2014 ANNUAL REPORT General Information 2 General Information 2 Table of Contents Table of Contents GENERAL INFORMATION ......................................................................................................................................... 5 CORPORATE BOARDS AND AUDITORS ..................................................................................................................................7 SHARE CAPITAL AND OWNERSHIP.........................................................................................................................................8 MARCOLIN GROUP STRUCTURE AS AT DECEMBER 31, 2014............................................................................................10 MARCOLIN GROUP STRUCTURE AS AT MARCH 27, 2015...................................................................................................11 THE MARCOLIN GROUP ........................................................................................................................................................12 THE GROUP'S FINANCIAL HIGHLIGHTS................................................................................................................................13 GROUP REPORT ON OPERATIONS ...................................................................................................................... 17 BUSINESS PERFORMANCE ...................................................................................................................................................17 INCOME STATEMENT HIGHLIGHTS.......................................................................................................................................25 SALES REVENUES..................................................................................................................................................................27 STATEMENT OF FINANCIAL POSITION HIGHLIGHTS ...........................................................................................................32 MARCOLIN S.P.A. REPORT ON OPERATIONS ..................................................................................................... 41 INCOME STATEMENT HIGHLIGHTS.......................................................................................................................................42 SALES REVENUES..................................................................................................................................................................43 STATEMENT OF FINANCIAL POSITION HIGHLIGHTS ...........................................................................................................47 SUBSIDIARIES AND JOINT VENTURES .................................................................................................................................51 ASSOCIATES ...........................................................................................................................................................................55 MAIN RISKS AND UNCERTAINTIES TO WHICH THE GROUP AND THE COMPANY ARE EXPOSED..................................57 OTHER INFORMATION ...........................................................................................................................................................60 SUBSEQUENT EVENTS AND BUSINESS OUTLOOK ............................................................................................ 67 NOTICE OF CALLING TO GENERAL MEETING ..................................................................................................... 69 PROPOSED RESOLUTION ..................................................................................................................................... 70 CONSOLIDATED FINANCIAL STATEMENTS OF THE MARCOLIN GROUP ......................................................... 71 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ....................................................................................................73 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME ..........................................................................74 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY.....................................................................................................75 CONSOLIDATED STATEMENT OF CASH FLOWS .................................................................................................................76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ...............................................................................................77 ANALYSIS OF CONSOLIDATED FINANCIAL POSITION.........................................................................................................97 INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS ........................................... 125 MARCOLIN S.P.A FINANCIAL STATEMENTS. ..................................................................................................... 127 STATEMENT OF FINANCIAL POSITION ............................................................................................................................... 129 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME ........................................................................ 130 STATEMENT OF CHANGES IN EQUITY ............................................................................................................................... 131 STATEMENT OF CASH FLOWS ............................................................................................................................................ 132 NOTES TO THE SEPARATE FINANCIAL STATEMENTS ...................................................................................................... 133 INDEPENDENT AUDITORS' REPORT ON THE SEPARATE FINANCIAL STATEMENTS .................................................... 173 BOARD OF STATUTORY AUDITORS' REPORT ................................................................................................................... 177 RECLASSIFIED FINANCIAL STATEMENTS OF SUBSIDIARIES ......................................................................... 182 SIGNIFICANT RESOLUTIONS PASSED AT GENERAL MEETING ...................................................................... 193 3 4 Marcolin Group GENERAL INFORMATION MARCOLIN S.p.A. Headquarters, Executive Management and Business Offices in Z.I. Villanova, 4 32013 Longarone (Belluno) Share Capital Euro 32,312,475.00 Fully Paid In R.E.A n. 64334 Tax and Companies Register n. BL 01774690273 VAT n. 00298010257 Single-Member Company Tel +39.0437.777111 Fax +39.0437.777282 www.marcolin.com 5 6 Marcolin Group CORPORATE BOARDS AND AUDITORS Board of Directors 1 Vittorio Levi Giovanni Zoppas Antonio Abete Francesco Capurro Cirillo Coffen Marcolin Roberto Ferraresi Violaine Odile Marie Grison Emilio Macellari Frédéric Jaques Mari Stévenin Franck Raymond Temam Raffaele Roberto Vitale Board of Statutory Auditors 1 Chairman Acting Auditor Acting Auditor Alternate Auditor Alternate Auditor David Reali Mario Cognigni Diego Rivetti Alessandro Maruffi Rossella Porfido Internal Audit Committee 2 Chairman Internal Auditor Internal Auditor Vittorio Levi Roberto Ferraresi Cirillo Coffen Marcolin Supervisory Body Chairman C.E.O. and General Manager Director Director Director Director Director Director Director Director Director 2 Chairman Supervisor Supervisor Federico Ormesani David Reali Cirillo Coffen Marcolin Independent Auditors 3 PricewaterhouseCoopers S.p.A. 123 1 Term of office ends on the date of the Shareholders’ Meeting called to approve the annual financial statements for the year ended December 31, 2015 (according to Shareholders’ Resolution of April 30, 2013). 2 Board of Directors' appointment of April 30, 2013. 3 Term of engagement: 2013, 2014 and 2015 (according to Shareholders’ Resolution of April 30, 2013). 7 General Information SHARE CAPITAL AND OWNERSHIP In 2013 Marcolin S.p.A. ("Marcolin") and the direct parent company, Cristallo S.p.A. ("Cristallo"), a company indirectly controlled by investment funds managed by PAI Partners, were involved in a reverse merger whereby Cristallo was incorporated into Marcolin. In December 2012 Cristallo purchased from Marcolin's former shareholders 48,842,131 shares representing 78.601% of Marcolin S.p.A.'s share capital, for a price of 4.25 euros per share (with a total payment of euro 207,579,057), financed with a short-term credit facility (for euro 87,500,000) and equity for euro 160,740,000 (from the financial resources made available by the sole shareholder, Marmolada S.p.A., through the subscription and payment of two subsequent capital increases with additional paid-in capital). As a result of the change of control, since Marcolin was listed on the electronic share market (Mercato Telematico Azionario - MTA) segment of the Italian stock exchange, Cristallo had to launch a mandatory full public tender offer ("Offer") under Legislative Decree 58/1998 ("T.U.F." Consolidated Finance Act) Articles 102 and 106, first paragraph, as subsequently integrated and amended, and under the Issuers' Regulations, for a maximum of 13,297,244 ordinary Marcolin shares representing 21.399% of Marcolin S.p.A.’s share capital (the offering prospectus was approved with Consob Resolution n. 18421 of December 21, 2012). The acceptance period began on January 7, 2013 and ended on February 1, 2013. On the closing date of the Offer, 10,367,974 shares (corresponding to 77.971% of the public offer and 16.685% of the subscribed paid-in share capital of Marcolin) were tendered. Those shares, added to the Marcolin shares already owned by Cristallo S.p.A. and the treasury shares (681,000, corresponding to 1.096% of capital), resulted in Cristallo owning 59,891,105 shares, equal to 96.382% of the 4 Issuer's share capital, on the Offer payment date of February 8, 2013. Therefore, under Consolidated Finance Act Article 108, first paragraph, the legal conditions were present for the obligation to buy, and right to buy, the remaining 2,248,260 outstanding shares not tendered into the Offer, corresponding to 3.618% of the Issuer's share capital. In accordance with the offering memorandum and the notice published on February 7, 2013, and in compliance with Article 41, paragraph 6 of CONSOB's Issuer Regulations, the Bidder applied the joint procedure to execute the obligation to buy and the right to buy, and thus to buy the remaining Marcolin shares, for a total joint 5 procedure price of euro 9,555,147.50. As a result of those events, Cristallo owned 100% of Marcolin's share capital. Therefore, under Borsa Italiana Provision n. 7645 of February 7, 2013, the delisting of the Issuer's shares from the electronic share market was arranged for February 14, 2013. Cristallo financed the procedure (for euro 53,619,037) with liquid resources of euro 29,669,093 and additional equity of euro 27,300,000, again made available by the sole shareholder, Marmolada S.p.A., through another capital increase. During the year, procedures for the merger of Cristallo into Marcolin commenced within the scope of an extensive reorganization and optimization plan for the business, industrial and strategic purposes of the Group of which Cristallo and Marcolin are part. In contrast to a direct merger, the reverse merger enabled Marcolin to retain its own business and legal relationships, with significant savings in terms of costs and organizational demands. The main objective of the merger, which was part of the reorganization and restructuring plan described in the public offering prospectus, was to shorten the chain of command in order to improve flexibility and operational efficiency, reduce corporate and administrative expenses, and rationalize the financial indebtedness involving the Group companies, and thus achieve greater financial stability. The merger, expressly required under financing agreements, was a condition for the medium/long-term credit facilities foreseen under the Senior Term and Revolving Facilities Agreement of October 14, 2012, as those credit facilities could be issued solely upon the effective completion of the merger. Since Cristallo used bank loans to finance the original acquisition of Marcolin (indebtedness that was assumed by the surviving company), the merger is legally defined as a "merger as a result of acquisition with debt", so the procedures set forth in Italian Civil Code 2501-bis and 2501-quinquies were followed. On June 26, 2013, Marcolin S.p.A.'s Board of Directors presented the plan of merger through absorption of Cristallo S.p.A. into Marcolin S.p.A., and the Directors' Report on the merger plan prepared in accordance with the Italian Civil Code; on July 8, 2013 Marcolin's Extraordinary General Meeting approved the merger plan as well as new By-Laws that used the current text of the absorbed entity. 4 5 The price of euro 4.25 per share corresponds to the contractual value of Marcolin's shares for Cristallo's acquisition in December 2012. Since this procedure follows a mandatory public tender offer, in compliance with Consolidated Finance Act Article 108, third paragraph, the price offered for each remaining share was the public offer price, i.e. euro 4.25 for each of the remaining outstanding shares. 8 Marcolin Group The deed of merger was stipulated on October 28, 2013 and became effective for tax, accounting and legal purposes on the same date. The merger took place by assigning the shares of the surviving company, originally owned by the absorbed entity (98.9% of the share capital), to Marmolada S.p.A., Cristallo's sole shareholder. Since the remaining 1.1% consisted of treasury shares, the transaction did not require any swap ratio. The merger resulted in the cancellation of all Cristallo's shares, as the Marcolin shares were assigned to the sole shareholder, Marmolada, except for the treasury shares, which were canceled at the end of October. The Extraordinary General Meeting of October 31, 2013 canceled the 681,000 treasury shares owned by Marcolin by transferring the nominal value directly to the sole Shareholder, and eliminating the nominal value of the Company's shares in accordance with Italian Civil Code Article 2436, paragraphs 2 and 3. ***** As a result of the merger, on December 31, 2013 the Parent Company's share capital was euro 32,312,475.00, fully paid-in, comprised of 61,458,375 ordinary shares, without par value. On that date the share capital was wholly owned by the sole shareholder, Marmolada S.p.A., a single-member company based in Milan. After the above-described transactions, Marcolin shares retained normal dividend rights and they continue to be encumbered by liens (previously claimable by the Financing Banks). At the end of 2013, Marcolin issued bond notes, secured by collateral for the same amount of the obligations assumed with the bondholders, including a lien on the shares of the Issuer, Marcolin, representing 100% of share capital. This transaction and the related guarantees are described herein. No changes occurred as at December 31, 2014 that changed the composition of equity, which therefore is in line with the equity composition reported at December 31, 2013. ***** 9 General Information MARCOLIN GROUP STRUCTURE AS AT DECEMBER 31, 2014 10 Marcolin Group MARCOLIN GROUP STRUCTURE AS AT MARCH 27, 2015 11 General Information THE MARCOLIN GROUP Marcolin, a well-established company based in Longarone (Belluno) in the Italian eyewear district, is a designer, manufacturer and distributor of eyewear products. As a renowned leader in the global eyewear business, Marcolin stands out for its premium quality products, design skills, production capabilities, attention to detail and first-rate distribution. In 2014 the Marcolin group sold an estimated 15 million pairs of eyeglasses and sunglasses worldwide, with sales exceeding euro 360 million. At the end of 2013 Marcolin acquired the Viva International group (hereinafter also “Viva”), one of the most important international eyewear groups, by acquiring from the American group HVHC Inc. a 100% stake in Viva Optique, Inc. (the group's parent company based in New Jersey, with branches in New York and Miami). The Viva International group, with some 8.5 million eyewear items sold, 300 employees and sales of nearly $190 million dollars (55% of which in the United States), was the ninth largest eyewear company in the world and the second largest in the United States, where it had an especially strong position in the “vision” segment. With a network of more than 160 agents operating on the American market and a brand portfolio that included Guess, Guess by Marciano, Gant, Harley Davidson, and other brands targeted specifically to the U.S. "diffusion" market, Viva controlled affiliates in major countries of strategic interest (with subsidiaries in France, the United Kingdom, Hong Kong and Brazil, and partnerships in Mexico, Australia and Germany). In 2014 Marcolin successfully moved forward with the Viva integration plan, which entailed reorganizing distribution networks on an international scale, reviewing logistic flows, improving the efficiency of business structures in the countries present, and consequentially revising the cost structures. Those activities were completed according to schedule in the initial months of 2015; currently the rationalization of the corporate structure is being completed, after which the Group's structure will be definitive. Thanks to Viva's products and markets complementing those of the Marcolin group, Viva integration has improved Marcolin's standing as a highly global eyewear company in terms of its brand portfolio, products, geographic presence and markets. In 2014, combined with Viva, the Marcolin group had sales exceeding euro 360 million and some 1,500 employees (including 570 in the American affiliates), plus a widespread, well-structured network of independent agents. Today Marcolin has a strong brand portfolio, with a good balance between luxury and mainstream ("diffusion") products, men's and women's products, and eyeglass frames and sunglasses. The luxury segment includes glamorous fashion brands such as Tom Ford, Tod’s, Balenciaga, Roberto Cavalli, Montblanc and the recent additions Zegna, Agnona and Pucci (whose distribution will commence in 2015); the diffusion segment includes Diesel, Swarovski, DSquared2, Just Cavalli, Timberland, Cover Girl, Kenneth Cole New York and Kenneth Cole Reaction. Viva International has added to this portfolio the brands Guess, Guess by Marciano, Gant, Harley Davidson, and other brands targeted specifically to the U.S. market. The house brands are WEB, National and Marcolin. The Viva acquisition has bolstered Marcolin’s distribution capacity on the American market. The Group is now present in all major countries across the world through direct affiliates, partnerships (joint ventures) and exclusive distribution agreements with major players. ***** 12 Marcolin Group THE GROUP'S FINANCIAL HIGHLIGHTS Sales revenues by geographical area (destination market) 2014 2013 Pro Forma * Sales and adjusted EBITDA (euro/millions) excluding non-current costs incurred for extraordinary transactions Equity (euro/millions) Net financial debt (euro/millions) * with a constant perimeter, including the Viva group for 12 months 13 General Information 14 Marcolin Group GROUP REPORT ON OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2014 15 Report on operations for the year ended December 31, 2014 16 Marcolin Group GROUP REPORT ON OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2014 Consistently with previous periods, the Annual Financial Report for the year ended December 31, 2014 (which includes the consolidated financial statements of the Marcolin group and the separate financial statements of Marcolin S.p.A.) was prepared in conformity with the valuation and measurement criteria established by the international accounting standards (IAS/IFRS) adopted by the European Commission with Regulation 1606/2002, Article 6, of the European Parliament and of the Council of July 19, 2002 on the application of international accounting standards, and with the measures enacting Legislative Decree n. 38/2005. BUSINESS PERFORMANCE The eyewear industry 6 Global economic growth accelerated at the end of summer and beginning of fall, driven by the United States and China in particular. However, the advanced economies of the euro area, lacking the structural reforms to promote growth and employment, remained on the brink of a recession accompanied by deflation. Italy's economy remained stable, although with very low domestic demand and production. Thanks to exports, which reached new records near the end of the year assisted by a stronger U.S. dollar and low oil prices, Italian eyewear production grew by 9.4% from 2013. Exports of eyeglass frames, sunglasses and lenses rose by 11.8% year on year, a record high. This positive trend affected primarily large companies, which are better structured to seize opportunities quickly, whereas small and medium enterprises (SMEs and craft enterprises) benefited to a lesser extent, as they require more effort to cope with the difficult situation due to inherent limitations mainly related to their size, and are less organized and flexible with respect adapting to market changes. Overall, in 2014 the number of businesses remained the same as that of the previous year; for every business that closed down, a new business entered the market, demonstrating renewed vitality in the industry. Employment rose by an annual 2.3% (excluding employees with temporary contracts). In fact, the eyewear industry is experiencing a reshoring phenomenon, i.e. manufacturing activities are returning to Italy: in reaction to the inflation in China but also stimulated by the need to be closer to the market with greater manufacturing flexibility, and to meet the demands expressed by the clientele for high-end, prestigious, high-quality products made in Italy. In this record year for Italian eyewear exports, both Europe and the United States were experiencing full recovery for the second year in a row. Europe, which had good results in 2013 only for some countries, presents some important turnarounds (Spain, Portugal, Greece), with resumed growth for eyewear exports. Europe remains the major export market, accounting for nearly 50% of the total and having double-digit annual growth. Exports to the United States, which account for nearly 30% of the total, had nearly double-digit growth (9.6%) for both eyeglass frames and sunglasses. Exports to North America increased by practically 13%. Exports to Asia, up by 15% from 2013, had the highest growth. Although the levels remain low, Italian eyewear exports to emerging markets remain positive, both in the established eyewear markets and in "new" markets, in the context of a continuously evolving global scenario. 