreciation
    
    
    (291
    )
    
    
    (86
    )Pension asset
    
    
    (380
    )
    
    
    1,026Book revaluation of certain assets
    
    
    (8,431
    )
    
    
    (8,234
    )Surplus on business assignment
    
    
    
    
    
    
    10,289Net operating loss carry forwards (NOL)
    
    
    3,977
    
    
    
    2,348Agents termination indemnity
    
    
    421
    
    
    
    118Investments devaluation
    
    
    340
    
    
    
    238Other
    
    
    1,445
    
    
    
    725Net deferred tax assets
    
    
    8,305
    
    
    
    9,116Less:Valuation allowance on NOLs
    
    
    (3,942
    )
    
    
    (2,348
    )Net deferred tax assets
    
    
    4,363
    
    
    
    6,768
 F-19




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) In 2004, the Company underwent an internal reorganization of its wholesale and distribution
business in order to prepare for certain anticipated business transactions. This reorganization
allowed, under Italian tax law, a step up in the tax basis of the assets involved. This step up
will allow for additional fixed asset depreciation in future years. The tax benefits associated
with this step up are reflected above in the surplus on business assignment line in the table
above. Two subsidiaries of the Company that operate in the Longarone area were entitled to income tax
exemptions from both national corporate income taxes and local income taxes under the Vajont
Relief Program that the Italian Government implemented under an incentive program for the
Longarone area as part of a package of relief measures after the Vajont dam catastrophe in 1963.
These exemptions expired in September 2001 and in April 2003. Tax years for the constituent companies in the Group are open from 1997 and are subject to review
by the pertinent tax authorities. Management and its legal advisors do not believe that any
significant liabilities will arise from future tax reviews. 12. EMPLOYEE BENEFITS Italian companies in the Group recognized employee benefit costs in accordance with Italian
severance pay statutes and certain foreign subsidiaries recognized pension costs related to their
pension plans. The total expense for employee benefits recognized for each of the three years in
the period ended December 31, 2004 are summarized as follows: 2002
    
    
    2003
    
    
    2004Italian termination indemnities
    
    
    1,437
    
    
    
    1,441
    
    
    
    1,404Defined benefit plan of D&A
    
    
    5,407
    
    
    
    5,686
    
    
    
    5,470Defined benefit plans of GO
    
    
    257
    
    
    
    151
    
    
    
    185Defined benefit plans in other countries
    
    
    197
    
    
    
    309
    
    
    
    62Defined contribution plans of D&A and GO
    
    
    805
    
    
    
    880
    
    
    
    1,0298,103
    
    
    
    8,467
    
    
    
    8,150
 The liabilities reported in the balance sheet at December 31, 2003 and 2004 pertaining to these
employee benefits are summarized as follows: 2003
    
    
    2004Italian termination indemnities
    
    
    6,315
    
    
    
    6,912Defined benefit plans of GO
    
    
    2,547
    
    
    
    2,405Defined benefit plan of D&A
    
    
    
    
    
    
    658Defined benefit plans in other countries
    
    
    893
    
    
    
    1679,755
    
    
    
    10,142
 Additional information with respect to Italian termination indemnities and the pension plans of
companies within the Group is provided below: F-20




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) Liabilities for Italian Termination Indemnities The liability for termination indemnities relates to the Companys employees at its Italian
operations. In accordance with the Italian severance pay statutes, an employee benefit is accrued
for service to date and is payable immediately upon separation. The termination indemnity
liability is calculated in accordance with local civil and labor laws based on each employees
length of service, employment category and remuneration. The termination liability is adjusted
annually by a cost of living index provided by the Italian Government. There is no funding
requirement associated with the liability. The liability recorded in the balance sheet is the
amount that the employee would be entitled to if the employee were to separate immediately. The
provisions charged to earnings for 2002, 2003 and 2004 were  1,437,  1,441 and  1,404,
respectively. Defined Benefit and Pension plans D&A, an entity acquired on December 2, 1998, has a defined benefit pension plan covering some of
its employees that is funded. The benefits are based on years of service and the employees
compensation during a period up to the last seven years of employment. Contributions are intended
to provide not only for benefits attributed to service to date but also for those expected to be
earned in the future. At the date of acquisition the projected benefit obligation for service
rendered to date and the value of the plan assets were stated at fair value and the amount of plan
assets in excess of the projected benefit obligation was recorded as a prepaid pension cost. The following tables summarize the components of net benefit expense recognized in the
consolidated statement of income for the years ended December 31, 2002, 2003 and 2004 and the
funded status and amounts recognized in the consolidated balance sheets at December 31, 2003 and
2004. Components of net periodic benefit cost for years ended December 31, are as follows: 2002
    
    
    2003
    
    
    2004Service benefit-cost: benefits earned during the year
    
    
    5,089
    
    
    
    2,890
    
    
    
    2,210Interest cost on projected benefit obligation
    
    
    9,383
    
    
    
    8,526
    
    
    
    9,430Expected return on plan assets
    
    
    (9,860
    )
    
    
    (7,659
    )
    
    
    (8,251
    )Amortization of unrecognized gain/loss
    
    
    795
    
    
    
    1,929
    
    
    
    2,081Net periodic benefit cost
    
    
    5,407
    
    
    
    5,686
    
    
    
    5,470
 The cost of providing benefits under the plan is determined using the projected unit credit
actuarial valuation method. Amortization of unrecognized net gain or loss is computed over the
average remaining service period of active employees expected to receive benefits under the plan.
The principal weighted average assumptions used in making the actuarial valuations are as follows: 2002
    
    
    2003
    
    
    2004Discount rate
    
    
    5.75
    %
    
    
    5.50
    %
    
    
    5.25
    %Expected long-term return on plan assets
    
    
    6.50
    %
    
    
    6.25
    %
    
    
    6.10
    %Rate of compensation increase
    
    
    3.30
    %
    
    
    3.25
    %
    
    
    3.25
    %
 F-21




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) Funded status of the pension plan is as presented in the tables below: December 31,2003
    
    
    2004Accumulated benefit obligation
    
    
    145,148
    
    
    
    155,450Fair value of plan assets
    
    
    127,412
    
    
    
    140,274Excess (deficit) of fair value of plan assets over accumulated
benefit obligation
    
    
    (17,736
    )
    
    
    (15,176
    )Changes in
projected benefit obligationat beginning of year
    
    
    159,723
    
    
    
    165,863Service cost
    
    
    2,890
    
    
    
    2,210Interest cost
    
    
    8,526
    
    
    
    9,430Plan participants contributions
    
    
    1,749
    
    
    
    1,577Actuarial (gain) loss
    
    
    9,957
    
    
    
    4,907Benefits paid
    
    
    (4,335
    )
    
    
    (4,420
    )Foreign currency translation adjustment
    
    
    (12,647
    )
    
    
    (573
    )Benefits obligation at the end of year
    
    
    165,863
    
    
    
    178,994
 Change in plan assets
     (invested primarily in United Kingdom stocks and bonds) 2003
    
    
    2004Fair value of plan assets at beginning of year
    
    
    123,751
    
    
    
    127,412Actual returns on assets  gain (loss)
    
    
    12,948
    
    
    
    13,291Companys contributions
    
    
    3,078
    
    
    
    2,962Plan participants contributions
    
    
    1,749
    
    
    
    1,577Benefits paid
    
    
    (4,335
    )
    
    
    (4,420
    )Foreign currency translation adjustments
    
    
    (9,779
    )
    
    
    (548
    )Fair value of plan assets at end of year
    
    
    127,412
    
    
    
    140,274Funded status of the plan over-funded (under-funded)
    
    
    (38,451
    )
    
    
    (38,720
    )Unrecognized net (gain) loss
    
    
    40,295
    
    
    
    38,062Foreign currency translation adjustments
    
    
    39
    
    
    
    Prepaid benefit/(accrued pension cost)
    
    
    1,883
    
    
    
    (658
    )
 The amount of the prepaid benefit/(accrued pension cost) has been classified in the consolidated
balance sheets as a prepaid current asset or liability. F-22




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) The following table summarizes, by asset category, the percentage of the fair value of total plan
assets held: December 31,2003
    
    
    2004Equity securities
    
    
    51.0
    %
    
    
    58,5
    %Debt securities
    
    
    48.9
    %
    
    
    41,2
    %Other (Cash)
    
    
    0.1
    %
    
    
    0.3
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 The trustee board has set the investment policy with regard to the pension plans liabilities and
funding level. At December 31, 2004 there was only one fund manager Legal & General, with
benchmark asset allocations as follows: Legal & General Equity securities
    
    
    58,0
    %Debt securities
    
    
    42,0
    %
 The investment policy broadly matches pensions already in payment with debt securities (which
include fixed interest and index-linked gilts and government bonds), and aims to meet the projected
liabilities for non-pensioners by using an appropriate combination of debt and equity securities.
The trustee board monitors closely the risk/return profile of the plans investments and has an
arrangement in place that could lead to a request for additional contributions from the Company if
the risk/return profile exceeds a pre-determined level. The Legal and General mandate is to track relevant indices. There are control ranges in place to
ensure that the fund manager does not depart significantly from the trustees overall benchmark,
and therefore to reduce the risk of over-concentration in one area. The trustee board reviews the fund managers performance and reviews its own investment policy
regularly, using independent professional advice. The trustees investment powers are set out in
the schemes Trust Deed and Rules. The expected rate of return for the year has been calculated by assuming that equity securities
will return 7% and debt securities will return 5%. These expected returns are based on the current
yields on long-dated gilts and bonds, with an addition for expected returns from equity securities. The Company expects to contribute GBP Sterling 2.1 million ( 3.0 million) to its defined benefit
pension plan in 2005. F-23




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) According to the latest actuarial valuation, the following benefit payments from the pension fund
are expected to be paid in the periods indicated on the basis of the membership profile at March
31, 2002. This projection allows for members to take tax-free cash sums on retirement, assuming
all members retire at age 60, and also allows for future service of current active members: 2005
    
    
    4,1132006
    
    
    4,8222007
    
    
    4,6812008
    
    
    5,3902009
    
    
    5,673Years 2010-2014
    
    
    30,495
 GO has defined benefit plans covering certain executives that are not funded at December 31, 2003
and 2004. The present value of the benefit obligations at December 31, 2003 and 2004 was  2,547
and  2,405, respectively. The net benefit costs accrued in 2002, 2003 and 2004 were  257,  151
and  185, respectively and the benefits paid in 2002, 2003 and 2004 were 1,079,  257 and  327,
respectively. The principal weighted average assumptions used in making the actuarial valuations
at December 31, 2003 and 2004 were a discount rate of 5.0% and a rate of compensation increase of
3.0% and 3.3%, respectively. The defined benefit plans in other countries are in Japan, France and
Greece and each of these plans is unfunded. Defined Contribution Plans D&A and GO make contributions to defined contribution plans that are based on a percentage of
employee compensation. The amounts of pension expense recognized for those plans in 2002, 2003,
and 2004 were  805,  880 and  1,029, respectively.  13.

