##### Table of Contents



As filed with the Securities and Exchange Commission on June [30], 2004   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 1934ORþ       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended: December 31, 2003ORo       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. Title of each
class
    
    Name of each exchange
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. 44,714,255 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.




---



##### Table of Contents



TABLE OF CONTENTS PageAccounting Principles and Reporting Currency
    
    iiiCautionary Statement Regarding Forward-Looking Information
    
    iiiPART I
    
    
    5Item 1. Identity of Directors, Senior Management and Advisors
    
    
    5Item 2. Offer Statistics and Expected Timetable
    
    
    5Item 3. Key Information
    
    
    5THE DE RIGO GROUP
    
    
    5SELECTED FINANCIAL DATA
    
    
    5EXCHANGE RATES
    
    
    7RISK FACTORS
    
    
    7Item 4. Information on the Company
    
    
    12HISTORY AND CORPORATE STRUCTURE
    
    
    12BUSINESS OVERVIEW
    
    
    14COMPANY STRATEGY
    
    
    15PRODUCTS
    
    
    17DESIGN AND MANUFACTURING
    
    
    19MARKETING AND DISTRIBUTION
    
    
    20COMPETITION
    
    
    25ITALIAN GOVERNMENT INCENTIVE PROGRAM
    
    
    26TRADEMARKS
    
    
    26INSURANCE
    
    
    27SEASONALITY AND AVAILABILITY OF RAW MATERIALS
    
    
    27DESCRIPTION OF PROPERTY
    
    
    28Item 5. Operating and Financial Review and Prospects
    
    
    28CRITICAL ACCOUNTING POLICIES
    
    
    28RESULTS OF OPERATIONS
    
    
    32EFFECT OF INFLATION
    
    
    43U.S. GAAP RECONCILIATION
    
    
    43LIQUIDITY AND CAPITAL RESOURCES
    
    
    43OFF-BALANCE SHEET ARRANGEMENTS
    
    
    44CONTRACTUAL OBLIGATIONS
    
    
    45CONCENTRATIONS OF CREDIT RISK
    
    
    46NEW ACCOUNTING STANDARDS
    
    
    46PROCESS OF TRANSITION TO INTERNATIONAL ACCOUNTING STANDARDS
    
    
    46TREND INFORMATION
    
    
    46Item 6. Directors, Senior Management and Employees
    
    
    47DIRECTORS AND SENIOR MANAGEMENT
    
    
    47COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT
    
    
    50EMPLOYEES AND LABOR RELATIONS
    
    
    50Item 7. Major Shareholders and Related Party Transactions
    
    
    51
 i




---



##### Table of Contents



PageMAJOR SHAREHOLDERS
    
    
    51RELATED PARTY TRANSACTIONS
    
    
    52Item 8. Financial Information
    
    
    52CONSOLIDATED FINANCIAL STATEMENTS
    
    
    52OTHER FINANCIAL INFORMATION
    
    
    52Item 9. The Offer and Listing
    
    
    53TRADING MARKETS AND SHARE PRICES
    
    
    53Item 10. Additional Information
    
    
    54OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR ITS SUBSIDIARIES
    
    
    54BY-LAWS
    
    
    55SIGNIFICANT DIFFERENCES IN CORPORATE GOVERNANCE PRACTICES FOR
PURPOSES OF SECTION 303A.11 OF THE NEW YORK STOCK EXCHANGE
LISTED COMPANY MANUAL (THE
    
    
    63MATERIAL CONTRACTS
    
    
    66EXCHANGE CONTROLS
    
    
    66TAXATION
    
    
    66DOCUMENTS ON DISPLAY
    
    
    70Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    71RISK ANALYSIS
    
    
    71EXCHANGE RATE RISK
    
    
    72INTEREST RATE RISK
    
    
    72CHANGES IN MARKET RISK EXPOSURE COMPARED TO 2002
    
    
    72Item 12. Description of Securities Other than Equity Securities
    
    
    72PART II
    
    
    73Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    73Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    73Item 15. Controls and Procedures
    
    
    73Item 16. [Reserved]
    
    
    73Item 16A. Audit Committee Financial Expert
    
    
    73Item 16B. Code of Ethics
    
    
    73Item 16C. Principal Accountant Fees and Services
    
    
    73PART III
    
    
    75Item 17. Financial Statements
    
    
    75Item 18. Financial Statements
    
    
    75Item 19. Exhibits
    
    
    75EX-12.1EX-12.2EX-99.1
 ii




---



##### Table of Contents



Accounting Principles and Reporting Currency Beginning with the fiscal year ended December 31, 2001, De Rigo S.p.A.
(the Company) 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,
2003 of $1.2597 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 of this annual
report are prepared in conformity with Italian regulations governing financial
statements (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 of this annual report. In addition to focusing on the Groups Italian GAAP results, De Rigos
management uses certain non-GAAP measures in evaluating the Groups financial
performance. These non-GAAP measures include sales results calculated on an
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 (i.e., calculating results for the first quarter of 2004 on the
basis of the average exchange rates used to translate sales made in non-euro
currencies during the first quarter of 2003 into euro). With respect to the
first quarter of 2004, the Group has also calculated comparative results for
2003 that exclude the contribution of EID, its former joint venture with the
Prada group, 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 sales performance on
a consistent consolidation basis. In both 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 the De Rigos results of operations. These
non-GAAP measures are also commonly used by securities analysts, credit rating
agencies and investors to evaluate De Rigos operating performance and 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. 
 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. iii




---



##### Table of Contents



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. iv




---



##### Table of Contents



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 S.p.A., together with its consolidated subsidiaries (the Group
or 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, 2003
and 2002, and for each of the years in the three-year period ended December 31,
2003 have been derived from the audited Consolidated Financial Statements
included in Item 18. Financial data at December 31, 2001, 2000 and 1999, and
for each of the years in the two-year period ended December 31, 2000, have been
derived from audited Consolidated Financial Statements not included herein. The financial data at December 31, 2003 and 2002, and for each of the
years in the three-year period ended December 31, 2003, 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 of this annual report. 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




---



##### Table of Contents



Year Ended at December 31,(thousandsof dollars,except perOrdinaryShare andADS(thousands of euros, except per Ordinary Share and ADS amounts)
    
    amounts) (1)1999 (2)
    
    2000 (2)
    
    2001(2)
    
    2002
    
    2003
    
    2003INCOME STATEMENT DATAAmounts in accordance with Italian GAAP:Net sales
    
    
    321,555
    
    
    
    456,602
    
    
    
    505,250
    
    
    
    512,459
    
    
    
    504,801
    
    
    $
    635,898Cost of sales
    
    
    129,561
    
    
    
    167,613
    
    
    
    184,293
    
    
    
    203,208
    
    
    
    202,040
    
    
    
    254,510Gross profit
    
    
    191,994
    
    
    
    288,989
    
    
    
    320,957
    
    
    
    309,251
    
    
    
    302,761
    
    
    
    381,388Operating expenses
    
    
    184,617
    
    
    
    265,307
    
    
    
    289,897
    
    
    
    292,524
    
    
    
    277,907
    
    
    
    350,079Income (loss) from operations
    
    
    7,377
    
    
    
    23,682
    
    
    
    31,060
    
    
    
    16,727
    
    
    
    24,854
    
    
    
    31,309Income before income taxes
    
    
    3,699
    
    
    
    21,763
    
    
    
    27,200
    
    
    
    9,769
    
    
    
    37,838
    
    
    
    47,665Income taxes
    
    
    2,596
    
    
    
    6,895
    
    
    
    6,551
    
    
    
    46
    
    
    
    14,935
    
    
    
    18,814Net income (2)
    
    
    1,406
    
    
    
    14,136
    
    
    
    21,217
    
    
    
    10,645
    
    
    
    18,478
    
    
    
    23,277Net income per Ordinary Share and ADS (2)
    
    
    0.03
    
    
    
    0.32
    
    
    
    0.48
    
    
    
    0.24
    
    
    
    0.42
    
    
    $
    0.52Dividends per Ordinary Share and ADS
    
    
    0.09
    
    
    
    
    
    
    
    0.12
    
    
    
    0.13
    
    
    
    
    
    
    
    Amounts in accordance with U.S. GAAP:Net sales
    
    
    321,555
    
    
    
    456,602
    
    
    
    505,250
    
    
    
    512,459
    
    
    
    504,801
    
    
    $
    635,898Net sales from continuing operations
    
    
    321,555
    
    
    
    433,161
    
    
    
    473,269
    
    
    
    481,314
    
    
    
    485,192
    
    
    
    611,196Net income (loss)
    
    
    1,565
    
    
    
    13,282
    
    
    
    18,249
    
    
    
    17,145
    
    
    
    24,250
    
    
    
    30,548Net income (loss) from continuing
operations
    
    
    1,975
    
    
    
    13,305
    
    
    
    18,188
    
    
    
    18,382
    
    
    
    16,486
    
    
    
    20,767Net income per Ordinary Share
    
    
    0.04
    
    
    
    0.30
    
    
    
    0.41
    
    
    
    0.38
    
    
    
    0.54
    
    
    $
    0.68Basic earnings per share and per ADS
from continuing operations
    
    
    0.04
    
    
    
    0.30
    
    
    
    0.41
    
    
    
    0.41
    
    
    
    0.37
    
    
    $
    0.47Diluted earnings per share and per ADS
from continuing operations
    
    
    0.04
    
    
    
    0.30
    
    
    
    0.40
    
    
    
    0.41
    
    
    
    0.37
    
    
    $
    0.47Dividends per Ordinary Share and ADS
    
    
    0.09
    
    
    
    
    
    
    
    0.12
    
    
    
    0.13
    
    
    
    
    
    
    
    BALANCE SHEET DATAAmounts in accordance with Italian GAAP:Total current assets
    
    
    197,831
    
    
    
    166.211
    
    
    
    202.373
    
    
    
    195.483
    
    
    
    156,349
    
    
    $
    196,953Property, plant and equipment, net
    
    
    67,127
    
    
    
    123,194
    
    
    
    128,102
    
    
    
    120,905
    
    
    
    109,083
    
    
    
    137,412Total assets
    
    
    305,866
    
    
    
    420,802
    
    
    
    462,492
    
    
    
    439,901
    
    
    
    376,887
    
    
    
    474,765Total current liabilities
    
    
    105,369
    
    
    
    196,344
    
    
    
    220,813
    
    
    
    199,586
    
    
    
    123,838
    
    
    
    155,999Long-term debt, less current portion
    
    
    1,325
    
    
    
    1,098
    
    
    
    764
    
    
    
    696
    
    
    
    497
    
    
    
    626Total shareholders equity
    
    
    175,357
    
    
    
    189,374
    
    
    
    210,419
    
    
    
    212,117
    
    
    
    226,884
    
    
    
    285,806Amounts in accordance with U.S. GAAP:Total assets
    
    
    306,050
    
    
    
    420,891
    
    
    
    459,479
    
    
    
    450,069
    
    
    
    392,220
    
    
    $
    494,080Total current liabilities
    
    
    105,369
    
    
    
    196,344
    
    
    
    220,813
    
    
    
    199,586
    
    
    
    123,838
    
    
    
    155,999Total shareholders equity
    
    
    175,541
    
    
    
    189,460
    
    
    
    206,695
    
    
    
    199,470
    
    
    
    221,744
    
    
    
    279,331
   (1)
    
    The translation of euro into dollars has been made at the rate of
$1.2597 = 1.00, the Noon Buying Rate on December 31, 2003. 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, 1999, 2000, 2001 and 2002 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, 2003. See Note 2 of Notes to the Consolidated Financial
Statements included in Item 18 of this annual report. 2




---



##### Table of Contents



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. Amounts for 1998 (before the adoption of the euro) have
been calculated based on the Noon Buying Rates for lire, converted into euro at
the official fixed conversion rate of 1= Lit. 1936.27 and expressed in U.S.
dollars per euro. Year:
    
    High
    
    Low
    
    Average(1)
    
    At Period End1999
    
    
    
    
    
    
    
    
    
    
    1.0588
    
    
    
    1.00702000
    
    
    
    
    
    
    
    
    
    
    0.9207
    
    
    
    0.93882001
    
    
    
    
    
    
    
    
    
    
    0.8909
    
    
    
    0.89012002
    
    
    
    
    
    
    
    
    
    
    0.9495
    
    
    
    1.04852003
    
    
    
    
    
    
    
    
    
    
    1.1411
    
    
    
    1.2597Month ending:December 31, 2003
    
    
    1.2597
    
    
    
    1.1956
    
    
    
    
    
    
    
    January 30, 2004
    
    
    1.2853
    
    
    
    1.2839
    
    
    
    
    
    
    
    February 28, 2004
    
    
    1.2848
    
    
    
    1.2426
    
    
    
    
    
    
    
    March 31, 2004
    
    
    1.2431
    
    
    
    1.1801
    
    
    
    
    
    
    
    April 30, 2004
    
    
    1.2358
    
    
    
    1.1802
    
    
    
    
    
    
    
    May 31, 2004
    
    
    1.2274
    
    
    
    1.1801
    
    
    
    
    
    
    
    
   (1)
    
    Average of the Noon Buying Rate for euro for the last business day of
each month in the period. On
June 25, 2004, the Noon Buying Rate for euros was
1.00 =
$1.2145 or $1.00 =
0.8234. 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 of this annual report. 
 RISK FACTORS Holders and prospective purchasers of the American Depositary Shares
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 3




---



##### Table of Contents



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. 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 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, financial condition and prospects. 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 1999, we
acquired D&A, in 2000, we acquired General Optica and began operations at our 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. 4




---



##### Table of Contents



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. 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. For example, production and supply chain
difficulties at the lens facilities transferred to BBGR in 2001 had a negative
impact on operations in the second half of 2001 and the first half of 2002.
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. Our business has grown significantly in recent years, particularly as a
result of our acquisition of D&A and General Optica. 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
Fendi, Etro, La Perla, Celine, Loewe, Givenchy, Fila Eyes, Onyx, Furla, Mini
and others. The percentage of our sales attributable to licensed brands has
increased in recent years, accounting for 55.1% of the sales of our wholesale
and manufacturing segment in 2003 (54.8% in 2002). These license agreements
typically have terms of between one and five years. We believe that our
ability to maintain and negotiate favorable license agreements or alternative 5




---



##### Table of Contents



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 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. We lost certain tax benefits in September 2001 and April 2003; our
effective income tax rate will therefore increase significantly
     towards the statutory rate. Historically, we derived significant benefits from an investment incentive
program for the Longarone area implemented by the Italian government as part of
a package of relief measures after the Vajont dam catastrophe in 1963. In
particular, a substantial portion of our income before income taxes was derived
from Dierre S.r.l. (prior to its merger into De Rigo S.p.A. in January 2002)
and, to a much lesser extent, from Quattro Valli Italian Flair S.r.l., each of
which was entitled to income tax exemptions under the Vajont Relief Program.
The exemption for Dierre expired in September 2001, and that for Quattro Valli
expired in April 2003. Our effective income tax rate has therefore increased
significantly towards the statutory rate, reaching 39.5% in 2003. For further
information, see Operating and Financial Review and Prospects  Results of
Operations  2003 Compared to 2002  Income Taxes in Item 5. We do not expect
new tax benefits of this type to be introduced by the Italian government for
operations in the Longarone area or any other area in Italy where our
facilities are currently located. 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 6




---



##### Table of Contents



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 recent
appreciation of the euro against the Pound Sterling has reduced the value in
euro terms of the results of D&A, our British retail chain, while the recent
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. 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. 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 25, 2004, 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 74% of the
Companys outstanding 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. 7




---



##### Table of Contents



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
analysis; 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 and a substantial portion of our assets are located
in Italy. 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 Italy upon the Company, our directors or other key personnel. 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, 2003 and have paid
dividends only three times in the past seven 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 Fendi, FilaEyes, Etro, La Perla, Onyx,
Celine, Loewe, Givenchy, Mini and Furla.In 2003, the Group recorded net
sales of 504.8 million and generated net income of 18.5 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. 8




---



##### Table of Contents



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 46 years, expiring on December 31, 2050. In recent years, 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. The Company directly owns and operates the principal manufacturing plants
that design and manufacture metal and plastic eyeglass frames for the Group and
distributes its products both through subsidiaries and directly, as well as
using independent distributors. 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. The
Companys current distribution subsidiaries are Vogart Line España S.A.
(Vogart España), De Rigo France S.a. (De Rigo France), De Rigo UK Ltd. (De
Rigo UK), De Rigo Nederland B.V. (De Rigo Nederland), 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). The Companys direct manufacturing and distribution
operations and those of its distribution subsidiaries comprise De Rigos
wholesale and manufacturing segment (Wholesale and Manufacturing). The
subsidiaries noted above distribute certain of the Groups eyewear lines in
Spain, France, the United Kingdom, the Netherlands, Greece, Japan and Hong
Kong, respectively, while the German market is served directly by the Company.
The Group also operates as an optical retailer in the United Kingdom through
its 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. Vogart España, De Rigo France, De Rigo UK, De Rigo Nederland and De Rigo
Hellas are 59.3%, 100%, 80%, 100%, and 51% owned directly by the Company,
respectively. The Company indirectly controls 100% of each of D&A and General
Optica through European Vision and General Optica Internacional Sa, respectively;
each of these companies is an intermediate holding company that is 100% owned
by the Company. The Company also indirectly controls 90% of De Rigo Japan and
80% of De Rigo Hong Kong through De Rigo Nederland. 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 74.0% 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 of this
annual report. 9




---



##### Table of Contents



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. During the three-year period ended December 31, 2003 covered by the
Consolidated Financial Statements included in Item 18, the Group divided its
activities into three distinct segments:  
    
    Wholesale and Manufacturingconsists of the design, manufacturing,
marketing and distribution of high-quality eyewear to opticians in
Italy and to independent distributors and opticians through the Groups
distribution subsidiaries abroad. 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 prescription eyeglasses, fashion
sunglasses and other optical products 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.  
    
    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 Sanderbrand names.
This joint venture was terminated in July 2003 by mutual agreement of
the parties; as a result the Group sold its 51% interest 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. 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) 2001
    
    2002
    
    2003Wholesale and Manufacturing
    
    
    133.2
    
    
    

141.1
    
    
    
136.2Retail
    
    
    358.4
    
    
    
    359.6
    
    
    
    361.5EID
    
    
    32.1
    
    
    
    31.2
    
    
    
    19.8Intersegment Eliminations
    
    
    (18.4
    )
    
    
    (19.4
    )
    
    
    (12.7
    )Total
    
    
    505.3
    
    
    
    512.5
    
    
    
    504.8
 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. 10




---



##### Table of Contents



Sales of Owned Brands and Licensed Brands by Wholesale and Manufacturing Segment 2001
    
    2002
    
    2003Owned brands
    
    
    47.9
    %
    
    
    42.1
    %
    
    
    42.0
    %Licensed brands
    
    
    48.9
    %
    
    
    54.8
    %
    
    
    55.1
    %Other
    
    
    3.2
    %
    
    
    3.1
    %
    
    
    2.9
    %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) 2001
    
    2002
    
    2003Sunglass Unit Sales.
    