6 Source: ANFAO – Associazione Nazionale Fabbricanti Articoli Ottici (Italian Association of Eyewear Article Manufacturers) – Annual Report 17 Report on operations for the year ended December 31, 2014 ***** Introduction In the above-described scenario, 2014 was for Marcolin a year of important events and extraordinary transactions that impacted the corporate and organizational aspects of the Group, and which were reflected in the annual financial and business performance. During the year Marcolin implemented its plan to integrate the Viva International group, acquired at the end of 2013 through Marcolin USA with a 100% stake in the group's parent company, Viva Optique, Inc. The Viva group integration process was immediately initiated in early 2014, beginning with the rationalization and consolidation of the business on an international level (distribution and logistics in primis), and proceeding with the organizational and corporate restructuring, accompanied by a revision of cost structures. The integration plan entailed incurring non-recurring costs, but the operational and cost synergies that had been identified at the time of the Viva acquisition were effectively realized. Currently, the synergies are estimated to arrive at euro 10 million annually, some of which were already realized in 2014. The integration plan is concluding in the initial months of 2015, perfectly on schedule. In addition, some important investments were made in 2014, especially in products and the brand portfolio but also in the area of distribution and organization. Activities to develop the license portfolio resulted in the announcement of new agreements with important groups in the luxury segment (Zegna, Agnona, Pucci) and the relaunching of Web, the house brand, which played a significant role in the comeback of the domestic market. Additional activities were carried out to develop new markets, including through partnerships under joint-venture agreements (in China, Russia and Northern Europe). Due to their scale, such transactions, particularly those referring to Viva integration, impacted significantly the results of operations of the companies involved. For this reason, the annual performance is presented along with the Group's normalized results, i.e. those excluding the nonrecurring costs incurred in the year, including in the comparison with the previous year. Moreover, due to the need to present homogeneous data for the two years, pro-forma information consolidating the Viva group for 12 months is provided for 2013 in order to provide comparability with the same consolidation perimeter of 2014 ("pro-forma" shall mean Viva International for 12 months). ***** Viva integration On the path of growth pursued by Marcolin, Viva integration has turned the Group into a true global player by expanding its scale, geographical presence, brand portfolio and product range. The complementarity of the brands managed, completion of the "diffusion" product range and the balance achieved between men's and women's products and between eyeglass frames and sunglasses are among the strategic factors behind the important acquisition. Moreover, Viva's strong presence in the overseas market has made Marcolin stronger in North America by enabling it to cover one third of the market, while maintaining a focus on the Far East and Europe. Thanks to the complementarity of the reciprocal distinctive characteristics and expertise, the Viva acquisition and integration has created an important, globally competitive eyewear company: by bringing its know-how and background to a wider scale, Marcolin offers significant added value to the market in terms of both product range and global distribution. 18 Marcolin Group Integration of the Viva group was one of the most important projects carried out in 2014, and is now practically concluded. In early 2015 the final operations planned in the United States will be carried out, ending the rationalization of the distribution network, logistics, cost structure and organizational and corporate structures. The timetable being observed will enable important synergies to unfold within the Marcolin group starting in 2015; at least in the countries in which integration was first implemented, some synergies were already achieved near the end of 2014, and account for some euro 3.6 million. Now that the integration process is almost finished, the synergies are exceeding those originally budgeted, and are estimated to reach euro 10 million. The synergies derive from rationalization of the organizational and corporate structures, including logistics, but also from opportunities ensuing from the integration of the sales and distribution networks on an international scale. During the year activities planned to integrate the foreign affiliates of Marcolin and Viva in countries in which both groups already existed were carried out, beginning with the strategic affiliates in North America, the United Kingdom and Hong Kong, and then in France and Brazil in the second half of 2014. In early 2014, Marcolin had already separated the key functions that had been centered at the organization of the former shareholder, HVHC, Inc. As noted, the plan to rationalize the sales force was implemented in the United States first, and was continued throughout the first half of 2014. The plan to integrate information technology processes and systems, necessary for the achievement of the planned synergies, was immediately begun with the assistance of international collaborators. The reorganization process then involved all countries in which companies of both the Viva group and the Marcolin group co-existed, in the order of Far East countries, the United Kingdom, France, Brazil and South American countries. In July a new company structure was set up in Hong Kong, with the objective of combining the distribution of Marcolin and Viva products through a new organization operating directly in the Far East. That organization, established in July 2014 through a transfer of Viva Hong Kong's operating business, was the object of a subsequent business transfer by Marcolin S.p.A., which continued to serve the Asian market directly until the end of the year, when it transferred the entire Asia Pacific Distribution business to the new structure (taking effect on January 1, 2015). Due to a sales decline that prevented it from breaking even, Viva Hong Kong had accumulated losses and was burdened by some impaired accounts (referring to the Australian joint venture and associate Viva Brazil) and some pending disputes. Within the scope of the complex organizational and corporate restructuring process required for Viva/Marcolin integration, it was considered opportune to identify and carve out the viable operating division of Viva Hong Kong, and transfer it to the newly established Hong Kong branch of Marcolin UK Ltd. The transfer took place at the beginning of July. After absorbing the business division relating to Viva products, the Hong Kong branch's mission included the distribution of Marcolin products in the same areas of the Far East, with clear advantages in terms of economies of scale and cost and top -line synergies. In fact, previously Marcolin S.p.A., which used to distribute its products directly in the Far East, had to import the products into Italy to the logistical center in Longarone and then send them out again to clients and distributors in Asia, a costly and time-consuming process. Instead the Hong Kong branch sources directly from Chinese suppliers thanks to the size and scale achieved, thereby saturating overheads by distributing into outlying markets autonomously and fully exploiting the cost benefits arising on operational gearing to improve sales. The transactions made it possible to create the Group's third sales hub, due to the critical mass represented by the sales of Marcolin and Viva brands, enabling to invest in structures and means to better penetrate markets cost-effectively as a result of the streamlining and synergies realizable from the new size. 19 Report on operations for the year ended December 31, 2014 Afterward, in order to adapt to the Marcolin group's sales and logistical organization, the operational divisions of Viva Eyewear UK Ltd (domestic and international distributor of Viva products) were transferred to Marcolin UK Ltd (domestic market) and Marcolin S.p.A. (international market for distribution to Italy, the rest of Europe, and the other non-EU countries to which Viva UK had exported). The business transfers, which took place at the beginning of September, considerably downsized the U.K. company (which retained only some non-operating activities), whose operating structures became redundant, allowing to realize the cost synergies planned. Activities formerly performed by Viva UK are now carried out by Marcolin UK and Marcolin S.p.A., with minimum costs compared to before the transfer. In early 2015, as part of the reorganization, the business division dealing with distribution of Marcolin products in South America (excluding Brazil) was transferred from the former Marcolin USA, Inc. (now Marcolin USA Eyewear, Corp.) to Marcolin S.p.A. The transfer completed the redistribution of international markets in accordance with the Group's plans for the geographical hubs and a new sales organization. The transactions described above (Marcolin S.p.A.'s acquisition of the “international” business division and Marcolin UK Ltd's acquisition of the “domestic” division, and the transfer of the “Asia Pacific Distribution” division from Marcolin S.p.A. to subsidiary Marcolin UK Ltd) are linked, being part of a plan to reorganize and establish three geographical hubs (Europe, USA and Far East), from which the Group may benefit from considerable cost and top-line synergies (the latter of which are difficult to quantify in advance). ***** Concerning the French market, on October 31, 2014 Marcolin France Sas acquired Viva France Sas (formerly owned by Viva Eyewear UK Ltd), the distributor of Viva products in France. This transaction, a step toward the subsequent merger of Viva into Marcolin France (by way of the “dissolution sans liquidation” of Viva France and “trasmission universelle du patrimoine de Viva France à Marcolin France”, effective on January 1, 2015), had the stated objective of reducing and streamlining the structures and related costs by integrating the two businesses into one organization with a sole management, in order to manage, including prospectively, the related market more efficiently and effectively. Through the merger, the operations, assets and liabilities of the absorbed company continue to survive in the acquirer. A similar transaction took place in Brazil, where two identical sales organizations existed, one for the distribution of Marcolin products (Marcolin do Brasil Ltda) and the other for the distribution of Viva products (Viva Brasil Comercio Produtos Opticos Ltda). In this case as well, after Marcolin do Brasil acquired all Viva Brasil shares (at the end of December), it initiated a merger to absorb such company (which took place on January 1, 2015). Similarly to the French market, in Brazil the business management was assigned to a newly appointed manager with extensive experience in the eyewear industry, in order to fully exploit cost and top-line synergies that only full integration of the two structures would allow. ***** As noted, in North America integration started immediately with the sales organization and rationalization of the sales force, with the objective of reassigning products and markets according to a single, coordinated logic in order to optimize the distribution of Marcolin and Viva products. In October the switch to a new SAP system (Group ERP) was completed, which resulted in the full replacement of the information systems formerly used by Viva, and operating procedures and processes were revised in the light of the larger Group. 20 Marcolin Group On January 1, 2015 the corporate restructuring was in effect by way of the dissolution and absorption of American companies Marcolin USA, Inc., Viva Europa, Inc., Viva International, Inc. and Viva IP, Corp. into Viva Optique, Inc. (the effective time and date of the merger was as of the close of business on December 31, 2014). Viva Optique's name was changed to Marcolin USA Eyewear, Corp. A plan to streamline the logistics structures in North America, which will reduce the number of plants currently operating, is being developed. When the Scottsdale, Arizona location is closed down, the U.S. market will be served by the establishment in Somerville, New Jersey. In 2015, the operations of Viva Canada will be evaluated to complete the organizational and corporate rationalization process. ***** Once Viva and Marcolin are fully integrated, the Group's business operations will be concentrated into three geographical hubs: • the U.S. hub, directed by Marcolin USA Eyewear, Corp. (sole legal entity, which will focus on distribution in the North and Central American markets); • the European hub, directed by Marcolin S.p.A., which will address the European rim and its complementary and neighboring countries (in terms of both geography and business, such as South America and the Middle East), including through direct affiliates and joint ventures; • the Asian hub, where companies have been set up to manage the Far East markets, distant and difficult to penetrate. Indeed, only by operating there directly may such markets be developed (as noted, the business divisions dealing with the distribution of Viva products in the Far East, and then the division dealing with Marcolin product distribution division in Asia Pacific were transferred to the Marcolin UK Ltd Hong Kong branch). The reorganization entailed overhauling the logistical flows on an international scale through the establishment of the three main hubs (for distribution management) in order to render the integrated logistics more agile and efficient, thereby reducing costs, shortening the distance to the end customer, and consequently improving the effectiveness of response to the market. ***** Products and licenses Within the scope of its brand portfolio consolidation and development, the Marcolin group moved forward with the following activities in 2014, which were dedicated to both licensed brands and house brands: • • • an important strategic alliance was created at the end of 2013 with the stipulation of licenses for prestigious eyewear brands Ermenegildo Zegna and Agnona. The licensing agreement has a tenyear duration and involves the exclusive design, manufacturing and global distribution of sunglasses and eyeglass frames. Marcolin's high quality and design standards will be combined with the exclusive style and international appeal of the Zegna group brands, renowned throughout the world as an example of Italian excellence. The strength of the Marcolin-Zegna partnership is a dual project focused on product innovation for the Zegna brand and development of the women's segment for Agnona, which Marcolin's core competencies can offer to the Belluno group through its distribution network, presence in American markets recently expanded with the Viva acquisition, and ability to penetrate emerging markets assisted by partnerships and exclusive distribution agreements (in China and the Middle East). The initial Ermenegildo Zegna and Couture collections were launched in January 2015; an exclusive worldwide license agreement was stipulated with Emilio Pucci, a classic, highly prestigious fashion and luxury brand for more than sixty years; the five-year, renewable license took effect in January 2015; early license renewals were stipulated for the Timberland brand and, pursuant to previous contractual negotiations, the Tom Ford license was extended; 21 Report on operations for the year ended December 31, 2014 • • • • • long-term licensing agreements with Skechers USA, Harley-Davidson and M.lle Catherine Deneuve were renewed; they had initially been stipulated through Viva International partnerships, which are now extended to Marcolin; Marcolin renewed its licensing agreement with Procter & Gamble for the design, manufacturing and distribution of the Covergirl Eyewear brand in the American market; the Diesel brand license was also extended; moreover, Diesel communicated its intention to stop selling apparel with the 55 DSL brand, so Marcolin ceased production of 55 DSL models, while continuing to distribute the products in stock until December 2014; a similar agreement to extent the duration of a license was reached during the year for the Swarovski brand; in October an agreement concerning one of the Group's most important licenses was revised to provide for less royalty and advertising payments from 2015 until the license expiration, in exchange for a lump-sum payment of transaction fees. The Marcolin group pursued an important initiative to rationalize and optimize its product collections. Part of the Swarovski brand collection was repositioned in order to offer a product with a more balanced price/quality ratio, partly drawing on imports from Asian markets; this was very well received by the market, and boosted the sales. With respect to product innovation, Tom Ford introduced a new collection in metal, the "Essential" line, combining Italian design and production capabilities with Marcolin's special expertise. Sales of the Essential line commenced in February 2014 and contributed to the important sales growth realized by the brand in 2014. Diesel's new "Denim Eye" line, designed in 2013 with an exclusive Marcolin patent, was put on the market. Conceived for young consumers by combining the brand image with Marcolin's expertise and production capacity, it was extremely well received by the market. The relaunching of the house brand, WEB, continued with a "Made in Italy" eyeglass frame collection positioned in a highly competitive price range. It is a service product created with the specialized skills of the internal product development structures, saturating their costs, and the manufacturing capability of the eyewear district. Its success was behind the comeback of the domestic market, which grew significantly in 2014, especially considering the difficulties persisting due to the crisis that has been present for years. Balenciaga was relaunched, after the fashion house's designer was changed, with a sophisticated and elegant collection having great complexity, which was presented to a group of selected retailers. It was extremely successful in the international markets. In general, a great effort was made to enhance the collections, expand the eyeglass frame segment and add new lines and new products. The design and product departments were directly involved with exceptional designing activities aimed to adapt the collections to more international (Asian-fitting) distribution, with stylish and exclusive designs while improving the capacity to produce the new models and focusing on opportunities deriving from the availability of new, original materials. ***** Sales activities Sales activities aimed to strengthen relationships with the distribution network continued in 2014, with the objective of greater penetration into the markets sustaining the Group's growth. Within the scope of the Viva integration plan, the foregoing sections describe the rationalization of the distribution networks and international sales organizations (establishment of the new Hong Kong branch that will manage distribution of Viva and Marcolin products, Marcolin/Viva integration in the United States, France and Brazil, the closing of Viva UK's operating activities, which were transferred to Italy and to the pre-existing U.K. branch of Marcolin, all of which were carried out in 2014, and the transfer of the Latin American business to the Parent Company, which will take effect in early 2015). 