STOCK OPTIONS At an extraordinary shareholders meeting held on May 4, 1999 the Board of Directors was
authorized to grant stock options for 2,325,000 shares to certain key employees, and the Board was
also authorized to increase the Companys authorized and issued share capital by up to 2,600,000
shares in the event such options were exercised. During 1999 the Board granted options for
2,325,000 shares with an exercise price of U.S.$ 6.00 per share, which was slightly more than the
fair market price of the shares on the date of the grant of the options. During 1999, options for
250,000 shares lapsed due to employee resignations. At December 31, 1999 the 2,075,000 options
granted and outstanding were exercisable from 2000 through 2003. At an extraordinary shareholders meeting held on November 17, 2000 a new stock option plan was
approved to replace the plan implemented in 1999. The option holders in that plan all accepted
conversion to the plan approved in the year 2000. Between January 1, 2000 and November 17, 2000,
225,000 options lapsed due to employee resignations, leaving options for 1,850,000 shares
outstanding as of November 17, 2000. Under the terms of the new plan 851,000 options were granted
(the 1,850,000 existing options were converted in the ratio of .46 new options for each option
held) at an exercise price of U.S$ 1.00 per share, which was less than the fair value of the stock
at the grant date, and the life of the awards was extended by one year. Also, on November 17,
2000, an additional 348,400 options were granted at an exercise price of U.S.$ 1.00 per share. At
the same shareholders F-24




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) meeting the authorized share capital increase was reduced to 1,300,000 shares. In 2004, no
additional options were granted, 227,700 options were forfeited and the 352,200 options
outstanding at December 31, 2004 expired. The maximum number of options set forth above were eligible for exercise if the price of the
Companys ADRs on the NYSE has reached more than U.S.$ 10.00. If the ADR price during the exercise
period had fallen between $ 6.25 and $ 10.00 per share 20% to 90% could be exercised; none of the
options could be exercised in the event the share price was below U.S.$ 6.25 throughout the
period. The average price of the Companys ADRs on the NYSE in 2004 was U.S.$ 6.30. Any
outstanding options not exercised in any year could be carried forward and exercised in a
subsequent year providing the ADR price reached the set targets.  14.

OTHER NON-CURRENT LIABILITIES Other non-current liabilities consisted of the following: December 31,2003
    
    
    2004Minority interests
    
    
    1,619
    
    
    
    1,355Accrual for expected losses on contractual obligation
for shops that are closed and non-operating
    
    
    2,281
    
    
    
    2,106Agents termination indemnity
    
    
    1,131
    
    
    
    1,597Other
    
    
    2,212
    
    
    
    2,1427,243
    
    
    
    7,200
  15.

SHAREHOLDERS EQUITY Italian law requires that 5% of a companys net income be retained as a legal reserve, until such
reserve equals 20% of share capital. Included in retained earnings
are legal reserves of  2,325
and  2,349 at December 31, 2003 and 2004, respectively, pertaining to the Groups Italian
companies. This reserve is not available for distribution. Retained earnings which could be available for distribution to shareholders are those recorded by
the Groups constituent companies in their individual financial statements. Such retained
earnings amount in aggregate to  310,624 and  332,511 at December 31, 2003 and 2004,
respectively. No provision has been made in 2003 and 2004 for income taxes on the following components of
shareholders equity:  a.

Revaluation reserve not affected by the equalization tax amounting to  5,995 that would be
subject to taxes of  1,020, since no provision is required under current Italian GAAP.b.

Undistributed earnings of Spanish subsidiaries, amounting to  3,651 and  3,651 in 2003 and
2004, respectively, would be subject to taxes of  365 in 2003 and 2004, respectively, in
case of distribution and undistributed earnings of British subsidiaries, amounting to 
49,298 and  47,809 in 2003 and 2004, respectively, would be subject to taxes of  813 and 
789 in 2003 and 2004, respectively, in case of distribution. F-25




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)    16.

COMMITMENTS AND CONTINGENCIES Lease commitments D&A leases property, computer hardware and cars and GO leases property under non-cancelable
operating leases. Other lease commitments relate to the rental of buildings by distribution
subsidiaries. Rental expense for the years 2002, 2003 and 2004 amounted to approximately  26,316,
 26,596 and  28,440 respectively. At December 31, 2004 the future lease payments under such
operating leases are as follows: Year
    
    D&A
    
    
    GO
    
    
    Other
    
    
    Total2005
    
    
    20,216
    
    
    
    3,684
    
    
    
    755
    
    
    
    24,6552006
    
    
    18,965
    
    
    
    2,973
    
    
    
    660
    
    
    
    22,5982007
    
    
    17,407
    
    
    
    2,316
    
    
    
    543
    
    
    
    20,2662008
    
    
    16,209
    
    
    
    1,949
    
    
    
    385
    
    
    
    18,5432009
    
    
    14,990
    
    
    
    1,106
    
    
    
    384
    
    
    
    16,480Thereafter
    
    
    57,104
    
    
    
    760
    
    
    
    
    
    
    
    57,864Total
    
    
    144,891
    
    
    
    12,788
    
    
    
    2,727
    
    
    
    160,406
 Royalty Agreements The Group has agreements with certain designers for the use of their trademarks in the production
of fashion eyewear. Such agreements require the Company to pay royalties at various percentages
of net sales. Certain royalty agreements expire in 2005, 2006, 2007, 2008, 2009 and 2010. Others
are renewable at the option of either party. Royalty expenses were  7,463,  7,052 and  5,213 in 2002, 2003 and 2004, respectively. The future minimum payments for royalties and advertising expenses required under existing royalty
contracts are the following: Year
    
    Royalties
    
    
    Advertising2005
    
    
    3,932
    
    
    
    1,9912006
    
    
    3,324
    
    
    
    1,7222007
    
    
    3,116
    
    
    
    1,0552008
    
    
    3,900
    
    
    
    1,3152009
    
    
    4,657
    
    
    
    1,508Thereafter
    
    
    2,102
    
    
    
    1,517Total
    
    
    21,031
    
    
    
    9,108
 Sponsorship agreements The Group has a sponsorship agreement with a soccer player, expiring in 2006, and a similar
agreement with a racing driver expiring in 2005. The future minimum payments on these contracts
are the following: Year2005
    
    
    7502006
    
    
    500Total
    
    
    1,250
 F-26




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) Litigation The Company is involved in legal and tax proceedings arising in the normal course of business.
Management believes that, based on advice of legal counsel, the outcome of these proceedings will
not have any material adverse effect on the Companys financial statements.  17.

SEGMENT INFORMATION The Companys business consists of designing, manufacturing, distributing and selling premium price
sunglasses and prescription eyeglass frames and lenses. Management utilizes more than one measurement and multiple types of data to measure segment
performance and to allocate resources to business divisions. However, the most heavily relied upon
measurements are consistent with the Companys consolidated financial statements and, accordingly,
are reported on the same basis herein. Management evaluates the performance of its segments and
allocates resources to them based primarily on actual and expected operating profitability.
Intersegment sales are generally accounted for at prices comparable to those for sales to
unaffiliated customers, and are eliminated in consolidation. The accounting policies of the
segments are the same as those described in the summary of significant accounting policies
described in Note 2. Certain items relate to the Companys headquarters operations and are not allocated to the
segments. These primarily include the net cost of the Companys interest expense and other items.
Management views interest income and expense as corporate financing costs and not as a cost of a
particular business segment. In addition, income taxes are not viewed internally on a segment
basis but rather as a cost of the taxing jurisdiction in which the relevant individual companies
operate. Wholesale and Manufacturing:the Company distributes its manufactured products through its network
of sales representatives in Italy and the countries in which its distribution subsidiaries are
based, and through independent distributors. This segment includes De Rigo Vision S.p.A. and all of
its controlled distribution subsidiaries. Retailing:the Companys retailing segment consists of the sale of optical frames and lenses for
prescription eyeglasses and fashion sunglasses (as well as contact lenses and other optical
products), together with the provision of related professional consulting and aftercare services,
through the network of stores operated by the Groups two retail chains, D&A, a leading retailer in
the British optical market, and General Optica, the leading optical chain in Spain, which also has
a presence in Portugal. EID:The Companys EID segment distributed Prada-branded eyewear exclusively through a network of
joint venture subsidiaries with Prada. EID was sold on July 23, 2003. The segments results through
the date of disposal are shown in the tables below. F-27




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) Wholesale and2002
    
    Manufacturing
    
    
    Retailing
    
    
    EID
    
    
    TotalSales to third parties
    
    
    121,709
    
    
    
    359,605
    
    
    
    31,145
    
    
    
    512,459Intersegment sales
    
    
    19,390
    
    
    
    2
    
    
    
    96
    
    
    
    19,488Income from operations before
depreciation and amortization
    
    
    11,472
    
    
    
    32,237
    
    
    
    570
    
    
    
    44,279Depreciation
    
    
    2,992
    
    
    
    14,135
    
    
    
    1,212
    
    
    
    18,339Amortization of goodwill
    
    
    273
    
    
    
    6,134
    
    
    
    
    
    
    
    6,407Amortization of other intangibles
    
    
    1,020
    
    
    
    1,522
    
    
    
    264
    
    
    
    2,806Income (loss) from operations
    
    
    7,187
    
    
    
    10,446
    
    
    
    (906
    )
    
    
    16,727Identifiable long-lived assets
    
    
    26,758
    
    
    
    215,746
    
    
    
    1,914
    
    
    
    244,418Total assets
    
    
    152,468
    
    
    
    256,772
    
    
    
    30,661
    
    
    
    439,901Capital expenditures and acquisitions
    
    
    3,384
    
    
    
    13,525
    
    
    
    1,170
    
    
    
    18,079
 Wholesale and2003
    
    Manufacturing
    
    
    Retailing
    
    
    EID
    
    
    TotalSales to third parties
    
    
    123,693
    
    
    
    361,499
    
    
    
    19,609
    
    
    
    504,801Intersegment sales
    
    
    12,533
    
    
    
    2
    
    
    