    
    3,109
    
    
    
    54.6
    %
    
    
    3,040
    
    
    
    55.3
    %
    
    
    2,931
    
    
    
    54.3
    %Prescription
Eyewear Unit Sales
    
    
    2,582
    
    
    
    45.4
    %
    
    
    2,457
    
    
    
    44.7
    %
    
    
    2,462
    
    
    
    45.7
    %Total Unit Sales
    
    
    5,691
    
    
    
    100.0
    %
    
    
    5,497
    
    
    
    100.0
    %
    
    
    5,393
    
    
    
    100
    %
 In 2003, sales in Europe accounted for 89.9% of the Groups total net
sales, with 2.4% of the total being attributable to sales in the Americas and
the remaining 7.7% to sales in the rest of the world. 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 of this annual report. Net Sales by Geographic Region
(in millions of euros) 2001
    
    2002
    
    2003Europe
    
    
    453.2
    
    
    
    89.7
    %
    
    
463.9
    
    
    
    90.5
    %
    
    
    453,9
    
    
    
    89.9
    %Americas
    
    
    17.6
    
    
    
    3.5
    %
    
    
    12.0
    
    
    
    2.3
    %
    
    
    11,9
    
    
    
    2.4
    %Rest of the World
    
    
    34.5
    
    
    
    6.8
    %
    
    
    36.6
    
    
    
    7.2
    %
    
    
    39,00
    
    
    
    7.7
    %Total net sales
    
    
    505.3
    
    
    
    100.0
    %
    
    
    512.5
    
    
    
    100.0
    %
    
    
    
    
    
    
    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. 11




---



##### Table of Contents




    
    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 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. 12




---



##### Table of Contents




    
    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 sales of 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, fashionable sunglasses. Sunglasses
manufactured by the Group represented 49.1% of the Groups unit sales of
eyewear in 2003, as compared with 53.3% in 2002, with Group-manufactured
prescription eyewear representing 29.9% and 27.4% of unit sales, respectively.
Sales of eyewear bearing brands that do not belong to the Group through the
retail segment represented the remaining 21.0% and 19.3% of De Rigos unit
sales of eyewear in 2003 and 2002. 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, represented approximately 31.6% and
32.8% of its total eyewear unit sales in 2003 and 2002, whereas De Rigos
designer lines as a group represented approximately 38.9% and 34.2% of total
unit sales. 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. 13




---



##### Table of Contents



Police.The first of the Groups core brands, Police, was created with the
goal of selling an entire range of sunglass models associated with a single
strong brand image, introducing in Europe a product based on a depiction of an
aggressive urban American lifestyle. In 1996, De Rigo revamped the Police
line in order to shift its target market from aggressive urban young adults to
more mature adults (ages 25 to 40) with higher discretionary spending power.
In recent years, the Company has continued to invest money in communicating
this shift worldwide. From 1999 to 2000 and from 2001 to
2002, respectively, Bruce Willis and George Clooney served as spokespersons
for the Policebrand in all markets outside the U.S., Canada and Japan. The
brands latest publicity campaign features David Beckham, the Real Madrid and
England soccer star, who wears both Policeeyeglasses and sunglasses. 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 Etrophilosophy: 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. Fendi.A collection of high-premium priced designer eyewear. Models are
generally characterized by simplicity and clean forms. Fila Eyes.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.A worldwide leading brand in the bridge market. Furla products 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. 14




---



##### Table of Contents



Loewe.A luxurious modern collection for women and men inspired by
Mediterranean culture. Onyx.A brand created to meet the fashion needs of teenagers. A youthful
and trendy collection of well-constructed designs that can give the wearer a
wide variety of looks at affordable prices. Mini. The BMW Groups Mini brand, which is both a trendsetter and an
automotive legend, is much more than just a car; it is a thrill that stands for
an individual, young and cosmopolitan lifestyle. The design and materials of
the new range of Mini sunglasses are innovative, almost futuristic. Made of
light, high-quality metal and plastic, the models appeal lies in their shape
and color. 
 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 2003, new models
represented roughly 65% 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 22 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, 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 15




---



##### Table of Contents



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 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 2003,
the Group produced approximately 60% of its production requirements
internally, as compared with approximately 70% in 2002. In 2004, 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 recent 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 16




---



##### Table of Contents



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 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, respectively. 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 Hut and 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, Selfridges
and 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, 2003, the Group had
approximately 70 sales representatives in Italy. Each sales representative is
assigned to a particular territory within Italy for 17




---



##### Table of Contents



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, 2003, there were distribution
networks in Germany, Spain, France, the Netherlands, the United Kingdom,
Greece, Japan and Hong Kong. The international distribution network has the exclusive right to
distribute certain of the Groups brands within a designated territory. As of
December 31, 2003, 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 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 136.21 million (or 26.9% of total net
sales) in 2003, as compared with sales of 141.1 million (or 27.5% of total net
sales) in 2002. EID: Prada Joint Venture In 1999, De Rigo and the Prada Group agreed to create a joint venture for
the manufacture and distribution of Prada-brand eyeglass frames and sunglasses.
Central to the joint venture was the incorporation of EID, a new company that
was owned 51% by De Rigo and 49% by Prada. The venture sought to take
advantage of the specialized expertise of its two parent companies: the
creation of collections, positioning of products, and broad marketing
strategies were the responsibility of Prada, while De Rigo was responsible for
the actual production (creation of prototypes and subsequent manufacture) of
the collections. Major business decisions (including adoption of a business
plan) required the approval of both parties. In July 2003, Prada and De Rigo
agreed to terminate the joint venture agreement and De Rigo sold its
participation of 51% in EID to Prada. 18




---



##### Table of Contents



EIDs sales, including sales to the other segments, totalled 19.8 million
(or 3.9% of total net sales) for the portion of 2003 prior to the Groups sale
of its interest, as compared to sales of 31.2 million (or 6.1% of total net
sales) for the full year 2002. Retail Segment The Groups retail segment comprises D&A, with stores throughout the
United Kingdom, and General Optica, with stores in Spain and Portugal. Dollond & Aitchison In December 1998, the Group acquired 100% of the British optical chain
Dollond & Aitchison. D&A is arguably the longest established optical chain in
the world (having been founded in 1750). D&A operates a retail network
throughout the United Kingdom that was comprised of 232 company-owned stores
(including 23 optical megastores) and 146 franchised stores at June 25, 2004. Retail sales through D&A totalled 230.8 million in 2003 and comprised
45.7% of the Groups total net sales, as compared with sales of 236.2 million
(or 46.1% of total sales) in 2002. In 2003, D&A sales of De Rigo products
(almost exclusively eyeglass frames) accounted for approximately 28.9% of D&As
total revenues from eyeglass sales, from 22.9% in 2002. In 2002, the most
recent year for which market share data is available, D&As owned retail
network had a share* of 8.2% of the British optical market based on value of
products sold; its share of this market rose to 9.2% if its franchised stores
were included. D&As market share is decreasing with the related figures for
2001 being 8.5% and 9.5%, respectively. D&As service is focused on providing professional eye examinations and on
assisting customers in choosing eyeglass frames and lenses. In the United
Kingdom, D&As main competitors tend to center their marketing on one hour
service or on price. Market research commissioned by D&A found (i) that
customers fundamentally feel unattractive wearing spectacles and uncomfortable
when buying them; (ii) that customers want honest, straight-forward advice on
what suits them; and (iii) that customers want outstanding value for money in
terms of pricing, quality and after-sales service. On the basis of these
findings, D&A formulated a marketing strategy that focused on customer service,
cultivating an exemplary level of service that has earned D&A the honor of a
Royal Appointment. In order to improve its assistance of customers in choosing eyeglasses,
D&A (together with well-known consultants in the field) developed the Styleeyes
and Computereyesservices. Styleeyesadapts techniques in aesthetic consulting
typically used in the cosmetics industry to identify the shape and color of
frames that best match the customers face. Computereyesallows the consumer to
see on a computer screen how he or she would look wearing different eyeglass
frames. The quality of service offered by D&A professionals is regularly
monitored through the use of customer satisfaction forms filled out by clients.
This evaluative process constitutes the base of the incentive program for
company employees working at its retail stores. Management believes that D&As presence throughout the United Kingdom has
enabled it to earn wide recognition of its brand name and the concomitant image
of quality and innovation. In order to further develop its customer
relationships, D&A established the Contact Lenses by Postservice, which
provides periodic mail deliveries of contact lenses to D&As clients. This
service, the only one of its kind in the United Kingdom offering a wide range
of products from different suppliers, has allowed D&A to   *
    
    All market share data in this annual report is taken from the 2003/2004 and
2002/2003 Jobson L.L.C. editions of the European Optical
Industry  Economic Review Handbook. 19




---



##### Table of Contents



increase customer loyalty significantly while at the same time providing a
readily available channel for direct marketing. Contact Lenses by Posthas
also enabled D&A to broaden its share of the contact lenses market by reaching
consumers in the 18-40 age group, as well as consumers above the age of 40 who
typically use eyeglasses. As of June 1, 2004, roughly 185,000 clients are
active customers in the program, and D&A believes that Contact Lenses by Post
continues to offer significant potential for growth. D&A is engaged in an on-going strategic process of refocusing of the D&A
brand; restructuring of its branch network; reorganizing the supply chain so as
to optimize the efficiency of purchasing and inventory management;
re-engineering D&As information technology system; and reviewing and
repositioning of the products and services D&A offers its customers. The refocusing of the D&A brand name  a strategy designed to enable D&A
to reach a wider range of consumers with greater disposable income  is focused
on improving D&As assistance in helping customers choose optical products
within its retail stores. In working towards this goal, D&A has concentrated
on building a professional and customer-sensitive culture, re-engineered its
employee compensation structure to include performance-based incentives 
especially for store employees  expanded training to reach all members of the
D&A organization, and introduced new management techniques. In re-organizing its supply chain, D&A divested its manufacturing
facilities, selling all of the assets of its two lens laboratories to BBGR
Ltd., a wholly owned subsidiary of Essilor International SA, the worlds
largest lens manufacturer, and transferring all related employees to BBGR in
July 2001. The agreement with BBGR also includes a long-term supply
arrangement that is expected to allow the parties to develop mutual synergies
along the lens supply chain  an agreement D&A believes will reduce its
operating costs now that initial supply chain-related difficulties appear to
have been resolved. The underlying strategy of this comprehensive ongoing effort incorporates
a focus on customers, colleagues and the way D&A does business, with the goal
of achieving D&As mission of becoming the best optical retailer in the United
Kingdom. The program focuses on changing the way D&A had traditionally
operated by paying increased attention to the quality of central management,
while at the same time introducing a clear mission and performance-related
culture among the staff of the stores that make up the branch network. As of
December 31, 2003, 2,427 individuals were employed by D&A. 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 of this annual report. At June 25, 2004, General Opticas network of stores consists of 136
directly owned stores in Spain, 10 in Portugal and 15 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 1955, its retail stores are primarily located in northern and
eastern Spain, particularly Catalonia , Basque Country, Asturias and Galicia.
General Opticas recent policy 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 20




---



##### Table of Contents



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 130.7 million (or 25.9% of the Groups
total net sales) during 2003, as compared with sales of 123.4 million (or
24.1% of total sales) in 2002. 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 1,400 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 had a market share of approximately 10.0% in
the Spanish optical market in 2002 based on value of products sold, as compared
to a share of approximately 9.3% in 2001. 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 and Portugal, collecting used glasses for
distribution to underprivileged groups and providing support for collaborative
ophthalmology projects in developing countries, which have received recognition
from important national organizations. 
 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 Loop 21




---



##### Table of Contents



and Revobrands), Oakley (Oakleybrand), Safilo (Gucci, Diesel, Dior,
Armaniand Polobrands), Marchon (Calvin Kleinbrands) and Marcolin (Dolce &
Gabbanaand Replaybrands). 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, and Vision Expressin
the United Kingdom, Multiopticas, Visionlaband Optica 2000in 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 of this annual report. 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. 
 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: Fendi, Fila Eyes, Etro, La Perla,
Onyx, Celine, Loewe, Givenchy, Miniand Furla. 22




---



##### Table of Contents



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. 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
2003, 54.3% 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. 23




---



##### Table of Contents



DESCRIPTION OF PROPERTY The general location, use and approximate size of the principal properties
used by the Group as of December 31, 2003 are set forth below. Total AreaLocation
    
    Use
    
    (in square meters)Longarone (BL), Italy
    
    Group headquarters,
manufacturing facility and
distribution center
    
    
    16,946Longarone (BL), Italy
    
    Manufacturing facility
    
    
    1,972Limana (BL), Italy
    
    Manufacturing facility
    
    
    5,878Limana (BL), Italy
    
    Manufacturing facility
    
    
    850Barcelona, 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
    
    
    1,144Hoofddorp, The Netherlands
    
    Distribution center
    
    
    200Watford, United Kingdom
    
    Distribution center
    
    
    247Athens, 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
    
    
    64Tokyo, Japan
    
    Distribution center
    
    
    718
 At June 25, 2004, the Group also owned and operated 232 retail stores with
an average retail area of 95 square meters in the United Kingdom and of 136
retail stores in Spain and 10 retail stores in Portugal, which have an average
retail area of 180 square meters. As of the same date, D&A owned a freehold
interest in 48 of its properties and General Optica owned a freehold interest
in 37 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, 2001, 2002 and 2003 is based on the Companys audited Consolidated
Financial Statements and the related Notes thereto included in Item 18 of this
annual report. 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 24




---



##### Table of Contents



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 of this annual
report. 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
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 of this annual report. Accounting for Long-lived Assets.Property, plant and equipment and
purchased intangible assets other than goodwill are recorded at
either historical or revaluated 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 25




---



##### Table of Contents



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 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 maintain 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 26




---



##### Table of Contents



reserves. Since management cannot
predict future changes in the financial stability of customers, actual future
losses from uncollectible accounts may differ from the estimates. If the
financial condition of the customers were to deteriorate, resulting in 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 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 optimum 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 of this annual report, 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. 27




---



##### Table of Contents



RESULTS OF OPERATIONS Overview De Rigo posted net sales of 504.8 million for 2003, a 1.5% decrease as
compared with last year. The overall sales results were negatively affected by
the appreciation of the Euro against other currencies in which De Rigo makes
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. Operating
expenses decreased by 5.0% to
277.9 million,
or 55.1% of total net sales, in
2003, as compared to 292.5million, or 57.1% of net sales, in 2002.
Notwithstanding the decline in net sales, income from operations increased 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 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 income of 13.0 million in 2003, as compared to net expenses of
6.9 million in 2002. 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 were 0.42, an increase of 75.0% as
compared with 0.24 per share in 2002. Each of these items is analyzed in more
detail in the comparison of the Groups 2002 and 2003 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 31,2001
    
    2002
    
    2003Net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    36.5
    
    
    
    39.6
    
    
    
    40.0Gross profit
    
    
    63.5
    
    
    
    60.4
    
    
    
    60.0Operating expenses
    
    
    57.4
    
    
    
    57.1
    
    
    
    55.1Income (loss) from operations
    
    
    6.1
    
    
    
    3.3
    
    
    
    4.9Income taxes
    
    
    1.3
    
    
    
    0.0
    
    
    
    3.0Net income
    
    
    4.2
    
    
    
    2.1
    
    
    
    3.7
 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; (iii) export sales by the Group to
independent distributors; and (iv) for the period prior to the Groups sale of
its interest in July 2003, sales by EID, the Groups former joint venture with
the Prada Group for the distribution of Prada-branded eyewear, to opticians,
independent distributors and the Prada retail network in major markets
worldwide. 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 in Italy. Sales to independent distributors, however,
are made at prices that exclude distributor and retailer markups. As a result,
changes 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 28




---



##### Table of Contents



of sales to independent distributors will result in a decrease in 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 does 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 During the three-year period ended December 31, 2003 covered by the
Consolidated Financial Statements included in Item 18, the Group divided its
activities into three distinct segments for financial reporting purposes:  
    
    Wholesale and Manufacturingconsists of the design, manufacturing,
marketing and distribution of high-quality eyewear to opticians in
Italy and to independent distributors and opticians through the Groups
distribution subsidiaries abroad. 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 prescription eyeglasses, fashion
sunglasses and other optical products 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.
    