22 Marcolin Group In order to manage distribution directly in mainland China, at the end of 2014 a joint venture was set up with the Gin Hong Yu International Co. Ltd group (Ginko Group), a well-known and respected business operating in the Chinese eyewear market. Distribution operations will be managed by Ginlin Optical Shanghai Ltd Co., based in Shanghai, a subsidiary controlled indirectly (through Ging Hong Lin International Co. Ltd), by way of joint ownership by Marcolin S.p.A. and the Ginko group. Still regarding the Group's international development, a joint venture was set up with Sover-M, a wellestablished, prestigious company operating in the eyewear business in Russia, for the distribution of all Marcolin and Viva products. The Italian Parent Company controls 51% of Sover-M. Sover-M's shares were acquired in December 2014. In Europe, an affiliate was started up in Frösundaviks (Stockholm), Sweden. Marcolin Nordic began operating at the end of February 2015, and its mission is to manage the Nordic market (Denmark, Finland, Norway, Iceland and Sweden) closely and effectively in order to distribute there all brands in the Marcolin/Viva portfolio. Much attention was dedicated to the reorganization of the Italian sales network. When a new Italian Sales Director with a proven track record in the industry joined Marcolin in 2013, a review of the sales force was begun that led to a reorganization of the independent agents, an important step for relaunching on the domestic market. In parallel, a thorough review of the affiliates' sales organization was performed (which led to a change in the management of the Brazilian affiliate at the beginning of 2014). Those initiatives continued during the year within the scope of the Viva integration process, beginning with the review of the distribution network and sales force, with the objective of maximizing the distribution synergies possible and promoting cost efficiencies. New, prestigious offices were located in strategic countries (France, Brazil, Hong Kong) in consideration of the need to provide support to sales that have grown considerably as a result of Viva integration. In the marketing area, some collections and parts of collections were repositioned in term of product and price. Price lists for the public were reviewed on one hand and margins for the distribution network on the other. Revisions were implemented to support volumes, focusing specifically on collections that are more sensitive to the market demand curve. ***** Logistics and organizational activities The Group's reorganization process was carried out in the logistical area as well. Investments continued to be made in resources and systems in the production and sales planning areas, strengthening the central supply chain management function in order to better handle the integrated logistics. The objective is to achieve better allocation of resources by way of more careful and more rational demand planning, exploiting upstream and downstream synergies. As a result, the organizational activities (focusing on planning processes, which led to the creation of the demand planning function) enabled to improve internal efficiency, effectiveness in responding to the market and customer service, with positive effects on sales and key performance indicators. With respect to resources and systems, the new ERP (SAP) system was successfully implemented internationally at all Viva companies: in Hong Kong, France, Brazil, through the operations integrating Viva businesses into the Marcolin ones; in the United States, SAP roll-out was completed in October 23 Report on operations for the year ended December 31, 2014 at Viva Optique Inc.'s U.S. affiliate, an achievement attained with a minimal impact on the business and on market service. ***** Marcolin is preparing to double its Italian manufacturing operation with the purchase of a new 3,500 square meter factory in Longarone (Fortogna locality), in the heart of the eyewear district, close to its historic headquarters. This will benefit employment levels by dedicating important resources to production. The project will be executed from the second half of 2015 (Marcolin’s new acetate division in Fortogna will become operational by the summer of 2015), and will ensure the production expansion necessary to meet the demands arising from both the new brands added to the brand portfolio and the structural expansion of some markets. Consistently with the Company's medium/long-term growth plans, the operation aims to create value by maximizing the opportunities offered by the development of the high-end collections that have always represented Marcolin's design concept. The production layout of the Longarone plant (currently housing the acetate production, which will be transferred to Fortogna) will be changed by overhauling the Metal, Product Development and Prototype divisions. It will cost some euro 4.5 million (partly for the purchase of the Fortogna factory, and the rest to transfer and outfit the new acetate division in Fortogna, renew the floor space that will be made available in Longarone, and purchase plant and machinery to expand production capacity). This opportunity will enable to immediately undertake the business plan necessary to promote the Group's growth, and to obtain savings from the insourcing of production beginning in the second half of 2015. Reasons for which the consolidation and development of its production capacity in Italy are important to Marcolin include: • reduced dependence on external suppliers, which will enable to shorten the manufacturing lead time, and thus increase the ability to seize market opportunities (and improve the time to market); • made in/made out realignment according to the eyewear industry standards (and those of the main competitors); • expansion of the capacity to produce more Italian-made products, which are increasingly perceived as having added value by the Italian and international clientele; • as an essential condition for managing the inflation risk in the Chinese sourcing market, production insourcing will allow greater control of production factors, and not only in terms of costeffectiveness. ***** The Asian suppliers were reviewed and monitored from a quantitative and qualitative point of view (quality, reliability and service), in light of the particular social and economic dynamics characterizing that sourcing market. In 2014, thanks to the critical mass deriving from the higher volumes sourced after the Viva acquisition, it was possible to contain the impact of the current inflation in China on the product cost. A new company will be established in China that shall monitor the production of Chinesemanufactured products, perform quality control and check production work in progress for all the Group's companies that source from that market: Marcolin S.p.A., Marcolin USA Eyewear Corp., and Marcolin (UK) Hong Kong Branch. The new company, Marcolin Technical Services (Shenzhen) Co. Ltd, is owned directly by Marcolin S.p.A. and is based in Shenzhen, Guangdong Province, China. It has been operating since mid 2015, providing technical services regarding production, such as supplier selection in China, quality control and monitoring of production work in progress, and general manufacturing-related services. ***** 24 Marcolin Group Lastly, concerning organizational restructuring, the management team was consolidated and increased in 2014, consistently with the projects and challenges that have involved the Group in the past and will continue to do so in the future. The Group underwent a comprehensive reorganization process, with changes made in top and middle management from recruiting from the outside and using internal mobility. ***** INCOME STATEMENT HIGHLIGHTS In order to provide comparability between 2014 and the prior year, the 2013 values presented hereinafter were obtained by summing up the Marcolin group's results with those of the Viva group for the period of January to December 2013 (2013 pro forma). In fact, the information presented in the 2013 consolidated financial statements included Viva's income statement results from the acquisition date (December 3, 2013) to the annual closing date, whereas the statement of financial position as at December 31, 2013 already fully consolidated the Viva group, so the key financial ratios were not truly meaningful. For this reason, the 2013 pro-forma accounts presented herein for comparison purposes include the Viva International group results for the entire 12 months. ***** As noted, in 2014 Marcolin was involved in many new projects and activities of consolidation and especially of development and global reorganization at all levels. Accordingly, 2014 must be considered a year of strong change, in which many activities were introduced that will bring returns only in the future. The activities carried out had a significant impact on the results of the year, requiring the 2014 financial statements to be interpreted in the light of such extraordinary events. The organizational activities are described previously herein, particularly the Marcolin/Viva integration process, and the sales-related activities, with the rationalization of the distribution networks on an international scale and continued restructuring of the brand portfolio thanks to the stipulation of new prestigious licensing agreements that will bring important results in terms of future sales and margins. As a result of the extraordinary activities in progress, particularly those referring to Viva integration, the income statement results were adversely affected by some non-recurring events, which need to be highlighted. For all the foregoing reasons, where significant, the main changes of the year are also reported herein by showing the impact of the extraordinary activities and thus of the non-recurring costs, also providing comparability, with the same consolidation perimeter, of the 2014 data with the 2013 data, by presenting “normalized” income for both years. Upon completion of the Viva integration process, an estimated euro 10.0 million in cost synergies will be realized, exceeding those originally estimated. The synergies, euro 3.6 million of which were realized in 2014, will fully benefit future years starting from 2015 in an amount of euro 10.0 million. ***** The following table summarizes the Group’s key performance indicators. 25 Report on operations for the year ended December 31, 2014 As noted, the pro-forma data includes the full contribution of Viva International for 12 months, and so is comparable with the corresponding results of 2014. Year 2010 Net Sales 205.7 YOY 14.0% 2011 224.1 9.0% 34.2 15.3% 28.9 12.9% 21.0 9.4% 2012 214.0 (4.5)% 11.2 5.2% 11.0 5.1% 6.0 (euro/000.000) % of EBITDA revenue 29.9 14.6% % of EBIT revenue 24.9 12.1% % of Net Result revenue 18.6 9.0% ROS ROI ROE 12.1% 28.6% 23.7% 12.9% 29.5% 22.2% 2.8% 5.1% 5.2% 3.8% 2013 * 212.3 (0.8)% 15.9 7.5% 10.0 4.7% 12.0 5.7% 4.7% 2.6% 5.6% 2013 2014 ** 346.3 362.1 61.8% 4.6% 28.5 29.4 8.2% 8.1% 19.2 19.9 5.6% 5.5% (8.6) 0.4 (2.5)% 0.1% 5.6% 5.5% 5.0% 4.8% (4.0)% 0.2% EBITDA: is EBIT before amortization, depreciation and annual allowance for doubtful debts EPS: Earnings per share = Net result/number of shares ROS: Return on sales = EBIT/Net sales ROE: Return on equity = Net result/ Net Equity * Viva consolidated 1 month ** Pro-forma (Viva consolidated 12 month) The net revenues of 2014 were euro 362.1 million, compared to the euro 346.3 million of 2013 (proforma). Ebitda was euro 29.4 million, or 8.1% of sales (2013 pro-forma: euro 28.5 million, corresponding to 8.2% of sales). Ebit was euro 19.9 million, or 5.5% of sales (2013 pro-forma: euro 19.2 million, 5.6% of sales). As noted, the Group’s margins were greatly influenced by non-recurring transactions; in 2014, the costs of those transactions reduced Ebitda by euro 14.5 million (in 2013, including the costs of the absorbed company, Cristallo, the Ebitda decrease was nearly euro 10.4 million). In order to better understand the business performance, those effects, mainly referring to costs incurred for Viva integration, must be eliminated. The following costs were involved: • • • • euro 9.4 million incurred for the Viva integration process, reported primarily by subsidiaries Viva Optique, Inc. (USA), Viva Eyewear (UK) Ltd, Viva France, Viva Brasil and Viva Hong Kong, and by the Parent Company, Marcolin S.p.A.; most costs were incurred for termination of redundant personnel, severance benefits paid to employees, restructuring of the sales force particularly regarding terminated or revised agency agreements, and legal, corporate, organizational and logistics consulting services and other professional services rendered by third parties to assist the integration process; euro 2.0 million in extraordinary expenses deriving from ad-personam agreements for changes in top management positions and mobility within the scope of organizational changes; euro 2.7 million in non-recurring expenses referring to the renewal and development of new licenses for brands that have not generated revenues yet, including Zegna, Agnona and Pucci; other non-recurring costs of euro 0.4 million. Excluding the effects of the transactions described above, the 2014 normalized ("adjusted") Ebitda is euro 43.8 million (12.1% of sales), against the 2013 pro-forma amount of euro 38.8 million (11.2% of sales). Excluding such effects, the 2013 adjusted Ebit (Operating Income) is euro 34.6 million (9.5% of sales), against the 2013 pro-forma amount of euro 30.6 million (8.8% of sales). The normalized (adjusted) key performance indicators, filtered of the effects of the non-recurring costs, are as follows: 26 Marcolin Group Economic indicators - adjusted 2014 2013 euro (euro/000) % of revenue euro % of revenue Ebitda 43,831 12.1% 26,227 12.4% Operating income - Ebit 34,554 9.5% 21,361 10.1% Economic indicators - adjusted 2014 2013 * euro (euro/000) Ebitda Operating Income - Ebit % of revenue 43,831 34,554 12.1% 9.5% euro 38,841 30,640 % of revenue 11.2% 8.8% * Pro-forma (Viva consolidated 12 month) SALES REVENUES Due to Viva consolidation on the acquisition date of December 3, 2013, the 2013 sales data included Viva solely for the month of December. The (pro-forma) aggregate net revenues including the Viva International group data for the entire 12 months of 2013 were euro 346.3 million for the combined Group, compared to euro 362.1 million for 2014. The euro 15.8 million difference year on year corresponds to an increase of 4.6%. 7 At constant exchange rates, the increase is 5.1%. The Group continued to invest in brands and in its sales organization under a medium-term strategy, even in difficult markets, where it has decided to keep pace with demand in the short term instead of saturating customers with products, and to focus on credit quality. In an irregular year, the sales revenues were impacted favorably by the sales realized on new brands (Balenciaga, Web). The Group's performance in its markets was also affected by the activities added within the scope of the Marcolin/Viva integration plan, especially the sales force reorganization, which involved practically all the Group's strategic markets, except perhaps Italy. The revenues obtained in 2014 by Marcolin reflect the sales growth in Europe (especially in Italy, Spain and Portugal, but also in Germany and Belgium), where a 4.8% increase is reported year-onyear (or euro 6.0 million), in North America (up euro 2.8 million), and in some emerging markets; likefor-like, sales in Asia and the Rest of the World grew by euro 7.0 million from the previous year. The following table sets forth the sales revenues by geographical area. 7 Currency Sym bol Closing exchange rate 12/31/2014 12/31/2013 Australian Dollar Brasilian Real Canadian Dollar Sw iss Franc Remimbi English Pound Hong Kong Dollar Japanese Yen Mexican Pesos Russian Rublo USA Dollar AUD BRL CAD CHF CNY GBP HKD JPY MXN RUB USD 1.483 3.221 1.406 1.202 7.536 0.779 9.417 145.230 17.868 72.337 1.214 1.542 3.258 1.467 1.228 8.349 0.834 10.693 144.720 18.073 45.325 1.379 Change Average exchange rate 2014 2013 (3.9)% 1.472 1.378 (1.1)% 3.121 2.869 (4.1)% 1.466 1.368 (2.1)% 1.215 1.231 (9.7)% 8.186 8.165 (6.6)% 0.806 0.849 (11.9)% 10.302 10.302 0.4% 140.306 129.663 (1.1)% 17.655 16.964 59.6% 50.952 42.337 (12.0)% 1.329 1.328 Change 6.8% 8.8% 7.1% (1.3)% 0.3% (5.1)% 0.0% 8.2% 4.1% 20.3% 0.0% 27 Report on operations for the year ended December 31, 2014 Net Sales by geographical area Net sales like for like Increase (decrease) 2014 Turnover (euro/000) 2013 % on Turnover % on total total Turnover Change 2014 Turnover Increase (decrease) 2013 % on total Turnover % on total Turnover Change Pro-forma Europe 130,406 36.0% 91,414 43.1% 38,992 42.7% 130,406 36.0% 124,402 35.9% 6,004 4.8% U.S.A. 140,187 38.7% 61,421 28.9% 78,766 128.2% 140,187 38.7% 137,341 39.7% 2,846 2.1% Asia 30,701 8.5% 23,130 10.9% 7,571 32.7% 30,701 8.5% 27,289 7.9% 3,412 12.5% Rest of World 60,839 16.8% 36,362 17.1% 24,477 67.3% 60,839 16.8% 57,229 16.5% 3,610 6.3% 212,327 100.0% 149,806 70.6% 346,262 100.0% 15,872 4.6% Total 362,133 100.0% 362,133 100.0% Although Europe was affected by the Viva integration process and fluctuating markets, with uneven trends and growth rates, it represented Marcolin's main market in terms of annual growth (with sales up by euro 6.0 million or 4.8%). As noted, the sales and distribution organization in Europe and particularly in Italy underwent important rationalization processes in 2014, which is to be considered a year of considerable reorganization in this sense. Some geographic areas performed very well, especially Italy, where sales rose by 21.8%; other countries that performed well are Spain (+23.5%) and Portugal (+21.6%), with Belgium and Germany lagging behind. France, suffering from an adverse economy, presents less favorable results, as does to a certain extent the United Kingdom (which was more exposed to discontinuity caused by Viva integration). Europe accounted for 36.0% of the Group's total net revenues in 2014, in line with the 35.9% of 2013 (with a constant perimeter). The U.S. market was positive, with sales up by euro 2.8 million from 2013 (a 2.1% increase, or 2.7% at constant exchange rates). Management focused on this market due to its expanding economy, a springboard for current and prospective sales. The performance of this market was affected by Marcolin/Viva integration in terms of operating systems and operations (with the new ERP system implemented in October) and in terms of the distribution network reorganization (sales force restructuring). Sales in Asia also grew, consistently with the positive trend for the Far East markets. The annual increase was 12.5%, representing euro 3.4 million of the total increase reported (with a constant perimeter). The Group is continuing to expand in Asia with investments in the sales structure and extension of its distribution network, in a market characterized by high growth potential. The activities carried out to strengthen the Group's structures in Asia, including the establishment of an important organizational structure that will unite the distribution of Viva and Marcolin products (Marcolin UK Ltd - Hong Kong Branch) in the Far East, and other important partnerships with renowned industry players, were designed to promote growth in that geographical area. In the Rest-of-World segment, sales rose by 6.3%, or euro 3.6 million, assisted by favorable market trends in the Middle East. These are emerging markets with interesting growth potential, focused on in order to find distribution partners in which to invest for better penetration in a strategic area. The Americas, Far East and some areas of the Rest of the World, including the Middle East, represent strategic markets for the Group due to their growth trends and because the buying patterns of the consumers there involve the fashion and luxury segment, in which Marcolin is specialized. American markets are highly stimulated by the strong presence assured by Viva, a critical success factor for Marcolin's geographical expansion and increase in scale, especially in view of the expanding economy and stronger U.S. dollar. 