    212
    
    
    
    12,747Income from operations before
depreciation and amortization
    
    
    18,423
    
    
    
    31,153
    
    
    
    2,230
    
    
    
    51,806Depreciation
    
    
    3,005
    
    
    
    14,321
    
    
    
    409
    
    
    
    17,735Amortization of goodwill
    
    
    815
    
    
    
    5,985
    
    
    
    
    
    
    
    6,800Amortization of other intangibles
    
    
    1,022
    
    
    
    1,265
    
    
    
    130
    
    
    
    2,417Income (loss) from operations
    
    
    13,581
    
    
    
    9,582
    
    
    
    1,691
    
    
    
    24,854Identifiable long-lived assets
    
    
    25,245
    
    
    
    195,293
    
    
    
    
    
    
    
    220,538Total assets
    
    
    141,974
    
    
    
    234,913
    
    
    
    
    
    
    
    376,887Capital expenditures and acquisitions
    
    
    3,069
    
    
    
    9,323
    
    
    
    165
    
    
    
    12,557
 Wholesale and2004
    
    Manufacturing
    
    
    Retailing
    
    
    EID
    
    
    TotalSales to third parties
    
    
    124,593
    
    
    
    389,791
    
    
    
    
    
    
    
    514,384Intersegment sales
    
    
    9,890
    
    
    
    1
    
    
    
    
    
    
    
    9,891Income from operations before
depreciation and amortization
    
    
    21,355
    
    
    
    34,369
    
    
    
    
    
    
    
    55,724Depreciation
    
    
    3,846
    
    
    
    14,590
    
    
    
    
    
    
    
    18,436Amortization of goodwill
    
    
    239
    
    
    
    6,014
    
    
    
    
    
    
    
    6,253Amortization of other intangibles
    
    
    1,038
    
    
    
    1,172
    
    
    
    
    
    
    
    2,210Income (loss) from operations
    
    
    16,232
    
    
    
    12,593
    
    
    
    
    
    
    
    28,825Identifiable long-lived assets
    
    
    43,801
    
    
    
    191,280
    
    
    
    
    
    
    
    235,081Total assets
    
    
    152,134
    
    
    
    242,430
    
    
    
    
    
    
    
    394,564Capital expenditures and acquisitions
    
    
    2,558
    
    
    
    17,153
    
    
    
    
    
    
    
    19,711
 An analysis of sales and long-lived assets by both geographic area and segment is the
following: F-28




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) Wholesale and2002
    
    Manufacturing
    
    
    Retailing
    
    
    EID
    
    
    TotalSales to third parties by geographic areaItaly and other European countries
    
    
    82,590
    
    
    
    359,605
    
    
    
    21,679
    
    
    
    463,874Americas
    
    
    9,343
    
    
    
    
    
    
    
    2,622
    
    
    
    11,965Rest of the world
    
    
    29,776
    
    
    
    
    
    
    
    6,844
    
    
    
    36,620Total
    
    
    121,709
    
    
    
    359,605
    
    
    
    31,145
    
    
    
    512,459Long-lived assets based on a physical
locationItaly and other European countries
    
    
    26,369
    
    
    
    215,746
    
    
    
    1,914
    
    
    
    244,029Americas
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rest of the world
    
    
    389
    
    
    
    
    
    
    
    
    
    
    
    389Total
    
    
    26,758
    
    
    

    215,746
    
    
    
    1,914
    
    
    
    244,418
 Retailing includes sales to third parties amounting to  123,366 and  236,239 in Spain and
the UK, respectively. Long-lived assets for retailing amount to  141,743 and  74,003 in Spain
and the UK, respectively. Wholesale and2003
    
    Manufacturing
    
    
    Retailing
    
    
    EID
    
    
    TotalSales to third parties by geographic areaItaly and other European countries
    
    
    80,255
    
    
    
    361,499
    
    
    
    12,129
    
    
    
    453,883Americas
    
    
    8,204
    
    
    
    
    
    
    
    3,747
    
    
    
    11,951Rest of the world
    
    
    35,234
    
    
    
    
    
    
    
    3,733
    
    
    
    38,967Total
    
    
    123,693
    
    
    
    361,499
    
    
    
    19,609
    
    
    
    504,801Long-lived assets based on a physical
locationItaly and other European countries
    
    
    24,926
    
    
    
    195,293
    
    
    
    
    
    
    
    220,219Americas
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rest of the world
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    319Total
    
    
    25,245
    
    
    
    195,293
    
    
    
    
    
    
    
    220,538
 Retailing includes sales to third parties amounting to  130,690 and  230,809 in Spain and
the UK, respectively. Long-lived assets for retailing amount to  136,632 and  58,661 in Spain
and the UK, respectively. Wholesale and2004
    
    Manufacturing
    
    
    Retailing
    
    
    EID
    
    
    TotalSales to third parties by geographic areaItaly and other European countries
    
    
    77,034
    
    
    
    389,791
    
    
    
    
    
    
    
    466,825Americas
    
    
    7,905
    
    
    
    
    
    
    
    
    
    
    
    7,905Rest of the world
    
    
    39,654
    
    
    
    
    
    
    
    
    
    
    
    39,654Total
    
    
    124,593
    
    
    
    389,791
    
    
    
    
    
    
    
    514,384Long-lived assets based on a physical
locationItaly and other European countries
    
    
    43,537
    
    
    
    191,280
    
    
    
    
    
    
    
    234,817Americas
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rest of the world
    
    
    264
    
    
    
    
    
    
    
    
    
    
    
    264Total
    
    
    43,801
    
    
    
    191,280
    
    
    
    
    
    
    
    235,081
 F-29




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated) Retailing includes sales to third parties amounting to  140,944 and  248,847 in Spain and
the UK, respectively. Long-lived assets for retailing amount to  132,413 and  58,867 in Spain
and the UK, respectively.  18.

RELATED PARTY TRANSACTIONS AND MINORITY INTERESTS Related Party Transactions- Certain of the Companys facilities in Longarone and Limana were
constructed in the years 1992 through 2002 by Impresa Edile F.lli De Rigo S.r.l., a construction
company which is wholly owned by Mr. Walter De Rigo. The related construction costs through
December 31, 2004, which have been capitalized as buildings amounted to  2,418. In the year 2000, EID, a 51% owned subsidiary that distributed sunglasses and eyeglasses under the
Prada name, started operations. The Prada Group owned the remaining 49% interest in EID. During
the years 2002 and 2003, EID had commercial transactions with companies within the Prada Group.
These transactions were represented by sales amounting to  2,787 and  1,210, and paid management
fees, royalties and commissions amounting to  4,089 and  2,307 in 2002 and 2003, respectively.
In addition, in 2002 and 2003, EID accounted for  119 and  60, respectively, in rental expenses
relating to the rental of a building in Longarone from Surfrigo, a company owned by the De Rigo
brothers. As described in Note 3, the Company sold its 51% interest in EID to the Prada Group on
July 23, 2003 realizing a gain of  11,751. In December 2003, the Company sold a building to an entity controlled by the De Rigo brothers. The
disposal was made at book value. As mentioned in Note 3 above, on June 30, 2004, the Group sold to De Rigo Holding BV its 100%
interest in De Rigo Nederland and De Rigo Singapore for cash consideration of  580 realizing a
gain of  62. The two companies are no longer operative in the optical business. During 2004, De Rigo Vision accounted for  6 in rental expenses relating to the rental of a
building in Longarone from De Rigo Refrigeration (previously named Surfrigo), a company which is
owned by the De Rigo brothers. Minority Interests- The charge to income in 2004 of  434 primarily arises from profits of De
Rigo Hellas, De Rigo UK, De Rigo HK and De Rigo Japan to holders of minority interests in those
companies. The charge to income in 2003 of  4,425 primarily arises in relation to profits at EID (through
the date of its disposal) and De Rigo Hellas attributable to holders of minority interests in
those companies. The minority interest credit to income in 2002 of  922 primarily relates to losses of EID and De
Rigo Deutschland.  19.

RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA The Companys accounting policies are in accordance with Italian GAAP, which differs in certain
material respects from U.S. generally accepted accounting principles (U.S. GAAP). Differences
that have a significant effect on consolidated net income and shareholders equity are as follows:  (a)

Sale of the Companys shares to the Managing Director- In October 1994, the De Rigo
brothers granted an option offering 3% of the Ordinary Shares they held in the Company to its
Managing Director. Under Italian GAAP, this transaction was considered a transaction between
shareholders and therefore not F-30




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DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  reported in the consolidated financial statements. Under U.S. GAAP, the benefit (measured
by the difference between the fair value of the stock, to which the option refers, and the
exercise price) received of  9,554 by the Managing Director from the transaction was
required to be reported as a charge to 1994 income. Consequently, in the reconciliations of
shareholders equity as at December 31, 2002, 2003 and 2004 the amount of  9,554 was
recorded as a charge to retained earnings with an offsetting credit of  9,554 to
additional paid in capital.(b)

Revaluation of assets prior to 1992- Certain assets were revalued by the Company and two
of its Italian subsidiaries to amounts in excess of historical cost. These revaluations,
which were either authorized or required by Italian law, are permissible under Italian GAAP.Assets revalued under Italian GAAPare depreciated over their remaining useful lives based
on their revalued basis. U.S. GAAPdoes not permit the revaluation of such assets.
Accordingly, the increases in shareholders equity and the related increase in depreciation
expense occurring as a result of such revaluations have been reversed in the accompanying
reconciliation for all periods presented.No deferred tax liabilities have been provided for on the revaluation reserve mentioned in
Note 15 point (a), as such liabilities are not required to be provided for in accordance
with U.S. GAAP, because these revaluations were all made prior to December 15, 1992, the
effective date for applying existing U.S. accounting standards with respect to accounting
for income taxes.(c)

Revaluation of trademarks in 2001- Under Italian GAAPit is permitted to recognize the
revaluation of assets for financial accounting purposes as well as for tax purposes and to
recognize as a charge to revaluation reserve the amount of the tax liability recorded that is
to be paid over 3 years. Under U.S. GAAPsuch revaluations are not recognized in the
financial statements and the tax charge is not recorded as a charge to retained earnings, but
the tax effects of the revaluation are recognized. Accordingly, in the U.S. GAAP
reconciliation adjustments have been made to: (a) reverse the revaluation of trademarks made
in 2001 against trademarks and the revaluation reserve; and (b) recognize the tax effects of
the revaluation by (i) reclassifying the charge to revaluation reserve for tax payable on the
revaluation to the current tax provision, (ii) recognizing a deferred tax asset and a credit
to the deferred tax provision to record the tax effects of the temporary difference between
the Italian tax basis and the U.S. book basis of the trademarks that was created by the
revaluation; (iii) recognizing a deferred tax liability and a charge to the deferred tax
provision to record the tax to be paid upon distribution of the revaluation reserve recorded
in the Italian financial statements and (iv) reverse the amortization of trademarks
revaluation. The net tax benefit resulting from the revaluation permitted by the applicable
tax law was recognized in the statement of income for 2001, the year in which the revaluation
was made.(d)