    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 Sanderbrand names.
This joint venture was terminated in July 2003 by mutual agreement of
the parties; as a result the Group sold its 51% interest 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. Tax Benefits and New Tax Laws The Italian statutory tax rate for 2001 and 2002 was 40.25%, comprised of
a 36% national corporate income tax (IRPEG) and a 4.25% Regional Tax on
Productive Activities (IRAP). New tax laws enacted in 2002 and 2003 had the
effect of reducing the IRPEG (now called IRES) tax rate from 36% to 34% for
year 2003 and from 34% to 33% for 2004. The Company decreased its Italian deferred tax assets and liabilities as
of December 31, 2002 and 2003 to reflect these changes in tax law. In both
2002 and 2003 , the Company recognized, as a change in tax rate, deferred taxes
on temporary differences of its tax exempt companies together with the effect
of the reduction of IRPEG rates from 36% to 34% in 2002 and to 33% in 2003. The
effect of applying the enacted tax rate in 2003 to existing temporary
differences was to increase income tax expense by 0.3 million. 29




---



##### Table of Contents



The 2001 Italian investment tax incentive law was enacted in order to
encourage capital investments and other expenditures in Italy. Companies were
able to reduce their taxable income by up to 50% of the excess of new
qualifying capital and other expenditures made during the second half of 2001
and all of 2002 in fixed assets (tangibles and specified intangibles) over the
average of the investments made in such assets during the five prior years. The
incentive law also applied to certain expenses incurred in connection with
training of companies personnel. The incentive resulted in a current one time
deduction and neither increased nor decreased the tax bases of the assets to
compute future tax deductions for depreciation and amortization relating to the
investment deductions granted. As a result, in each of 2001 and 2002, the
Company recognized a benefit from the investment deductions of 0.2 million. Pursuant to a law decree enacted in 1997 to foster the capitalization of
Italian companies, the Dual Income Tax (DIT) was introduced. In accordance
with such law decree, a portion of the Companys taxable income subject to
IRPEG taxes was taxable at the reduced rate of 19% instead of the enacted IRPEG
rates reported above. Such portion of the taxable income (amounting to 4.7
million in 2001) was computed applying a specific interest rate, fixed by the
Government and equal to 6%, to the net increase in the Companys net equity
over the period from December 31, 1996 to December 31, 2001. The application of
DIT reduced the Companys current taxes by 0.8 million in 2001. Deferred
taxes on temporary differences at December 31, 2002 and 2001 are accounted for
at the tax rate expected to occur in the year of reversal, taking into
consideration the enacted IRPEG rates, the expected applicable effect of the
DIT benefit and the enacted IRAP tax rate. See Note 11 of Notes to the Consolidated Financial Statements included in
Item 18 of this annual report, Risk Factors in Item 3 and
 Italian Government Investment Incentive Program  Tax Benefits in Item 4. 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 Groups financial
performance. These non-GAAP measures include sales results calculated on an
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 (i.e., calculating results for the first quarter of 2004 on the
basis of the average exchange rates used to translate sales made in non-euro
currencies during the first quarter of 2003 into euro). With respect to the
first quarter of 2004, the Group has also calculated comparative results for
2003 that exclude 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 sales performance on a consistent consolidation basis.
In both 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 the
De Rigos results of operations. These non-GAAP measures are also commonly
used by securities analysts, credit rating agencies and investors to evaluate
De Rigos operating performance and 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. 30




---



##### Table of Contents



Unaudited First Quarter Sales Results The Group posted net sales of 139.2 million for the first quarter of
2004, a 0.5% decrease as compared with the same period last year. These
unaudited sales results, which were calculated on the basis of Italian GAAP,
reflected positive trends in the Groups current businesses, as comparisons
with the prior year were affected by De Rigos sale of the controlling interest
in EID during July 2003. As indicated in the reconciliation table appearing
below, excluding EIDs net sales from the Groups results for the
first quarter of 2003 (during which EID was consolidated for the
entire period), the
period on period increase in consolidated net sales was 6.1% at current
exchange rates and 7.0% at constant exchange rates. 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 both a constant
exchange rate basis and on a basis that excludes sales made through EID to
sales calculated in accordance with Italian GAAP. NET SALES BY BUSINESS SEGMENT
(including reconciliations of non-GAAP measures)
( in millions) 1Q 2003
    
    1Q 2004
    
    
    
    
    
    1Q 2004*Effect of
    
    IQ 2004application of
    
    Sales at constantNet
    
    Net
    
    
    
    constant
    
    exchange rates
    
    %Sales
    
    Sales
    
    % change
    
    exchange rates
    
    (Non-GAAP)
    
    changeWholesale & Manufacturing
    
    
    41.5
    
    
    
    42.3
    
    
    
    +1.9
    %
    
    
    0.3
    
    
    
    42.6
    
    
    
    +2.7
    %Retail
    
    
    94.5
    
    
    
    99.9
    
    
    
    +5.7
    %
    
    
    0.9
    
    
    
    100.8
    
    
    
    +6.7
    %- D&A
    
    
    61.8
    
    
    
    63.5
    
    
    
    +2.8
    %
    
    
    0.9
    
    
    
    64.4
    
    
    
    +4.2
    %- GO
    
    
    32.7
    
    
    
    36.4
    
    
    
    +11.3
    %
    
    
    0.0
    
    
    
    36.4
    
    
    
    +11.3
    %Elimination of Intercompany Sales
    
    
    (4.8
    )
    
    
    (3.0
    )
    
    
    -37.5
    %
    
    
    0.0
    
    
    
    (3.0
    )
    
    
    -37.5
    %Consolidated net sales excluding
net sales through EID
    
    
    131.2
    
    
    
    139.2
    
    
    
    +6.1
    %
    
    
    1.2
    
    


    140.4
    
    
    
    +7.0
    %EID
    
    
    8.7
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0
    
    
    
    0.0Consolidated net sales
    
    
    139.9
    
    
    
    139.2
    
    
    
    -0.5
    %
    
    
    1.2
    
    
    
    140.4
    
    
    
    +0.4
    %
   *     The translation of foreign currencies into euro has been made using the
following rates: Currencies
    
    1Q 2003
    
    1Q 2004US dollars per euro
    
    
    1.0731
    
    
    
    1.2497Pound Sterling per euro
    
    
    0.6696
    
    
    
    0.6799Japanese Yen per euro
    
    
    127.5857
    
    
    
    133.9720HK dollars per euro
    
    
    8.3695
    
    
    
    9.7201
 Consolidated net sales.The Groups consolidated net sales of 139.2
million were broken down as follows: eyewear sales of 65.6 million, lens sales
of 42.0 million, contact lens sales of 18.6 million and other sales and
revenues of 13.0 million, as compared with sales of 70.9 million, 37.6
million, 18.7 million and 12.7 million, respectively, for the first quarter
of 2003. 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 31




---



##### Table of Contents



Hong Kong Dollars, as the average exchange rates for these currencies in
the first quarter of 2004 were less favorable to the Group than those during
the first quarter of 2003. As detailed in the reconciliation table above,
foreign exchange rate translations had a negative effect of 0.9% on
consolidated net sales. Analyzing consolidated net sales by geographic area, net sales in Europe
increased by 2.0% to 126.6 million, primarily as a result of higher net sales
through the retail companies and increased wholesale sales in certain markets.
Net sales in the Americas decreased to 2.5 million from 3.2 million,
primarily as a result of the deconsolidation of EID. Net sales in the Rest of
the World decreased to 10.1 million from 12.6 million, primarily as a result
of the deconsolidation of EID and lower sales in certain Middle and Far East
markets not served by distribution subsidiaries that were partially offset by
the very positive results posted by the Groups distribution subsidiaries
located in the Far East region. Net sales by business segment.Wholesale and manufacturing sales grew by
1.9% to 42.3 million from 41.5 million posted in the first quarter of 2003.
Excluding net sales made by the wholesale and manufacturing business segment to
EID from the first quarter of 2003 results, net sales increased by 4.4% at
current exchange rates and by 5.2% at constant exchange rates, as detailed in
the following reconciliation table: Euro in millions 1Q 2004
    
    1Q 20041Q 2003
    
    1Q 2004
    
    
    
    
    
    Effect ofapplication of
    
    Sales at constantNet
    
    Net
    
    
    
    constant
    
    exchange ratesSales
    
    Sales
    
    % change
    
    exchange rates
    
    (Non-GAAP)
    
    % changeWholesale & Manufacturing sales
    
    
    41.5
    
    
    
    42.3
    
    
    
    +1.9
    %
    
    
    0.3
    
    
    
    42.6
    
    
    
    +2.7
    %- of which sales to EID
    
    
    (1.0
    )
    
    
    0.0
    
    
    
    
    
    
    
    0.0
    
    
    
    0.0Wholesale & Manufacturing
sales excluding net sales to
EID
    
    
    40.5
    
    
    
    42.3
    
    
    
    +4.4
    %
    
    
    0.3
    
    
    
    42.6
    
    
    
    +5.2
    %
 As indicated in the reconciliation table above, when calculated on a
constant exchange rate basis, the business segments sales increased by 2.7%.
The increase in wholesale and manufacturing sales was primarily due to very
strong sales results posted by the Groups in certain Far East markets,
particularly Japan and Hong Kong, as well as in several European markets
including France, Greece, Germany and Spain. Sales through the retail companies increased by 5.7% to 99.9 million from
94.5 million posted in the first quarter of 2003. As indicated in the
reconciliation table on the prior page, when calculated on a constant exchange
rate basis, net sales through the retail companies increased by 6.7%. 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, for the first quarter of each of 2004 and 2003 and as of March 31, 2003
and March 31, 2004. 1Q 2003
    
    1Q 2004
    
    
    
    
    
    Mar 31, 03
    
    Mar 31, 04
    
    
    
    
    
    Mar 31, 03
    
    Mar 31, 04Euro in
    
    Euro in
    
    
    
    
    
    Owned
    
    Owned
    
    Unit
    
    Franchised
    
    Franchised
    
    Unitmillions
    
    millions
    
    % Change
    
    stores
    
    stores
    
    change
    
    stores
    
    stores
    
    changeD&A
    
    
    61.8
    
    
    
    63.5
    
    
    
    +2.8
    %
    
    
    233
    
    
    
    232
    
    
    
    -1
    
    
    
    145
    
    
    
    143
    
    
    
    -2General Optica
    
    
    32.7
    
    
    
    36.4
    
    
    
    +11.3
    %
    
    
    140
    
    
    
    143
    
    
    
    +3
    
    
    
    7
    
    
    
    14
    
    
    
    +7Total Retail
    
    
    94.5
    
    
    
    99.9
    
    
    
    +5.7
    %
    
    
    373
    
    
    
    375
    
    
    
    +2
    
    
    
    152
    
    
    
    157
    
    
    
    +5
 32




---



##### Table of Contents



Sales at D&A grew by 4.2% in Pound Sterling terms, while same store sales
per working day increased by 5.1%. In Euro terms, D&As sales grew to 63.5
million, an increase of 2.8% as compared with sales of 61.8 million posted in
the first quarter of 2003, reflecting the decline in the value of the Pound
Sterling against the Euro. Sales of franchised stores during the period grew
by 1.7% to 17.6 million; in Pound Sterling terms, sales of franchised stores
increased by 3.5%. The increase in D&As sales was primarily attributable to
the Companys continuing aggressive marketing campaigns driving increased sales
of higher quality products. At March 31, 2004, D&A operated a network of 232
owned shops and 143 franchised shops. General Optica grew sales by 11.3% to 36.4 million from the 32.7 million
posted in the first quarter of 2003. General Optica continued to achieve
notable net sales gains as a result of a 8.4% increase in same store sales per
working day, as well as the expansion of its owned and franchised store
network. At March 31, GO operated a network of 143 owned shops and 14
franchised shops, having opened a net total of 3 owned shops and 7 franchised
shops during the last twelve months. 2003 compared to 2002 Net sales. De Rigo posted net sales of 504.8 million for 2003, a 1.5%
decrease as compared with last 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. NET SALES BY BUSINESS SEGMENT
(Euro in millions)
(including reconciliations of non-GAAP measures) 2003*
    
    20032002
    
    2003
    
    
    
    Effect ofapplication of
    
    Sales at constantReported
    
    Reported
    
    
    
    constant
    
    exchange ratessales
    
    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
    %- GO
    
    
    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 translation of foreign currencies into euro has been made using the
following rates: Currencies
    
    2002
    
    2003US dollars per euro
    
    
    0.9456
    
    
    
    1.1312Pound Sterling per euro
    
    
    0.6288
    
    
    
    0.6920Japanese Yen per euro
    
    
    118.0625
    
    
    
    130.9712HK dollars per euro
    
    
    7.3750
    
    
    
    8.8079
 33




---



##### Table of Contents



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%. Net 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. 2002
    
    2003
    
    
    
    
    
    Dec 31, 02
    
    Dec 31, 03
    
    
    
    
    
    Dec 31, 02
    
    Dec 31, 03Euro in
    
    Euro in
    
    
    
    
    
    Owned
    
    Owned
    
    Unit
    
    Franchised
    
    Franchised
    
    Unitmillions
    
    millions
    
    % Change
    
    stores
    
    stores
    
    change
    
    stores
    
    stores
    
    changeD&A
    
    
    236.2
    
    
    
    230.8
    
    
    
    -2.3
    %
    
    
    233
    
    
    
    232
    
    
    
    -1
    
    
    
    147
    
    
    
    144
    
    
    
    -3GO
    
    
    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. 34




---



##### Table of Contents



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. 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 remained unchanged at 12.0
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 54.9% 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 203.2 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. 35




---



##### Table of Contents



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 6.9 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. Income taxes.Income taxes amounted to 14.9 million in 2003, as compared
with 0.1 million in 2002. The Groups income was taxed at an effective rate
of 39.5% in 2003, as compared to an effective rate of 0.5% in 2002. 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 73.6% 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 0.41 on a weighted average
total of 44.7 million outstanding shares, an increase of 70.8% as compared with
0.24 in 2002. 2002 compared to 2001 Net sales.De Rigo posted consolidated net sales of 512.5 million in
2002, an increase of 1.4%, as compared with sales of 505.3 million in 2001.
The sales results of the Group and each of its segments are summarized in the
tables appearing in Business Overview in Item 4 Information on the Company
above. The increase in net sales primarily reflected strong price growth in the
Groups wholesale and manufacturing segment, particularly in the premium-priced
segment of the market, and General Optica, the Iberian retail optical chain
acquired by the Group in February 2000. The Groups consolidated net sales of 512.5 million for 2002 were broken
down as follows: eyewear sales of 245.3 million, lens sales of 138.7 million,
contact lens sales of 76.5 million, and other sales and revenues of 51.9
million, as compared with sales of 234.6 million, 148.3 million, 69.5
million and 52.9 million, respectively, in 2001. Total unit sales decreased by 3.4% to 5,497,130. Unit sales of sunglasses
decreased by 2.2% and accounted for 55.3% of the Groups overall unit sales,
having represented 54.6% of unit sales in 2001. Unit sales of prescription
frames decreased by 4.8%, and accounted for 44.7% of the Groups overall unit
sales, having represented 45.4% of those sales in 2001. Net sales by business segment Wholesale and Manufacturing sales, including sales to the other segments,
increased by 5.9% to 141.1 million from 133.2 million in 2001. 36




---



##### Table of Contents



The 2002 sales results of the wholesale and manufacturing segment were
influenced by a difficult market environment in certain markets such as
Singapore, Italy and Germany. The negative impact of this factor was more than offset by very strong
sales results in a number of other markets, including Japan, the United
Kingdom, France and Korea, and by De Rigos continuing success in the
premium-priced segment of the market, as sales of the Groups licensed brands
increased by approximately 23% as compared with last year. Sales through retail companies, including sales to the other segments,
amounted to 359.6 m, an increase of 0.3% as compared with sales of 358.4
million in the fiscal year 2001. Sales of D&A, the Groups British retail chain, totalled 236.3 million, a
decrease of 4.6%, as compared with sales of 247.6 million in 2001. These
decreases reflected a difficult retail environment for sales of optical frames
in the United Kingdom and were primarily a consequence of certain disruptions
and delays in service due to changes in the supply chain for lenses being
implemented by Essilors subsidiary BBGR. BBGR purchased D&As assembly
factories in 2001 and these changes in the supply chain are designed to ensure
that D&A receives the highest quality lenses. In the last quarter of 2002, the
level of service at the lens plants sold to BBGR improved significantly,
reducing delivery lead-times to the Groups customers. Sales of franchised shops totalled 62.9 million, a decrease of
approximately 1.4 % compared to 2001. At December 31, 2002, D&A operated a
network of 233 owned shops and 147 franchised shops. General Optica, the Groups Spanish retail company, reported sales of
123.4 million, an increase of 11.6% as compared to sales of 110.6 million in
2001, reflecting a 8.5% growth in same-store sales per working day, an increase
in sales of sunglasses and the contribution of new stores opened within the
last year. At December 31, 2002, General Optica operated a network of 140
owned shops and 5 franchised shops, having begun to implement a new strategy of
opening franchised shops in smaller Spanish cities and towns in which a direct
investment in company-owned stores would not be likely to produce reliably high
returns. Total unit sales at EID continued to grow, increasing by 37.3% as compared
with 2001. The increase in volumes sold reflects the effect of EIDs new
distribution organization, which is primarily focused on sales agents in Europe
and independent distributors outside of Europe. The implementation of this new
structure resulted in a significant decline in the units average prices, as
the percentage of sales made through independent distributors increased. As a
result, sales at EID declined by 2.8% to 31.2 million from 32.1 million in
2001. Net sales by geographic region.Analyzing consolidated net sales by
geographic area, net sales in Europe increased by 2.4% to 463.9 million,
primarily reflecting increased wholesale sales in a number of European markets,
including France, Greece and the United Kingdom (notwithstanding the difficult
retail environment for optical frames that negatively affected the retail
segments results in that country), as well as strong sales growth at General
Optica. Net sales in the Americas decreased by 31.4% to 12.0 million,
primarily due to the recent economic crisis in Argentina and lower sales at
EID. Net sales in the Rest of the World increased by 6.1% to 36.6 million,
primarily reflecting increased sales in the Far East region. Cost of sales.Cost of sales increased by 10.3% to 203.2 million or 39.6%
of total net sales, in 2002, from 184.3 million, or 36.5% of net sales, in
2001. The increase in cost of sales in absolute terms and as a percentage of
total sales was attributable to the growth in net sales, especially those of
higher 37




---



##### Table of Contents



margin luxury/designer eyewear, as well as to manufacturing inefficiencies
in the launch of some new brands collections at the beginning of the year. Operating expenses.Operating expenses increased by 0.9% to 292.5
million, or 57.1% of total net sales, in 2002, as compared to 289.9 million,
or 57.4% of net sales, in 2001. Operating expenses increased at a lower rate
than net sales primarily due to the cost-containment efforts of D&A and to the
increased proportion of overall sales accounted for by the wholesale and
manufacturing segment, which benefits from proportionally lower operating
expenses than the Groups other segments. Commissionsdecreased by 1.8% to 16.4 million, or 3.2% of total net
sales, in 2002, from 16.7 million, or 3.3% of net sales, in 2001, primarily
due to a decline in commissions paid by EID to the Prada Group for the sales of
Pradaeyewear through the Prada Groups network of stores following the
restructuring of the EID distribution system noted above. The effects of this
decline on the overall result was partially offset by increased commissions
paid as a result of the continuing success of the Contact Lenses by Post mail
order program operated by D&A, for which the Company pays commissions to
franchisees. Advertising and promotion expensesdecreased by 1.7% to 34.9 million, or
6.8% of total net sales in 2002, from 35.5 million, or 7.0% of net sales, in
2001. The decrease reflected the fact that advertising expenses in the
wholesale and manufacturing segment in 2001 had included those relating to the
launch of certain new luxury/designer brands and the new Policeadvertising
campaign. Advertising expenses also increased at D&A, which increased its
marketing activities in the last quarter of the year. Other selling expensesincreased by 1.5% to 203.0 million, or 39.6% of
total net sales, in 2002, from 200.0 million, or 39.6% of net sales, in 2001.
Selling expenses increased in absolute terms at all of the Groups business
segments except at D&A, and rose in particular at General Optica as a result of
its opening of new stores. The decrease at D&A reflected its on-going cost
reduction efforts. General and administrative expensesincreased by 1.6% to 38.3 million, or
7.5% of total net sales, in 2002, from 37.7 million, or 7.5% of net sales, in
2001. The increase in general and administrative expenses in absolute terms
was primarily attributable to higher provisions for doubtful accounts in the
wholesale and manufacturing segment following a perceived deterioration in
market conditions in certain countries, as well as higher personnel costs at
General Optica. Income from operations.Income from operations decreased by 46.3% to 16.7
million, or 3.3% of total net sales, in 2002, from 31.1 million, or 6.2% of
net sales, in 2001. The decrease in the Groups operating income was primarily
attributable to the lower operating results of D&A (which recorded operating
profit of 1.5 million in 2002, as compared with 12.3 million in 2001, net of
goodwill amortization of 1.6 million and 1.7 million, respectively), and the
wholesale and manufacturing segment (which recorded operating profit of 7.2
million in 2002, as compared with 11.8 million in 2001, net of goodwill
amortization of 0.3 million and 0.3 million, respectively). The decline in
income from operations in the wholesale and manufacturing segment, both in
absolute terms and as a percentage of sales, was primarily attributable to
lower gross margins reflecting the cost factors discussed above. Other income (expenses).Financial and other items contributed net
expenses of 6.9 million in 2002, as compared to net expenses of 3.9 million
in 2001. Net financial expenses in 2002 totalled 3.4 million, compared to net
financial expenses of 3.2 million in 2001. Net other expenses of 3.6
million, as compared to net other expenses of 0.7 million in 2001, accounted
for the remainder of the total net result in 2002 mainly due to exchange rate
losses and expenses related to special corporate projects. 38