28 Marcolin Group The European market, which performed well in 2014, although with various intensities (with certain countries being particularly affected by weak domestic demand, especially France and the United Kingdom), should benefit from Marcolin's sales initiatives undertaken to shore up weak markets and to find more extensive forms of collaboration, including joint ventures, to take on more effectively Northern Europe (with Marcolin Nordic) and Eastern Europe (with Sover-M in Russia), where Marcolin had not been present directly. Russia is a separate matter, where serious political difficulties and social tensions that worsened in the last few months of the year have hampered eyewear exports to that country. The close partnership there will enable Marcolin to remain in a market that would be difficult to preserve on its own. Other initiatives are being considered to expand the Group's presence in other geographical areas with high growth potential. ***** The consolidated income statement highlights are set forth below. In the following table, the income statement results are not comparable, because Viva's results of 2013 refer to solely one month of operation. Consolidated income statement (euro/000) 2014 euro 2013 % of revenue euro % of revenue Net revenues 362,133 100.0% 212,327 100.0% Gross profit 216,773 59.9% 130,444 61.4% Ebitda 29,384 8.1% 15,875 7.5% Operating income - Ebit 19,932 5.5% 9,959 4.7% Financial income and costs Profit before taxes Net profit for the year Economic indicators - adjusted (euro/000) (12,830) (3.5)% (21,769) (10.3)% 7,102 2.0% (11,810) (5.6)% 407 0.1% (12,011) (5.7)% % of revenue euro 2014 euro 2013 % of revenue Ebitda 43,831 12.1% 26,227 12.4% Operating income - Ebit 34,554 9.5% 21,361 10.1% The following table sets forth the pro-forma information including Viva results for the entire 12 months of 2013 in order to provide comparability with the same consolidation perimeter of 2014. Consolidated income statement (euro/000) 2014 euro 2013 * % of revenue euro % of revenue Net revenues 362,133 100.0% 346,262 100.0% Gross profit 216,773 59.9% 212,913 61.5% Ebitda 29,384 8.1% 28,489 8.2% Operating income - Ebit 19,932 5.5% 19,238 5.6% Financial income and costs Profit before taxes Net profit for the year (12,830) (3.5)% (24,568) (7.1)% 7,102 2.0% (5,330) (1.5)% 407 0.1% (8,556) (2.5)% 29 Report on operations for the year ended December 31, 2014 Economic indicators - adjusted (euro/000) Ebitda Operating Income - Ebit 2014 euro 2013 * % of revenue 43,831 34,554 12.1% 9.5% euro 38,841 30,640 % of revenue 11.2% 8.8% * Pro-forma (Viva consolidated 12 month) As shown by the key performance indicators, gross profit is 59.9% of sales, down in terms of percentage of sales by 1.6% (61.5% for 2013). The euro 3.9 million increase in gross profit is attributable to higher volumes relating to higher sales, and lower prices resulting from the price repositioning conducted in 2014 on certain collections and parts of collections. The activities, implemented to rationalize the price structure and stimulate demand for basic products in particular, successfully increased the annual sales volumes. The increase in volumes sold enabled to absorb more overheads, thereby containing the effect on margins of the price revisions made to the diffusion collection during the year. Thanks in part to the critical mass made possible from access to Chinese sourcing markets combining Marcolin and Viva volumes, the product costs remained fairly constant from 2013 to 2014, containing the impact of the inflation caused by labor unrest on the Group's cost of sales. ***** In a highly irregular year featuring important investments, the Group continued to invest in advertising and marketing to promote the brands it handles, including both portfolio and house brands. Although in some cases the volumes were not at full capacity, Marcolin is aware of the importance of ongoing advertising and promotional support. The advertising expenditure, along with inadequate absorption of the guaranteed minimum royalties required under certain licensing agreements due to irregular revenue streams, affected the gross profit, which should therefore not be considered typical. Pursuant to certain operations and agreements stipulated during the year, in 2015 it will be possible to improve the profitability of some licenses, thanks to better absorption of royalties and advertising contributions which in 2014 were not fully saturated by the sales realized. ***** In the second half of the year business accelerated due to the unfolding of the benefits of the rationalization and development activities undertaken at the end of 2013 and throughout 2014. Ebitda is euro 29.4 million (8.1% of sales), compared to the euro 28.5 million of 2013 (pro-forma, 8.2% of sales). Ebit is euro 19.9 million (2013 pro-forma: euro 19.2 million), representing 5.5% of sales (5.6% in 2013). The performance indicators are greatly affected by non-recurring events both for 2014 and 2013, so they have been normalized to provide margins that disregard the negative effects of the discontinuing organizational and corporate rationalization activities. In summary, adjusted Ebitda is euro 43.8 million, compared to the euro 38.8 million of 2013 (proforma, including Viva for 12 months), and represents 12.1% of sales (11.2% in 2013). Adjusted Ebit is euro 34.6 million (9.5% of sales), compared to the euro 30.6 million of 2013 (proforma, 8.8% of sales). The net profit for the year is euro 0.4 million, compared to a net loss of euro 8.6 million for 2013 (pro forma). It is affected considerably by the financial items that result in a net cost of euro 12.8 million for the year (2013: pro-forma net cost of euro 24.6 million). 30 Marcolin Group Such net cost, the 2014 balance between finance costs of euro 31.0 million and financial income of euro 18.2 million, was influenced by the following: • • • • • interest payments of euro 17.0 million on the bond notes issued by Marcolin S.p.A., paid semiannually in May and November; reversal of bond issue costs, accounted for under IFRS with the financial method of amortized cost over the life of the bond notes (maturing November 2019), for euro 1.4 million; net interest costs of euro 1.3 million, including euro 0.9 million in bank interest expense referring to the Parent Company, Marcolin S.p.A., and euro 0.4 million referring to subsidiaries; additional finance costs regarding actualization and translation differences of euro 1.3 million, including euro 0.6 million referring to the Parent Company; financial discounts of euro 2.0 million, nearly entirely attributable to foreign subsidiaries. The Group’s foreign currency exchange in 2014 resulted in a net loss of euro 2.6 million (including fair value measurement of currency hedges in place at the end of the year, and currency translation adjustments to end-of-period trade receivables and payables). Foreign currency exchange regarding the Parent Company's revenues and expenses was balanced, with an immaterial net gain. Currency differences of foreign subsidiaries resulted in a net loss of euro 1.2 million, largely attributable to those affiliates located in countries with currency strains. Additional financial income is reported for end-of-period adjustments to a receivable due to Marcolin S.p.A. from Marcolin USA denominated in U.S. dollars, which increased due to the appreciation of the U.S. dollar. ***** Income tax expense is euro 6.7 million, compared to the euro 3.2 million for 2013 (pro-forma). Marcolin S.p.A., together with the parent company, Cristallo S.p.A. (absorbed through a reverse merger) and its subsidiaries Eyestyle Retail S.r.l. and Eyestyle.com S.r.l., had opted for the Italian tax consolidation regime for IRES (corporate income tax) purposes for 2013, 2014 and 2015, which recognized Marmolada S.p.A. as the parent company. On June 13, 2014, pursuant to the Italian Income Tax Code ("TUIR"), Presidential Decree no. 917, Article 117 et seq. of December 22, 1986, the ultimate parent company, 3 Cime S.p.A. notified the Italian Revenue Office of its adoption of the Italian tax consolidation regime with its subsidiaries, including Marcolin S.p.A., for years 2014, 2015 and 2016. Accordingly, the tax consolidation in effect in 2013 was replaced with an identical agreement with 3 Cime S.p.A., which involved terminating the previous agreement and stipulating a new one for the new three-year period. From the current year to December 31, 2016, the tax consolidation regime will enable each participant (including the Company), by way of partial recognition of the group's tax burden, to optimize the financial management of corporate income tax, for example by netting taxable income and tax losses within the tax group. The Parent Company's current taxes amount to euro 1.6 million, consisting mainly of Marcolin S.p.A.'s IRAP (regional business tax) and IRES expense. The affiliates contribute net current tax expense of euro 2.7 million, referring largely to the American subsidiaries. The consolidated tax expense is affected by deferred tax, including the allocation of deferred tax assets on the net losses of some companies (including Marcolin USA, Inc.), whose recognition is based on the expectation of future taxable profits according to the business plans prepared. ***** 31 Report on operations for the year ended December 31, 2014 STATEMENT OF FINANCIAL POSITION HIGHLIGHTS The consolidated net financial position as at December 31, 2014 compared to the previous year is set forth below. Net invested capital (euro/000) Trade receivables Inventories Trade payables Operating working capital Other receivables Other payables Net working capital Non-current receivables Equity investments and other financial assets Property, plant and equipement Intangible assets Goodwill Fixed assets Provisions Net invested capital Current financial payables Non-current financial payables Gross financial indebtedness Cash and cash equivalents Non-current financial receivables Net financial position Equity 12/31/2014 12/31/2013 66,890 100,075 (102,322) 64,643 14,099 (30,960) 47,782 39,382 1,877 24,657 37,213 278,010 381,138 (10,032) 418,887 41,353 199,152 240,504 (38,975) (5,455) 196,074 222,813 55,123 68,301 (65,263) 58,161 13,994 (21,229) 50,926 31,931 2,030 22,957 29,341 266,833 353,091 (22,870) 381,147 17,707 195,891 213,597 (40,294) (7,132) 166,172 214,976 The net financial indebtedness at the reporting date is set forth below against the corresponding data of 2013: Net financial position / (indebtedness) 12/31/2014 12/31/2013 36,933 7,497 (40,021) 38,536 8,890 (17,626) Current portion of long-term borrowings Long-term borrowings (1,332) (199,152) (81) (195,891) Total (196,074) (166,172) (euro/000) Cash and cash equivalents Financial receivables Short-term borrowings The Group's net financial position is indebtedness of euro 196.1 million, compared to the euro 166.2 million indebtedness of 2013, an increase of euro 29.9 million. At the end of 2013, Marcolin's debt was restructured, partly as a result of the former parent Cristallo's assumption of its debt. In November 2013, Marcolin announced a bond issue reserved for institutional investors for a nominal amount of euro 200 million. Given the favorable financial market conditions for this type of financing and the persistent credit crunch, the bond issue represented a useful funding instrument which, together with the senior revolving credit facility associated with the overall financing transaction, enabled the Company to 32 Marcolin Group efficiently restructure its medium-term debt, assuring the Group financial stability and funding of working capital and demands in general, including those related to investments in development. Part of the funding was used to help finance the Viva acquisition (which took place in December 2013) The non-convertible senior-secured notes have a fixed coupon of 8.50%, payable semiannually in May and November. The issue, arranged by major banks, was listed on the Luxembourg Stock Exchange for trading on the regulated MTF Market, and in Italy on Borsa Italiana S.p.A. for trading on the multilateral Extra MOT Pro Professional Segment. The notes, resolved upon with a notarial deed dated October 31, 2013, were issued on November 14, 2013 and have a maturity date of November 15, 2019, although they are callable after 3 years. The notes are secured by collateral (pledges, mortgages and special liens) and personal guarantees provided by Marcolin, some subsidiaries (Marcolin UK Limited, Marcolin France S.a.s., Marcolin Deutschland Gmbh, Marcolin USA, Inc.), and the sole shareholder Marmolada, as explained in the Notes to the Financial Statements. The notes were classified as non-current liabilities net of the transaction costs (totaling euro 10.1 million) accounted for with the amortized cost criteria. Within the scope of the refinancing transaction, a super senior revolving credit facility was granted, for a maximum amount of euro 25 million, by Banca IMI S.p.A., IKB Deutsche Industriebank AG, Natixis S.A., UniCredit S.p.A. and Goldman Sachs, to be used for ordinary cash flow demands. The credit facility had been used for euro 20.0 million at the end of 2014. In 2014, the Company was granted a 48-month credit line from Unicredit S.p.A. to cover cash flow needs associated with investments in joint ventures in China and Russia, which are expected to be drawn on at the end of 2014 and beginning of 2015. The credit line is for euro 5.0 million, 50% of which is backed with an irrevocable guarantee from SACE S.p.A. (Gruppo Cassa Depositi e Prestiti), granted specifically to fund Italian companies that invest directly or indirectly in projects aimed to make their businesses more international. The credit line was granted in a committed form, and is unsecured by collateral. It will be repaid over a 48-month period, with deferred quarterly installments. It is priced at market conditions for similar facilities. The financial liabilities include amounts due to the HVHC, Inc. group (an investor in the former Marcolin USA, Inc., now Marcolin USA Eyewear, Corp.), some of which are short-term and some medium/long term, due in 2 years (recognized as non-current financial liabilities); both are discounted in accordance with the applicative accounting standards. The debt-to-equity ratio at December 31, 2014 is 0.88 (0.77 in 2013). ***** The composition of net working capital, in comparison with the previous financial year, is detailed in the following table. Net working capital 12/31/2014 12/31/2013 (euro/000) Inventories Trade receivables Trade payables Other current assets and liabilities Total 100,075 68,301 66,890 (102,322) (16,861) 55,123 (65,263) (7,235) 47,782 50,926 With reference to the different items that make up net working capital: 33 Report on operations for the year ended December 31, 2014 • • • the value of inventories rose by euro 31.8 million compared to the previous year (U.S. dollar appreciation accounts for more than euro 4.0 million of this). The increase in closing inventories is attributable to an increase in “current” finished product inventories, due to the higher sales and management's decision to improve customer service by reducing delivery time and investing in supplies of continuing products (to be “never out of stock”). In contrast, inventories of products from former collections (obsolete and slow-moving stock) fell considerably from those of 2013. The inventory increase is also attributable to the discontinuity represented by products with new brands, particularly Zegna and Pucci, which will be launched shortly, and to the increase in collections offered and models produced; although trade receivables were higher than in the previous year, they were largely affected by the increased sales, and particularly by the acceleration of business at the end of 2014 due to a concentration of deliveries at the end of the year. Credit quality remained consistent with that of recent years. In 2014 the recent improvement in the average collection period, or "days sales outstanding" (DSO), lost momentum, but the extreme emphasis on credit management and client selection made it possible to keep the DSO (up by 2 days) under control even with difficult markets and rising sales; the balance of trade payables at the end of 2014 was affected by the inventory increase and by the recognition of payables due to some licensors under important license renewals that were stipulated in the year but will affect the accounts of 2015. Excluding this effect in order to make comparison between the two years more meaningful, the average payment period, or "days payable outstanding" (DPO), for trade payables improved considerably year-on-year. Some of the improvement is due to the adjustment of payment terms for suppliers shared by Marcolin and Viva to the longest time period between the two. With a constant perimeter, the working capital-to-sales ratio is 0.15 (in line with the pro-forma 2013 ratio). ***** Among the non-current assets, in line with the previous year, goodwill was euro 278.0 million (euro 189.7 million of the Parent Company, arising on the reverse merger with Cristallo S.p.A., and the remainder arising on the acquisition of Viva International). Since it is considered an asset with an infinite useful life, it is not amortized. At December 31, 2013 the total amount was euro 266.8 million. In 2013 the Group accounted for provisional goodwill arising on the Viva International acquisition; it was calculated it on the basis of IFRS 3, "Business Combinations”. The 2014 goodwill includes translation differences emerging on the appreciation of the U.S. dollar. The item was reviewed for impairment; the related assumptions and results are described in the Marcolin group's notes to the consolidated financial statements. ***** The Marcolin group's net indebtedness increased by euro 29.9 million. It was impacted by the following variations (the 2013 data includes the Viva accounts for one month): 34 Marcolin Group Cash Flow (euro/000) 12/31/2014 12/31/2013 7,102 8,958 15,046 (8,914) 22,192 (11,810) 5,411 17,075 1,034 11,709 Movements in Working Capital Reversal of Funds Income taxes paid Interest paid Net cash flows provided by operating activities (4,127) (6,892) (3,609) (18,253) (10,688) (14,818) (1,938) (17,452) (22,499) Investing activities (Purchase) of property, plant and equipment Proceeds from the sale of property, plant and equipment (Purchase) of intangible assets (Acquisition) of investment - Marcolin e Viva (Acquisition) of investment - Sover M Net cash (used in) investing activities (6,179) 755 (6,742) (4,958) (1,530) (18,655) (2,645) (1,512) (127,745) (131,902) Adjustments to other non-cash items (2,492) 5,524 Financing activities Net proceeds from/(repayments of) borrowings Other cash flows from financing activities Net cash from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Effect of foreign exchange rate changes Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 26,497 26,497 (5,338) 3,736 38,536 36,933 91,620 51,300 142,920 (5,958) (707) 45,200 38,536 Operating activities Profit before income tax expense Depreciation, amortization and impairments Accruals to provisions other accruals Adjustments to other non-cash items CF from operating activities before changes in WC, tax and int. The annual cash flow was affected by the Viva integration process, for which non-recurring costs of euro 9.4 million were incurred in the year. Financing activities associated with the bond issue used cash flows of euro 20.3 million for interest (euro 17.0 million) and transaction costs, some of which were paid in early 2014 (euro 3.3 million). Cash flows of euro 1.5 million were used for investments in new joint ventures near the end of the year. Non-recurring cash outflows include transaction fees paid to renegotiate some important licensing agreements in the year. Other cash flows were used to meet the contractual obligations stipulated with the HVHC, Inc. group, regarding the payment of the outstanding balance for the Viva acquisition in January, and the payment of the first deferred loan installment in December (totaling euro 5.0 million). ***** The annual capital expenditures amounted to euro 12.9 million (euro 6.2 million for property, plant and equipment and euro 6.7 million for intangibles), compared to euro 4.2 million in 2013 (pro-forma). 35 Report on operations for the year ended December 31, 2014 Property, plant and equipement 12.31.2014 12.31.2013 (euro/000) Land and buildings 1,361 350 Plant and machinery 1,391 610 Industrial equipement 1,208 462 Stand and commercial equipement 314 338 Hardware 907 394 Office furniture and furnishings 287 197 Other 711 295 Total 6,179 2,645 Intangible assets 12.31.2014 12.31.2013 (euro/000) Software 3,633 771 Other 3,109 741 Total 6,742 1,512 The 2014 capital expenditures regarded mainly industrial plant and machinery for the Parent Company's upgrading purposes, and manufacturing equipment (such as molds) to develop new product collections. Investments were made to adjust and rationalize the existing business software, especially of the Parent Company, whereas in the United States important investments were made to implement the new ERP (SAP) in Viva Optique, Inc. pursuant to the Viva/Marcolin integration plan. A new warehouse automation system was purchased by Viva Optique in Somerville, New Jersey, where distribution to North American markets will be concentrated. In October the Parent Company put a downpayment on the purchase of a new manufacturing plant in Fortogna, for which the outstanding balance was paid in early 2015 with a notarial deed. A factory in Longarone formerly owned by associate Finitec in liquidation was purchased (before the end of the liquidation process in 2014). Its designation as space to assist Marcolin S.p.A.'s growth is currently being evaluated. Leasehold improvements were made by the American subsidiary in Somerville, and investments were made in the new headquarters of Marcolin France, which was transferred to new, prestigious premises during the year. ***** A Statement of Financial Position summary presenting current and non-current assets and liabilities is shown below: 36 Marcolin Group Statement of financial position 12/31/2014 12/31/2013 386,593 233,725 620,318 360,223 194,416 554,639 222,813 - 214,976 - 220,200 177,305 219,259 120,405 620,318 554,639 (euro/000) Assets Non-current assets Current assets Total assets Net equity Equity attributable to Group Non-controlling interests Liabilities Non-current liabilities Current liabilities Total Liabilities and Equity The balances therein and the changes in equity are included in the notes to the consolidated financial statements. ***** Additional information and comments on the financial statement results are reported in the notes to the consolidated financial statements. 37 Marcolin S.p.A MARCOLIN S.P.A. REPORT ON OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2014 39 Report on operations for the year ended December 31, 2014 40 Marcolin S.p.A MARCOLIN S.P.A. REPORT ON OPERATIONS Pursuant to the October 2013 merger with the former parent company, Cristallo S.p.A., the Company's income statement and financial position results include Cristallo's figures for 2013, from the effective 8 merger date until December 31, 2013. The continuity principle of Assirevi OPI Document n. 2 was adopted for the merger, i.e. significance was given to the pre-existence of the control relationship between the Companies involved in the merger and the cost incurred by Cristallo S.p.A. for the original acquisition of the Marcolin group. Accordingly, on the effective merger date, the current values of the assets and liabilities and related goodwill of Marcolin S.p.A., which had been reflected in the purchase price of the 100% stake owned directly by Cristallo S.p.A., emerged in the separate financial statements of Marcolin S.p.A., the surviving company, to the extent allocated to the assets, liabilities and goodwill in the consolidated financial statements of Cristallo (now the Marcolin group) as at the same date. In other words, the merger resulted in the alignment of the Group’s consolidated financial statements as at the merger date with the post-merger separate financial statements of the surviving company, thereby realizing “legal consolidation”. ***** As described in the section dedicated to the Marcolin group, in the past year Marcolin S.p.A. was involved in many new projects and activities of consolidation and development, which led to global reorganization at all departmental levels. 