Goodwill amortization- Italian GAAP requires that goodwill related to assets be amortized
over the assets estimated economic life. In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142 Goodwill
and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 changed the accounting for goodwill from an amortization method to an
impairment-only approach based on the supposition that goodwill is not a wasting asset that
requires periodic cost allocation. Thus, amortization of goodwill, including goodwill
recorded in past business combinations and amortization of intangibles with an indefinite
life, ceased upon adoption of SFAS No. 142. The Company adopted the provisions of SFAS No.
142 effective January 1, 2002. All goodwill is assigned to the reporting unit that benefits
from the synergies arising from each business combination. F-31




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DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  The Company completed the SFAS No. 142 transitional impairment test during the second
quarter of 2002 and concluded that there was no impairment of goodwill at that time, as the
fair value of its reporting units exceeded their carrying amounts as of January 1, 2002.
Therefore, the second step of the transitional impairment test required under SFAS No. 142
was not necessary.As required under SFAS No. 142, the Company performed the required annual impairment test
as of December 31, 2004. Based on that assessment, it was determined that no impairment
existed in the reporting units identified.The estimated aggregate amortization expense of Trademarks and Other intangible assets for
each of the five succeeding fiscal years is indicated below: Year2005
    
    
    1,4522006
    
    
    1,0562007
    
    
    8382008
    
    
    6932009
    
    
    549
  The weighted-average amortization period of Trademarks and Other intangible assets is
seven years.(e)

Public offering expenses- The expenses incurred in connection with the public offering of
October 1995 were capitalized under Italian GAAP and are being amortized over a five year
period. Under U.S. GAAP, such expenses are deducted from additional paid-in capital, net of
the estimated tax benefits to be received.(f)

Stock Options Under Italian GAAP, the Companys stock option plan does not result in
recognizing compensation expense in the Companys statement of income at either at the date
of the grant to employees or at the date when such options are exercised. Under U.S. GAAP,
the Company has elected to continue to account for its compensation expense for its stock
based compensation plan using the intrinsic value method in accordance with the provisions of
Accounting Practice Bulletin (APB) No. 25, Accounting for Stock Issued to Employees.
Under FASB Interpretation (FIN) 44, Accounting for Certain Transactions Involving Stock
Compensation, the modifications made in the plan in the year 2000 to reduce the exercise
price to an amount less than fair value at date of grant and to modify the terms for
exercising the options require that the awards be accounted for as a variable plan under APB
No. 25, which requires remeasurement of the intrinsic value of the award from the date of the
modification to the date the award is exercised, is forfeited, or expires unexercised.
Compensation expenses are recognized using the accelerated method allowed under FIN 44.The Company has adopted the disclosure requirements of FASB No. 123, Accounting for
Stock-based Compensationas amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosures (SFAS 148). When compensation expense has been
recorded in accordance with APB No. 25, SFAS No. 148 requires pro-forma disclosure of what
net income and earnings per share would have been had the Company also adopted SFAS 148 for
recording compensation expense.(g)

Call and put arrangements for sale by De Rigo Holding B.V. to Prada of unregistered shares
in the Company- In connection with establishing in July 1999 a subsidiary that used the
Prada trademarks, the Company entered into an agreement with Prada whereby (i) Prada had an
option to acquire, at any time between April 30, 2001 to June 30, 2001, 5% of the
unregistered shares that De Rigo Holding B.V. owned F-32




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DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  in the Company at an agreed upon price per share and (ii) De Rigo Holding B.V. had a put
arrangement that gave it the right to require Prada to buy the same number of shares in the
Company at the agreed upon price per share within the same time frame. Under Italian GAAP
the fair value of the options granted to Prada is considered a transaction between
shareholders and therefore is not reported in the financial statements. Under U. S. GAAP,
the fair value of the options granted is required to be accounted for as an intangible
asset by the Company. Consequently, in the reconciliation of shareholders equity as at
December 31, 1999 and net income for the year then ended, the fair value of the options
granted in the amount of  465 was recorded as an intangible asset with an offsetting
credit to additional paid in capital, and amortization of the intangible asset (which is
being amortized over five years). Arrangements whereby Prada could have acquired an
additional 10% of the Companys unregistered capital stock were contingent upon Prada
renewing the existing licensing agreements with the Companys subsidiary, EID for an
additional stipulated number of years, and expired due to the disposal of EID on July 23,
2003. Under U.S. GAAP, the fair value of the options granted should be recognized as an
intangible asset to be amortized over the period of the licensing agreement when such
license agreements are renewed.(h)

Deferred charges- In 2002 the Group deferred certain consulting expenses related to
production activity and will amortize these amounts over three years under Italian GAAP.
Under U.S. GAAP, these expenses would have been charged to income when incurred. The
accompanying reconciliation reflects the adjustment to expense these amounts.(i)

Additional deferred taxeswere provided on U.S. GAAP adjustments (b), (e), (g), (h), (j)
and (m).(j)

Pensions- The Group maintains a defined benefit pension plan for some U.K. employees of D&A
that is funded. Under Group accounting policies the recognition of a minimum pension
liability is not required. Under SFAS 87 it is a requirement that companies must recognize as
a minimum liability for any unfunded accumulated benefit obligation. The impact of this
minimum pension liability is to increase long-term obligations and decrease shareholders
equity.(k)

Earnings per Share Italian GAAP does not require disclosure of earnings per share. Under
U.S. GAAP,earnings per share are calculated and presented in accordance with FASB No. 128
Earnings Per Share (FASB 128). FASB No. 128 requires dual presentation of basic and
diluted earnings per share for all periods presented. Basic earnings per share is computed by
dividing the net income of the entity by the weighted average number of ordinary shares
outstanding for the period. The basic earnings per share calculation takes into account the
reacquired treasury shares, reducing the total weighted average shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue ordinary shares were exercised or converted into
ordinary shares or resulted in the issuance of ordinary shares that then shared in the
earnings of the entity. At December 31, 2002 and 2003, unexercised stock options to purchase
846,621 and 800,621 shares, respectively were outstanding. These securities could potentially
dilute basic earnings per share in the future and the number of incremental shares computed by
the treasury stock method were considered in the computation of diluted earnings per share and
per ADS for the years 2002 and 2003. In 2004 no additional options were granted and the
352,200 options outstanding at December 31, 2004 expired.(l)

Comprehensive income Italian GAAP does not require the presentation of comprehensive
income. Under U.S. GAAP, FASB No. 130 Comprehensive Income: Financial Statement
Presentation,which was adopted by the Company in December 1998,requires disclosure of
comprehensive income, which is defined as the change in net assets of a business enterprise
during a period from transactions and events and circumstances from non owner sources. F-33




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DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)  (m)

Marketable securities Under Italian GAAP, marketable securities are carried at the lower
of cost or market value. If securities are written-down, the original value of these
investments is reinstated in future accounting periods should the reasons for such writedowns
no longer apply. For U.S. GAAP purposes, the Company has applied the provisions of SFAS No.
115, Accounting for Certain Investment in Debt and Equity Securities (SFAS 115). Under
SFAS 115, the Company classifies its marketable securities as available for sale. Unrealized
gains and losses for securities classified as available for sale are included in
shareholders equity until the securities are sold or otherwise considered to be other than
temporary impaired. The effects of SFAS 115 on net income and shareholders equity have been
reflected in the reconciliation. The fair value of marketable securities as of December 31,
2002 is  1,907. No marketable securities existed at December 31, 2003 and 2004.(n)

Treasury stock In 2003 and 2004 De Rigo purchased 223,200 and 2,225,000 of its own ordinary
shares. Under Italian GAAP, these ordinary shares have been recorded at historical cost within
long-term assets, while under U.S. GAAP, the cost of the acquired shares is shown as a
deduction from shareholders equity.(o)

Impairment of long-lived assetsIn August 2001, the FASB issued SFAS No. 144
Accounting for the Impairment of Long-Lived Assets (SFAS 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. The Statement
applies to certain long-lived assets, including those reported as discontinued operations,
and develops one accounting model for long-lived assets to be disposed of by sale. SFAS 144
supersedes SFAS No. 121 Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of, and APB No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment. The Company
adopted the provisions of SFAS 144 effective January 1, 2002.SFAS 144 requires that long-lived assets to be disposed of by sale be measured at the lower
of carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. The Statement also changes the measurement
criteria for discontinued operations. SFAS 144 broadens the reporting of discontinued
operations to include the disposal of a component of an entity, provided that the
operations and cash flows of the component will be eliminated from the ongoing operations
of the entity and the entity will not have any significant continuing involvement in the
operations of the component. The Statement does not apply to investments in equity
investees. No write-downs of long-lived assets were recorded under SFAS 144 in 2002, 2003
or 2004.(p)

Derivative financial instruments Under Italian GAAP, if a derivative is designated as a
fair value hedge, changes in the fair value of the derivative and the related change in the
hedged item are recognized in the statement of income. If a derivative is designated as a
cash flow hedge, changes in the fair value of the derivative are recognized in the statement
of income when the hedged item effects operations. Changes in fair value of derivatives that
do not qualify as a hedge are recognized in the statement of income. Unrealized gains related
to the remeasurement at fair value of long-term derivative contracts are deferred until
realized. Effective January 1, 2001, the Group adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), and the corresponding amendments
and interpretations to this Statement. The Statement requires that all derivative financial
instruments be recognized in the financial statements and are to be measured at fair value
regardless of the purpose or intent of holding them. If the derivative is designated as a
fair value hedge, changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in net earnings (loss). If the derivative is
designated as a cash flow hedge, the effective portions of the change in the fair value of
the derivative are recorded in other comprehensive income (OCI) and are recognized in net
earnings (loss) when the F-34