---



##### Table of Contents



Income taxes.Income taxes amounted to 0.1 million in 2002, as compared
with 6.6 million in 2001. The Groups income was taxed at an effective rate
of 0.01% in 2002, as compared with an effective rate of 24.1% in 2001. The
decrease in the effective tax rate was primarily due to the recognition of
deferred tax assets on tax relief granted to the Group in connection with the
expiration of certain tax incentives. Net income.Net income decreased by 50.0% to 10.6 million in 2002 from
21.2 million in 2001 and represented 2.1% of net sales, as compared with 4.2%
last year. Earnings per share.Earnings per share were 0.24 on a weighted average
total of 44.7 million outstanding shares, a decrease of 50.0% as compared with
0.48 in 2001. 
 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, 2000, 2001 and 2002. 
 U.S. GAAP Reconciliation The Groups consolidated net income determined in accordance with U.S.
GAAP would have been
24.3 million, 17.1 million and 18.2 million for the
years ended December 31, 2003, 2002 and 2001, respectively, as compared with
net income of 18.5 million, 10.6 million and 21.2 million, respectively, for
the same periods, as determined under Italian GAAP. The principal difference
affecting the determination of net income in 2001 related to the different
treatment under U.S. GAAP of certain stock option expenses and intangible
assets and deferred charges, as well as the Groups revaluation of certain
trademarks. Differences in goodwill depreciation principles under Italian GAAP
and U.S. GAAP following the Groups adoption of SFAS 144 impacted the results
for 2002 and 2003. In addition 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 statement of operations and reported after income from
continuing operations. The Groups total assets determined in accordance with U.S. GAAP would
have been
392.2 million
and
450.1 million at December 31, 2003 and 2002,
respectively, as compared with 376.9 million and 439.9 million, respectively,
under Italian GAAP. Shareholders equity determined in accordance with U.S.
GAAP would have been
221.7 million and 199.5 million at December 31, 2003 and
2002, respectively, as compared with 226.9 million and 212.1 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 of this annual report. 
 Liquidity and Capital Resources De Rigos cash flow from operating activities increased from 22.3 million
in 2002 to 50.8 million in 2003, primarily as a result of the improvement of
income from operations at a group level. 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 of credit with
Italian banks, which have no set term and are payable upon demand. At December
31, 2002 and 2003, the Group had unsecured short-term bank lines of credit
aggregating approximately 167,324 and 137,103, respectively. At December 31,
2002 and 2003, approximately 82,144 and 114,534, respectively, were available
for further borrowings. At December 31, 2002 and 2003, the weighted 39




---



##### Table of Contents



average interest rates for the short-term lines of credit were 3.99% and
3.48%, 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
Note 8 of the Notes to the Consolidated Financial Statements included in Item
18. At December 31, 2003, the Company had positive net working capital
(calculated as our total current assets less our current liabilities) of 32.5
million, as compared to negative 4.1 million at December 31, 2002. The
increase in net working capital was primarily attributable to a sharp decline
in short-term bank borrowings, which fell to 22.6 million at December 31, 2003
from 85.2 million a year earlier, as a result of repayments made possible by
the strong cash flow generated by operating activities, as well as to
reductions in outstanding trade accounts receivable and inventories. In
2003, cash provided by investing activities was equal to
2.9 million, as
compared to cash used of 16.7 million in 2002, reflecting the positive cash impact of the
Groups sale of its interest in EID to Prada, as well as lower capital
expenditures at both General Optica, which opened fewer new stores, and D&A,
which reduced its expenditures on refitting stores. Net cash used in financing activities increased significantly, from 9.3
million in 2002 to
54.8 million in 2003, reflecting the Groups use of cash
generated by operations to repay short-term debt. Capital expenditures in 2003 were 11.6 million, as compared to 16.1
million in 2002, and were primarily attributable to the refitting of stores by
General Optica and to investments made at D&A for the refitting of shops.
Capital expenditures were financed principally with funds from operations. The Group expects to incur capital expenditures of approximately 25
million in 2004, 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 2004. As of December 31, 2003 and 2002, the Groups ratio of long-term debt to
shareholders equity was 0.2% and 0.3%, respectively. The decrease in this
ratio between 2003 and 2002 reflects the increase in the level of the Groups
retained earnings. 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 2003, 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 of this annual report 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. 40




---



##### Table of Contents



Contractual Obligations The following table sets forth the contractual obligations and commercial
commitments of the Group with definitive payment terms which will require
significant cash outlays in the future, as of December 31, 2003: Payments Due by
Period
(in millions of euro) 2005-
    
    2007-
    
    2009 andTotal
    
    2004
    
    2006
    
    2008
    
    thereafterLong-Term Debt
    
    
    0.7
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2Operating Leases
    
    
    165.5
    
    
    
    25.8
    
    
    
    44.7
    
    
    
    36.0
    
    
    
    59.0Other
Commitments
    
    
    12.5
    
    
    
    6.0
    
    
    
    6.5
    
    
    
    
    
    
    
    Total Obligations
    
    
    178.7
    
    
    
    32.0
    
    
    
    51.4
    
    
    
    36.1
    
    
    
    59.2
 Long-term debt.For information on our long-term debt obligations, see
 Capital 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, 2003, the future lease payments under these
operating leases totalled approximately 165.5 million. For additional
information, see Note 16 of Notes to the Consolidated Financial Statements
included in this Annual Report. Other
commitments.At December 31, 2003, 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, 2003, the minimum future
payments arising out of these agreements totalled approximately 10.9
million, of which approximately 7.6 million related to royalty
arrangements and 3.3 million for 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, 2003 future payments due
under these agreements totalled approximately
1.6 million. 41




---



##### Table of Contents



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, 2001, 2002 and 2003. 
 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(q) of Notes
to the Consolidated Financial Statements included in Item 18 of this annual
report. 
 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 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. 42




---



##### Table of Contents




    
    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. Name
    
    Age
    
    Position within Group/CompanyEnnio De Rigo
    
    
    64
    
    
    Chairman of the Board of Directors and Chief Executive OfficerEmiliana De Meio De Rigo
    
    
    60
    
    
    Vice Chairman of the Board of DirectorsWalter De Rigo
    
    
    72
    
    
    DirectorMichele Aracri
    
    
    47
    
    
    Director and Managing DirectorMaurizio Dessolis
    
    
    38
    
    
    Vice-Chairman and Chief Financial Officer (3)Massimo De Rigo
    
    
    35
    
    
    Vice-Chairman and Head of Design Department (3)
 43




---



##### Table of Contents



Name
    
    Age
    
    Position within Group/CompanyLuigi Arsellini
    
    
    74
    
    
    Outside Director (1)Claudio Dematté
    
    
    61
    
    
    Outside Director (2)Enrico Valdani
    
    
    55
    
    
    Outside DirectorAdriano De Sandre
    
    
    48
    
    
    Head of Manufacturing OperationsJordi Fontcuberta
    
    
    48
    
    
    Managing Director, General OpticaRussel Hardy
    
    
    43
    
    
    Managing Director, Dollond & AitchisonBruno Palmegiani
    
    
    54
    
    
    Art & Creative DirectorMario Sommavilla
    
    
    56
    
    
    Chief Administrative Officer
   (1)
    
    Mr. Arsellini resigned from the Board in May 2003.(2)
    
    Mr. Dematté died in February 2004.(3)
    
    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 on the same day. 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 the De Rigo brothers. 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. Luigi Arsellini was an Outside Director of the Company from September
1995 through May 2003, at which time he resigned from the Board of Directors. Professor Claudio Dematté was an Outside Director of the Company from
September 1995 until his untimely death in February 2004. He was a Full
Professor of Economics of Financial Intermediaries at L. Bocconi University in
Milan and from 1997 to 2002 chairman of SDA Bocconi Business School. He had
been Chairman of the Board of Directors of FS-Ferrovie dello Stato, CARIME
Bank, RAI-Radio Televisione Italiana and BTB, Banca di Trento e Bolzano, as
well as serving on the boards of several other companies, including Winterthur
Assicurazioni S.p.A. and Natuzzi S.p.A. 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. 44




---



##### Table of Contents



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. Mr. Adriano De Sandre has been the Head of Manufacturing Operations of the
Company since May 1999. From 1987 to 1999, he was Manufacturing Planning
Manager and Operating Director of SAFILO, one of Italys leading optical
companies. 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 Bacardi-Martini
Spain and Chief Financial Officer of DArcy Masius Benton Bowles Spanish
operations. Mr. Russel Hardy has been the Managing Director of Dollond & Aitchison
since 1996. Before joining D&A, he was the Trading Director  Fresh Foods of
Safeway Stores plc, a British consumer goods retail chain. 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. 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 45




---



##### Table of Contents



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 2.1
million in 2003, excluding the accrual for termination indemnities required by
Italian law. In addition, such senior managers have been granted options in
respect of a total of 591.000 Ordinary Shares pursuant to the stock option plan
described in Item 10. Additional Information Options to Purchase Securities
from Registrant or Subsidiaries. The directors of the Company are not
eligible to receive options under such plan. As of June 25, 2004, 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, 2003, the Group had approximately 4,800 employees
worldwide, of which approximately 3,300 were sales employees (including about
2,150 at D&A and 990 at General Optica), approximately 800 were manufacturing
employees and 600 were employed at central offices. The Group had approximately
4,700 employees at December 31, 2002. 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 July 1, 2000,
and expired on December 31, 2003. 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, 2003, the Group had accrued 6.3 million in
respect of such termination indemnity liabilities, such reserves being equal to
the amounts required by Italian law. 46




---



##### Table of Contents



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. The prepaid benefit costs will be realized through lower future
contributions as differences occur between the funding and expensing of the
pension plan, or as a result of a combination of these events. Contributions
made by D&A to the defined contribution plan are based on a percentage of
employee compensation. Pension expense recognized for the contribution plan
amounted to 5.7 million in 2003. This plan was under-funded by 38.5 million
at December 31, 2003. See Note 12 of Notes to the Consolidated Financial
Statements included in Item 18 of this annual report. 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 2.5 million at December 31, 2003. The net decrease in the benefit
obligation of 0.1 million during 2003 represents the net periodic benefit cost
recognized of 0.2 million for the twelve months ended December 31, 2003 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 of
this annual report. 
 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. As of June 1,2004
    
    2003
    
    2002No. of Shares
    
    % of Class
    
    No. of Shares
    
    % of Class
    
    No. of Shares
    
    % of ClassEnnio De Rigo and
Walter De Rigo(1)
    
    
    32,922,000
    
    
    
    74.0
    %
    
    
    32,922,000
    
    
    
    73.6
    %
    
    
    32,801,600
    
    
    
    73.4
    %Schroeder
Investment Mgmt. Ltd(2)
    
    
    3,211,111
    
    
    
    7.2
    %
    
    
    n.a.
    
    
    
    
    

    
    n.a.Prada
    
    
    2,225,000
    
    
    
    5.0
    %
    
    
    2,225,000
    
    
    
    5.0
    %
    
    
    2,225,000
    
    
    
    5.0
    %Michele Aracri
    
    
    870,000
    
    
    
    2.0
    %
    
    
    870,000
    
    
    
    1.9
    %
    
    
    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, 2004, June, 1, 2003 and
June 1, 2002, 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.(2)
    
    Holding as of December 31, 2003, as reported in
the Schedule 13G filed with the SEC on February 13, 2004. 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 of this annual report. 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. 47




---



##### Table of Contents



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 the De Rigo Brothers.
The related construction costs through December 31, 2003, 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 of this annual report. 
 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 95.7 million in
2003, as compared with 92.1 million in 2002, represented 19.0% of the Groups
net sales (17.9% in 2002). Legal Proceedings The Group is involved from time to time in various claims and litigation
incidental to the ordinary course of its business, including various
governmental and administrative proceedings. Management does not believe that
the outcome of any pending claim or proceedings is likely to have a material
adverse effect on the Company. 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 5, 2004, 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, 2003. The
Company did also not pay dividends in respect of the fiscal years ended
December 31, 1999 and 2003 For
the fiscal years ended December 31, 1999, 2001 and 2002, the Company
paid dividends of 0.09, 0.12 and 0.13 per Ordinary Share to holders of
record as of June 4, 1999, of June 4, 2001 and June 6, 2002, respectively. 48




---



##### Table of Contents



Item 9.The Offer and Listing 
 TRADING MARKETS AND SHARE PRICES De Rigos Ordinary Shares (in the form of American Depositary Shares
(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. Price Range of ADSsHigh
    
    Low1999:First Quarter
    
    $
    8
    
    
    
    
    3/8
    
    $
    4
    
    
    
    15/16Second Quarter
    
    $
    7
    
    
    
    
    3/8
    
    $
    5
    
    
    
    5/8Third Quarter
    
    $
    6
    
    
    
    
    1/4
    
    $
    4
    
    
    
    15/16Fourth Quarter
    
    $
    6
    
    
    
    
    1/16
    
    $
    4
    
    
    
    15/162000:First Quarter
    
    $
    6
    
    
    
    
    5/8
    
    $
    5
    
    
    
    1/8Second Quarter
    
    $
    6
    
    
    
    
    5/8
    
    $
    5
    
    
    
    Third Quarter
    
    $
    9
    
    
    
    
    
    
    $
    6
    
    
    
    3/8Fourth Quarter
    
    $
    8
    
    
    
    
    3/4
    
    $
    6
    
    
    
    7/82001: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
    
    
    
    
    
    
    $4.10Month EndedJanuary 31, 2004.
    
    
    
    
    
    
    
    $5.39
    
    
    
    
    
    
    $4.95February 28, 2004
    
    
    
    
    
    
    
    $5.15
    
    
    
    
    
    
    $4.65March 30, 2004
    
    
    
    
    
    
    
    $5.99
    
    
    
    
    
    
    $5.05April 30, 2004
    
    
    
    
    
    
    
    $6.15
    
    
    
    
    
    
    $5.34May 31, 2004
    
    
    
    
    
    
    
    $6.38
    
    
    
    
    
    
    $5.95
 49




---



##### Table of Contents



As
of June 25, 2004, 44,714,255 Ordinary Shares were outstanding. As of
the same date, there were outstanding 9,514,195 ADSs (equivalent to the same
number of Ordinary Shares) representing 21.3% of the total number of
outstanding Ordinary Shares. A total of 223,200 ADSs were owned by the Company
as of such date, having been repurchased as part of De Rigos authorized
buy-back program. See By-lawsPurchase of Shares by the Company 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.

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 varies according to the performance of the Companys ADSs during the
relevant period. In accordance with the 2000 Option Plan, the Company has
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.

At December 31, 2003, a total of 800,621 options were outstanding, a total
of 214,255 options having been exercised and 184,524 options having been
forfeited.

50



---



##### Table of Contents



For additional information on these stock options, see Note 13 of Notes to
the Consolidated Financial Statements included in Item 18 of this annual
report. 
 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 25, 2004, the issued and outstanding share capital of the
Company consists of 44,714,255 Ordinary Shares, par value euro 0.26 per share.
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. 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 25, 2004, 214,255 of such new shares had been
issued and fully paid. Form and Transfer of Shares Ordinary shares are 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. 51




---



##### Table of Contents



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 Shareholders 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. 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. 52




---



##### Table of Contents



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 five days in advance by
registered letter 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 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. 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. The remuneration of directors is determined by shareholders at ordinary
shareholders meetings. 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 53




---



##### Table of Contents



managing director. Directors are entitled to reimbursement for expenses
reasonably incurred in connection with their functions. With effect from January 1, 2004, an Italian stock corporation may adopt
one of two different models of corporate governance structure, as an
alternative to the current model based on a board of directors and a board of
statutory auditors. Stock corporations may opt for (i) a one-tier model with a
single board of directors, including an audit committee composed of independent
non-executive directors, or (ii) a two-tier model, including a management
board, which is entrusted with management responsibilities, and a supervisory
board which is entrusted mainly with control and supervisory responsibilities
and, among other functions, appoints and removes the members of the management
board and approves the companys annual financial statements. The adoption of
one of the new corporate governance models requires an extraordinary
shareholders meeting resolution. The amended By-laws approved by our
shareholders on May 24, 2004, do not provide for a change in our governance
structure. 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. 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 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. As mentioned in the preceding section, starting from January 1, 2004,
Italian stock corporations may depart from the traditional Italian model of
corporate governance structure and opt for two 54




---



##### Table of Contents



alternative models, neither of which includes a board of statutory auditors.
The amended By-laws approved by our shareholders on May 24, 2004, do not provide
for a change in our governance structure. External Auditor The 2003 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
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, 55




---



##### Table of Contents



mergers and de-mergers, capital increases and reductions, where such resolutions
may not be taken by our board of directors. In particular, our board of directors
may transfer our registered office within Italy or resolve upon other
amendments to our By-laws when these amendments are required by law, resolve
upon mergers by absorption into us of our subsidiaries in which we hold at
least 90% of the issued share capital and reductions of our share capital in
case of withdrawal of a shareholder. Our 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. 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 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. A separate proxy must be provided
for each meeting. Share certificates may be retrieved following the meeting. Preemptive Rights Pursuant to Italian law, holders of Ordinary 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. 56




---



##### Table of Contents



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 our shares in
vested in our board of directors. Segregation of Assets and Proceeds Pursuant to the 2003 corporate law reform, effective January 1, 2004, the
board of directors of an Italian company 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. 57




---



##### Table of Contents



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 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. There is currently 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, which is valid until May 2005. As of June 25, 2004, the Company had
repurchased a total of 223,200 ADSs pursuant to this authorization. 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, 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 to the net assets 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% 58




---



##### Table of Contents



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 is successful 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 contemplates
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 59




---



##### Table of Contents



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
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 60




---



##### Table of Contents



do not have a dedicated internal
audit function at the current time, nor have we out-sourced any such
activities. 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 of this annual report, 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. 61