2014 was a year characterized by discontinuity, change, and investments in initiatives that will bring full returns only in the future. In this scenario, the non-recurring activities undertaken at the end of 2013 and especially in 2014 had a significant impact on the results of the year, requiring the Parent Company's financial statements for the year ended December 31, 2014 to be interpreted in the light of the extraordinary events of the year. Accordingly, where significant, the main changes of the year are also reported herein net of the impact of the non-recurring transactions (even in the comparison with 2013) in order to provide comparability, with the same consolidation perimeter, of the 2014 data with the 2013 data, by presenting "normalized" income. ***** 8 The Cristallo-Marcolin merger took effect on October 28, 2013 for accounting and tax purposes. 41 Report on operations for the year ended December 31, 2014 INCOME STATEMENT HIGHLIGHTS The following table sets forth Marcolin S.p.A.'s key performance indicators: Year (euro/000.000) 2010 2011 2012 2013 2014 Net Sales 126.5 142.6 128.0 123.4 150.4 YOY 12.3% 12.7% (10.3)% (3.6)% 21.9% EBITDA 20.1 27.4 9.6 8.1 16.1 % of revenue 15.9% 19.2% 7.5% 6.6% 10.7% EBIT 18.2 31.8 6.2 3.8 10.5 % of revenue 14.4% 22.3% 4.9% 3.1% 7.0% Net Result 11.4 24.1 4.9 (8.5) 4.5 % of revenue 9.0% 16.9% 3.8% (6.9)% 3.0% In summary, the income statement presents: • • • • • • sales revenues of euro 150.4 million (euro 123.4 million in 2013); Ebitda of euro 16.1 million, corresponding to 10.7% of sales (euro 8.1 million in 2013, 6.6% of sales); Ebit of euro 10.5 million, corresponding to 7.0% of sales (euro 3.8 million in 2013, 3.1% of sales); a net profit of euro 4.5 million (compared to a net loss of euro 8.5 million for 2013); net financial indebtedness of euro 116.7 million (compared to indebtedness of euro 102.1 million as at December 31, 2013); equity of euro 213.1 million, in line with the euro 213.9 million of 2013. The Parent Company reports 2014 sales revenues up by 21.7% (euro 27.0 million), with satisfactory results across all geographical areas. The sales growth was generated by the Rest of the World (+43.4%), the United States (+40.6%), European markets (+14.4%), and even Asian markets, which increased their sales by 8.7%. Although the margins were affected by the non-recurring items explained herein, they increased substantially, being driven by higher sales, investment and development activities and rationalization and reorganization activities initiated in 2013 and continued throughout 2014. As explained for the Group, in order to better understand the 2014 business performance of Marcolin S.p.A., certain non-recurring events that impacted the margins should be taken into account. The normalized (adjusted) key performance indicators, filtered of the effects of the non-recurring costs, are as follows. Economic indicators - adjusted (euro/000) Ebitda Operating income - EBIT 2014 euro 22,253 16,688 2013 % of revenue 14.8% 11.1% euro 16,257 13,057 % of revenue 13.2% 10.6% In detail, the non-recurring costs were as follows: • 9 euro 1.9 million for the Viva integration process; the amount consists of distribution and logistics costs incurred for the sales reorganization described in the Group Report on Operations, and 9 costs for legal, administrative, tax and organizational services assisting such activities; The reasons for and content of the non-recurring transactions directly involving the Parent Company are fully described in the Group Report on Operations. They refer to 1) the acquisition of the International Distribution business division from Viva Eyewear (UK) Ltd, 2) the transfer of the Asia Pacific Distribution business division to Marcolin UK Ltd - Hong Kong Branch, 3) acquisition of the Latin America Distribution business division from Marcolin USA, Inc. 42 Marcolin S.p.A • • extraordinary expenses deriving from ad-personam agreements referring to changes in top management positions and mobility within the scope of organizational changes, totaling euro 1.6 million; non-recurring expenses referring to collection development, promotional and marketing activities and the implementation of the organization dealing with new licenses for brands that have not generated revenues yet, including Zegna, Agnona and Pucci, for an amount of euro 2.7 million; Excluding the effects of the non-recurring transactions, the 2013 adjusted Ebitda is euro 22.3 million, equal to 14.8% of sales (euro 16.2 million, 13.2% of sales in 2013), whereas the adjusted Ebit is nearly euro 16.7 million, 11.1% of sales (euro 13.1 million and 10.6% of sales in 2013). SALES REVENUES The 2014 sales revenues were euro 150.4 million, compared to the euro 123.4 revenues of 2013, up by a substantial euro 27.0 million (21.9%) from the prior year. 10 At constant exchange rates, the increase is 5.1%. The Parent Company's revenues from sales to third parties were euro 94.9 million in 2014, compared to euro 80.6 million in 2013, up by euro 14.2 million or 18.0%. The following table sets forth Marcolin S.p.A.'s sales revenues by geographical segment: Net sales by geographical area 2014 2013 Increase (decrease) Turnover % on total Turnover % on total Turnover Change Europe U.S.A. 70,784 28,585 47.1% 19.0% 61,874 50.2% 16.5% 8,910 8,254 14.4% 40.6% Asia Rest of World 25,006 26,045 16.6% 17.3% 23,009 18,160 18.6% 14.7% 1,997 7,885 8.7% 43.4% 150,420 100.0% 123,374 100.0% 27,047 21.9% (euro/000) Total 20,331 The Company continued to invest in brands and in its sales organization under a medium-term strategy, even in difficult markets, where it has decided to keep pace with demand in the short term instead of saturating customers with products, and to focus on credit quality. In a year featuring discontinuity for some brands, the sales revenues were impacted favorably by the sales realized on new brands (Balenciaga, Web). The Parent Company's performance benefited from the Marcolin/Viva integration process, particularly from the reorganization of the sales and logistical activities based on a rational design consistently with the Group's structure (this will be completed in the initial months of 2015). In 2014 Marcolin S.p.A. centralized the distribution to international clients that had previously been served by Viva Eyewear (UK) Ltd, and to key clients that need to be handled directly from Longarone due to their nature and significance, and for reasons of interdependence. 10 Currency Sym bol Closing exchange rate 12/31/2014 12/31/2013 Australian Dollar Brasilian Real Canadian Dollar Sw iss Franc Remimbi English Pound Hong Kong Dollar Japanese Yen Mexican Pesos Russian Rublo USA Dollar AUD BRL CAD CHF CNY GBP HKD JPY MXN RUB USD 1.483 3.221 1.406 1.202 7.536 0.779 9.417 145.230 17.868 72.337 1.214 1.542 3.258 1.467 1.228 8.349 0.834 10.693 144.720 18.073 45.325 1.379 Cha nge Average exchange rate 2014 2013 (3.9)% 1.472 1.378 (1.1)% 3.121 2.869 (4.1)% 1.466 1.368 (2.1)% 1.215 1.231 (9.7)% 8.186 8.165 (6.6)% 0.806 0.849 (11.9)% 10.302 10.302 0.4% 140.306 129.663 (1.1)% 17.655 16.964 59.6% 50.952 42.337 (12.0)% 1.329 1.328 Change 6.8% 8.8% 7.1% (1.3)% 0.3% (5.1)% 0.0% 8.2% 4.1% 20.3% 0.0% 43 Report on operations for the year ended December 31, 2014 ***** Marcolin S.p.A.'s revenue performance in 2014 reflects sales growth across all markets. Although Europe was affected by fluctuating markets, with very uneven trends and growth rates, it represented Marcolin's main market in terms of annual growth (with sales up by euro 8.9 million or 14.4%). As noted, the sales and distribution organization in Europe and particularly in Italy underwent important rationalization processes in 2014, a year of considerable reorganization in this sense. Some geographic areas performed very well, especially Italy, where sales rose by an annual 49%; other countries that performed well are Spain (+46%), Portugal (+37%), Greece (+42%) and Belgium (+19%). Europe accounted for 47.1% of the Group's total net revenues in 2014, compared to 50.2% in 2013. Important growth was also achieved in the United States (+36%) and Brazil (+84%) in the year. The foregoing table presenting sales by geographical segment shows the United States as having some of the highest growth (sales there rose by euro 8.3 million, or 40.6%). Management focused on this market thanks to its expanding economy, a springboard for prospective sales. As noted, the American market was affected by Marcolin/Viva integration, due to the reorganization of the distribution network (sales force restructuring under one management and coordination unit for the two main American companies). Marcolin collections, particularly the luxury brands but also products in which Marcolin has invested heavily such as Swarovski and Timberland, are benefiting substantially from top-line synergies thanks to the use of Viva's sales organization and its widespread presence in North American markets. Sales in Asia grew consistently with the positive trend in the Far East markets. The annual increase was 8.7%, representing euro 2.0 million of the total increase reported from 2013. As noted, the Company is continuing to expand in Asia, and for this reason it has invested in the creation of local business structures, in a geographical area characterized by high growth potential. The activities carried out to strengthen the structures in the Far East, including the establishment of an important organization that will combine the distribution of Viva and Marcolin products (Marcolin UK Hong Kong Branch) and other important partnerships with renowned industry players, were designed to promote growth in that geographical area. In the Rest-of-World segment, sales rose by 43.4%, or euro 7.9 million. These are emerging markets with interesting growth potential, focused on in order to find distribution partners in which to invest for better penetration in a strategic area. In the Rest of the World, South Korea (+46%) and the United Arab Emirates (+37%) performed extremely well. ***** The European market, which performed well in 2014, although with various intensities (with certain countries being particularly affected by weak domestic demand, especially France and the United Kingdom), should benefit from Marcolin's sales initiatives undertaken to shore up weak markets and to find more extensive forms of collaboration, including joint ventures, to take on more effectively Northern Europe (with Marcolin Nordic) and Eastern Europe (with Sover-M in Russia), where Marcolin had not been present directly. Russia is a separate matter, where serious political difficulties and social tensions that worsened in the last few months of the year have hampered eyewear exports to that country. The close partnership there will enable Marcolin to remain in a market that would be difficult to preserve on its own. 44 Marcolin S.p.A The Americas, Far East and some areas of the Rest of the World, including the Middle East, represent strategic markets for the Marcolin due to their growth trends and because the buying patterns of the consumers there involve the fashion and luxury segment, in which Marcolin is specialized. As noted, American markets are highly stimulated by the strong presence assured by Viva, a critical success factor for Marcolin's geographical expansion and increase in scale, especially in view of the expanding economy and stronger U.S. dollar. ***** The Company's income statement highlights are reported hereunder. Ebitda is euro 16.1 million (10.7% of sales), compared to the 2013 amount of euro 8.1 million (6.6% of sales); Ebit is euro 10.5 million, 7.0% of sales, compared to the euro 3.8 million for 2013 (3.1% of sales). As noted, the 2013 and 2014 results were influenced by exceptional events, so the margins have been "normalized" in order to present the business performance without the non-recurring costs deriving from the organizational and corporate rationalization activities. The adjusted Ebitda is euro 22.3 million, compared to the euro 16.3 million of 2013, and represents 14.8% of sales (13.2% in 2013). Adjusted Ebit is euro 16.7 million (11.1% of sales), compared to the euro 13.1 million of 2013 (10.6% of sales). Income statement (euro/000) Revenues 2014 euro 2013 % of revenue euro % of revenue 150,420 100.0% 123,374 100.0% Gross profit 66,366 44.1% 56,398 45.7% Ebitda 16,110 10.7% 8,119 6.6% Operating profit - EBIT 10,545 Financial income and costs (823) 7.0% 3,820 3.1% (0.5)% (14,053) (11.4)% Profit before taxes 9,722 6.5% (10,234) (8.3)% Net profit for the year 4,483 3.0% (8,515) (6.9)% According to the key performance indicators, gross profit is 44.1% of sales, down as a percentage of sales by 1.6% from 2013 (45.7%). The euro 10.0 million increase in gross profit is attributable to the price repositioning conducted at the end of 2013, which was successful in that the adverse effects of the price reductions were offset by higher volumes in 2014, and other positive effects attributable to brand mix and geographical area. The product costs remained fairly consistent with those of the previous year, thanks to activities undertaken to contain the impact on margins of inflation, especially in the sourcing markets (China). The margins were also affected by costs of investments made to relaunch collections and enhance the designs of the new brands, and advertising costs incurred by the Company to promote its sales, even when the revenues were not at full capacity. Despite the impact of the reorganization and sales development, which have not fully produced returns on the top line yet, operating income was a positive euro 10.5 million (7.0% of sales), compared to the euro 3.8 million of 2013 (3.1% of sales). 45 Report on operations for the year ended December 31, 2014 The net profit for the year is euro 4.5 million (3.0% of sales), compared to a net loss of euro 8.5 million for 2013. It includes net finance costs of euro 0.8 million, compared to the net finance costs of euro 14.1 million incurred in 2013. Marcolin S.p.A.'s net finance costs, resulting from finance costs of euro 23.9 million and financial income of euro 24.7 million, were influenced by the following: • • • • interest payments of euro 17.0 million on the bond notes, paid semiannually in May and November; reversal of bond issue costs, accounted for under IFRS with the financial method of amortized cost over the life of the bond notes (maturing November 2019), for euro 1.4 million; net interest costs of euro 0.9 million on bank loans; additional net finance costs regarding actualization, translation differences and financial discounts, totaling euro 0.6 million. The Parent Company's foreign currency exchange in 2014 resulted in a net loss of euro 1.4 million (including the fair value measurement of currency hedges in place at the end of the year), referring entirely to currency translation adjustments made to receivables and payables at the end of the year. Foreign currency exchange referring to income and expenses (foreign exchange differences on trade transactions) was balanced, with an immaterial net gain. Additional financial income of euro 12.3 million is reported referring to end-of-period adjustments of a receivable due from Marcolin USA denominated in U.S. dollars, which increased due to the appreciation of the U.S. dollar. ***** Marcolin S.p.A., together with the parent company, Cristallo S.p.A. (absorbed through a reverse merger) and its subsidiaries Eyestyle Retail S.r.l. and Eyestyle.com S.r.l., had opted for the Italian tax consolidation regime for IRES (corporate income tax) purposes for 2013, 2014 and 2015, which recognized Marmolada S.p.A. as the parent company. On June 13, 2014, pursuant to the Italian Income Tax Code ("TUIR"), Presidential Decree no. 917, Article 117 et seq. of December 22, 1986, the ultimate parent company, 3 Cime S.p.A. notified the Italian Revenue Office of its adoption of the Italian tax consolidation regime with its subsidiaries, including Marcolin S.p.A., for 2014, 2015 and 2016. Accordingly, the tax consolidation in effect in 2013 was replaced with an identical agreement with 3 Cime S.p.A., which involved terminating the previous agreement and stipulating a new one for the new three-year period. From the current year to December 31, 2016, the tax consolidation regime will enable each participant (including the Company), by way of partial recognition of the group's tax burden, to optimize the financial management of corporate income tax, for example by netting taxable income and tax losses within the tax group. The income tax expense is euro 5.2 million, compared to euro 1.7 million for 2013. The Parent Company's current taxes amount to euro 1.6 million, consisting mainly of Marcolin S.p.A.'s IRAP (regional business tax) and IRES expense. The tax expense was affected by the allocation of deferred tax assets on net losses of euro 2.3 million, whose recognition is based on the expectation of future taxable profits according to the business plans prepared by the Company (the 2013 amount was euro 3.9 million, reported as income from participation in Italian tax consolidation). ***** 46 Marcolin S.p.A STATEMENT OF FINANCIAL POSITION HIGHLIGHTS The Parent Company's financial position as at December 31, 2014 is presented below in comparison with the corresponding results of the previous year: Net invested capital (euro/000) Trade receivables Inventories Trade payables Operating working capital Other receivables Other payables Net working capital Non-current receivables Equity investments and other financial assets Property, plant and equipement Intangible assets Goodwill Fixed assets Provisions Net invested capital Current financial payables Non-current financial payables Gross financial indebtedness Cash and cash equivalents Non-current financial receivables Net financial position Equity 12/31/2014 12/31/2013 69,053 63,061 (98,380) 33,733 7,582 (14,478) 26,837 16,722 64,494 19,867 19,113 189,722 309,918 (7,020) 329,735 57,412 196,386 253,798 (28,947) (108,190) 116,662 213,073 43,954 36,407 (41,740) 38,621 9,491 (7,901) 40,211 13,115 62,776 18,609 12,874 189,722 297,096 (21,325) 315,983 23,862 190,865 214,728 (105,619) (6,985) 102,124 213,858 The net financial indebtedness at December 31, 2014 is set forth below against the corresponding data of 2013: Net financial position / (indebtedness) 12/31/2014 12/31/2013 Cash and cash equivalents Current financial receivables Short-term borrowings Current portion of long-term borrowings Long-term borrowings 18,879 118,257 (56,080) (1,332) (196,386) 6,686 105,917 (23,781) (81) (190,865) Total net financial indebtedness (116,662) (102,124) (euro/000) The Company's net financial position is indebtedness of euro 116.7 million, compared to the euro 102.1 million indebtedness of 2013, an increase of euro 14.6 million. Pursuant to the transactions described in the first section of this document, the size and structure of the Company's indebtedness changed dramatically during 2013. Due to the merger absorbing Cristallo, the December 31, 2013 balance reflects Marcolin's assumption of Cristallo's existing indebtedness as at October 28, 2013 (incurred for the 2012 acquisition of 47 Report on operations for the year ended December 31, 2014 Marcolin from the former Shareholders, and affected by outflows for the mandatory and residual public 11 tender offers launched by Cristallo on the Marcolin shares). As noted, in November Marcolin issued bond notes, subscribed for a nominal amount of euro 200 million, whose proceeds were used partly to restructure the pre-existing debt, with principal repayments of euro 110.0 million, and partly to finance the indirect Viva acquisition (of December 2013). Marcolin financed Marcolin USA's acquisition of Viva Optique, Inc. with a loan of $ 125 million, at a fixed interest rate of 8.60%. The notes, maturing in November 2019, were classified as non-current liabilities net of the transaction costs (totaling euro 10.1 million) accounted for with the amortized cost method. Within the scope of the refinancing transaction, a super senior revolving credit facility was granted, for a maximum amount of euro 25 million, by Banca IMI S.p.A., IKB Deutsche Industriebank AG, Natixis S.A., UniCredit S.p.A. and Goldman Sachs, to be used for ordinary cash flow demands. The credit facility had been used for euro 20.0 million at the end of 2014. In 2014, the Company was granted a credit line from Unicredit S.p.A. to cover cash flow demands associated with investments in joint ventures in China and Russia, which were expected to be drawn on at the end of 2014 and beginning of 2015. The credit line of euro 5.0 million, granted to fund Italian companies that invest directly or indirectly in projects aimed to make their businesses more international, has an irrevocable guarantee on 50% from SACE S.p.A. (Gruppo Cassa Depositi e Prestiti). The credit line was granted in a committed form, and is unsecured by collateral. It will be repaid over a 48-month period, with deferred quarterly installments. The increase in net financial indebtedness was affected by the following transactions: • • • the Company incurred costs of euro 3.3 million for payment of the 2014 bond transaction expenses; transaction fees were paid to renegotiate some important licensing agreements in the year, as referred to in the Group Report on Operations; non-recurring costs of euro 1.9 million for the Viva integration plan were incurred in the year by the Parent Company. More information on the cash generated by operating activities is reported notes to the financial statements. The debt-to-equity ratio at December 31, 2014 is 0.55 (compared to 0.48 at December 31, 2013). Net financial (euro/000.000) position Net equity 2010 (17.3) 75.4 2011 (13.6) 93.2 2012 (14.9) 92.0 2013 (102.1) 213.9 2014 (116.7) 213.1 The level of indebtedness is the ratio between net financial position and equity. Year 11 Level of indebtedness (0.23) (0.15) (0.16) (0.48) (0.55) On December 31, 2012, Cristallo's net indebtedness was euro 80.9 million (net of the costs deferred under the amortized cost method), plus liquidity of euro 31.8 million, used for the cash outflows of the public tender offers on the Marcolin shares. The expenditure incurred by Cristallo financed by bank loans to execute the public tender offers was euro 29.7 million. On October 28, 2013, Cristallo's net financial indebtedness was euro 86.4 million. 