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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)  hedged item affects operations. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in net earnings (loss) prior to the contracts expiration. If
the derivative used in an economic hedging relationship is not designated in an accounting
hedging relationship, changes in the fair value of the derivative are recognized in the
statement of income through the life of the contract.The Company did not formally designate exchange rate derivative contracts entered into
during the year ended December 31, 2002, 2003 and 2004 as fair value or cash flow hedges.
Accordingly, as required by SFAS 133, the fair value of such contracts have been recorded
on the balance sheet until the contracts are settled, and all changes in fair value of the
derivative instruments since the date of the derivative contracts have been recognized in
the current income for the year. Since under Italian GAAP all derivatives outstanding at
December 31, 2002, 2003 and 2004 were accounted for as ineffective hedges, no adjustment
was required to comply with the requirements of FASB No. 133.(q)

Consolidation of Ranieri Argentina S.A. The Company sold its 51% interest in Ranieri
Argentina S.A. in June 2002. For Italian GAAP purposes, the sale was effective retroactive to
January 1, 2002. Therefore, the results of operations through the date of sale were not
consolidated in the consolidated statement of income of the Company. U.S. GAAP requires that
the results of operations be consolidated through the date of sale. The Company has reviewed
the impact on the U.S. GAAP figures that would result from consolidation and determined that
the impact on sales, cost of sales, other operating costs, and other non-operating costs is
not significant.(r)

Discontinued operations As described in Note 3, the Company sold its 51%
interest in EID to the Prada Group on July 23, 2003. Under U.S. GAAP, EID is presented as a
discontinued operation in accordance with the guidance of SFAS 144. Based upon this guidance,
the results for all periods, including revenues and costs, of the sold businesses are removed
from the consolidated statements of operations and reported after income from continuing
operations. The accompanying reconciliation includes, in the discontinued operations line,
the effect of all line items associated with the disposed EID business.At the time of its sale on July 23, 2003, EIDs net assets consisted of: Current assets
    
    
    27,168Fixed assets, net
    
    
    962Other intangibles, net
    
    
    583Total assets disposed of
    
    
    28,713Total liabilities disposed of
    
    
    28,123Net assets disposed of
    
    
    590
  (s)

New accounting standards In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51 (FIN 46). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. F-35




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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)  In December 2003, the FASB issued Interpretation No. 46R (FIN 46R), a revision to FIN 46,
Consolidation of Variable Interest Entities. FIN 46R clarifies some of the provisions of
FIN 46 and exempts certain entities from its requirements. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46 as amended by FIN
46R have been applied as of January 1, 2004. The adoption of FIN 46 as amended by FIN 46R
did not have a material effect on the consolidated financial statements.In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150
establishes standards for classification and measurement of mandatorily redeemable financial
instruments, obligations to repurchase the issuers equity shares by transferring assets,
and certain obligations to issue a variable number of shares. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of fiscal 2004. The adoption of SFAS 150 did not have an effect
on the consolidated financial statements.In May 2003, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No.
01-8, Determining Whether an Arrangement Contains a Lease (EITF 01-8). EITF 01-8
provides guidance on how to determine whether an arrangement contains a lease that is within
the scope of FASB Statement No. 13, Accounting for Leases. EITF 01-8 is effective for
arrangements entered into or modified after the beginning of the reporting period that began
after May 28, 2003. The adoption of EITF 01-8 did not have an effect on the consolidated
financial statements.In March 2004, the EITF reached a consensus on EITF Issue 03-6 (EITF 03-6). Participating
Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share. The
consensus addresses how to determine whether a security should be considered a
participating security for purposes of computing earnings per share and how earnings
should be allocated to a participating security when using the two-class method for
computing basis earnings per share. The provisions of EITF 03-6 are effective for reporting
periods beginning after March 31, 2004. The adoption of this consensus is not expected to
have a material impact on the Companys results of operations, financial position and cash
flows.In December 2004, the FASB issued Statement 153 (SFAS 153), Exchanges of Nonmonetary
Assets  an amendment of APB Opinion No. 29. The Guidance in Accounting Principles Board
Opinion 29 (APB 29), Accounting for Nonmonetary Transactions, is based on the general
principle that exchanges of non-monetary assets should be measured based on the fair value
of the assets exchanged. The guidance in APB 29 included certain exceptions to that
principle. SFAS 153 amends APB 29 to eliminate the narrow exception for nonmonetary
exchanges of similar productive assets and replaces it with a broader exception for
exchanges of nonmonetary assets that do not have commercial substance (that is, transactions
where future cash flows are not expected to significantly change as a result of the
exchange). The Company will adopt the provisions of SFAS 153 for non-monetary asset exchange
transactions after December 31, 2005. The adoption of SFAS 153 is not expected to have a
material impact on the Companys consolidated financial position or results of operations.In December 2004, the FASB issued Statement 123 (revised 2004) (SFAS 123(R)), Share-Based
Payment. SFAS 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based
Compensation, which superseded APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123(R) requires all share-based awards to employees, including grants of
employee stock options, to be recognized in the financial statements based on their
grant-date fair values. The related compensation costs are to be recognized over the period
during which an employee is required to provide service in exchange for the award. Excess
tax benefits are to be recognized as an addition to paid-in capital and reflected as
financing F-36




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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)  cash inflows in the statement of cash flows. The Company will adopt the prospective
provisions of SFAS 123(R) to new and existing plans as of January 1, 2006. The grant-date
fair values of unvested awards that are outstanding on the date of adoption will be charged
to expense over their remaining vesting periods. The Company does not expect that the
adoption of SFAS 123(R) will have a material impact on its consolidated financial position
or results of operations. The following tables summarize those adjustments to consolidated net income and shareholders
equity that would be required if U.S. GAAP had been applied instead of Italian GAAP. NET INCOME for the years ended December 31, 2002
    
    
    2003
    
    
    2004Net income as reported per the consolidated statements of income
    
    
    10,645
    
    
    
    18,478
    
    
    
    14,478Adjustments required for U.S. GAAP
reporting purposes:(b)
    
    Elimination of depreciation relating to
revaluation of certain assets prior to
1992
    
    
    13
    
    
    
    13
    
    
    
    13(c)
    
    Recognize tax effects on reversal of
trademark revaluation at end of 2001(i) charge substitute tax to current
tax provision rather than revaluation
reserve
    
    
    
    
    
    
    
    
    
    
    (ii) recognize deferred tax asset on
trademark revaluation
    
    
    (294
    )
    
    
    (233
    )
    
    
    (188
    )(iii) recognize deferred tax liability
on revaluation reserve on Italian basis
    
    
    
    
    
    
    
    
    
    
    (iv) reversal of amortization of
trademarks revaluation
    
    
    504
    
    
    
    504
    
    
    
    504(d)
    
    Reversal of goodwill amortization
    
    
    6,407
    
    
    
    6,419
    
    
    
    6,253(f)
    
    Recognize stock compensation expense in
accordance with APB No. 25, net of
credit of  351,  47 and  0 in 2002,
2003 and 2004 respectively for the
reversal of stock option expense
recorded in prior periods on options
forfeited by the employees that left
the Company in that year
    
    
    
    
    
    
    (801
    )
    
    
    2,009(h)
    
    Deferred charges
    
    
    (178
    )
    
    
    59
    
    
    
    59(m)
    
    Marketable securities available for sale
    
    
    (111
    )
    
    
    111
    
    
    
    (o)
    
    Gain for disposal of De Rigo Nederland
    
    
    
    
    
    
    
    
    
    
    (62
    )(i)
    
    Deferred income taxes on (b), (h) and
(m) above after considering change in
tax rate on deferred tax for (c) in
2003.
    
    
    239
    
    
    
    (236
    )
    
    
    (27
    )Net income in accordance with U.S. GAAP before reconciliation
effects of discontinued operations
    
    
    17,225
    
    
    
    24,314
    
    
    
    23,039
 F - 37




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DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) Total effect of the reconciling differences on discontinued
operations  EID2002
    
    
    2003
    
    
    2004(g)
    
    Amortization of intangible asset in
respect of Pradas 5% options
    
    
    (97
    )
    
    
    (77
    )
    
    
    (i)
    
    Deferred income taxes on (g) above
    
    
    17
    
    
    
    13
    
    
    
    Total effect discontinued operations  EID
    
    
    (80
    )
    
    
    (64
    )
    
    
    Net income in accordance with U.S. GAAP
    
    
    17,145
    
    
    
    24,250
    
    
    
    23,039Earnings per share and per ADS:Numerator for the basic and diluted per-share and per ADS
computations for income from continuing operations:Net income from continuing operations (in Euro thousands)
    
    
    18,383
    
    
    
    16,486
    
    
    
    23,039DenominatorDenominator for basic per-share and per ADS computations for net
income from continuing operations  weighted average shares and
ADS shares
    
    
    44,688,415
    
    
    
    44,618,230
    
    
    
    43,503,858Effects of dilutive employee stock options
    
    
    701,097
    
    
    
    605,369
    
    
    
    608,152Denominator for diluted per-share and per ADS computations for net
income from continuing operations  adjusted weighted average
shares and ADS
    
    
    45,389,512
    
    
    
    45,223,599
    
    
    
    44,112,010Basic earnings per share and per ADS before discontinued operations
    
    0.41 Euro
    
    
    0.37 Euro
    
    
    0.53 EuroDiluted earnings per share and per ADS before discontinued
operations
    
    0.41 Euro
    
    
    0.37 Euro
    
    
    0.52 EuroBasic earnings per share and per ADS from discontinued operations
    
    (0.03) Euro
    
    
    0.17 Euro
    
    
     EuroDiluted earnings per share and per ADS from discontinued operations
    
    (0.03) Euro
    
    
    0.17 Euro
    
    
     EuroBasic earnings per share and per ADS
    
    0.38 Euro
    
    
    0.54 Euro
    
    
    0.53 EuroDiluted earnings per share and per ADS
    
    0.38 Euro
    
    
    0.54 Euro
    
    
    0.52 EuroDividends per share and per ADS
    
    0.13 Euro
    
    
    Nil
    
    
    Nil
 F - 38




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) SHAREHOLDERS EQUITY at December 31, 2002
    
    
    2003
    
    
    2004Balance as reported in
the consolidated financial statements
    
    
    212,117
    
    
    
    226,884
    
    
    
    241,409Adjustments required for U.S. GAAP reporting purposes:(a)
    
    Decrease in retained earnings as a result
of the charge to income for additional
compensation paid in 1994 by
shareholders to Managing Director
    
    
    (9,554
    )
    
    
    (9,554
    )
    
    
    (9,554
    )And concurrent increase in additional
paid-in capital
    
    
    9,554
    
    
    
    9,554
    
    
    
    9,554(b)
    
    Elimination of revaluations of certain
assets prior to 1992, net of accumulated
depreciation of  678,  691 and  704
in 2002, 2003, and 2004 respectively.
    