---



##### Table of Contents



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 guidelines, on the other hand, do not address
all of the issues contemplated by the NYSE standards. Certifications as to Violations of NYSE Standards NYSE domestic company standards.Under NYSE listing standards, the CEO of
a U.S. company must certify annually that he or she is unaware of any violation
by the company of the NYSE corporate governance standards. This certification
must be included in the companys annual report to shareholders (or, if no
annual report is prepared, its Form 10-K). The CEO must also notify the NYSE
in writing if
any executive officer becomes aware of any material non-compliance with
the NYSE corporate governance standards. Our practice.The NYSE does not apply the first of the two domestic
certification standards to foreign private issuers. Accordingly, our CEO must
only notify the NYSE in writing if any executive officer becomes aware of any
material non-compliance 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 se
require 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 would affect the
payment of dividends or other remittances to holders of ADSs or Ordinary Shares
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 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. The summary does not discuss the
treatment of Ordinary Shares or ADSs that are held in connection with a 62




---



##### Table of Contents



permanent establishment or fixed base 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 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. 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. 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. 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 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. The
time for processing requests for certification by the U.S. Internal Revenue
Service 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 63




---



##### Table of Contents



obtain from the
U.S. Internal Revenue Service. 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.
Distribution of additional shares issued upon capitalization of reserves to
beneficial 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 Italian tax. However, such additional shares will reduce the tax
basis of each single share for the calculation of the capital gains tax. 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 64




---



##### Table of Contents



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 our shares or ADSs after December 31, 2002 and before January 1,
2009 is subject to taxation at a maximum rate of 15%. You should consult your
own tax adviser regarding the availability of the reduced dividend tax rate in
the light of your 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 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.As of January 1, 2004, 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 or
fixed base through which such shareholders carry on or perform business
services in Italy are no longer subject to Italian capital gain tax (CGT) but
to 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 45%, plus a surcharge of up to 1.4%, depending on the
municipality in which the shareholder resides). 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, 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 CGT unless such U.S. owner has a permanent establishment
or fixed base in Italy to which Ordinary Shares or ADSs are effectively
connected. To this end, U.S. residents that sell Ordinary Shares or ADSs and
claim benefits under the Income Tax Convention may be required to produce
appropriate 65




---



##### Table of Contents



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 CGT. No CGT will be imposed 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 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. 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 129.11 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 either underage (i.e.,
younger than 18) or 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 concluded either on a regulated market or with the intervention of a
bank or an investment services company. 
 DOCUMENTS ON DISPLAY Copies of De Rigo S.p.A.s Statutomay be examined at its registered
office at Zona Industriale Villanova, No. 12, 32013 Longarone (BL), Italy. De Rigo S.p.A. also files reports, including annual reports on Form 20-F,
periodic reports on Form 6-K and other information with the Securities and
Exchange Commission pursuant to the rules and regulations of the SEC that apply
to foreign private issuers. You may read and copy any materials filed 66




---



##### Table of Contents



with the SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20459. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. You may also read and copy any
materials we file with the SEC at the regional offices of the SEC located at
233 Broadway, New York, New York, 10279, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. 
 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 losses of 0.5 million for 2002 and net foreign exchange gains of
0.5 million for 2003. For additional information on the Groups financial
instruments, see Note 19 to Notes to the Consolidated Financial Statements
included in Item 18 of this annual report. 
 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 which are instruments with non-linear returns, sensitivity
analysis models considering the year-end market volatility are employed. 67




---



##### Table of Contents



Exchange Rate Risk At December 31, 2003, 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 1.2 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 relates to the 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, 2003, 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 2002 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, 2003 have changed substantially from the preceding year.
See Note 19 to Notes to the Consolidated Financial Statements included in Item
18 of this annual report. 
 Item 12.Description of Securities Other than Equity Securities Not applicable. 68




---



##### Table of Contents



PART II 
 Item 13.Defaults, Dividend Arrearages and Delinquencies None. 
 Item 14.Material Modifications to the Rights of Security Holders and Use of
Proceeds None. 
 Item 15.Controls and Procedures As of December 31, 2003, 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 2003 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 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 69




---



##### Table of Contents



Audit and Non-Audit Fees The following table sets forth the fees billed to the Company by its
independent auditors, Reconta Ernst & Young, during the fiscal years ended
December 31, 2002 and 2003: Year ended December 31,2003
    
    2002(in thousands of euro)Audit fees
    
    
    473
    
    
    
    481Audit-related fees.
    
    
    0
    
    
    
    0Tax fees
    
    
    225
    
    
    
    663All other fees
    
    
    4
    
    
    
    0Total fees
    
    
    702
    
    
    
    1,144
 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. These other procedures include information
systems and procedural reviews and testing performed in order to understand and
place reliance on the systems of internal control, and consultations relating
to the audit. 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. All other fees in the above table are fees billed by Ernst & Young
primarily related to tax audits. 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 70




---



##### Table of Contents



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 Securities and Exchange
Commission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 services and the total amount of fees for certain permissible non-audit
services classified as all other services. 
 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 Auditors
    
    
    F-1Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    F-2Consolidated Statements of Income for the Years Ended December 31, 2001, 2002 and 2003
    
    
    F-4Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and
2003
    
    
    F-5Consolidated Statements of Shareholders Equity for the Years Ended December 31,
2001, 2002 and 2003
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7
 
 Item 19.Exhibits Index to Exhibits filed with this Report 1.1
    
    Bylaws of De Rigo S.p.A.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.
 71




---



##### Table of Contents



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




---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS 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, 2002 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, 2003. 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe 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, 2002 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, 2003, in conformity with accounting principles
generally accepted in Italy, which differ in certain respects from accounting
principles generally accepted in the United States of America (see Note 19 of
the Notes to Consolidated Financial Statements).  Padua, Italy
April 9, 2004 F-1




---



##### Table of Contents



DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of Euro (), unless otherwise noted) December 31,2002
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    
    21,028
    
    
    
    19,634Investment in debt securities
    
    
    1,907
    
    
    
    Accounts receivable, trade, net of allowances
for doubtful accounts of  6,976 in 2002
and  7,383 in 2003
    
    
    80,414
    
    
    
    61,938Inventories (Note 4)
    
    
    59,338
    
    
    
    49,366Deferred income taxes (Note 11)
    
    
    12,332
    
    
    
    13,018Prepaid expenses and other current assets (Note 5)
    
    
    20,464
    
    
    
    12,393Total current assets
    
    
    195,483
    
    
    
    156,349Property, plant and equipment (Note 9):Land
    
    
    17,877
    
    
    
    16,848Buildings
    
    
    56,513
    
    
    
    54,587Machinery and equipment
    
    
    24,739
    
    
    
    25,491Office furniture and equipment
    
    
    84,442
    
    
    
    82,800Construction in progress
    
    
    280
    
    
    
    183,851
    
    
    
    179,726Less: Accumulated depreciation
    
    
    (62,946
    )
    
    
    (70,643
    )Property, plant and equipment, net
    
    
    120,905
    
    
    
    109,083Goodwill and intangible assets (Note 6)
    
    
    114,707
    
    
    
    103,891Other non current assets (Note 7)
    
    
    8,806
    
    
    
    7,564TOTAL ASSETS
    
    
    439,901
    
    
    
    376,887
 See accompanying notes F-2




---



##### Table of Contents



DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of Euro (), unless otherwise noted) December 31,2002
    
    2003LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term bank borrowings (Note 8)
    
    
    85,180
    
    
    
    22,569Current portion of long-term debt (Note 9)
    
    
    218
    
    
    
    166Accounts payable, trade
    
    
    76,323
    
    
    
    66,141Commissions payable
    
    
    1,553
    
    
    
    895Income taxes payable
    
    
    3,334
    
    
    
    5,452Deferred income taxes (Note 11)
    
    
    1,005
    
    
    
    1,392Accrued expenses and other current liabilities (Note 10)
    
    
    31,973
    
    
    
    27,223Total current liabilities
    
    
    199,586
    
    
    
    123,838Termination indemnities and other employee benefits (Note12)
    
    
    8,926
    
    
    
    9,755Deferred income taxes (Note 11)
    
    
    10,068
    
    
    
    8,670Long-term debt, less current portion (Note 9)
    
    
    696
    
    
    
    497Other non-current liabilities (Note 14)
    
    
    8,508
    
    
    
    7,243Shareholders equity (Note 15):Capital
stock,  0.26 par value, 45,800,000 and 45,800,000
shares authorized; 44,714,255 and 44,714,255 issued;
44,714,255 and 44,491,055 outstanding at December 31, 2002 and
2003
    
    
    11,626
    
    
    
    11,626Additional paid-in capital
    
    
    54,490
    
    
    
    54,490Retained earnings
    
    
    142,935
    
    
    
    161,413Foreign currency translation adjustments
    
    
    (1,971
    )
    
    
    (5,682
    )Revaluation reserve
    
    
    5,037
    
    
    
    5,037Total shareholders equity
    
    
    212,117
    
    
    
    226,884TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    439,901
    
    
    
    376,887
 See accompanying notes F-3




---



##### 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 31,2001
    
    2002
    
    2003NET SALES (Note 17)
    
    
    505,250
    
    
    
    512,459
    
    
    
    504,801COST OF SALES
    
    
    184,293
    
    
    
    203,208
    
    
    
    202,040GROSS PROFIT
    
    
    320,957
    
    
    
    309,251
    
    
    
    302,761COSTS AND EXPENSESCommissions
    
    
    16,724
    
    
    
    16,381
    
    
    
    13,432Advertising and promotion expenses
    
    
    35,479
    
    
    
    34,854
    
    
    
    32,644Other selling expenses
    
    
    199,956
    
    
    
    203,011
    
    
    
    195,532General and administrative expenses
    
    
    37,738
    
    
    
    38,278
    
    
    
    36,299289,897
    
    
    
    292,524
    
    
    
    277,907INCOME FROM OPERATIONS
    
    
    31,060
    
    
    
    16,727
    
    
    
    24,854OTHER (INCOME) EXPENSESInterest expense
    
    
    4,182
    
    
    
    4,025
    
    
    
    2,217Interest income
    
    
    (982
    )
    
    
    (633
    )
    
    
    (718
    )Other (income) expenses, net
    
    
    660
    
    
    
    3,566
    
    
    
    (14,483
    )3,860
    
    
    
    6,958
    
    
    
    (12,984
    )INCOME BEFORE INCOME TAXES
    
    
    27,200
    
    
    
    9,769
    
    
    
    37,838INCOME TAXES (Note 11)
    
    
    6,551
    
    
    
    46
    
    
    
    14,935INCOME BEFORE MINORITY INTERESTS
    
    
    20,649
    
    
    
    9,723
    
    
    
    22,903MINORITY INTERESTS (Note 18)
    
    
    (568
    )
    
    
    (922
    )
    
    
    4,425NET INCOME
    
    
    21,217
    
    
    
    10,645
    
    
    
    18,478
 See accompanying notes F-4




---



##### Table of Contents



DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Euro (), unless otherwise noted) 2001
    
    2002
    
    2003Cash flows from operating activitiesNet income
    
    
    21,217
    
    
    
    10,645
    
    
    
    18,478Adjustments to reconcile net income to net
cash provided by operating activitiesDepreciation
    
    
    18,829
    
    
    
    18,339
    
    
    
    17,735Amortization
    
    
    9,009
    
    
    
    9,213
    
    
    
    9,216Provision for doubtful accounts
    
    
    851
    
    
    
    2,821
    
    
    
    2,545Provision for inventory obsolescence
    
    
    4,223
    
    
    
    4,480
    
    
    
    5,325Gain on sale of investments in debt securities
    
    
    (86
    )
    
    
    (111
    )
    
    
    (86
    )Deferred income taxes
    
    
    (3,320
    )
    
    
    (8,479
    )
    
    
    (1,969
    )Gain on disposal of EID
    
    
    
    
    
    
    
    
    
    
    (11,751
    )Other, non-cash items
    
    
    (36
    )
    
    
    622
    
    
    
    489Provision for termination indemnities and pension costs
    
    
    5,655
    
    
    
    8,103
    
    
    
    8,467Minority interest in income
    
    
    (568
    )
    
    
    (922
    )
    
    
    4,425Changes in operating assets and liabilities:Accounts receivable
    
    
    (14,518
    )
    
    
    (14,945
    )
    
    
    (2,986
    )Inventories
    
    
    (24,669
    )
    
    
    6,698
    
    
    
    (3,582
    )Accounts payable
    
    
    22,518
    
    
    
    (3,451
    )
    
    
    6,333Income taxes payable
    
    
    (4,320
    )
    
    
    (6,666
    )
    
    
    2,829Value added tax
    
    
    (1,113
    )
    
    
    1,799
    
    
    
    126Other  net
    
    
    (7,519
    )
    
    
    (150
    )
    
    
    201Payments of termination of indemnities and pension contributions
    
    
    (5,750
    )
    
    
    (5,656
    )
    
    
    (4,965
    )Net cash provided by operating activities
    
    
    20,403
    
    
    
    22,340
    
    
    
    50,830Cash flows from investing activitiesNet proceeds from sale of EID (Note 3)
    
    
    
    
    
    
    
    
    
    
    12,341Acquisition of minority interests in Dierre, De Rigo France and De
Rigo Deutschland
    
    
    (3,678
    )
    
    
    (304
    )
    
    
    Net proceeds from sale of Ranieri Argentina and Vogart S.r.l.
    
    
    
    
    
    
    386
    
    
    
    Dividends to holders of minority interests
    
    
    
    
    
    
    
    
    
    
    (4,429
    )Additions to property, plant and equipment
    
    
    (24,989
    )
    
    
    (16,075
    )
    
    
    (11,548
    )Proceeds from disposal of equipment and other assets
    
    
    2,127
    
    
    
    1,354
    
    
    
    1,870Additions to intangible assets
    
    
    (3,343
    )
    
    
    (2,086
    )
    
    
    (1,009
    )Purchase of own shares
    
    
    
    
    
    
    
    
    
    
    (753
    )Proceeds from sale of investments in debt securities
    
    
    3,544
    
    
    
    
    
    
    
    1,993Net cash used in investing activities
    
    
    (26,339
    )
    
    
    (16,725
    )
    
    
    (1,535
    )Cash flows from financing activitiesNet change in short-term borrowings from lines of credit
    
    
    38,867
    
    
    
    (3,241
    )
    
    
    (50,169
    )Proceeds from short-term borrowings under credit facilities
    
    
    36,592
    
    
    
    
    
    
    
    Repayments of short-term borrowings under credit facilities and
obligations to sellers of acquired companies
    
    
    (64,817
    )
    
    
    
    
    
    
    Capital contribution(s) by minority interest(s)
    
    
    733
    
    
    
    
    
    
    
    (Repayments) of borrowings from related parties
    
    
    (735
    )
    
    
    
    
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    151
    
    
    
    Repayment of long-term debt and non current liability
    
    
    (287
    )
    
    
    (494
    )
    
    
    (251
    )Share capital increase
    
    
    174
    
    
    
    68
    
    
    
    Payment of dividends
    
    
    (5,179
    )
    
    
    (5,805
    )
    
    
    Net cash provided (used) by financing activities
    
    
    5,348
    
    
    
    (9,321
    )
    
    
    (50,420
    )Effect of exchange rate changes on cash
    
    
    93
    
    
    
    (241
    )
    
    
    (269
    )Decrease in cash and cash equivalents
    
    
    (495
    )
    
    
    (3,947
    )
    
    
    (1,394
    )Cash and cash equivalents at beginning of the year
    
    
    25,470
    
    
    
    24,975
    
    
    
    21,028Cash and cash equivalents at end of the year
    
    
    24,975
    
    
    
    21,028
    
    
    
    19,634Supplemental disclosures:Interest paid
    
    
    4,038
    
    
    
    3,871
    
    
    
    2,430Income taxes paid
    
    
    14,930
    
    
    
    18,147
    
    
    
    9,701
 See accompanying notes F-5




---



##### Table of Contents



DE RIGO S.p.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2000, 2001 and 2002
(In thousands of Euro (), unless otherwise noted) ForeignAdditional
    
    
    
    
    
    currencyShare
    
    paid-in
    
    Retained
    
    translation
    
    RevaluationCapital
    
    capital
    
    earnings
    
    adjustments
    
    reserve
    
    TotalBalance at December 31, 2000
    
    
    11,491
    
    
    
    54,305
    
    
    
    122,135
    
    
    
    491
    
    
    
    952
    
    
    
    189,374Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    748
    
    
    
    
    
    
    
    748Share capital increase- exercise of 151,403 stock
options
    
    
    40
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174- translation of share capital
into Euro
    
    
    78
    
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    
    
    
    
    Revaluation of trademarks,
net of tax of
 958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,085
    
    
    
    4,085Net income for 2001
    
    
    
    
    
    
    
    
    
    
    21,217
    
    
    
    
    
    
    
    
    
    
    
    21,217Dividends paid
    
    
    
    
    
    
    
    
    
    
    (5,179
    )
    
    
    
    
    
    
    
    
    
    
    (5,179
    )Balance at December 31, 2001
    
    
    11,609
    
    
    
    54,439
    
    
    
    138,095
    
    
    
    1,239
    
    
    
    5,037
    
    
    
    210,419Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,210
    )
    
    
    
    
    
    
    (3,210
    )Share capital increase- exercise of 2,736 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
    
    
    
    226,884
 See accompanying notes F-6




---



##### Table of Contents



DE RIGO S.p.A. and
SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 1. BACKGROUND AND ORGANIZATION De Rigo S.p.A. is incorporated in Italy, and on December 31, 2002 and 2003,
respectively, was 73.6% and 74.0% owned by the De Rigo brothers. On December
31, 2003, a portion of the De Rigo brothers interest equal to 71.9% of the
Company was indirectly owned through De Rigo Holding B.V. and another related
company, with the remaining 2.1% being directly owned by the De Rigo brothers.
The remaining 26.0% of the Company was owned as follows: Managing Director
    
    
    2.0
    %Prada
    
    
    5.0
    %Publicly owned
    
    
    19.0
    %26.0
    %
 A total of 21% 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 19% publicly owned shares with the other 2% 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 its tax exemption
grants are disclosed in Notes 17 and 11, respectively. Effective January 1, 2002 the Company changed its reporting currency from
Italian Lire to Euro. All financial data for prior periods have been restated
in Euro at the official fixed exchange rate of Lit. 1,936.27 =  1.00. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation 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
accounting principles established by the National Councils of 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 F-7




---



##### Table of Contents



DE RIGO S.p.A. and
SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 The preparation of the financial statements in conformity with 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 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 losses are charged to income
and unrealized gains are credited to income, except those unrealized gains
related to the remeasurement of non current assets and liabilities. Such
unrealized gains are deferred until realized. Cash equivalents The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments in debt securities The Companys financial investments in debt securities are stated at the lower
of cost or market. 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. 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
reevaluations 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: F-8




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

Buildings
    
    33-50 yearsMachinery and equipment
    
    4-10 yearsOffice, furniture and equipment
    
    4-8 yearsLeasehold improvements
    
    lesser of useful life or lease term
 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 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. 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. F-9