48 Marcolin S.p.A ***** The composition of net working capital, in comparison with the previous year, is set forth in the following table: Net working capital (euro/000) 12/31/2014 12/31/2013 63,061 69,053 (98,380) (6,896) 36,407 43,954 (41,740) 1,591 26,837 40,211 Inventories Trade receivables Trade payables Other current assets and liabilities Net working capital With respect to the various items that make up net working capital: • • • the value of inventories rose by euro 26.7 million compared to the previous year. The increase in closing inventories is attributable to an increase in “current” finished product inventories due to the higher sales, management's decision to improve customer service by reducing delivery time and increasing the supplies of continuing products (to be “never out of stock”), and the increase in models and designs within the collections produced. In contrast, inventories of products from noncurrent collections fell considerably from those of 2013. The inventory increase is also attributable to the discontinuity represented by products with new brands, particularly Zegna and Pucci, which will be launched shortly; trade receivables (up by euro 25.1 million) were affected primarily by the sales growth. The increase in trade receivables is due particularly to the acceleration of business at the end of 2014, caused by a concentration of deliveries at the end of the year. The credit quality of receivables due from third parties remained consistent with that of recent years. In 2014 the recent improvement in the average collection period, or "days sales outstanding" (DSO), lost momentum, but the extreme emphasis on credit management and client selection made it possible to keep the DSO, which rose slightly, under control even in the most difficult markets; the balance of trade payables at the end of 2014 was affected by the inventory increase and by the recognition of payables due to some licensors under important license renewals that were stipulated in the year but will affect the accounts of 2015. Excluding this effect in order to make comparison between the two years more meaningful, the average payment period, or "days payable outstanding" (DPO), for trade payables improved considerably year-on-year. With a constant perimeter, the working capital-to-sales ratio is 0.14 (the same as the pro-forma ratio of 2013). ***** Among the non-current assets, in line with the previous year, the Parent Company recognized goodwill of euro 189.7 million at the end of 2014 (arising on the reverse merger with Cristallo S.p.A.) as an asset with an indefinite useful life, and thus not amortized. Goodwill was reviewed for impairment. The related assumptions and results are described in the notes to the separate financial statements of Marcolin S.p.A. The annual capital expenditures regarded mainly industrial plant and machinery for upgrading purposes, and manufacturing equipment (such as molds) to develop new product collections. Investments in intangibles were made to upgrade and rationalize the existing business software, in addition to other investments related to the renewal of certain licenses, as reported at the beginning of this document. In October a downpayment (of euro 0.4 million) was put on the purchase of a new manufacturing plant in Fortogna, for which the outstanding balance was paid in early 2015 with a notarial deed. 49 Report on operations for the year ended December 31, 2014 In addition, a factory in Longarone formerly owned by associate Finitec in liquidation was purchased (before the end of the liquidation process in 2014); its designation as space to assist Marcolin S.p.A.'s growth is currently being evaluated. ***** A Statement of Financial Position summary presenting current and non-current assets and liabilities is shown below: Statement of financial position 12/31/2014 12/31/2013 Assets Non-current assets 418,107 394,719 Current assets 169,790 107,499 Total assets 587,897 502,218 Net equity 213,073 213,858 Non-current liabilities Current liabilities 208,909 209,890 165,915 78,470 Total liabilities and equity 587,897 502,218 (euro/000) Liabilities An analysis of the main changes therein is provided in the notes to the separate financial statements. ***** 50 Marcolin S.p.A SUBSIDIARIES AND JOINT VENTURES Pursuant to the December 2013 acquisition of Viva International, in 2014 the Marcolin group underwent a thorough reorganization process that involved all countries in which companies of both the Viva group and the Marcolin group co-existed, in the order of the United States, Far East countries, the United Kingdom, France, Brazil and South American countries. The Group's structure has changed profoundly since the end of 2013 and will continue to do so at the beginning of 2015, when the final corporate transactions will be completed, particularly in the United States, France and Brazil (absorption mergers). While the Report on the Operations of the Marcolin group describes such process, some information on the operations that involved Marcolin S.p.A.'s direct and indirect subsidiaries and associates is reported in this section. The performance of the related companies is summarized briefly hereunder. The financial statement results of the subsidiaries as at December 31, 2014 compared to December 31, 2013 are reported extensively at the end of this document. ***** Marcolin France Sas Marcolin France Sas (Paris) is 76.9%-owned by Marcolin S.p.A and 23,1%-owned by Marcolin International B.V. It distributes Marcolin products in France, and in 2014 it produced sales revenues of euro 18.5 million (euro 19.8 million in 2013). Marcolin France Sas reports a net loss of euro 0.2 million for 2014 (net loss of euro 0.3 million for 2013). Viva France Sas In 2014 Viva France, which distributes Viva brand products in France, produced sales revenues of euro 18.6 million (euro 17.5 million in 2013). Wholly owned by Viva Eyewear (UK) Ltd, the stake was sold on October 31 to Marcolin France Sas. The transaction, a step toward the subsequent merger of Viva France into Marcolin France (by way of the “dissolution sans liquidation” of Viva France and “trasmission universelle du patrimoine de Viva France à Marcolin France”, effective on January 1, 2015), had the objective of reducing and streamlining the structures and related costs of the two French companies by integrating the businesses into one organization with a sole management, in order to manage the related market more efficiently and effectively. Through the merger, the operations, assets and liabilities of the absorbed company continue to survive within the acquirer. Marcolin Iberica S.A. Marcolin Iberica S.A., located in Barcelona, is wholly owned by Marcolin S.p.A. A distributor of Marcolin products in Spain and Andorra, in 2014 it produced sales revenues of euro 8.1 million (euro 6.2 million in 2013) in those countries. It reports a net profit of euro 0.2 million for 2014 (net loss of euro 0.2 million for 2013). Marcolin Deutschland Gmbh Marcolin Deutschland Gmbh, Ludwigsburg, distributor for the German market (wholly owned by Marcolin S.p.A.) produced sales revenues of euro 7.5 million in 2014 (euro 6.9 million in 2013) in Germany. It reports a net loss of euro 0.2 million for 2014 (net profit of euro 0.4 million for 2013). 51 Report on operations for the year ended December 31, 2014 Marcolin Schweiz Gmbh Marcolin Schweiz Gmbh, based in Fuellinsdorf (wholly owned by Marcolin S.p.A.), produced sales revenues of euro 2.0 million in 2014 (euro 2.0 million also in 2013), mainly in Switzerland. It broke even in 2014 (as in 2013). Marcolin Benelux Sprl Marcolin Benelux Sprl (Faimes), wholly owned by Marcolin S.p.A., produced sales revenues of euro 5.0 million in 2013 in Belgium (euro 4.3 million in 2013) in Belgium, Luxembourg and the Netherlands. It broke even in 2014 (net loss of euro 0.1 million for 2013). Marcolin Portugal-Artigos de Optica Lda Marcolin Portugal-Artigos de Optica Lda is based in Lisbon and is 99.82%-owned by Marcolin S.p.A. In 2014 it produced sales revenues of euro 1.8 million (euro 1.4 million in 2013). It reports a net profit of euro 0.1 million for 2014 (it broke even in 2013). Marcolin (UK) Ltd Marcolin U.K. Ltd, based in Thatcham, Berkshire, wholly owned by Marcolin S.p.A., produced sales revenues of euro 6.1 million in 2014 (euro 5.5 million in 2013) in the United Kingdom and Ireland. It reports a net profit of euro 0.3 million for 2014 (net profit of euro 0.8 million for 2013). Viva Eyewear UK Ltd Viva Eyewear U.K. Ltd, domestic and international distributor of Viva products, is wholly owned by the former Viva Europa (now Marcolin USA Eyewear, Corp.). In 2014 it produced sales of euro 19.9 million (euro 26.7 million in 2013). The annual decrease is attributable to the September transfer of its business divisions (international and domestic distribution) to Marcolin S.p.A. and Marcolin UK Ltd. Under the Marcolin group's sales reorganization plan, Viva Eyewear UK Ltd’s operating divisions were transferred to Marcolin UK (domestic market) and Marcolin S.p.A. (international market, for distribution in Italy, the rest of Europe and non-EU countries to which Viva UK had exported). The business transfers, completed on September 1, considerably downsized the U.K. company, whose operating structures became redundant, allowing to realize important cost synergies (the activities formerly performed by Viva UK are now carried out by Marcolin UK and Marcolin S.p.A., with minimum costs compared to the pre-transfer situation). Moreover, as part of the international distribution reorganization required for Viva/Marcolin integration, on January 1 Marcolin S.p.A. transferred the "Asia Pacific Distribution" business division (distribution of Marcolin products in the Far East) to Marcolin UK Ltd. The transactions described above (Marcolin S.p.A.'s acquisition of the “international” business division and Marcolin UK Ltd's acquisition of the “domestic” division), and Marcolin S.p.A.'s subsequent transfer of the “Asia Pacific Distribution” division are linked, being part of a sophisticated reorganization plan to set up three geographical hubs (for Europe, USA and the Far East), from which the Group may benefit from considerable cost and top-line synergies (the latter of which are unspecified as they are difficult to quantify in advance). The euro 12 million profit of 2014 (euro 1.8 million in 2013) is largely attributable to non-recurring capital gains deriving from corporate transactions carried out during the year within the scope of the plan to integrate Viva into Marcolin, i.e. the transfer of the business divisions (international and domestic distribution) and the sale of the stakes in Viva France and Viva do Brasil. 52 Marcolin S.p.A Marcolin USA, Inc. Marcolin USA, Inc. (based in Scottsdale, Arizona), 89.90%-owned by Marcolin S.p.A., along with Viva Optique, Inc. is the Group's most important affiliate. It produced sales revenues of $ 101.6 million in 2014 (equivalent to euro 76.5 million), compared to $ 92.3 million in 2013 (euro 69.5 million), primarily in the United States, Canada and South America (excluding Brazil). It reports a net loss of euro 4.0 million for 2014 (net profit of euro 2.7 million for 2013). The 2014 result is affected by borrowing costs on the loan stipulated with Marcolin S.p.A. to acquire the Viva International group in December 2013. The operating income of 2014 is a net loss of 2.7 million (-3.6% of revenues), compared to the operating income of euro 5.5 million for 2013 (7.9% of net revenues). Viva Optique, Inc. In 2014 Viva Optique, Inc., based in Somerville, New Jersey, produced revenues of $ 100.7 million (euro 75.8 million), compared to the $ 107 million of 2013 (euro 80.6 million). As noted, in December 2013 the Viva International group, a major player in the American eyewear market, was acquired though Marcolin USA, Inc., which bought the entire shareholding of the parent, Viva Optique, Inc. In North America integration started in early 2014, beginning with the sales organization and rationalization of the sales force, with the objective of reassigning products and markets according to a unitary logic in order to optimize the distribution of Viva and Marcolin products in the various markets. In October the switch to a new SAP system (Group ERP) was completed, which resulted in the entire replacement of the information systems formerly used by Viva, and the operating procedures and processes were revised considering the larger Group. On January 1, 2015 the corporate restructuring took effect by way of the dissolution and absorption of American companies Marcolin USA, Inc., Viva Europa, Inc., Viva International, Inc. and Viva IP, Corp. into Viva Optique, Inc., effective as of the close of business on December 31, 2014. The name of the surviving company, Viva Optique, was then changed to Marcolin USA Eyewear, Corp. Viva Canada Inc. Viva Canada Inc. is wholly owned by Marcolin USA Eyewear, Corp. In 2014 it produced sales of euro 5.7 million (euro 6.1 million in 2013), realizing a net loss of euro 1.0 million (net loss of euro 0.6 million in 2013). The last company of the Viva group to be integrated into the Marcolin group, Viva Canada's business will be evaluated in 2015 to complete the rationalization process of the organizational structures and the sales and logistical restructuring in North America. Marcolin Do Brasil Ltda Marcolin Do Brasil Ltda, based in Barueri, 99.9%-owned by Marcolin S.p.A., produced sales revenues of euro 6.2 million (euro 5.8 million in 2013) in the Brazilian market. It reports a net loss of euro 1.8 million for 2014 (net loss of euro 0.9 million for 2013). Viva Brasil Comércio Produtos Opticos Ltda In 2014 the company produced sales of euro 4.8 million (euro 5.2 million in 2013), realizing a net loss of euro 1.1 million (loss of euro 0.8 million in 2013). Viva Brasil Comércio Productos Opticos Ltda was 50%-owned by Viva Eyewear UK Ltd and 50%owned by Viva Eyewear HK Ltd. Within the scope of Viva/Marcolin integration, a transaction similar to the one in France took place in Brazil, where two identical sales organizations existed, one for the distribution of Marcolin products 53 Report on operations for the year ended December 31, 2014 (Marcolin do Brasil Ltda) and the other for the distribution of Viva products (Viva Brasil Comercio Produtos Opticos Ltda). In this case as well, after the new parent Marcolin do Brasil acquired all Viva Brasil shares (at the end of December), it initiated a merger to absorb such company (which took place on January 1, 2015). Similarly to the French market, in Brazil the business management was assigned to a newly appointed manager with extensive experience in the eyewear industry, in order to fully exploit cost and top-line synergies that only full integration of the two structures would allow. Marcolin Asia HK Ltd Marcolin Asia Ltd Hong Kong (wholly owned by Marcolin International B.V.), based in Hong Kong, produced sales revenues of euro 6.9 million in 2014 (euro 2.7 million in 2013). It reports a net profit of euro 1.5 million for 2014 (net profit of euro 1.0 million for 2013). Viva Eyewear H.K. Ltd and Marcolin UK Ltd Hong Kong Branch Viva Eyewear HK Ltd (wholly owned by Viva Eyewear UK Ltd) produced sales of euro 3.5 million in 2014 (euro 6 million in 2013), and a net loss of euro 0.6 million (as in 2013). As noted, in July a new organization was set up in Hong Kong, with the objective of combining the distribution of Marcolin and Viva products in the Far East. That organization, established in July 2014 through a transfer of Viva Hong Kong's operating division, was the object of a subsequent business transfer by Marcolin S.p.A., which continued to serve the Asian market directly until the end of the year, when it transferred the entire Asia Pacific business to the new organization (effective January 1, 2015). Due to a sales decline that prevented it from absorbing enough costs to break even, Viva Hong Kong had accumulated losses and was burdened by some unresolved situations with the Australian and Brazilian subsidiaries as well as some pending disputes. Within the scope of the organizational and corporate restructuring process required for Viva/Marcolin integration, it was considered opportune to identify and carve out the viable operating division of Viva Hong Kong and transfer it to the newly established Hong Kong branch of Marcolin UK Ltd. The transfer took place in July 1, 2014. After absorbing the business division relating to Viva products, the Hong Kong branch was also designated to distribute Marcolin products in the same areas of the Far East, with clear advantages in terms of economies of scale and cost and top-line synergies. In fact, previously Marcolin S.p.A., which used to distribute its products directly in the Far East, had to import the products into Italy to the logistical center in Longarone and then send them out again to clients and distributors in Asia, a costly and time-consuming process. Instead, the Hong Kong branch sources directly from Chinese suppliers thanks to the size and scale achieved, thereby saturating overheads by distributing into outlying markets autonomously and fully exploiting the cost benefits arising on operational gearing to improve sales. Eyestyle Trading (Shanghai) Co. Ltd This company was established in February 2013. Eyestyle Trading (Shanghai) Co. Ltd (wholly owned by Marcolin S.p.A.) reports a net loss of euro 0.1 million for 2014 (it broke even in 2013). It has been reorganized to assist the importing and distribution of the Zegna line to the Zegna boutiques in China, starting in February 2015. Marcolin Technical Services Co. Ltd For the Asia Pacific area, a new company will be established in China that shall monitor the production of Chinese-manufactured products, perform quality control and check production work in progress for the Group's companies (Marcolin S.p.A., Marcolin USA Eyewear, Corp., and Marcolin UK Hong Kong Branch). The new company, Marcolin Technical Services (Shenzhen) Co. Ltd, will be owned directly by 54 Marcolin S.p.A Marcolin S.p.A. and based in Shenzhen, Guangdong Province, China. It will be operational in mid 2015, providing technical services regarding production, such as supplier selection in China, quality control and monitoring of production work in progress, and general manufacturing-related services. Marcolin International B.V. Marcolin International B.V. (Amsterdam), wholly owned by Marcolin S.p.A., reports a net loss of euro 0.1 million for 2014 (net loss of euro 0.1 million for 2013). It does not perform operating activities. Eyestyle Retail Srl Eyestyle Retail, based in Milan, runs the Marcolin store in downtown Milan, a prestigious showcase completing the Group's business activity with a direct retail approach a year ago. It serves as a direct contact with the retail market that enables to test Marcolin and Viva collections directly with the consumer and obtain useful information for understanding consumer tastes and trends. It reports a net loss of euro 0.3 million for 2014 (net loss of euro 0.4 million in 2013, its start-up year). Eyestyle.com Srl Eyestyle.com, based in Longarone (Belluno), was founded in March 2012, when it started to develop the web portal dedicated to sales of sunglasses, eyeglass frames, optical products and materials and similar products The operation produced a net loss of euro 0.2 million in 2014 (net loss of euro 0.2 million in 2013 as well). ASSOCIATES Ging Hong Lin International Co. Ltd and Ginlin Optical Shanghai Co. Ltd With the objective of managing distribution directly in mainland China, a joint venture was set up with the Gin Hong Yu International Co. Ltd group, a well-known and respected business operating in the Chinese eyewear market, in the second half of 2014. The operation will be managed by Ginlin Optical Shanghai Ltd Co., based in Shanghai, a company fully controlled by Gin Hong Lin International Co. Ltd. The Hong Kong company is 50%-owned by Marcolin S.p.A. Sover-M ZAO Still regarding the Group's international development, a joint venture was set up with Sover-M, a wellestablished, prestigious company operating in the eyewear business in Russia, for the distribution of all Marcolin and Viva products. Sover-M's shares were acquired in December 2014. The Italian Parent Company