    
    (274
    )
    
    
    (261
    )
    
    
    (248
    )(c)
    
    Elimination of revaluation of trademarks
in 2001, net of accumulated amortization
of  504,  1,008 and  1,512 in 2002,
2003 and 2004, respectively.
    
    
    (4,539
    )
    
    
    (4,035
    )
    
    
    (3,531
    )(d)
    
    Reversal of goodwill amortization
    
    
    6,407
    
    
    
    12,826
    
    
    
    19,079(e)
    
    Elimination of amortization of offering
expenses, deferred for Italian purposes
    
    
    2,128
    
    
    
    2,128
    
    
    
    2,128(e)
    
    Offering expenses less estimated tax
benefits of  1,030 in 2002, 2003 and
2004 charged to paid in capital
    
    
    (1,098
    )
    
    
    (1,098
    )
    
    
    (1,098
    )(f)
    
    Reduce retained earnings for amount of
stock compensation
    
    
    (3,999
    )
    
    
    (4,800
    )
    
    
    (2,791
    )(f)
    
    Increase additional paid in capital for
accretion resulting from stock
compensation expense
    
    
    3,999
    
    
    
    4,800
    
    
    
    2,791(g)
    
    Increase in additional paid in capital
as a result of recording the fair value
of Pradas 5% options on the total
outstanding share capital
    
    
    465
    
    
    
    465
    
    
    
    465(g)
    
    Decrease in retained earnings as a result
of the charge to income for amortization
of the intangible asset arising on the
valuation of Pradas 5% options
    
    
    (388
    )
    
    
    (465
    )
    
    
    (465
    )(h)
    
    Deferred charges
    
    
    (178
    )
    
    
    (119
    )
    
    
    (60
    )(j)
    
    Recognition of minimum pension liability
    
    
    (22,137
    )
    
    
    (19,623
    )
    
    
    (14,518
    )(m)
    
    (Reduce)/Increase retained earnings for
marketable securities
    
    
    (111
    )
    
    
    111
    
    
    
    (m)
    
    Increase/(Reduce) Other Comprehensive
Income related to unrealized gains on
marketable securities
    
    
    111
    
    
    
    (111
    )
    
    
    (n)
    
    Treasury stock
    
    
    
    
    
    
    (753
    )
    
    
    (12,019
    )
 F - 39




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) 2002
    
    
    2003
    
    
    2004(o)
    
    Decrease in retained earnings as a
result of the elimination of the gain
for disposal of De Rigo Nederland to De
Rigo Holding BV.
    
    
    
    
    
    
    
    
    
    
    (62
    )And concurrent increase in additional
paid-in capital.
    
    
    
    
    
    
    
    
    
    
    62(i)
    
    Recognition of deferred income taxes on
(b), (e), (g), (h), (j) and (m) above
    
    
    5,987
    
    
    
    4,998
    
    
    
    3,439(c)
    
    Tax effect on elimination of trademarks
revaluation in 2001 (c) above, after
considering change in tax rate in 2002
to(i) recognize deferred tax asset on
revalued assets
    
    
    1,736
    
    
    
    1,503
    
    
    
    1,315(ii) recognize deferred tax liability
on revaluation reserve on
Italian basis
    
    
    (756
    )
    
    
    (706
    )
    
    
    (706
    )Balance at December 31, in accordance with U.S. GAAP
    
    
    199,470
    
    
    
    221,744
    
    
    
    235,190
 Condensed U.S. GAAP consolidated financial statements The condensed consolidated financial statements as of December 31, 2003 and 2004 and for the three
years in the period ended December 31, 2004 presented below have been prepared taking into effect
the principal differences between the De Rigo Groups accounting policies and U.S. GAAP discussed
above. BALANCE SHEET Year ended December 31,2002
    
    
    2003
    
    
    2004ASSETSCurrent Assets
    
    
    195,483
    
    
    
    156,393
    
    
    
    159,505Property Plant and equipment
    
    
    120,631
    
    
    
    108,822
    
    
    
    107,928Goodwill and intangible assets
    
    
    116,474
    
    
    
    112,563
    
    
    
    113,062Other Long-term Assets:Deferred tax assets
    
    
    10,135
    
    
    
    8,894
    
    
    
    17,689Other
    
    
    7,424
    
    
    
    5,404
    
    
    
    5,385Total assets
    
    
    450,147
    
    
    
    392,076
    
    
    
    403,569LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities
    
    
    200,342
    
    
    
    123,838
    
    
    
    125,637Termination indemnities and other employee benefits
    
    
    31,063
    
    
    
    29,378
    
    
    
    24,660Deferred income taxes
    
    
    10,068
    
    
    
    9,376
    
    
    
    10,541Long-term debt, less current portion
    
    
    696
    
    
    
    497
    
    
    
    341Other non-current liabilities
    
    
    7,179
    
    
    
    5,624
    
    
    
    5,845Minority Interests
    
    
    1,329
    
    
    
    1,619
    
    
    
    1,355Shareholders equity
    
    
    199,470
    
    
    
    221,744
    
    
    
    235,190Total
Liabilities and shareholders equity
    
    
    450,147
    
    
    
    392,076
    
    
    
    403,569
 F - 40




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) STATEMENT OF INCOME Year ended December 31,2002
    
    
    2003
    
    
    2004Net sales from continuing operations
    
    
    481,314
    
    
    
    485,192
    
    
    
    514,384Gross profit from continuing operations
    
    
    294,002
    
    
    
    293,409
    
    
    
    315,556Income from continuing operations
    
    
    24,379
    
    
    
    29,357
    
    
    
    37,663Other (income) expenses from continuing operations
    
    
    5,765
    
    
    
    (1,951
    )
    
    
    1,238Income from continuing operations before income taxes
and minority interests
    
    
    18,614
    
    
    
    31,308
    
    
    
    36,425Income taxes
    
    
    247
    
    
    
    14,422
    
    
    
    12,952Income from continuing operations before minority
interests
    
    
    18,367
    
    
    
    16,886
    
    
    
    23,473Minority interests
    
    
    (16
    )
    
    
    400
    
    
    
    434Net income from continuing operations
    
    
    18,383
    
    
    
    16,486
    
    
    
    23,039Discontinued operationsNet sales from discontinued operations
    
    
    31,145
    
    
    
    19,609
    
    
    
    Gross profit from discontinued operations
    
    
    15,084
    
    
    
    9,424
    
    
    
    Income (loss) from discontinued operations
    
    
    (1,003
    )
    
    
    1,614
    
    
    
    Other (income) expenses from discontinued operations
(including gain on disposal of  11,751 in 2003)
    
    
    1,304
    
    
    
    (11,144
    )
    
    
    Income (loss) from discontinued operations before
income taxes and minority interests
    
    
    (2,307
    )
    
    
    12,758
    
    
    
    Income taxes
    
    
    (163
    )
    
    
    969
    
    
    
    Income (loss) from discontinued operations before
minority interests
    
    
    (2,144
    )
    
    
    11,789
    
    
    
    Minority interests
    
    
    (906
    )
    
    
    4,025
    
    
    
    Net income (loss) from discontinued operations
    
    
    (1,238
    )
    
    
    7,764
    
    
    
    Net income in accordance with U.S. GAAP
    
    
    17,145
    
    
    
    24,250
    
    
    
    23,039
 Shareholders Equity Due to operating losses incurred by a subsidiary through December 31, 1993, the Company, pursuant
to Italian legal requirements, has eliminated losses reported for Italian GAAP purposes amounting
to  2,195 against additional paid in capital by the former shareholders of the subsidiary. For
U.S. GAAP financial reporting purposes, such F - 41




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(expressed in thousands of Euro (), except as otherwise indicated) operating losses would be reflected as a reduction of consolidated retained earnings, and the
amount of capital used to eliminate such losses would be reflected as additional paid-in capital. The components of shareholders equity at December 31, 2003 and 2004 are as follows: Italian
    
    
    
    
    
    
    U.S.2003
    
    GAAP
    
    
    Adjustments
    
    
    GAAPShare capital
    
    
    11,626
    
    
    
    
    
    
    
    11,626Treasury Shares
    
    
    
    
    
    
    (753
    )
    
    
    (753
    )Additional paid-in-capital
    
    
    54,490
    
    
    
    13,721
    
    
    
    68,211Retained earnings
    
    
    161,413
    
    
    
    665
    
    
    
    162,078Other comprehensive income
    
    
    (5,682
    )
    
    
    (13,736
    )
    
    
    (19,418
    )Revaluation reserves
    
    
    5,037
    
    
    
    (5,037
    )
    
    
    226,884
    
    
    
    (5,140
    )
    
    
    221,744
 Italian
    
    
    
    
    
    
    U.S.2004
    
    GAAP
    
    
    Adjustments
    
    
    GAAPShare capital
    
    
    11,683
    
    
    
    
    
    
    
    11,683Treasury Shares
    
    
    
    
    
    
    (12,019
    )
    
    
    (12,019
    )Additional paid-in-capital
    
    
    54,599
    
    
    
    11,650
    
    
    
    66,249Retained earnings
    
    
    175,891
    
    
    
    9,350
    
    
    
    185,241Other comprehensive income
    
    
    (5,801
    )
    
    
    (10,163
    )
    
    
    (15,964
    )Revaluation reserves
    
    
    5,037
    
    
    
    (5,037
    )
    
    
    241,409
    
    
    
    (6,219
    )
    
    
    235,190
 Pro-forma Information Regarding Net Income and Earnings Per Share and Per ADS required by FASB No.
123 FASB 123 requires that when APB 25 is applied in computing compensation cost for stock based
compensation that pro forma information as to net income and earnings per share be presented as if
the Company had accounted for its employee stock based compensation in accordance with FASB 123. The fair value of each stock option granted is estimated on the grant date using the
Black-Scholes option pricing model with the following weighted-average assumptions: Employee stock options
    
    2000 PlanExpected life of option
    
    4 yearsRisk free interest rates
    
    
    4.5
    %Volatility
    
    
    20
    %Dividend yield
    
    
    0
    %
 The weighted average estimated fair value of the options granted during fiscal 2000 amounted to 
8,971. As disclosed in Note 13 the options granted in 1999 were cancelled in connection with
adoption of the stock option plan approved in 2000. F - 42