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

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 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. For the Companys retail operations revenues
are recognized upon consummation of sales to customers. Revenues from services
are recognized as soon as services are provided. Shipping and handling costs Shipping and handling costs are included in cost of sales. 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. The derivative products used by the Company are
primarily interest rate swaps, foreign currency forward contracts and foreign
currency option contracts. 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. 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. Statements of cash flows F-10




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

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. Reclassifications Certain amounts in the financial statements in 2001 and 2002 have been
reclassified to conform with the 2003 presentation. 3. BUSINESS ACQUISITIONS AND DISPOSALS 2001 Acquisitions On January 31, 2001, September 11, 2001 and June 30, 2001 the Group acquired
the outstanding 45% and 2% minority interests in its subsidiaries De Rigo
France and Dierre and a 10% minority interest in De Rigo Deutschland for cash
consideration of
 1,223,
 2,503 and
 256, respectively. The acquisitions
have been accounted for under the purchase method. Prior to the acquisitions of
these outstanding minority interests the Company was fully consolidating the
results of each of these entities. The excess of the purchase prices paid over
the corresponding portion of the fair values assigned to tangible and
identifiable intangible assets less the fair value assigned to liabilities
assumed, amounted to  640,  218 and  278, respectively, and has been
allocated to goodwill, which is being amortized over 5 years on a straight-line
basis. 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. 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. 4. INVENTORIES Inventories consisted of the following: F-11




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

December 31,2002
    
    2003Raw materials and supplies
    
    
    11,586
    
    
    
    5,068Semi-finished goods
    
    
    3,577
    
    
    
    5,077Finished goods
    
    
    44,175
    
    
    
    39,22159,338
    
    
    
    49,366
 Inventories are net of allowances for obsolete and slow moving items of 
21,927 and  24,355 at December 31, 2002 and 2003, respectively. 5.     PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consisted of the following: December 31,2002
    
    2003Prepaid shop rentals
    
    
    4,855
    
    
    
    4,509Prepaid pension benefit costs (Note 12)
    
    
    2,152
    
    
    
    1,883Value added tax receivable
    
    
    3,799
    
    
    
    1,630Income tax receivable
    
    
    5,251
    
    
    
    251Advances to suppliers and agents
    
    
    1,076
    
    
    
    390Franchise prepayments
    
    
    846
    
    
    
    868Prepaid taxes
    
    
    638
    
    
    
    600Other
    
    
    1,847
    
    
    
    2,26220,464
    
    
    
    12,393
 6.     GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets consisted of the following: December 31,2002
    
    2003Goodwill, net of accumulated
amortization of
 20,241 in 2002 and
 26,508 in 2003
    
    
    103,253
    
    
    
    94,532Trademarks, net of accumulated amortization
of
 1,808
in 2002 and
 2,420 in 2003
    
    
    4,918
    
    
    
    4,368Other intangibles, net of accumulated amortization
of
 11,661
in 2002 and
 12,373 in 2003
    
    
    6,536
    
    
    
    4,991114,707
    
    
    
    103,891
 F-12




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

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 is
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.

7.     OTHER NON CURRENT ASSETS

Other non-current assets consisted of the following:

December 31,2002
    
    2003Prepaid pension benefit costs (Note 12)
    
    
    2,644
    
    
    
    Advance payment of withholding tax on termination
indemnities
    
    
    123
    
    
    
    71Income tax receivable
    
    
    3,435
    
    
    
    4,154Deferred income taxes
    
    
    1,382
    
    
    
    1,407Long-term deposits
    
    
    1,094
    
    
    
    1,154Treasury shares
    
    
    
    
    
    
    753Other
    
    
    128
    
    
    
    258,806
    
    
    
    7,564


8.     SHORT-TERM BANK BORROWINGS

Short-term bank borrowings consisted of:

December 31,2002
    
    2003Borrowings under lines of credit payable on demand
    
    
    85,180
    
    
    
    22,569


Borrowings under lines of credit payable on demand

At December 31, 2002 and 2003, the Group had unsecured short-term bank lines
of credit aggregating approximately  167,324 and  137,103, respectively. At
December 31, 2002 and 2003, approximately  82,144 and  114,534,
respectively, were available for further borrowings. At December 31, 2002 and
2003, the weighted average interest rates for the short-term lines of credit
were 3.99% and 3.48%, respectively. Amounts outstanding under these lines of
credit are payable upon demand.

F-13



---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

9.     LONG-TERM DEBT Long-term debt consists of the following: December 31,2002
    
    2003Subsidized 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
    
    
    386
    
    
    
    351Subsidized 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 (3.88% and 3.11% at December 31, 2002 and
2003, respectively)
    
    
    290
    
    
    
    194Mortgage loans payable to banks bearing interest at
annual rates of 5% to 6%, due in installments to 2004
    
    
    87
    
    
    
    Mortgage loan payable to banks bearing interest at
annual rate of 5.20%, due in installments to 2004
    
    
    151
    
    
    
    118Total long-term debt
    
    
    914
    
    
    
    663Less: current portion
    
    
    (218
    )
    
    
    (166
    )696
    
    
    
    497
 The interest paid by the Italian Government and European Investment Bank
amounted to  45,  26 and  5 in 2001, 2002 and 2003, respectively. The
subsidy on the European Investment Bank loan eliminates 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  3,764 at December 31, 2003. The
maturities of long-term debt over the next five years as at December 31, 2003
are as follows: 2004
    
    
    1662005
    
    
    1652006
    
    
    712007
    
    
    532008
    
    
    39Thereafter
    
    
    169Total
    
    
    663
 F-14




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2000, 2001 and 2002

10.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: December 31,2002
    
    2003Salaries payable and related social security contributions
    
    
    12,965
    
    
    
    12,601Employee taxes withheld
    
    
    3,493
    
    
    
    3,545Customer advances
    
    
    2,744
    
    
    
    2,255Property expense accruals
    
    
    1,093
    
    
    
    853VAT taxes payable
    
    
    2,515
    
    
    
    3,083Warranty provision
    
    
    952
    
    
    
    1,685Taxes on revaluation reserve
    
    
    330
    
    
    
    Other accrued expenses
    
    
    7,881
    
    
    
    3,20131,973
    
    
    
    27,223
 F-15




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2000, 2001 and 2002

11.    INCOME TAXES Income before income taxes and the provision for income taxes consist of the
following: 2001
    
    2002
    
    2003Income before income taxes:Italy
    
    
    8,958
    
    
    
    1,299
    
    
    
    21,227United Kingdom
    
    
    13,167
    
    
    
    2,072
    
    
    
    1,968Spain
    
    
    7,079
    
    
    
    8,864
    
    
    
    9,087Other
    
    
    (2,004
    )
    
    
    (2,466
    )
    
    
    5,556Total
    
    
    27,200
    
    
    
    9,769
    
    
    
    37,838Provision for income taxes:Current:Italy
    
    
    (599
    )
    
    
    1,749
    
    
    
    9,314United Kingdom
    
    
    3,622
    
    
    
    1,764
    
    
    
    2,224Spain
    
    
    6,437
    
    
    
    4,459
    
    
    
    4,489Other
    
    
    411
    
    
    
    553
    
    
    
    877Total
    
    
    9,871
    
    
    
    8,525
    
    
    
    16,904Deferred:Italy
    
    
    (1,670
    )
    
    
    (8,014
    )
    
    
    (820
    )United Kingdom
    
    
    1,294
    
    
    
    (153
    )
    
    
    (999
    )Spain
    
    
    (3,099
    )
    
    
    (311
    )
    
    
    210Other
    
    
    155
    
    
    
    (1
    )
    
    
    (360
    )Total
    
    
    (3,320
    )
    
    
    (8,479
    )
    
    
    (1,969
    )Total tax provision
    
    
    6,551
    
    
    
    46
    
    
    
    14,935
 F-16




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2000, 2001 and 2002

A reconciliation between the Italian statutory tax rates and the consolidated
effective tax rates is as follows: 2001
    
    2002
    
    2003Tax @ Italian statutory rate of 40.25% in 2001 and 2002 and
38.25% in 2003
    
    
    10,948
    
    
    
    3,932
    
    
    
    14,473Tax savings from Italian subsidiaries operating in a tax
exempt area
    
    
    (3,816
    )
    
    
    (1
    )
    
    
    Investment tax credit and deductions
    
    
    (209
    )
    
    
    (245
    )
    
    
    Gains on business disposal
    
    
    
    
    
    
    (123
    )
    
    
    3,926Effect of a change in tax rate:- In Italy
    
    
    
    
    
    
    (7,042
    )
    
    
    303- Italian Dual Income Tax
    
    
    (801
    )
    
    
    
    
    
    
    - Other countries
    
    
    
    
    
    
    16
    
    
    
    (9
    )Effect of different tax rates of foreign jurisdictions
    
    
    (2,202
    )
    
    
    (785
    )
    
    
    (808
    )Tax benefit of NOLs of subsidiaries not recognized
    
    
    1,348
    
    
    
    1,026
    
    
    
    (168
    )Amortization of goodwill
    
    
    2,380
    
    
    
    2,384
    
    
    
    2,435Effect of tax provision on distribution of dividend from
foreign subsidiaries
    
    
    218
    
    
    
    
    
    
    
    Other permanent differences:- ItalyIRPEG
    
    
    (1,953
    )
    
    
    (459
    )
    
    
    1,325IRAP  (primarily payroll and interest)
    
    
    915
    
    
    
    1,413
    
    
    
    981- Other countries
    
    
    (277
    )
    
    
    (70
    )
    
    
    329Provision for income taxes
    
    
    6,551
    
    
    
    46
    
    
    
    14,935Effective consolidated tax rate
    
    
    24.1
    %
    
    
    0.5
    %
    
    
    39.5
    %
 The Italian statutory tax rate for 2001 and 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 to be effective January 1, 2004 with the effect of reducing the IRPEG
(now called IRES) tax rate from 34% to 33%. The Company decreased its Italian deferred tax assets and liabilities as of
December 31, 2002 and 2003 to reflect the 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. The 2001 Italian investment tax incentive law was enacted in order to encourage
capital investments and other expenditures in Italy. Companies were able to
reduce their taxable income by up to 50% of the excess of new qualifying
capital and other expenditures made in the second half of 2001 and in the year
2002 in fixed assets (tangibles and specified intangibles) over the average of
the investments made in such assets during the five prior years. The incentive
law also applied to certain expenses incurred in connection with the training
of the companies F-17




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 personnel. The incentive resulted in a current one-time deduction and neither
increases nor decreases the tax bases of the assets to compute future tax
deductions for depreciation and amortization relating to investment deductions
granted. As a result, in 2001 and 2002 the Company recognized a benefit from
the investment deductions of  209 and  245, respectively. In accordance with a law decree enacted in 1997 to foster the capitalization of
Italian companies, the Dual Income Tax (DIT) was introduced. In accordance
with such law decree, a portion of the Companys taxable income subject to
IRPEG taxes was taxable at the reduced rate of 19% instead of the enacted IRPEG
rates reported above. Such portion of the taxable income (amounting to 
4,711 in the year 2001) was computed applying a specific interest rate, fixed
by the Government and equal to 6%, to the net increase in the Companys net
equity over the period from December 31, 1996 to December 31, 2001. The
application of DIT reduced the Companys current taxes by  801 in 2001.
Deferred taxes on temporary differences at December 31, 2002 and 2001 are
accounted for at the tax rate expected to occur in the year of reversal, taking
into consideration the enacted IRPEG rates, the expected applicable effect of
the DIT benefit and the enacted IRAP tax rate. 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, 2003 are summarized as follows: 2001
    
    2002
    
    2003Italian termination indemnities
    
    
    1,323
    
    
    
    1,437
    
    
    
    1,441Defined benefit plan of Vantios/D&A
    
    
    2,733
    
    
    
    5,407
    
    
    
    5,686Defined benefit plans of GO
    
    
    437
    
    
    
    257
    
    
    
    151Defined benefit plans in other countries
    
    
    358
    
    
    
    197
    
    
    
    309Defined contribution plans of Vantios/D&A and GO
    
    
    804
    
    
    
    805
    
    
    
    8805,655
    
    
    
    8,103
    
    
    
    8,467
 The liabilities reported in the balance sheet at December 31, 2002 and 2003
pertaining to these employee benefits are summarized as follows: F-18




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 2002
    
    2003Italian termination indemnities
    
    
    5,681
    
    
    
    6,315Defined benefit plans of GO
    
    
    2,653
    
    
    
    2,547Defined benefit plans in other countries
    
    
    592
    
    
    
    8938,926
    
    
    
    9,755
 Additional information with respect to Italian termination indemnities and the
pension plans of companies within the Group is provided below: 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 2001, 2002 and 2003 were
 1,323,  1,437 and  1,441, respectively. Defined Benefit and Pension plans Vantios/D&A, an entity acquired on December 2, 1998, has a defined benefit
pension plan covering substantially all 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 income statement for the years ended December
31, 2001, 2002 and 2003 and the funded status and amounts recognized in the
consolidated balance sheets at December 31, 2002 and 2003. Components of net periodic benefit cost for years ended December 31, are as
follows: 2001
    
    2002
    
    2003Service benefit-cost: benefits earned during the year
    
    
    4,824
    
    
    
    5,089
    
    
    
    2,890Interest cost on projected benefit obligation
    
    
    8,522
    
    
    
    9,383
    
    
    
    8,526Expected return on plan assets
    
    
    (10,613
    )
    
    
    (9,860
    )
    
    
    (7,659
    )Amortization of unrecognized gain/loss
    
    
    
    
    
    
    795
    
    
    
    1,929Net periodic benefit cost
    
    
    2,733
    
    
    
    5,407
    
    
    
    5,686
 F-19




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 The cost of providing benefits under the plan is determined using the
projected unit credit actuarial valuation method. The principal weighted
average assumptions used in making the actuarial valuations are as follows: 2001
    
    2002
    
    2003Discount rate
    
    
    6.00
    %
    
    
    5.75
    %
    
    
    5.50
    %Expected long-term return on plan assets
    
    
    7.00
    %
    
    
    6.50
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    3.50
    %
    
    
    3.30
    %
    
    
    3.25
    %
 Funded status of the pension plan is as presented in the tables below: December 31,2002
    
    2003Accumulated benefit obligation
    
    
    141,122
    
    
    
    145,148Fair value of plan assets
    
    
    123,751
    
    
    
    127,412Excess (deficit) of fair value of plan assets over accumulated
benefit obligation
    
    
    (17,371
    )
    
    
    (17,736
    )Changes in projected benefit obligationAt beginning of year
    
    
    162,366
    
    
    
    159,723Service cost
    
    
    5,089
    
    
    
    2,890Interest cost
    
    
    9,383
    
    
    
    8,526Plan participants contributions
    
    
    1,574
    
    
    
    1,749Actuarial (gain) loss
    
    
    (4,071
    )
    
    
    9,104Benefits paid
    
    
    (3,865
    )
    
    
    (3,483
    )Foreign currency translation adjustment
    
    
    (10,753
    )
    
    
    (12,646
    )Benefits obligation at the end of year
    
    
    159,723
    
    
    
    165,863
 Change in plan assets (invested primarily in United Kingdom
stocks and bonds) 2002
    
    2003Fair value of plan assets at beginning of year
    
    
    144,782
    
    
    
    123,751Actual returns on assets  gain (loss)
    
    
    (12,961
    )
    
    
    12,096Companys contributions
    
    
    3,165
    
    
    
    3,078Plan participants contributions
    
    
    1,574
    
    
    
    1,749Benefits paid
    
    
    (3,865
    )
    
    
    (3,483
    )Foreign currency translation adjustments
    
    
    (8,944
    )
    
    
    (9,779
    )Fair value of plan assets at end of year
    
    
    123,751
    
    
    
    127,412
 F-20




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

Funded status of the plan over-funded (under-funded)
    
    
    (35,972
    )
    
    
    (38,451
    )Unrecognized actuarial (gain) loss on return
on plan assets
    
    
    44,735
    
    
    
    31,356Unrecognized actuarial (gain) loss in
benefit obligations
    
    
    (3,935
    )
    
    
    8,939Foreign currency translation adjustments
    
    
    (32
    )
    
    
    39Prepaid benefit cost
    
    
    4,796
    
    
    
    1,883
 The amount of the prepaid benefit cost has been classified in the consolidated
balance sheets at December 31, 2002 and 2003 as a prepaid current asset of 
2,152 and  1,883, respectively, and a non-current asset of  2,644 at December
31, 2002. The prepaid benefit costs will be realized through lower future
contributions as differences occur between the funding and expensing of the
pension plan, or as a result of a combination of these events. The following table summarizes, by asset category, the percentage of the fair
value of total plan assets held: December 31,2002
    
    2003Equity securities
    
    
    47.1
    %
    
    
    51.0
    %Debt securities
    
    
    52.7
    %
    
    
    48.9
    %Other (Cash)
    
    
    0.2
    %
    
    
    0.1
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 The trustee has set the investment policy with regard to the pension plans
liabilities and funding level. At December 31, 2003 there were two fund
managers with benchmark asset allocations as follows: Deutsche Asset Management
    
    Legal & General Index Tracker(38% of the fund)
    
    (62% of the fund)Equity securities
    
    
    100.0
    %
    
    
    20.0
    %Debt securities
    
    
    
    %
    
    
    80.0
    %
 The investment policy broadly matches pensions already in payment with debt
securities (which include fixed interest and index-linked government bonds),
and aims to meet the projected liabilities for non-pensioners by using an
appropriate combination of debt and equity securities. Overall, about 50% of
the plans assets are invested in equity securities. The trustee 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. The Deutsche Asset
Management mandate is to outperform the relevant market indices by 1% per
annum. There are control ranges in place to ensure that the fund managers do
not depart significantly from the trustees overall benchmark, and therefore to
reduce the risk of over-concentration in one area. F-21




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

The trustee reviews the fund managers 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 Company expects to contribute GBP Sterling 2.1 million ( 3.0 million) to
its defined benefit pension plan in 2004. 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, the date of the last actuarial valuation. 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: 2004
    
    
    3,9732005
    
    
    4,1152006
    
    
    4,8242007
    
    
    4,6822008
    
    
    5,392Years 2009-2013
    
    
    33,484
 GO has defined benefit plans covering certain executives that are not funded
at December 31, 2002 and 2003. The present value of the benefit obligations
at December 31, 2002 and 2003 was  2,653 and  2,547, respectively. The net
benefit costs accrued in 2002 and 2003 were  257 and  151, respectively and
the benefits paid in 2002 and 2003 were  1,079 and  257, respectively. The
principal weighted average assumptions used in making the actuarial valuations
at December 31, 2002 and 2003 were a discount rate of 5.0% and a rate of
compensation increase of 2.5% and 3.0%, respectively. Defined Contribution Plans Vantios/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 2001, 2002, and 2003 were  804,  805
and  880, 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 F-22




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

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 meeting the authorized share capital increase
was reduced to 1,300,000 shares. In 2003 no additional options were granted
and 46,000 options were forfeited. At December 31, 2003 there were 800,621
options outstanding, which expire at the end of the year 2004. The maximum number of options set forth above may be exercised if the price of
the Companys ADRs on the NYSE reaches more than U.S.$ 10.00. If the ADR price
during the exercise period falls between $ 6.25 and $ 10.00 per share 20% to
90% may be exercised; none of the options may be exercised in the event the
share price is below U.S.$ 6.25 throughout the period. The average price of
the Companys ADRs on the NYSE in 2003 was U.S.$ 4.02. Any options not
exercised in any year may be carried forward and exercised in a subsequent
year providing the ADR price reaches the set targets. All options expire at
the end of the year 2004. 14. OTHER NON-CURRENT LIABILITIES Other non-current liabilities consisted of the following: December 31,2002
    
    2003Minority interests
    
    
    1,329
    
    
    
    1,619Accrual for expected losses on contractual obligation
for shops of a subsidiary that are closed and non-operating
    
    
    3,058
    
    
    
    2,281Tax on revaluation of trademarks reserve
    
    
    330
    
    
    
    Agents termination indemnity
    
    
    1,322
    
    
    
    1,131Other
    
    
    2,469
    
    
    
    2,2128,508
    
    
    
    7,243
 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  2,391 and  2.325 at December 31, 2002 and
2003, 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  288,703
and  310,624 at December 31, 2002 and 2003, respectively. No provision has been made in 2002 and 2003 for income taxes on the following
components of shareholders equity: F-23




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003  a.
    