controls 51% of Sover-M. Marcolin Nordic AB In Europe, at the beginning of 2015 a new affiliate was started up in Frösundaviks (Stockholm), Sweden. Marcolin Nordic began operating at the end of February 2015, and its mission is to manage closely and directly the Nordic market (Denmark, Finland, Norway, Iceland and Sweden) in order to distribute all brands in the Marcolin/Viva portfolio there. Its structure will have branches operating in the main countries of interest. Viva Deutschland Gmbh 55 Report on operations for the year ended December 31, 2014 In November 2014 the Marcolin group stipulated an agreement with Viva Deutschland Gmbh to extend the (Guess and Gant) product distribution agreement expiring in December 31, 2014 to December 31, 2015 for Germany, Austria and Switzerland. Consequently, the joint venture with Viva UK Eyewear Ltd will continue operating until the new expiration of the distribution agreement renewed, as will subsidiaries Viva Schweiz AG and Viva Eyewear Brillenvertriebs Gmbh, whereas Viva Nederland B.V. will be put into liquidation. Viva Eyewear Australia Pty Ltd This company is a joint venture between Viva HK (50%) and General Optical (distributor of optical products in the Australian market). In March 2014, Viva HK formally notified General Optical that it would not renew the distribution agreement expiring on June 30, 2014. The company was then put into liquidation. Liquidators were appointed on February 5, 2015. Finitec S.r.l. This company, which handled contract manufacturing, was put into liquidation pursuant to a resolution of the Extraordinary General Meeting held on May 6, 2011. In 2014 the liquidation process of Finitec S.r.l. in liquidation was completed. On October 30, 2014, shareholder Marcolin was assigned assets of euro 240 thousand deriving from the liquidation. Marcolin purchased from Finitec an idle building (next to the Parent Company's historical headquarters in Longarone), which will soon be used to expand the floor space dedicated to the business activity. ***** 56 Marcolin S.p.A MAIN RISKS AND UNCERTAINTIES TO WHICH THE GROUP AND THE COMPANY ARE EXPOSED Economic risks and competitive risks associated with the sectors in which the Group and the Company operate The financial position and performance of the Marcolin group and Marcolin S.p.A. are influenced by macroeconomic factors of the various countries in which they operate. Economic recession has been present on an international level for the past few years, which has caused some major markets to contract, in some cases to record minimums. Recently, some economies have shown signs of significant improvement and have resumed growth; others are still in recession and continue to experience slow growth or even stagnation. In this critical moment it is difficult to predict the size and duration of economic cycles and make forecasts of future demand in the various countries; it is certain that, at least in the near future, the economies of certain countries will continue to have slow growth. Significant declines in consumer spending showing up across markets and product lines could impact the Group's and the Company's financial position and performance, although the diversification of our markets and the Marcolin product/brand portfolio limits such risk considerably compared to companies that are more concentrated in certain markets or segments. The balance achieved in 2014 by Marcolin with the Viva acquisition not only expands the possibilities to grow in markets having higher growth than Europe (particularly Viva's American markets, where much of the product is offered), it also accelerates the sales channel diversification (balance between eyeglass frames and sunglasses, luxury and diffusion, men's and women's), thereby reducing the risk of potential contraction of sales volumes due to economic recession. Other uncertain factors could create negative consequences for the Group's and the Company's performance, such as rising energy prices and/or fluctuating raw material prices, but in such circumstances the effects could be transferred to sales prices, eliminating or at least limiting the impact on performance and thus on self-financing capability. If sales volumes and/or selling prices were to fall significantly, the Group and the Company are able to implement actions in the short term to contain their cost structures in order to minimize any effects on financial position and performance. The tough economies/financial situations of some markets may lead to greater risks regarding the collection of trade receivables, at least in the most troubled situations. For this purpose, within the scope of its policy to manage risks regarding customer accounts, the Company has set up an internal credit management department headed by a designated manager, which takes every action to manage credit risk at the time of customer evaluation and at delivery, sending payment notices for delinquent accounts and monitoring new accounts, risky accounts, and sales credit and payment extensions granted, in collaboration of the sales functions. Cash flow risk At the end of 2013 the Parent Company's financial structure changed significantly due to the transactions described herein. The bond issue of November 2013 completely changed Marcolin's funding activities, which had been through the ordinary financial market, i.e. short-term and medium/long-term loans with major banks, often with bilateral agreements. The bond issue refinanced the existing debt, providing the Group and the Company with conditions of relative stability at least until the notes mature at the end of 2019. The transaction involved a super senior revolving credit facility to be used to manage the timing mismatch between receipts and payments, and cash requirements for normal operating activities such as those involving ordinary investments. The credit facility, a total of euro 25 million, expandable by an additional euro 5 million, is considered adequate to support the Group's and the Company's ordinary funding needs. 57 Report on operations for the year ended December 31, 2014 On December 31, 2014 additional undrawn credit facilities totaling some euro 16 million were present at major banks, consisting of revolving credit available for short-term cash flow requirements. At the end of 2014 and beginning of 2015, the Parent Company accessed forms of financing through leasing and factoring to assist investments in new projects and manage working capital. Any significant, sudden reductions of sales volumes could have negative effects on the ability to generate cash flow from its operating activities. In the current circumstances the Group and the Company expect to maintain an adequate capacity to generate cash flows though operating activities. The Marcolin group plans to meet its cash requirements for repayment of its financial debts due and for the approved budget by using cash flows from operating activities (annual self-financing), cash and bank balances, use of the aforementioned revolving credit facility, use of credit lines currently available, and funding through leasing and factoring. Currency and interest rate risks The Marcolin group and Marcolin S.p.A. operate in various markets throughout the world and thus are exposed to market risks connected with fluctuations of foreign exchange rates and interest rates. Exposure to currency risk arises from the different geographic locations of its manufacturing and commercial activities. The Group and the Company are primarily exposed to fluctuations of the U.S. dollar on supplies received from Asia and on sales conducted on the U.S. dollar market. The cash flows deriving from such transactions partly offset each other, creating natural hedging on this currency, so the risk is more limited and manageable. In 2014, due to Viva/Marcolin integration, the Group's and Parent Company's distribution and logistical flows changed dramatically, resulting in a need to overhaul the comprehensive structure and control systems and set up effective monitoring tools. In keeping with its risk management policies, the Marcolin group and Marcolin S.p.A. use hedging instruments to manage risks of adverse exchange rate and interest rate fluctuations (currency forwards, on the basis of budget forecasts monitored during the year). With respect to interest rate risk, the Marcolin group uses types of financing mainly with fixed interest rates, the bond notes in particular (which have a fixed interest rate of 8.50%). Therefore, changes in market interest rates should not significantly affect current borrowing costs. An analytical description of the Group’s risks and hedging instruments is provided in the notes to the financial statements. Licensing risks The markets in which the Group and the Parent Company operate are highly competitive in terms of product quality, innovation and business conditions. Marcolin's success is partially due to its capacity to introduce products with innovative and new designs, its continuous search for new materials and modern productive processes and its ability to adapt to consumers’ changing tastes, anticipating fashion shifts and reacting to such shifts in a timely manner. The Company has signed long-term licensing agreements that enable it to produce and distribute eyeglass frames and sunglasses under trademarks owned by third parties. If in the long-term the Group and the Company were unable to maintain or renew their licensing agreements at market conditions, or if they were unable to stipulate new licensing agreements for other successful labels, the growth prospects and operating results of the Marcolin group and Marcolin S.p.A. could be negatively impacted. For this reason the Group and the Company work constantly toward renewing existing licenses and procuring new licenses in order to maintain their long-term prospects. In 2014 these activities produced positive results, as described in the Group Report on Operations. Many initiatives were carried out successfully in terms of extending license durations and acquiring new, prestigious licenses (Zegna and Pucci) in addition to those brought by Viva in 2013 (Guess in primis). 58 Marcolin S.p.A Moreover, all licensing agreements require payment of annual minimum guaranteed royalties (the “guaranteed minimum”) to the licensor, even if the sales should fall below certain thresholds, with possible negative effects on the Group’s financial position and performance. The Group and the Company monitor these situations closely in order to safeguard the business performance when overheads are not adequately absorbed by sales revenues. In 2014, initiatives regarding the revision of minimum guaranteed royalties due over the term of the licensing agreement were successfully implemented, as described in the Group Report on Operations. Supplier risks The Group and the Company use contract manufacturers and third-party suppliers to manufacture and/or process some of their products. The use of contract manufacturers and third-party suppliers involves additional risks, such as cancellation and/or termination of contracts, poor quality in the supplies and services provided and delivery delays. Delays or defects of products supplied by third parties, or the cancellation or termination of supplier contracts without having adequate alternative sourcing available, could have a negative impact on the Group’s business operations, financial position and performance. Contract manufacturers and third-party suppliers, located mainly in Italy and Asia, are submitted to continuous controls by the responsible functions to verify compliance with quality and service standards, including those relating to delivery timing and methods, and fair prices with respect to target margins. The Group and the Company manage this risk by constantly monitoring the sourcing markets, also in order to identify alternative manufacturers and suppliers in case of temporary or structural difficulties with the current suppliers. In 2014 the Asian suppliers were reviewed and monitored from a quantitative and qualitative point of view (quality, reliability and service), in light of the particular social and economic dynamics characterizing that sourcing market. For the Asia Pacific area, a new company was set up in China that shall monitor the production of Chinese-manufactured products, perform quality control and check production work in progress for the Group's companies, specifically Marcolin S.p.A., Marcolin USA Eyewear, Corp., and Marcolin (UK) Hong Kong Branch. The new company, Marcolin Technical Services (Shenzhen) Co. Ltd, will be established and owned directly by Marcolin S.p.A. and will be based in Shenzhen, Guangdong Province, China. It will be operational in mid 2015, providing technical services regarding production, such as supplier selection in China, quality control and monitoring of production work in progress, and general manufacturingrelated services. Marcolin started up a manufacturing project aimed to double its Italian manufacturing operation with the purchase of a new 3,500 square meter factory in Longarone (Fortogna locality), in the heart of the eyewear district. From the second half of 2015 the factory will ensure the new production capacity necessary to meet the demands arising from both the new brands added to the brand portfolio and the structural expansion of some markets. Reasons for which the consolidation and development of its production capacity in Italy are important to Marcolin include reduced dependence on external suppliers (both Italian and Asian), which will enable to shorten the manufacturing lead time and thus increase the ability to seize market opportunities (and improve the time to market), and the possibility to manage the inflation risk regarding the Chinese sourcing market, as production insourcing will result in greater control of production factors. ***** 59 Report on operations for the year ended December 31, 2014 OTHER INFORMATION Human resources Marcolin considers the value of human resources to be a critical success factor. Training and personnel enhancement constitute an investment in the Group’s and the Company's business consolidation and development. In 2014 the Company increased the awareness of corporate values and launched a plan to evaluate qualifications and technical skills in line with the corporate vision. The values on which the Group is building its future are based on the concept of active, effective contributions from our people, teamwork, and the satisfaction of customer demands through wellinformed decision-making, relying on excellent skills and know-how and constantly keeping an eye and ear out for external changes. The Company worked on plans to reinforce and implement the corporate values in order to incorporate them more profoundly into the set of tools used to achieve business results. This objective was pursued through an engagement and performance survey, and through action plans managed within each department (the Murmur plan). 2014 was a year of feedback and corrective measures, featuring job rotation at the headquarters and effective support to the main corporate areas, in terms of new hires and development plans to meet the Group's changing demands. During the year the Group and the Company continued to recruit and hire competent, motivated personnel with leadership qualities and potential in line with the career paths. In 2014 Marcolin worked intensely on the company integration process within the scope of the Viva/Marcolin integration plan, as described in the Group Report on Operations. ***** On December 31, 2014, the Group had 1,505 employees (1,481 at the end of 2013), as presented below. The table presents the employees in service as at December 31, 2014, excluding independent agents that work exclusively for the Group and the Company. The annual increase is not influenced by the inclusion of Viva in the consolidation perimeter at the end of 2013, because the related employees are already included in the 2013 data. Employees Category Managers Staff Manual workers Total Final number 12/31/2014 57 854 594 1,505 12/31/2013 68 882 531 1,481 The annual increase of 102 employees against a decrease of 78 results in a net increase of 24 employees. The increase is attributable mainly to hiring in the manufacturing divisions and quality control areas at the Longarone facility in order to deal with peak periods and better manage product quality, a critical success factor, by insourcing quality control. 60 Marcolin S.p.A The reduction ensued from the Viva integration process, and refers largely to the downsizing of the sales force conducted by the American companies of the Group. Other affiliates involved in the reorganization process were Viva Eyewear UK, Viva France, Viva Hong Kong and Viva Brazil. On December 31, 2014, Marcolin S.p.A. had 709 employees (620 in 2013) in the following categories: Employees Final number Category 12/31/2014 12/31/2013 Managers 15 13 238 456 214 393 Staff Manual workers Total 709 620 The data includes the temporary workers employed to meet the demand peaks. As noted, the increase is attributable mainly to the higher number of employees at the manufacturing divisions and quality control area in Longarone. The logistics function and product engineering department were also expanded. Italian and second-level collective bargaining agreements The Company signed the new supplementary agreement (expired on December 31, 2013), which will be in effect until December 31, 2015. The focus was on improvement of measures aimed to balance work and personal life (part-time and flexible hours) and optimal use of initiatives to cover production peaks in line with market demands (planned overtime incentives). Moreover, performance bonuses were reviewed in accordance with the new parameters of the Group. Employee welfare and assistance to families In 2013 Marcolin S.p.A. participated in a bid for "Conciliazione dei tempi di vita e di lavoro" (Work-Life Balance) subsidies called by the Ministry of Family Policy. Total subsidies of euro 285,870 were granted, of which euro 114,348 already paid. From June 2013 the subsidies enabled to provide a tangible contribution to the reimbursement of costs incurred by Marcolin employees for services assisting a work-life balance (babysitting, daycare, after-school, services for the elderly). 2014 was an important year for the definition of the first employee welfare plan, which uses the Company's distinct formula of a separate, customized plan created for each employee. Its objective is to meet the needs of the employees and their families. It originates from a survey that investigated the necessities reported by the employees, and was built on the basis of the survey results. The welfare plan will be implemented in 2015. Research and development The Company continued with its research and development activities in 2014. Research and development activities are carried out by the Parent Company, Marcolin S.p.A., through two divisions. The first division works in close partnership with licensors to come up with new collections, hone style and research new materials for sunglasses and eyeglass frames. The second division, which works closely with the first, oversees the subsequent development of collections and manufacturing of products. 