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(expressed in thousands of Euro (), except as otherwise indicated) The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Because the Companys employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period. Had compensation costs related to the options granted in 2002, 2003 and 2004 been based on the
fair value at the grant dates, consistent with the provision of FASB 123, the Companys net
earnings and earnings per share would have decreased to the pro-forma amounts indicated below for
the years ended December 31, 2002, 2003 and 2004. 2002
    
    
    2003
    
    
    2004Net income from continuing
operations applicable to
ordinary shareholders:As reported on a U.S. GAAP basis
    
    
    18,383
    
    
    
    16,486
    
    
    
    23,039Add: Stock based compensation expense
recognized under intrinsic value
method
    
    
    
    
    
    
    801
    
    
    
    (2,009
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based for all awards
    
    
    (1,719
    )
    
    
    (1,048
    )
    
    
    1,235Pro-forma on a U.S. GAAP basis
    
    
    16,664
    
    
    
    16,239
    
    
    
    22,265
 Basic and diluted income per share and per ADS before discontinued operations: 2002
    
    
    2003
    
    
    2004Basic earnings per share
and per ADS before
discontinued operationsAs reported
    
    0.41 Euro
    
    0.37 Euro
    
    0.53 EuroPro-forma
    
    0.37 Euro
    
    0.36 Euro
    
    0.51 EuroDiluted earnings per share
and per ADS before
discontinued operationsAs reported
    
    0.41 Euro
    
    0.37 Euro
    
    0.52 EuroPro-forma
    
    0.37 Euro
    
    0.36 Euro
    
    0.50 Euro
 F - 43




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) 2002
    
    
    2003
    
    
    2004Net income applicable to
ordinary shareholders:As reported on a U.S. GAAP basis
    
    
    17,145
    
    
    
    24,250
    
    
    
    23,039Add: Stock based compensation
expense recognized under
intrinsic value method
    
    
    
    
    
    
    801
    
    
    
    (2,009
    )Deduct: Total stock-based
employee compensation expense
determined under fair value
based for all awards
    
    
    (1,719
    )
    
    
    (1,048
    )
    
    
    1,235Pro-forma on a U.S. GAAP basis
    
    
    15,426
    
    
    
    24,003
    
    
    
    22,265
 Basic and diluted income per share and per ADS: 2002
    
    2003
    
    2004Basic earnings per share and per ADSAs reported
    
    0.38 Euro
    
    0.54 Euro
    
    0.53 EuroPro-forma
    
    0.35 Euro
    
    0.54 Euro
    
    0.51 EuroDiluted earnings per share and per ADSAs reported
    
    0.38 Euro
    
    0.54 Euro
    
    0.52 EuroPro-forma
    
    0.34 Euro
    
    0.53 Euro
    
    0.50 Euro
 The effects of applying SFAS No. 123 in this pro forma disclosure should not be interpreted as
being indicative of future effects. Transactions in stock options, including the modification of the plan in the year 2000, are
presented in the following summary of the Companys stock option activity during the years ended
December 31, 2002, 2003 and 2004: Shares under
    
    
    Weighted averageOptions
    
    
    Exercise PriceOutstanding at January 1, 2002
    
    
    983,137
    
    
    
    U.S. $1.00Options granted
    
    
    Options exercised
    
    
    (62,852
    )
    
    
    U.S. $1.00Options forfeited
    
    
    (73,664
    )
    
    
    U.S. $1.00Outstanding at December 31, 2002
    
    
    846,621
    
    
    
    U.S. $1.00Options exercised
    
    
    
    
    
    
    U.S. $1.00Options forfeited
    
    
    (46,000
    )
    
    
    U.S. $1.00Outstanding at December 31, 2003
    
    
    800,621
    
    
    
    U.S. $1.00Options exercised
    
    
    (220,721
    )
    
    
    U.S. $1.00Options forfeited
    
    
    (227,700
    )
    
    
    U.S. $1.00Options expired
    
    
    (352,200
    )
    
    
    U.S. $1.00Outstanding at December 31, 2004
    
    
    
    
    
    
    U.S. $1.00Exercisable at December 31, 2004
    
    
    
    
    
    
    U.S. $1.00
 F - 44




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) Investments in debt securities All debt securities are classified as available-for-sale and U.S GAAP adjustments were made in
2002 to adjust the carrying basis to their fair values. No U.S GAAP adjustments were required at
December 31, 2001 because the carrying basis on an Italian GAAP basis approximated the fair value
of the assets. No marketable securities existed at December 31, 2003 and 2004. Comprehensive Income The components of accumulated other comprehensive income for a U.S. GAAP financial statements
presentation as of December 31, 2002, 2003 and 2004 are as follows: Currency
    
    
    
    
    
    
    Unrealized GainsTranslation
    
    
    
    
    
    
    on Available-for-Adjustments
    
    
    Pension
    
    
    Sale Securities perper financial
    
    
    minimum
    
    
    U.S. GAAPstatements
    
    
    liability
    
    
    adjustments
    
    
    TotalBalance at January 1, 2002
    
    
    1,239
    
    
    
    
    
    
    
    
    
    
    
    1,239Currency translation adjustment
    
    
    (3,210
    )
    
    
    
    
    
    
    
    
    
    
    (3,210
    )Unrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    111Recognition of pension minimum
liability
    
    
    
    
    
    
    (22,137
    )
    
    
    
    
    
    
    (22,137
    )Deferred taxes on pension
minimum liability and
unrealized gains on securities
    
    
    
    
    
    
    6,641
    
    
    
    (38
    )
    
    
    6,603Balance at December 31, 2002
    
    
    (1,971
    )
    
    
    (15,496
    )
    
    
    73
    
    
    
    (17,394
    )Currency translation adjustment
    
    
    (3,711
    )
    
    
    
    
    
    
    
    
    
    
    (3,711
    )Unrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    (111
    )Recognition of pension minimum
liability
    
    
    
    
    
    
    2,514
    
    
    
    
    
    
    
    2,514Deferred taxes on pension
minimum liability and
unrealized gains on securities
    
    
    
    
    
    
    (754
    )
    
    
    38
    
    
    
    (716
    )Balance at December 31, 2003
    
    
    (5,682
    )
    
    
    (13,736
    )
    
    
    
    
    
    
    (19,418
    )Currency translation adjustment
    
    
    (119
    )
    
    
    
    
    
    
    
    
    
    
    (119
    )Unrealized gains on securities
Recognition of pension minimum
liability
    
    
    
    
    
    
    5,105
    
    
    
     
    
    
    
    5,105Deferred taxes on pension
minimum liability and
unrealized gains on securities
    
    
    
    
    
    
    (1,531
    )
    
    
    
    
    
    
    (1,531
    )Balance at December 31, 2004
    
    
    (5,801
    )
    
    
    (10.162
    )
    
    
    
    
    
    
    (15,963
    )
 F - 45




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) Comprehensive income for each of the three years in the period ended December 31, 2004 is as
follows: 2002
    
    
    2003
    
    
    2004Net income per U.S. GAAP reconciliation
    
    
    17,145
    
    
    
    24,250
    
    
    
    23,039Change in currency translation adjustment
    
    
    (3,210
    )
    
    
    (3,711
    )
    
    
    (119
    )Unrealized gains on securities
    
    
    111
    
    
    
    (111
    )
    
    
    Minimum pension liability
    
    
    (22,137
    )
    
    
    2,514
    
    
    
    5,105Deferred taxes on minimum pension
liability and unrealized gains on
securities
    
    
    6,603
    
    
    
    (716
    )
    
    
    (1,531
    )Comprehensive income
    
    
    (1,488
    )
    
    
    22,226
    
    
    
    26,494
 Income Taxes Components of deferred income tax assets and liabilities were: December 31,2003
    
    
    2004Total deferred tax assets
    
    
    21,956
    
    
    
    23,154Total deferred tax liabilities
    
    
    (10,768
    )
    
    
    (11,308
    )Net deferred tax assets
    
    
    11,188
    
    
    
    11,846Of which:Current deferred tax assets
    
    
    13,063
    
    
    
    5,465Non-current deferred tax assets
    
    
    8,893
    
    
    
    17,689Current deferred tax liabilities
    
    
    (1,392
    )
    
    
    (767
    )Non-current deferred tax liabilities
    
    
    (9,376
    )
    
    
    (10,541
    )Detailed as follows:Italian GAAP financial statements
    
    
    4,363
    
    
    
    6,768U.S. GAAP adjustments
    
    
    6,825
    
    
    
    5,078Net deferred tax assets
    
    
    11,188
    
    
    
    11,846
 F - 46




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##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated) Principal items comprising net deferred income tax assets were as follows: December 31,2003
    
    
    2004Assets (liabilities)Equalization tax on dividends
    
    
    (475
    )
    
    
    (647
    )Tax revaluation on certain assets, net of accumulated
depreciation
    
    
    285
    
    
    
    280Allowance for doubtful accounts
    
    
    1,939
    
    
    
    1,035Inventory obsolescence
    
    
    8,041
    
    
    
    544Intercompany profits in inventory
    
    
    1,531
    
    
    
    1,572Accumulated accelerated depreciation
    
    
    (291
    )
    
    
    (86
    )Pension asset
    
    
    (380
    )
    
    
    1,026Property cost accruals
    
    
    46
    
    
    
    43Book revaluation of certain assets
    
    
    (8,431
    )
    
    
    (8,234
    )Trademark revaluation of assets
    
    
    1,503
    
    
    
    1,315Tax on revaluation reserve for trademark revaluation
    
    
    (706
    )
    
    
    (706
    )Surplus on business assignment
    
    
    
    
    
    
    10,289Net operating loss carry forwards (NOL)
    
    
    3,977
    
    
    
    2,348Pension minimum liability
    
    
    5,887
    
    
    
    4,355Agents termination indemnity
    
    
    421
    
    
    
    118Investments devaluation
    
    
    340
    
    
    
    238Other
    
    
    1,443
    
    
    
    704Net deferred tax assets (liabilities)
    
    
    15,130
    
    
    
    14,194Less:Valuation allowance on NOLs
    
    
    (3,942
    )
    
    
    (2,348
    )Net deferred tax assets
    
    
    11,188
    
    
    