    Revaluation reserve not affected by the equalization tax amounting to 
952 that would be subject to taxes of  343, since no provision is
required under current Italian GAAP.b.
    
    Undistributed earnings of Spanish subsidiaries, amounting to  15,906
and  6,649 in 2002 and 2003, respectively, would be subject to taxes of
 625 and  467 in 2002 and 2003, respectively, in case of distribution
and undistributed earnings of British subsidiaries, amounting to  57,841
and  49,298 in 2002 and 2003, respectively, would be subject to taxes of
 983 and  813 in 2002 and 2003, respectively, in case of distribution. 16. COMMITMENTS AND CONTINGENCIES Lease commitments Vantios/D&A leases property, computer hardware and cars and GO leases property
under non-cancellable operating leases. Other lease commitments relate to the
rental of buildings by distribution subsidiaries. Rental expense for the years
2001, 2002 and 2003 amounted to approximately  25,610,  26,316 and  26,596,
respectively. At December 31, 2003 the future lease payments under such
operating leases are as follows: Year
    
    Vantios/D&A
    
    GO
    
    Other
    
    Total2004
    
    
    21,431
    
    
    
    3,834
    
    
    
    515
    
    
    
    25,7802005
    
    
    19,651
    
    
    
    3,335
    
    
    
    428
    
    
    
    23,4142006
    
    
    18,338
    
    
    
    2,633
    
    
    
    338
    
    
    
    21,3092007
    
    
    16,705
    
    
    
    2,012
    
    
    
    116
    
    
    
    18,8332008
    
    
    15,534
    
    
    
    1,547
    
    
    
    
    
    
    
    17,081Thereafter
    
    
    57,443
    
    
    
    1,592
    
    
    
    
    
    
    
    59,035Total
    
    
    149,102
    
    
    
    14,953
    
    
    
    1,397
    
    
    
    165,452
 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 and in one case a
flat fee. Certain royalty agreements expire in 2004, 2005 and 2006. Others
are renewable at the option of either party. Royalty expenses were  6,838,  7,410 and  7,052 in 2001, 2002 and 2003,
respectively. The future minimum payments for royalties and advertising expenses required
under existing royalty contracts are the following: Year
    
    Royalties
    
    Advertising2004
    
    
    4,018
    
    
    
    1,4412005
    
    
    2,567
    
    
    
    1,4562006
    
    
    1,033
    
    
    
    376Total
    
    
    7,618
    
    
    
    3,273
 F-24




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 Sponsorship agreements The Group has a sponsorship agreements with a soccer player, expiring in 2006,
and a similar agreement with a racing driver expiring in 2004. The future
minimum payments on these contracts are the following: Year2004
    
    
    
    5252005
    
    
    
    6002006
    
    
    

    500Total
    
    
    
    1,625
 Litigation The Company is involved in legal 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
substantially 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, through independent
distributors, and through the D&A and General Optica retail stores in the
United Kingdom, Spain and Portugal. Retailing:the Companys retailing segment consists of the optical chains D&A
and General Optica, which are located in the United Kingdom and Spain and
Portugal, respectively. 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-25




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

Wholesale and2001
    
    Manufacturing
    
    Retailing
    
    EID
    
    TotalSales to third parties
    
    
    114,920
    
    
    
    358,349
    
    
    
    31,981
    
    
    
    505,250Intersegment sales
    
    
    18,267
    
    
    
    16
    
    
    
    137
    
    
    
    18,420Income from operations before
depreciation and amortization
    
    
    16,008
    
    
    
    40,846
    
    
    
    2,044
    
    
    
    58,898Depreciation
    
    
    3,339
    
    
    
    14,042
    
    
    
    1,448
    
    
    
    18,829Amortization of goodwill
    
    
    261
    
    
    
    6,156
    
    
    
    
    
    
    
    6,417Amortization of other intangibles
    
    
    598
    
    
    
    1,789
    
    
    
    205
    
    
    
    2,592Income (loss) from operations
    
    
    11,810
    
    
    
    18,859
    
    
    
    391
    
    
    
    31,060Identifiable long-lived assets
    
    
    27,984
    
    
    
    229,341
    
    
    
    2,794
    
    
    
    260,119Total assets
    
    
    158,233
    
    
    
    285,580
    
    
    
    18,679
    
    
    
    462,492Capital expenditures and acquisitions
    
    
    11,281
    
    
    
    18,874
    
    
    
    1,855
    
    
    
    32,010


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


F-26



---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 An analysis of sales and long-lived assets by both geographic area and segment
is the following: Wholesale and2001
    
    Manufacturing
    
    Retailing
    
    EID
    
    TotalSales to third parties by geographic areaItaly and other European countries
    
    
    75,761
    
    
    
    358,349
    
    
    
    19,096
    
    
    
    453,206Americas
    
    
    13,039
    
    
    
    
    
    
    
    4,495
    
    
    
    17,534Rest of the world
    
    
    26,120
    
    
    
    
    
    
    
    8,390
    
    
    
    34,510Total
    
    
    114,920
    
    
    
    358,349
    
    
    
    31,981
    
    
    
    505,250Long-lived assets based on a physical
locationItaly and other European countries
    
    
    26.319
    
    
    
    229,341
    
    
    
    2,544
    
    
    
    258,204Americas
    
    
    515
    
    
    
    
    
    
    
    250
    
    
    
    765Rest of the world
    
    
    1,150
    
    
    
    
    
    
    
    
    
    
    
    1,150Total
    
    
    27,984
    
    
    
    229,341
    
    
    
    2,794
    
    
    
    260,119
 Retailing includes sales to third parties amounting to  110,630 and  247,719
in Spain and the UK, respectively. Long-lived assets for retailing amount to 
146,192 and  80,345 in Spain and the UK, respectively. 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  73,157 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
 F-27




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 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. 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 the De
Rigo Brothers. The related construction costs through December 31, 2003,
which have been capitalized as buildings amounted to  2,418. In the year 2000, Eyewear International Distribution (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 2001, 2002 and 2003, EID had commercial transactions with
companies within the Prada Group. These transactions were represented by
sales amounting to
 5,862,  2,787 and  1,210, and paid management fees,
royalties and commissions amounting to  7,857,  4,089 and  2,307 in 2001,
2002 and 2003, respectively. Interest paid by EID on a loan from the Prada
Group amounted in 2001 to  19. 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. The amounts due to related parties reported in the consolidated balance sheet
at December 31, 2002 and 2003 are: 2002
    
    2003Rental payables to Surfrigo  included in accounts payable
    
    
    25
    
    
    
    Trade payables to Prada  included in accounts payable, trade
    
    
    3,940
    
    
    
    Trade receivables from Prada  included in accounts receivable trade
    
    
    2,771
    
    
    
    
 In December 2003, the Company sold a building to an entity controlled by the
De Rigo brothers. The disposal was made at book value. Minority Interests- 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. 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 respects from accounting principles generally accepted in
the United States of America (U.S. GAAP). Differences that have a
significant effect on consolidated net income and shareholders equity are as
follows: F-28




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003  (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 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, 2001, 2002 and 2003 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 income statement 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 F-29




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003  No. 142 effective January 1, 2002.
All goodwill is assigned to the reporting unit that benefits from the
synergies arising from each business combination.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, 2003. Based on that
assessment, it was determined that no impairment existed in the
reporting units identified.The Companys 2001 results of operations do not reflect the provisions of
SFAS No. 142. Had the Group adopted SFAS No. 142 as of January 1, 2001,
its U.S. GAAP net income and basic and diluted net income per share would
have been the adjusted pro forma amounts indicated below: 2001(thousands of Euro, exceptper share amountsNet income for the year under U.S. GAAP
    
    
    18,249Adjustment for amortization of goodwill, net of tax
    
    
    6,407Adjusted net income
    
    
    24,656Reported Basic EPS per share and ADS
    
    
    0.41Reported Diluted EPS per share and ADS
    
    
    0.40Adjusted Basic EPS per share and ADS
    
    
    0.55Adjusted Diluted EPS per share and ADS
    
    
    0.55
  The estimated aggregate amortization expense of Trademarks and Other
intangible assets for each of the five succeeding fiscal years is
indicated below: Year2004
    
    
    1,7152005
    
    
    1,1892006
    
    
    8202007
    
    
    6132008
    
    
    565
 F - 30




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003  The weighted-average amortization period of Trademarks and Other
intangible assets is three 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 B.V. to Prada of
unregistered shares in the Company In connection with establishing in
July 1999 a subsidiary that uses 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 B.V. owns in the Company at an agreed
upon price per share and (ii) De Rigo B.V. had a put arrangement that
gives 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 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. F - 31




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003  (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 (n).(j)
    
    Pensions The Group maintains a defined benefit pension plan for
substantially all U.K. employees of Vantios/D&A. 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. No adjustment was
necessary in 2001, as the plan did not have an unfunded accumulated
benefit obligation.(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. Basic
earnings per share excludes shares held in treasury or any shares held in
escrow pending release upon the occurrence of specified economic events.
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, 2001, 2002 and 2003, unexercised stock options to purchase
983,137, 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 2001, 2002 and 2003.(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.(m)
    
    Unrealized foreign exchange gains Under Italian GAAP, unrealized
gains arising from re-measurement of non current assets and liabilities
denominated in foreign currency are deferred until realized. Under U.S.
GAAP, such unrealized gains or losses are recognized in income currently.
No U.S. GAAP adjustments were required in 2001, 2002 or 2003.(n)
    
    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 F - 32




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003  fair value of marketable securities as of December
31, 2002 is  1,907. No marketable securities existed at December 31,
2003.No adjustments were made for U.S. GAAP financial reporting purposes at
December 31, 2001 because the fair values of such securities
approximated their carrying basis on an Italian GAAP basis.(o)
    
    Treasury stock In 2003 De Rigo purchased 223,200 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.(p)
    
    Impairment of Long-Lived Assets Prior to 2002 the Company applied SFAS
No. 121 Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of(SFAS 121),to all long-lived
assets, including goodwill.That statement required impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment were present and the future undiscounted cash flows estimated
to be generated by those assets were less than the assets carrying
amount. Impairment was the amount by which the carrying value exceeds its
fair value. No indicators of impairment were present in the year 2001.Effective January 1, 2002, the Company changed its method of accounting
for the 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 or 2003.(q)
    
    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 income statement. If a derivative is designated as a cash flow hedge,
changes in the fair value of the derivative are recognized in the income
statement when the hedged item effects operations. Changes in fair value
of derivatives that do not qualify as a hedge are recognized in the
income statement. 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 F - 33




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003  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 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 operations through the life of the contract.The Companys derivative financial instruments at December 31, 2000
consisted of foreign currency forward exchange contracts that would have
qualified as hedges. However, since the Company did not formally
designate their hedging relationships anew and document their risk
management strategies, such derivatives did not qualify as hedges as of
January 1, 2001, and accordingly under the provisions of SFAS 133, all
changes in the fair value of such derivative instruments subsequent to
January 1, 2001 were recognized in the current income for the year. In
implementing SFAS 133 the Company did not record any transition
adjustment.The Company did not formally designate derivative contracts entered into
during the year ended December 31, 2001, 2002 and 2003 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, 2001, 2002 and 2003 were
accounted for as ineffective hedges, no adjustment was required to
comply with the requirements of FASB No. 133.(r)
    
    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 operations 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.(s)
    
    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
    
    
    583
 F - 34




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 Total assets disposed of
    
    
    28,713Total liabilities disposed of
    
    
    28,123Net assets disposed of
    
    
    590
 The following table summarizes the results from continuing operations
and the results from discontinued operations for the years ended 2001,
2002 and 2003: Year ended December 31,
    
    2001
    
    2002
    
    2003Net sales from continuing operations
    
    
    473,269
    
    
    
    481,314
    
    
    
    485,192Gross profit from continuing operations
    
    
    302,543
    
    
    
    294,002
    
    
    
    293,409Income from continuing operations
    
    
    27,439
    
    
    
    24,379
    
    
    
    29,357Other (income) expenses from continuing operations
    
    
    4,212
    
    
    
    5,765
    
    
    
    (1,951
    )Income from continuing operations before income
taxes and minority interests
    
    
    23,227
    
    
    
    18,614
    
    
    
    31,308Income taxes
    
    
    5,971
    
    
    
    247
    
    
    
    14,422Income from continuing operations before minority
interests
    
    
    17,256
    
    
    
    18,367
    
    
    
    16,886Minority interests
    
    
    (931
    )
    
    
    (16
    )
    
    
    400Net income from continuing operations
    
    
    18,187
    
    
    
    18,383
    
    
    
    16,486Discontinued operationsNet sales from discontinued operations
    
    
    31,981
    
    
    
    31,145
    
    
    
    19,609Gross profit from discontinued operations
    
    
    18,427
    
    
    
    15,084
    
    
    
    9,424Income (loss) from discontinued operations
    
    
    294
    
    
    
    (1,003
    )
    
    
    1,614Other (income) expenses from discontinued
operations(including gain on disposal of 
11,751 in 2003)
    
    
    (352
    )
    
    
    1,304
    
    
    
    (11,144
    )Income (loss) from discontinued operations before
income taxes and minority interests
    
    
    646
    
    
    
    (2,307
    )
    
    
    12,758Income taxes
    
    
    221
    
    
    
    (163
    )
    
    
    969Income (loss) from discontinued operations before
minority interests
    
    
    425
    
    
    
    (2,144
    )
    
    
    11,789Minority interests
    
    
    363
    
    
    
    (906
    )
    
    
    4,025Net income (loss) from discontinued operations
    
    
    62
    
    
    
    (1,238
    )
    
    
    7,764Net income in accordance with U.S. GAAP
    
    
    18,249
    
    
    
    17,145
    
    
    
    24,250
 F - 35




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003  (t)
    
    New accounting standards In future periods the Company will be obliged
to adopt certain new standards and interpretations of U.S. GAAP. The
following paragraphs discuss those statements that are applicable to the
business of the Company and that could have an impact on future results
and financial position.In November 2002, the Emerging Issues Task Force (EITF) of the FASB
reached a consensus on EITF 00-21, Accounting for Revenue Arrangements
with Multiple Element Deliverables. On December 17, 2003, the SEC issued
SEC Staff Accounting Bulletin (SAB) No. 104 Revenue Recognition (SAB
104) which has effectively codified EITF 00-21 to a higher level of
GAAP. SAB 104 and EITF 00-21 address how to account for arrangements that
may involve the delivery or performance of multiple products, services
and / or rights to use assets. Revenue arrangements with multiple
deliverables should be divided into separate units of accounting if the
deliverables in the arrangement meet certain criteria. Arrangement
consideration should be divided into separate units of accounting based
on their relative fair values. The Issue also supersedes certain guidance
set forth in SAB 101. The Group is required to adopt the provision of
EITF 00-21 for revenue arrangements entered into on or after January 1,
2004. Additionally, companies are permitted to apply the consensus
guidance to all existing arrangements as a cumulative effect of a change
in accounting principle.In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research
Bulletin No. 51(FIN 46). FIN 46 requires the consolidation of entities
in which an enterprise absorbs a majority of the entitys expected
losses, receives a majority of the entitys expected residual returns, or
both, as a result of ownership, contractual or other financial interests
in the entity (variable interest entities or VIEs). Currently, entities are generally consolidated by an enterprise when
it has a controlling financial interest through ownership of a majority
voting interest in the entity. The Company adopted the recognition
requirements of FIN 46 for all new variable interest entities entered
into after January 31, 2003. The Company must adopt the provision of FIN
46 for all existing VIEs on December 31, 2004. 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, 2001
    
    2002
    
    2003Net income as reported per the consolidated statements of income
    
    
    21,217
    
    
    
    10,645
    
    
    
    18,478Adjustments 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
    
    
    (958
    )
    
    
    
    
    
    
    (ii) recognize deferred tax asset on
trademark revaluation
    
    
    2,030
    
    
    
    (294
    )
    
    
    (233
    )
 F-36




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 (iii) recognize deferred tax liability
on revaluation reserve on Italian basis
    
    
    (857
    )
    
    
    
    
    
    
    (iv) reversal of amortization of
trademarks revaluation
    
    
    
    
    
    
    504
    
    
    
    504(d) Reversal of goodwill amortization
    
    
    
    
    
    
    6,407
    
    
    
    6,419(f) Recognize stock compensation expense in
accordance with APB No. 25, net of
credit of
 492,
 351 and
 47 in
2001, 2002 and 2003 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
    
    
    (3,243
    )
    
    
    
    
    
    
    (801
    )(h) Deferred charges
    
    
    
    
    
    
    (178
    )
    
    
    59(n) Marketable securities available for sale
    
    
    
    
    
    
    (111
    )
    
    
    111(i) Deferred income taxes on (b), (h) and
above after considering change in
tax rate on deferred tax for (c) in
2002 and 2003
    
    
    127
    
    
    
    239
    
    
    
    (236
    )Net income in accordance with U.S. GAAP before reconciliation
effects of discontinued operations
    
    
    18,329
    
    
    
    17,225
    
    
    
    24,314Total effect of the reconciling differences on discontinued
operations  EID(g) Amortization of intangible asset in
respect of Pradas 5% options
    
    
    (97
    )
    
    
    (97
    )
    
    
    (77
    )(i) Deferred income taxes on (g) above
    
    
    17
    
    
    
    17
    
    
    
    13Total effect discontinued operations  EID
    
    
    (80
    )
    
    
    (80
    )
    
    
    (64
    )Net income in accordance with U.S. GAAP
    
    
    18,249
    
    
    
    17,145
    
    
    
    24,250Earnings 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)
    
    
    18,187
    
    
    
    18,383
    
    
    
    16,486DenominatorDenominator for basic per-share and per ADS computations for net
income from continuing operations  weighted average shares and
ADS shares
    
    
    44,590,060
    
    
    
    44,688,415
    
    
    
    44,618,230Effects of dilutive employee stock options
    
    
    952,129
    
    
    
    701,097
    
    
    
    605,369Denominator for diluted per-share and per ADS computations for net
income from continuing operations  adjusted weighted average
shares and ADS
    
    
    45,542,189
    
    
    
    45,389,512
    
    
    
    45,223,599
 F-37




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 Basic earnings per share and per ADS before discontinued operations
    
    0.41 Euro
    
    0.41 Euro
    
    0.37 EuroDiluted earnings per share and per ADS before discontinued
operations
    
    0.40 Euro
    
    0.41 Euro
    
    0.37 EuroBasic earnings per share and per ADS from discontinued operations
    
    0.00 Euro
    
    (0.03) Euro
    
    0.17 EuroDiluted earnings per share and per ADS from discontinued operations
    
    0.00 Euro
    
    (0.03) Euro
    
    0.17 EuroBasic earnings per share and per ADS
    
    0.41 Euro
    
    0.38 Euro
    
    0.54 EuroDiluted earnings per share and per ADS
    
    0.40 Euro
    
    0.38 Euro
    
    0.54 EuroDividends per share and per ADS
    
    0.12 Euro
    
    0.13 Euro
    
    Nil
 F-38




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 SHAREHOLDERS EQUITY at December 31, 2001
    
    2002
    
    2003Balance as reported in the consolidated financial
statements
    
    
    210,419
    
    
    
    212,117
    
    
    
    226,884Adjustments 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
 652,
 665 and
 678
in 2001, 2002, and 2003 respectively.
    
    
    (287
    )
    
    
    (274
    )
    
    
    (261
    )(c)
    Elimination of revaluation of trademarks
in 2001, net of accumulated amortization
of  0,
 504 and
 1,008 in 2001, 2002
and 2003, respectively.
    
    
    (5,043
    )
    
    
    (4,539
    )
    
    
    (4,035
    )(d)
    Reversal of goodwill amortization
    
    
    
    
    
    
    6,407
    
    
    
    12,826(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 2001, 2002 and
2003 charged to paid in capital
    
    
    (1,098
    )
    
    
    (1,098
    )
    
    
    (1,098
    )(f)
    Reduce retained earnings for amount of
stock compensation
    
    
    (3,999
    )
    
    
    (3,999
    )
    
    
    (4,800
    )(f)
    Increase additional paid in capital for
accretion resulting from stock
compensation expense
    
    
    3,999
    
    
    
    3,999
    
    
    
    4,800(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
    
    
    (291
    )
    
    
    (388
    )
    
    
    (465
    )(h)
    Deferred charges
    
    
    
    
    
    
    (178
    )
    
    
    (119
    )(j)
    Recognition of minimum pension liability
    
    
    
    
    
    
    (22,137
    )
    
    
    (19,623
    )(n)
    (Reduce)/Increase retained earnings for
marketable securities
    
    
    
    
    
    
    (111
    )
    
    
    111(n)
    Increase/(Reduce) Other Comprehensive
Income related to unrealized gains on
marketable securities
    
    
    
    
    
    
    111
    
    
    
    (111
    )(o)
    Treasury stock
    
    
    
    
    
    
    
    
    
    
    (753
    )
 F - 39




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 (i)
    Recognition of deferred income taxes on
(b), (e), (g), (h) and (j) above
    
    
    (771
    )
    
    
    5,987
    
    
    
    4,998(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
    
    
    2,030
    
    
    
    1,736
    
    
    
    1,503(ii) recognize deferred tax liability
on revaluation reserve on Italian basis
    
    
    (857
    )
    
    
    (756
    )
    
    
    (706
    )Balance at December 31, in accordance with U.S. GAAP
    
    
    206,695
    
    
    
    199,470
    
    
    
    221,744
 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 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, 2002 and 2003 are as
follows: Italian
    
    
    
    
    
    U.S.2002
    
    GAAP
    
    Adjustments
    
    GAAPShare capital
    
    
    11,626
    
    
    
    
    
    
    
    11,626Additional paid-in-capital
    
    
    54,490
    
    
    
    12,920
    
    
    
    67,410Retained earnings
    
    
    142,935
    
    
    
    (5,107
    )
    
    
    137,828Other comprehensive income
    
    
    (1,971
    )
    
    
    (15,423
    )
    
    
    (17,394
    )Revaluation reserves
    
    
    5,037
    
    
    
    (5,037
    )
    
    
    212,117
    
    
    
    (12,647
    )
    
    
    199,470
 Italian
    
    
    
    
    
    U.S.2003
    
    GAAP
    
    Adjustments
    
    GAAPShare capital
    
    
    11,626
    
    
    
    
    
    
    
    11,626Treasury Shares
    
    
    
    
    
    
    753
    
    
    
    753Additional 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
 F - 40




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 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. 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 2001, 2002 and 2003
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, 2001, 2002 and 2003. 2001
    
    2002
    
    2003Net income from continuing operations applicable to
ordinary shareholders:As reported on a U.S. GAAP basis
    
    
    18,187
    
    
    
    18,383
    
    
    
    16,486Add: Stock based compensation expense
recognized under intrinsic value
method
    
    
    3,243
    
    
    
    
    
    
    
    801Deduct: Total stock-based employee
compensation expense determined under
fair value based for all awards
    
    
    (3,773
    )
    
    
    (1,719
    )
    
    
    (1,048
    )Pro-forma on a U.S. GAAP basis
    
    
    17,657
    
    
    
    16,664
    
    
    
    16,239
 F-41




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

Basic and diluted income per share and per ADS before discontinued
operations: 2001
    
    2002
    
    2003Basic earnings per share and per ADS
before discontinued operationsAs reported
    
    0.41 Euro
    
    0.41 Euro
    
    0.37 EuroPro-forma
    
    0.40 Euro
    
    0.37 Euro
    
    0.36 EuroDiluted earnings per share and per
ADS before discontinued operationsAs reported
    
    0.40 Euro
    
    0.41 Euro
    
    0.36 EuroPro-forma
    
    0.39 Euro
    
    0.37 Euro
    
    0.36 Euro
 2001
    
    2002
    
    2003Net income applicable to ordinary shareholders:As reported on a U.S. GAAP basis
    
    
    18,249
    
    
    
    17,145
    
    
    
    24,250Add: Stock based compensation expense
recognized under intrinsic value
method
    
    
    3,243
    
    
    
    
    
    
    
    801Deduct: Total stock-based employee
compensation expense determined under
fair value based for all awards
    
    
    (3,773
    )
    
    
    (1,719
    )
    
    
    (1,048
    )Pro-forma on a U.S. GAAP basis
    
    
    17,719
    
    
    
    15,426
    
    
    
    24,003Basic and diluted income per share and per ADS:
 2001
    
    2002
    
    2003Basic earnings per share and per ADSAs reported
    
    0.41 Euro
    
    0.38 Euro
    
    0.54 EuroPro-forma
    
    0.40 Euro
    
    0.35 Euro
    
    0.54 EuroDiluted earnings per share and per ADSAs reported
    
    0.40 Euro
    
    0.38 Euro
    
    0.54 EuroPro-forma
    
    0.39 Euro
    
    0.34 Euro
    
    0.53 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, 2001, 2002 and 2003: F-42




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

Weighted averageShares under Options
    
    Exercise PriceOutstanding at January 1, 2001
    
    
    1,199,400
    
    
    
    U.S. $1.00Options granted
    
    
    Options exercised
    
    
    (151,403
    )
    
    
    U.S. $1.00Options forfeited
    
    
    (64,860
    )
    
    
    U.S. $1.00Outstanding at December 31, 2001
    
    
    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. $1.00Exercisable at December 31, 2003
    
    
    590,957
    
    
    
    U.S. $1.00
 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. Comprehensive Income The components of accumulated other comprehensive income for a U.S. GAAP
financial statements presentation as of December 31, 2001, 2002 and 2003 are as
follows: CurrencyTranslationAdjustmentsper
financialstatements
    
    Pensionminimumliability
    
    Unrealized Gains
onAvailable-for-SaleSecuritiesper U.S. GAAPadjustments
    
    TotalBalance at December 31, 2000
    
    
    491
    
    
    
    
    
    
    
    
    
    
    
    491Currency translation adjustment
    
    
    748
    
    
    
    
    
    
    
    
    
    
    
    748Balance at December 31, 2001
    
    
    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
    )
    
    
    6,603
 F-43




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

CurrencyTranslationAdjustmentsper
financialstatements
    
    Pensionminimumliability
    
    Unrealized Gains
onAvailable-for-SaleSecuritiesper U.S. GAAPadjustments
    
    TotalBalance 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
    )
 Comprehensive income for each of the three years in the period ended December
31, 2003 is as follows: 2001
    
    2002
    
    2003Net income per U.S. GAAP reconciliation
    
    
    18,249
    
    
    
    17,145
    
    
    
    24,250Change in currency translation adjustment
    
    
    748
    
    
    
    (3,210
    )
    
    
    (3,711
    )Unrealized gains on securities
    
    
    
    
    
    
    111
    
    
    
    (111
    )Minimum pension liability
    
    
    
    
    
    
    (22,137
    )
    
    
    2,514Deferred taxes on minimum pension
liability and unrealized gains on
    
    
    securities
    
    
    
    
    
    
    6,603
    
    
    
    (716
    )Comprehensive income
    
    
    18,997
    
    
    
    (1,488
    )
    
    
    22,226
 Income Taxes Components of deferred income tax assets and liabilities were: December 31,2002
    
    2003Total deferred tax assets
    
    
    22,468
    
    
    
    21,956Total deferred tax liabilities
    
    
    (11,830
    )
    
    
    (10,768
    )Net assets (liabilities)
    
    
    10,638
    
    
    
    11,188Of which:Current deferred tax assets
    
    
    12,603
    
    
    
    13,063Non-current deferred tax assets
    
    
    9,865
    
    
    
    8,893Current deferred tax liabilities
    
    
    (1,006
    )
    
    
    (1,392
    )
 F-44




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

December 31,2002
    
    2003Non-current deferred tax liabilities
    
    
    (10,824
    )
    
    
    (9,376
    )Detailed as follows:Italian GAAP financial statements
    
    
    2,641
    
    
    
    4,363U.S. GAAP adjustments
    
    
    7,997
    
    
    
    6,825Net assets (liabilities)
    
    
    10,638
    
    
    
    11,188
 Principal items comprising net deferred income tax assets were as follows: December 31,2002
    
    2003Equalization tax on dividends
    
    
    (210
    )
    
    
    (475
    )Tax revaluation on certain assets, net of accumulated
depreciation
    
    
    298
    
    
    
    285Allowance for doubtful accounts
    
    
    1,293
    
    
    
    1,939Inventory obsolescence
    
    
    6,691
    
    
    
    8,041Intercompany profits in inventory
    
    
    1,952
    
    
    
    1,531Accumulated accelerated depreciation
    
    
    (495
    )
    
    
    (291
    )Pension asset
    
    
    (1,286
    )
    
    
    (380
    )Property cost accruals
    
    
    150
    
    
    
    46Book revaluation of certain assets
    
    
    (8,844
    )
    
    
    (8,431
    )Trademark revaluation of assets
    
    
    1,736
    
    
    
    1,503Tax on revaluation reserve for trademark revaluation
    
    
    (756
    )
    
    
    (706
    )Net operating loss carry forwards (NOL)
    
    
    5,484
    
    
    
    3,977Pension minimum liability
    
    
    6,641
    
    
    
    5,887Agents termination indemnity
    
    
    501
    
    
    
    421Investments devaluation
    
    
    282
    
    
    
    340Other
    
    
    2,563
    
    
    
    1,443Net deferred tax assets (liabilities)
    
    
    16,000
    
    
    
    15,130Less:Valuation allowance on NOLs
    
    
    (5,362
    )
    
    
    (3,942
    )Net deferred tax assets (liabilities)
    
    
    10,638
    
    
    
    11,188
 At December 31, 2003, the Companys subsidiary in the United States had a net
operating loss carryforward (NOL) of  7,845, which will expire from 2010
thru 2017. Utilization of that NOL is limited to future earnings of the U.S.
subsidiary. For financial reporting purposes, a valuation allowance has been
recognized for the full amount of this NOL. NOLs of other foreign subsidiaries
amounted to  3,587 at December 31, 2003, which will expire from 2004. A
valuation allowance of  1,197 has been provided against this amount. F-45




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

Tax savings resulting from income derived from operations in Italian
tax-exempt areas generated a per share benefit of 0.09 Euro in the year 2001.
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. A reconciliation between the Italian statutory tax rates and the consolidated
effective tax rates for income from continuing operations is as follows: 2001
    
    2002
    
    2003Tax @ Italian statutory rate of 40.25% in 2001 and 2002 and 38.25%
in 2003
    
    
    9,349
    
    
    
    7,492
    
    
    
    11,975Tax savings from Italian subsidiaries operating in a tax exempt area
    
    
    (3,816
    )
    
    
    (1
    )
    
    
    Investment tax credit and deductions
    
    
    (209
    )
    
    
    (245
    )
    
    
    Gains on business disposal
    
    
    
    
    
    
    (123
    )
    
    
    Effect of a change in tax rate: In Italy
    
    
    
    
    
    
    (7,384
    )
    
    
    469 Italian Dual Income Tax
    
    
    (801
    )
    
    
    
    
    
    
     Other countries
    
    
    
    
    
    
    
    
    
    
    (9
    )Effect of different tax rates of foreign jurisdictions
    
    
    (1,818
    )
    
    
    (661
    )
    
    
    (559
    )Tax benefit of NOLs of subsidiaries not recognized
    
    
    1,058
    
    
    
    641
    
    
    
    (110
    )Amortization of goodwill
    
    
    2,380
    
    
    
    
    
    
    
    Effect of tax provision on distribution of dividend from foreign
subsidiaries
    
    
    218
    
    
    
    
    
    
    
    Other permanent differences: ItalyIRPEG
    
    
    (1,001
    )
    
    
    (459
    )
    
    
    1,597IRAP  (primarily payroll and interest)
    
    
    1,053
    
    
    
    1,387
    
    
    
    978 Other countries
    
    
    (442
    )
    
    
    (400
    )
    
    
    81Provision for income taxes
    
    
    5,971
    
    
    
    247
    
    
    
    14,422Effective consolidated tax rate
    
    
    25.7
    %
    
    
    1.3
    %
    
    
    46.1
    %
 Financial instruments Derivative products At December 31, 2002, the Company had outstanding forward exchange contracts
to buy US$ 1,070,000 ( 1,020) for GBP Sterling 704,547; none of the foreign
exchange contracts have maturities that exceed one year. At December 31, 2003, 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 
1,264,159 and  450,000 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  11,671,000 and purchased put options to
buy Japanese Yen 900,000,000 and GBP Sterling 1,100,000 for a total of 
8,225,000. At December 31, 2002 and 2003, the Company had an interest rate swap agreement
to convert the variable interest rate on bank borrowings totaling  20,000 to
a fixed interest rate of 3.3%. This interest rate swap agreement will expire
in January 2005. None of the foreign exchange contracts or foreign currency options have
maturities that exceed one year. As of December 31, 2002 and 2003, total unrealized gain (loss) on these
derivatives amounted to  (343) and  132, respectively, and has been included
in the consolidated statements of income as the derivatives were considered
ineffective hedges. Foreign exchange gains and losses The net foreign exchange gains and (losses) recognized in the consolidated
statement of income for 2001, 2002 and 2003 amounted to  (79),  (656) and 
448, 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, 2001, 2002 and 2003. F-46




---



##### Table of Contents



DE RIGO S.p.A. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed in thousands of Euro (), except as otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003

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, 2002 and 2003. Interest rate swap agreements  The carrying value approximates fair value
based on interest rates at December 31, 2002 and 2003. F-47




---



##### Table of Contents



DE RIGO S.p.A. and
SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(expressed in thousands of Euro
(), except as
otherwise indicated)
For the years ended December 31, 2001, 2002 and 2003 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, 2003: Charged toBalance at
    
    costs and
    
    Acquisitions
    
    
    
    
    
    Balance at end ofDescription
    
    beginning of period
    
    expenses
    
    (disposals)
    
    Deduction
    
    periodYear ended December 31, 2001Deducted from asset accounts:Allowance for doubtful accounts
    
    
    6,154
    
    
    
    851
    
    
    
    
    
    
    
    (1,504
    )
    
    
    5,501Allowance for returns
    
    
    505
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    565Reserve for inventory
obsolescence
    
    
    15,141
    
    
    
    4,223
    
    
    
    
    
    
    
    (455
    )
    
    
    18,909Valuation allowance on NOLs
    
    
    4,267
    
    
    
    964
    
    
    
    
    
    
    
    
    
    
    
    5,231Total
    
    
    26,067
    
    
    
    6,098
    
    
    
    
    
    
    
    (1,959
    )
    
    
    30,206Year 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
    )
    
    
    37,081
 F-48




---



##### Table of Contents



Exhibit 8.1 List of Subsidiaries of De Rigo S.p.A. Name
    
    Country of IncorporationVogart Line España S.a.
    
    SpainDe Rigo (UK) Ltd.
    
    United KingdomDe Rigo Hellas A.E.E.
    
    GreeceDe Rigo Deutschland Gmbh.
    
    GermanyAtair Opt. Geräte GesmbH.
    
    AustriaDe Rigo France S.a.
    
    FranceDe Rigo Nederland B.V.
    
    The NetherlandsDe Rigo Asia Ltd.
    
    Hong KongDe Rigo Hong Kong Ltd.
    
    Hong KongDe Rigo Japan Co., Ltd.
    
    JapanDe Rigo Singapore Pte Ltd.
    
    SingaporeDe Rigo U.S.A. , INC.
    
    United StatesEuropean Vision Ltd.
    
    United KingdomVantios Group Ltd.
    
    United KingdomDollond & Aitchison Ltd.
    
    United KingdomD&A Contact Lenses Ltd.
    
    JerseyD&A Eyewear Ltd.
    
    United KingdomD&A Professional Services Ltd.
    
    United KingdomVantios Ltd.
    
    United KingdomBindi Investment Ltd.
    
    JerseyGeneral Optica Internacional S.a.
    
    SpainGeneral Optica Ltd.
    
    United KingdomGeneral Optica S.a.
    
    Spain




---



##### Table of Contents



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 OfficerDate: June 30, 2004