    11,846
 At December 31, 2004, the Companys subsidiary in the United States had a net operating loss
carryforward (NOL) of
 6,710, which will expire from 2011 through 2017. Utilization of that
NOL is limited to future earnings of the U.S. subsidiary. For financial reporting purposes, a
valuation allowance of  2,348 has been recognized for the full amount of this NOL. During the years ended December 31, 2003 and 2004, deferred tax benefits of  110 and  12
respectively, were recognized as adjustments to the valuation allowance because of a change in
circumstances that caused a change in expectations about the realizability of the NOL. In 2003
and 2004, the valuation allowance decreased by  1,420 and  1,594, respectively (of which 
1,310 and  1,582 had no impact on the statements of income in 2003 and 2004, respectively). A
significant portion of this change in the valuation allowance was due to the sale of De Rigo
Deutschland and De Rigo Nederland, for which substantially all tax assets had previously been
reserved for. Tax savings resulting from income derived from operations in Italian tax exempt areas generated a
per share benefit of less than 0.01 Euro in the year 2002. F - 47




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DE RIGO S.p.A. and SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(expressed in thousands of Euro (), except as otherwise indicated) The provision for income taxes consists of the following 2002
    
    
    2003
    
    
    2004Provision for income taxes:Current:Italy
    
    
    1,749
    
    
    
    9,314
    
    
    
    6,352United Kingdom
    
    
    1,764
    
    
    
    2,224
    
    
    
    2,531Spain
    
    
    4,459
    
    
    
    4,489
    
    
    
    5,769Other
    
    
    553
    
    
    
    877
    
    
    
    539Total
    
    
    8,525
    
    
    
    16,904
    
    
    
    15,191Deferred:Italy
    
    
    (7,976
    )
    
    
    (364
    )
    
    
    (1,128
    )United Kingdom
    
    
    (153
    )
    
    
    (999
    )
    
    
    (948
    )Spain
    
    
    (311
    )
    
    
    210
    
    
    
    (389
    )Other
    
    
    (1
    )
    
    
    (360
    )
    
    
    226Total
    
    
    (8,441
    )
    
    
    (1,513
    )
    
    
    (2,239
    )Total tax provision
    
    
    84
    
    
    
    15,391
    
    
    
    12,952
 A reconciliation between the Italian statutory tax rates and the consolidated effective tax rates
for income from continuing operations is as follows: 2002
    
    
    2003
    
    
    2004Tax at Italian statutory rate of 40.25% in 2002, 38.25% in
2003 and 37.25% in 2004
    
    
    6,564
    
    
    
    16,855
    
    
    
    13,568Investment tax credit and deductions
    
    
    (245
    )
    
    
    
    
    
    
    Gains on business disposal
    
    
    (123
    )
    
    
    (3,926
    )
    
    
    Effect of a change in tax rate:·  In Italy
    
    
    (7,207
    )
    
    
    509
    
    
    
    ·  Other countries
    
    
    16
    
    
    
    (9
    )
    
    
    28Effect of different tax rates of foreign jurisdictions
    
    
    (763
    )
    
    
    (792
    )
    
    
    (720
    )Change in valuation allowance
    
    
    1,026
    
    
    
    (168
    )
    
    
    (12
    )Other permanent differences:·  ItalyIRPEG
    
    
    (496
    )
    
    
    1,289
    
    
    
    730IRAP  (primarily payroll and interest)
    
    
    1,408
    
    
    
    977
    
    
    
    (158
    )·  Other countries
    
    
    (96
    )
    
    
    656
    
    
    
    (484
    )Provision for income taxes
    
    
    84
    
    
    
    15,391
    
    
    
    12,952Effective consolidated tax rate
    
    
    0.5
    %
    
    
    35.0
    %
    
    
    35.6
    %
 F - 48




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DE RIGO S.p.A. and SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(expressed in thousands of Euro (), except as otherwise indicated) Financial instruments Derivative products The Group derivative financial instruments at December 31, 2004 consisted of foreign currency
option contracts and an interest rate swap agreement. The Company sold foreign currency put
options to buy US$ 4,600,000 for  3,603 and purchased call options to sell US$ 2,800,000 for
 2,193. None of the foreign currency option contracts had maturities that exceed one year. At December 31, 2004, the Company had an interest rate swap agreement to convert the variable
interest rate on bank borrowings totaling  10,000 to a fixed interest rate of 3.3%. This interest
rate swap agreement expired in January 2005. The Groups derivative financial instruments at December 31, 2003 consisted of forward contracts,
foreign currency option contracts and an interest rate swap agreement. The Company had outstanding
forward exchange contracts to buy  2,689 (US$ 1,150,000 for GBP Sterling 693,000, US$ 1,500,000
for  1,264 and  450 for GBP Sterling 311,231); in addition, the Company sold foreign currency
call options to sell Japanese Yen 1,260,000 and GBP Sterling 1,650,000 for a total of  11,671
and purchased put options to buy Japanese Yen 900,000,000 and GBP Sterling 1,100,000 for a total
of  8,225. None of the foreign exchange contracts or foreign currency option contracts had
maturities that exceed one year. At December 31, 2003 the Company had an interest rate swap agreement to convert the variable
interest rate on bank borrowings totaling  10,000 to a fixed interest rate of 3.3%. This interest
rate swap agreement expired in January 2005. In the consolidated statements of income, under the line item other (income) expenses net, the
Group recognized pre-tax losses related to changes in the fair value of its derivative financial
instruments of  327 and  635 in 2002 and 2004, respectively and gain of  475 in 2003. As of
December 31, 2003 and 2004 the Group has recorded in the balance sheets net derivative assets,
under the line item current assets, of  132 and net derivative liabilities, under the line item
current liabilities, of  271, respectively. Foreign exchange gains and losses The net foreign exchange gains and (losses) recognized in the consolidated statement of income for
2002, 2003 and 2004 amounted to  (656),  448 and  721, respectively. Concentration of Credit Risks Financial instruments that potentially subject the Group to concentration of credit risks consist
principally of cash investments and trade accounts receivable. The Group maintains cash and cash
equivalents and short-term investments with financial institutions located in Italy. The Company
selects only financial institutions with high credit standards for use in its investment
strategies. Concentration of credit risks and the risk of accounting loss with respect to trade
receivables is generally limited due to the large number of the Companys end customers and the
diversity of the geographic areas in which the customers are located. The Company generally does
not require collateral with respect to sale orders, but it may require collateral and bank
guarantees with respect to certain customers. No individual customer represented 10% or more of sales in any of the years ended December 31,
2002, 2003 and 2004. F - 49




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DE RIGO S.p.A. and SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(expressed in thousands of Euro (), except as otherwise indicated) Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value
disclosure for financial instruments. Cash and cash equivalents   The carrying amount of cash and cash equivalents reported in the
balance sheet approximates their fair value due to the short duration of these investments. Investment in debt securities    The carrying amount of investments in debt securities is based
on the lower of cost or market and approximates their fair value as these were valued based on
quoted prices. Accounts receivable and payable    The carrying amount of receivables and payables approximates
their fair value because of the short maturity of these instruments. Short-term debt   The carrying amount of the Companys borrowings under its short-term credit
arrangements approximates their fair value because of the short maturity of these instruments. Long-term debt  Certain of the Groups long-term loans are subsidized by government entities in
Italy and the European Investment Bank. The government entities pay a portion of these entities
interest charges thereby reducing the Companys interest rate to a below market level. The fair
value of these loans have been determined as being equal to the carrying amount of the loans, as
all companies with investments in the same region where the Company has its investments are
entitled to such benefits. Foreign currency exchange contracts and options    The carrying value approximates fair value
based on exchange rates at December 31, 2003 and 2004. Interest rate swap agreements  The carrying value approximates fair value based on interest rates
at December 31, 2003 and 2004. F - 50




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DE RIGO S.p.A. and SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(expressed in thousands of Euro (), except as otherwise indicated) Valuation and Qualifying Accounts The following table summarizes the changes in accounts receivable, inventory allowances and
deferred tax assets for each of the three years in the period ended December 31, 2004: Charged toBalance at
    
    
    costs and
    
    
    Acquisitions
    
    
    
    
    
    
    Balance at end ofDescription
    
    beginning of period
    
    
    expenses
    
    
    (disposals)
    
    
    Deduction
    
    
    periodYear ended December 31, 2002Deducted from asset accounts:Allowance for doubtful accounts
    
    
    5,501
    
    
    
    2,821
    
    
    
    (151
    )
    
    
    (1,195
    )
    
    
    6,976Allowance for returns
    
    
    565
    
    
    
    455
    
    
    
    
    
    
    
    
    
    
    
    1,020Reserve for inventory obsolescence
    
    
    18,909
    
    
    
    4,480
    
    
    
    (164
    )
    
    
    (1,298
    )
    
    
    21,927Valuation allowance on NOLs
    
    
    5,231
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    5,362Total
    
    
    30,206
    
    
    
    7,887
    
    
    
    (315
    )
    
    
    (2,493
    )
    
    
    35,285Year ended December 31, 2003Deducted from asset accounts:Allowance for doubtful accounts
    
    
    6,976
    
    
    
    2,545
    
    
    
    (285
    )
    
    
    (1,853
    )
    
    
    7,383Allowance for returns
    
    
    1,020
    
    
    
    584
    
    
    
    (120
    )
    
    
    (83
    )
    
    
    1,401Reserve for inventory
obsolescence
    
    
    21,927
    
    
    
    5,325
    
    
    
    (1,967
    )
    
    
    (930
    )
    
    
    24,355Valuation allowance on NOLs
    
    
    5,362
    
    
    
    
    
    
    
    
    
    
    
    (1,420
    )
    
    
    3,942Total
    
    
    35,285
    
    
    
    8,454
    
    
    
    (2,372
    )
    
    
    (4,286
    )
    
    
    37,081Year ended December 31, 2004Deducted from asset accounts:Allowance for doubtful accounts
    
    
    7,383
    
    
    
    1,380
    
    
    
    (69
    )
    
    
    (1,544
    )
    
    
    7,150Allowance for returns
    
    
    1,401
    
    
    
    305
    
    
    
    
    
    
    
    (324
    )
    
    
    1,382Reserve for inventory
obsolescence
    
    
    24,355
    
    
    
    3,875
    
    
    
    (115
    )
    
    
    (4,060
    )
    
    
    24,055Valuation allowance on NOLs
    
    
    3,942
    
    
    
    
    
    
    
    (1,152
    )
    
    
    (442
    )
    
    
    2,348Total
    
    
    37,081
    
    
    
    5,560
    
    
    
    (1,336
    )
    
    
    (6,370
    )
    
    
    34,935
 F - 51




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SIGNATURES The registrant hereby certifies that it meets all of the requirements of filing on Form
20-F and has duly caused and authorized the undersigned to sign this annual report on its behalf. De Rigo S.p.A(Registrant)/s/ Ennio De RigoEnnio De RigoChairman of the Board and Chief Executive Officer Date: June ......, 2005 74