61 Report on operations for the year ended December 31, 2014 In 2010, the research, development and innovation project “Industria 2015” -- New Technologies for Made in Italy, from the District to the Production Line was launched: Eyewear and industrial innovation, Objective B Area, Project Number MI00153. The purpose of the project was to create a platform for supply chain integration that operates on the technical and operational aspects of the companies, which should encourage the competitive and technological development of Italian eyewear business systems. The platform should enable marketing and supply chain events to be communicated quickly to the entire production process, and any critical issues leading to changes in supply chain planning to be made visible rapidly to all interested parties. The platform will also create interactive communications between the various parties in the supply chain. Under the Ministry of Economic Development decree n. 00098MI01 dated December 21, 2013, expenses of euro 13,747,949 and total facilities of euro 4,247,627 were granted. Marcolin S.p.A.'s share of investments is euro 849,686.49 with a total contribution to expenses of euro 182,790.90, and it sustained costs as expected in the financial plan. In 2014 Marcolin S.p.A. performed research and development activities for technological innovation, focusing on a project considered particularly innovatory, carried out in Longarone and entitled “R&D activities aimed at implementing new technical solutions for products and processes enabling to create new articles for the 2015-2016 collections of its own line and of the various brands managed. The Company incurred R&D costs of 4,033,955 for such projects in 2014”. The innovations should lead to good results in terms of sales with a favorable impact on the Company's business. With regards to accounting treatment for Research and Development costs, in compliance with Italian Civil Code Article 2426 point 5, Italian accounting standard n. 24 issued by the Italian Councils of Certified Accountants as updated by the Italian Accounting Board, and Presidential Decree 917/86 Article 108 (Italian Tax Code) and subsequent amendments, the cost incurred for research and development was considered an annual expense recognized entirely in the income statement. While full regulatory discretion is acknowledged in the opportunity to expense all costs in the year or through an amortization scheme with a maximum duration of five years, it was decided not to capitalize such costs because even though they regard applied research and precompetitive development designated to create a new and improved product or production process, the prudence concept prevailed, also considering the fact that recovery of R&D costs through future revenues (a requirement for R&D capitalization) requires a highly subjective and aleatory evaluation. Related party transactions Related party transactions, including intra-Group transactions, cannot be defined as either atypical or unusual, as they are part of the Group companies’ normal business activities. Such transactions take place on an arm’s length basis, taking into account the nature of the goods and services supplied. Detailed information on related party transactions is provided in the notes to the consolidated financial statements and in the notes to the separate financial statements of Marcolin S.p.A. Treasury shares On December 31, 2012, Marcolin S.p.A. owned 681,000 treasury shares, for a nominal value of euro 354,120 (the carrying amount, entered at purchase cost, was euro 947 thousand), representing 1.1% of Marcolin S.p.A.’s share capital. At the Extraordinary General Meeting of October 31, 2013, with the vote of the sole Shareholder representing all shares with voting rights, a resolution was passed that canceled all treasury shares owned by the Company, transferring the nominal value directly to the sole Shareholder, and eliminating the nominal value of the Company's shares in accordance with Italian Civil Code Article 2346, paragraphs 2 and 3, and changing the By-Laws accordingly. No other Group company owns shares of Marcolin S.p.A. Personal data protection 62 Marcolin S.p.A Pursuant to Legislative Decree 196/03, known as the “Personal Data Protection Code,” activities were implemented to evaluate the data protection systems of the Group companies subject to such legislation. The activities found substantial compliance with the legislative requirements for the protection of the personal data processed by such companies, including the preparation of the Security Planning Document, which is constantly updated. Branches Marcolin S.p.A. operates from its headquarters in Longarone and with qualified contract manufacturers. The operational premises are as follows: its headquarters in Longarone (Belluno), in zona industriale Villanova n. 4 (registered office, executive offices and operations); a logistics center and warehouse in Longarone (Belluno), in zona industriale Villanova n. 20 H; a showroom and representative office in Milan, in corso Venezia, n. 36; the former Finitec premises in zona industriale Villanova S.N. (not currently operational); non-operational premises in Via Noai, 31, Vallesella locality of Domeggie di Cadore (Belluno). In 2015 the new factory in the Fortogna locality of Longarone will become operational. The factory, which was purchased in January 2015 from third parties, will begin operating by summer. ***** 63 Marcolin Group SUBSEQUENT EVENTS NOTICE OF CALLING TO GENERAL MEETING PROPOSED RESOLUTION 65 Financial Statement for the year ended December 31,2014 66 Marcolin Group SUBSEQUENT EVENTS AND BUSINESS OUTLOOK According to recent forecasts for the Italian economy, the long period of crisis that began in 2008 may be ending, with possible recovery in GDP and employment. The economic indicators present fairly stable domestic demand and output in Italy, thanks to the impetus given by world trade, which is encouraging for recovery prospects. Reforms aiming for growth by promoting employment and investments are also playing a role. Consumer confidence could accelerate this process, including the positive expectations for Expo 2015, which could help boost business and enable stable recovery. With respect to international macroeconomics, a combination of apparently long-lasting factors is shaping the global outlook, including the depreciation of the euro against the dollar, the steep decline of oil prices, the reduction of medium/long-term interest rates and easier access to credit after the recent credit crunch. This situation will benefit European countries, which remains our main market. Moreover, thanks to the favorable economic situation in North America and in emerging countries that have arrived on the international scene, and despite the difficulties of the Russian and Brazilian markets, the international scenario is certainly encouraging. For Marcolin, after two years dedicated to repositioning, reorganization and above all development activities, the current year will bring consolidation and additional growth due the unfolding of the positive effects of the successful initiatives, particularly Viva integration, which is being completed in these first few months of 2015. Indeed, Viva integration is successfully being completed in these initial months of 2015 after engaging Marcolin throughout 2014 as a top priority to optimize the complementary aspects of the two Groups and to release synergies that will enable to face market challenges with greater competitiveness and focus. Events of early 2015 include the aforementioned Marcolin/Viva mergers in France and Brazil, the streamlining of the business and corporate structures in the United States through the termination of the Arizona operation and the integration of the North American companies into a single structure, Marcolin USA Eyewear Corp. To complete the distribution and logistics reorganization, the transfer of the “Asia Pacific” division from Marcolin S.p.A. to Marcolin UK Ltd Hong Kong Branch and the transfer of the “Latin America” distribution division from Marcolin USA to the Italian Parent Company took effect on January 1, 2015 and March 1, 2015, respectively. As a result of the new organization of resources and means obtained by the Group at the end of the process, the full effects of the expansion will contribute to sustain and stimulate our Company's business, thanks also to the oil price slump and euro depreciation. The strategy for the Italian eyewear industry and for Marcolin remains one of internationalization, having the capacity to seize opportunities offered on international markets. After the activities in Russia, Northern Europe and China, more initiatives are in progress to strengthen the sales presence in strategic markets, both in Europe and in the Rest of the World, through partnerships with renowned local players. Among the priorities for 2015, following the startup of the Swedish affiliate in February 2015, this year the Middle East, Brazil and Turkey are likely candidates for additional ventures after those arranged successfully in 2014. The Marcolin Group has achieved a strongly balanced product offering (between luxury and diffusion, men's and women's lines, and eyeglasses and sunglasses) and geographical presence, also thanks to Viva's widespread presence in America and dominance of the vision segment and mainstream brands. 67 Financial Statement for the year ended December 31,2014 The important scale and balance achieved in the organizational structure are strengths that will enable the Group to pursue more effectively the consolidation of its existing brand portfolio and the launching of new licenses, in keeping with the Group's growth targets in strategic markets, particularly in the more dynamic areas (United States, Middle East, Far East and emerging markets). Marcolin's strategy includes a larger focus on innovation, certified quality, and exclusive and original designs that add value and convey added value. Aware that recovery must take place here, and of the favor with which international consumers increasingly look upon high-end and luxury Italian-made goods, in 2015 Marcolin decided to invest in a new manufacturing plant that will enable to reorganize the production and logistics space in Longarone, in order to foster market growth and reduce dependence on Asian suppliers. Milan; March 27, 2015 for the Board of Directors C.E.O Giovanni Zoppas 68 Marcolin Group NOTICE OF CALLING TO GENERAL MEETING The Marcolin S.p.A. Shareholders are hereby called to the General Meeting to be held in Milan, corso Venezia n. 36 on April 23, 2015 at 10:00 a.m. at a first calling, and April 30, 2015, same place and same time, at a second calling, to discuss and resolve upon the following Agenda • • • Annual Financial Statements for the year ended December 31, 2014, Board of Directors' Report, Board of Statutory Auditors' Report, Independent Auditors' Report; Presentation of the Marcolin group's Consolidated Statements for the year ended December 31, 2014 and related Reports; Resolutions thereon. Shareholders satisfying the legal conditions and complying with the requirements set out in Italian Civil Code Article 2370 at least two business days before the date of the meeting are entitled to attend the General Meeting. The General Meeting may be attended through electronic means of communication enabling participation in discussions and equal information for all attendees, in accordance with Article 12.3 of the Corporate By-Laws currently in effect. Milan; March 27, 2015 for the Board of Directors the Chairman Vittorio Levi 69 Financial Statement for the year ended December 31,2014 PROPOSED RESOLUTION Shareholders, The Financial Statements of Marcolin S.p.A. submitted to you present a true and fair view of the Company's financial position, financial performance and cash flows for the year. Therefore, we request the Company's sole Shareholder, Marmolada S.p.A., to approve the proposed Financial Statements for the year ended December 31, 2014. We also propose to allocate the Company's net profit for the year of euro 4,483,252 as follows: - euro 224,163 to the legal reserve; euro 4,259,089 to retained earnings. Consequently, after such allocations, the amounts of those reserves will be as follows: - Legal reserve: euro 4,077,295; Retained earnings: euro 106,745,082. Milan; March 27, 2015 for the Board of Directors the Chairman Vittorio Levi 70 Marcolin Group CONSOLIDATED FINANCIAL STATEMENTS OF THE MARCOLIN GROUP FOR THE YEAR ENDED DECEMBER 31, 2014 CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS 71 Financial Statement for the year ended December 31,2014 72 Marcolin Group CONSOLIDATED STATEMENT OF FINANCIAL POSITION (euro/000) Notes 12/31/2014 12/31/2013 Restated * ASSETS NON-CURRENT ASSETS Property, plant and equipment 1 Intangible assets 2 Goodwill 2 Investments in subsidiaries and associates 3 Deferred tax assets 4 Other non-current assets 5 Non-current financial assets 6 Total non-current assets CURRENT ASSETS Inventories 7 Trade receivables 8 Other current assets 9 Current financial assets 10 Cash and bank balances 11 Total current assets 24,657 37,213 278,010 1,877 38,536 846 5,455 386,593 22,957 29,341 266,833 2,030 31,060 870 7,132 360,223 100,075 80,576 14,099 2,042 36,933 233,725 68,301 71,827 13,994 1,759 38,536 194,416 TOTAL ASSETS 620,318 554,640 32,312 151,994 3,853 50,447 (17,086) 407 32,312 151,994 3,853 43,638 (4,811) (12,011) EQUITY Share capital Additional paid-in capital Legal reserve Other reserves Retained earnings (losses) Profit (loss) for the year 12 Non-controlling interests 886 TOTAL EQUITY - 222,813 214,975 13 14 4 15 199,152 8,919 7,387 4,742 220,200 195,891 18,287 1,127 3,954 219,259 16 17 18 28 19 102,322 41,353 14,799 5,004 13,827 177,305 65,263 17,707 21,287 4,640 11,508 120,406 TOTAL LIABILITIES 397,505 339,664 TOTAL LIABILITIES AND EQUITY 620,318 554,640 LIABILITIES NON-CURRENT LIABILITIES Non-current financial liabilities Non-current provisions Deferred tax liabilities Other non-current liabilities Total non-current liabilities CURRENT LIBILITIES Trade payables Current financial liabilities Current provisions Tax liabilities Other current liabilities Total current liabilities (*) Some values of the 2013 consolidated financial statements of the Marcolin group have been restated with respect to those previously published as a result of completion of the purchase price allocation process for the Viva group, which was acquired on December 3, 2013. 73 Financial Statement for the year ended December 31,2014 CONSOLIDATED INCOME STATEMENT AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Notes 2014 % 2013 % (euro/000) NET REVENUES 21 362,133 100.0% 212,327 100.0% COST OF SALES 22 (40.1)% 59.9% (81,883) 130,444 (38.6)% GROSS PROFIT DISTRIBUTION AND MARKETING EXPENSES (145,360) 216,773 23 (169,250) (46.7)% (101,688) (47.9)% 24 (31,711) (8.8)% (20,707) (9.8)% 4,928 1.4% 3,221 1.5% 205 0.1% 120 0.1% GENERAL AND ADMINISTRATION EXPENSES Other operating income / expenses: - other operating income 26 - impairement / reversals of equity investments - other operating expenses TOTAL OPERATING INCOME / EXPENSES EFFECTS OF ACCOUNTING FOR ASSOCIATES OPERATING INCOME - EBIT Financial income and costs: (1,014) 4,120 3 205 19,932 18,203 - financial costs TOTAL FINANCIAL INCOME AND COSTS PROFIT BEFORE TAXES (euro/000) NET PROFIT FOR THE YEAR (1,432) 1,909 (0.7)% 0.9% 0.1% 5.5% (12) 9,959 (0.0)% 2,886 1.4% 5.0% (8.6)% (24,655) (11.6)% (12,830) (3.5)% (21,769) 7,102 28 (10.3)% 2.0% (11,810) (5.6)% (6,695) (1.8)% (201) (0.1)% - 0.0% - 0.1% (12,011) 407 2014 2013 407 (12,011) Other items that will not subsequently be reclassified to profit or loss: Effect (actuarial gains/losses) on defined benefit plans, net of taxes of euro 90 thousand (236) Other effects (265) TOTAL OTHER ITEMS THAT WILL NOT SUBSEQUENTLY RECLASSIFIED TO PROFIT OR LOSS (501) 122 122 Other items that will be subsequently reclassified to profit or loss Change in foreign currency translation reserve 7,045 (2,592) TOTAL OTHER ITEMS THAT WILL BE SUBSEQUENTLY RECLASSIFIED TO PROFIT OR LOSS 7,045 (2,592) TOTAL CONSOLIDATED COMPREHENSIVE INCOME FOR THE YEAR 6,952 (14,481) 74 4.7% (31,033) Profit attributable to non-controlling interests NET PROFIT FOR THE YEAR (0.3)% 1.1% 27 - financial income Income tax expense 61.4% 0.0% (5.7)% Marcolin Group December 2012 Capital increase of February 6,2013 Allocation of 2012 profit Merger impact Capital increase of November 29, 2013 Capital increase of December 3, 2013 Capital and reserves net total Period result Profit/(loss) for the year Retained earnings/(losses) Other reserves S.holders deposit in s/capital Legal Reserve Share capital (euro/000) Additional paid-in capital Other reserves Total Non-controlling interests in equity CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 1,200 159,660 - - - - - (4,811) 156,049 - 156,049 - - - 27,300 - - - - 27,300 - 27,300 - - - - - - (4,811) 4,811 - - - 31,112 (7,666) 3,853 (27,300) - - - - - - - - - - 24,000 - - - - 24,000 - 24,000 - - - 22,108 - - - - 22,108 - 22,108 - Period result - - - - - - - (12,011) (12,011) - (12,011) - Other components of comprehensive income - - - - (2,592) 122 - - (2,470) - (2,470) Total comprehensive income December 2013 32,312 151,994 3,853 46,108 (2,592) (2,592) 122 122 (4,811) (12,011) (12,011) - (14,481) Allocation of 2013 profit Change in consolidation perimeter - Period result - Other components of comprehensive income Total comprehensive income December 2014 32,312 151,994 3,853 46,108 7,045 7,045 4,454 - (12,011) (265) (265) (17,086) 12,011 407 407 407 (14,481) 214,975 407 6,544 6,952 221,927 886 886 214,975 886 407 6,544 6,952 222,813 (236) (236) (114) 75 Financial Statement for the year ended December 31,2014 CONSOLIDATED STATEMENT OF CASH FLOWS N o t es 2014 2013 (euro/000) OPERATING ACTIVITIES Profit for the period Depreciation and amortization Provisions 1.2 407 8,958 (12,011) 5,411 (2,806) 14.17 2,216 Income tax expense 28 6,695 201 Accrued interest expense 27 12,830 19,881 Adjustments to other non-cash items (8,914) Cash generated by operations 22,192 11,709 1,034 (1,300) (Increase) decrease in trade receivables 8 (10,553) (Increase) decrease in other receivables 9 (2,653) (Increase) decrease in inventories 7 (27,821) 3,717 (11,260) 16 33,787 (Decrease)/increase in other liabilities 15.19 3,113 (Use) of provisions 14.18 (6,892) (Decrease) increase in trade payables (Decrease)/increase in current tax liabilities 28 - (88) (931) (3,574) (1,383) Adjustments to other non-cash items (2,492) 5,524 Income taxes paid (3,609) (1,938) Interest paid (18,253) (17,452) Cash used for current operations (35,373) (28,685) Net cash from /(used in) operating activities (13,181) (16,975) (6,179) (2,615) INVESTING ACTIVITIES (Purchase) of property, plant and equipment 1 Proceeds from the sale of property, plant and equipment 1 (Purchase) of intangible assets 2 Net cash outflow on business combinations net of the liquidity acquired (Marcolin Group) 755 (6,742) - Net cash outflow on business combinations net of the liquidity acquired (Viva) (4,958) Net cash outflow on business combinations net of the liquidity acquired (SoverM) (1,530) Net cash from /(used in) investing activities (18,655) (30) (1,512) (53,619) (74,126) (131,902) FINANCING ACTIVITES Loans granted - Increase - Decrease 6 Net increase (decrease) in bank borrow ings Loans taken out - new loans - repayments Capital increase - - 1,676 1,600 (7,448) 1,934 13.17 47,190 (14,921) 252,600 (164,514) - 51,300 Net cash from /(used in) financing activities 26,497 142,920 Net increase/(decrease) in cash and cash equivalents (5,338) (5,958) Effect of foreign exchange rate changes Cash and cash equivalents at beginning of year 3,736 38,536 (707) 45,200 Cash and cash equivalents at end of year 36,933 38,536 76 Marcolin Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Introduction In 2013 Marcolin S.p.A. and the parent company, Cristallo S.p.A., were involved in a reverse merger whereby Cristallo was incorporated into Marcolin. In December 2012 Cristallo purchased from Marcolin's former shareholders 78.6% of Marcolin S.p.A.'s share capital, for a price of euro 4.25 per share (with a total payment of euro 207,579,057), financed with a short-term credit facility (for euro 87,500,000) and equity for euro 160,740,000 (from the financial resources made available by the sole shareholder, Marmolada S.p.A., through the subscription and payment of two subsequent capital increases with additional paid-in capital). As a result of the change of control, since Marcolin was listed on the electronic share market (Mercato Telematico Azionario - MTA) segment of the Italian stock exchange, Cristallo had to launch a mandatory full public tender offer ("Offer") of the remaining ordinary Marcolin shares outstanding, representing 21.4% of the Issuer's share capital (the offering prospectus was approved by Consob Resolution on December 21, 2012). The acceptance period began in January 2013 and ended in February 2013. On the closing date of the Offer, shares corresponding to approximately 78.0% of the shares involved in the public offer and 16.7% of Marcolin's share capital were tendered. Those shares, added to the Marcolin shares already owned by Cristallo and the treasury shares (corresponding to 1.1% of capital), resulted in Cristallo owning 59,891,105 shares, equal to 96.4% of the Issuer's share capital, on 12 the Offer payment date. Therefore, under Consolidated Finance Act Article 108, first paragraph, the legal conditions were present for the obligation to buy, and right to buy, the remaining outstanding shares not tendered into the Offer, corresponding to 3.6% of the Issuer's share capital. As a result of those events, Cristallo owned 100% of Marcolin's share capital. Therefore, under Borsa Italiana Provision n. 7645 of February 7, 2013, the delisting of the Issuer's shares from the electronic share market was arranged for February 14, 2013. Cristallo financed the procedure with liquid resources of euro 29,669,093 and additional equity of euro 27,300,000, made available by the sole shareholder, Marmolada S.p.A., through another capital increase. During the year, procedures for the merger of Cristallo into Marcolin commenced within the scope of an extensive reorganization and optimization plan for the business, industrial and strategic purposes of the Group of which Cristallo and Marcolin are part. The reverse merger enabled Marcolin to retain its own business and legal relationships, with significant savings in terms of costs and organizational demands compared to a direct merger. The main objective of the merger, which was part of the reorganization and restructuring plan described in the public offering prospectus, was to shorten the chain of command in order to improve flexibility and operational efficiency, reduce corporate and administrative expenses, and rationalize the financial indebtedness involving the Group companies, thereby resulting in greater financial stability. Since Cristallo used bank loans to finance the original acquisition of Marcolin (indebtedness that was assumed by the surviving company), the merger is legally defined as a "merger as a result of acquisition with debt", so the procedures set forth in Italian Civil Code 2501-bis and 2501-quinquies were followed. On June 26, 2013, Marcolin S.p.A.'s Board of Directors presented the plan of merger through absorption of Cristallo S.p.A. into Marcolin S.p.A., as well as the Directors' Report on the merger plan prepared in accordance with the Italian Civil Code; on July 8, 2013 Marcolin's extraordinary General Meeting approved the merger plan as well as new By-Laws that used the current text of the absorbed entity. The deed of merger was stipulated on October 28, 2013 and became effective for tax, accounting and legal purposes on the same date. The merger took place by assigning the shares of the surviving company, originally owned by the absorbed entity (98.9% of the share capital), to Marmolada S.p.A., Cristallo's sole shareholder. Since the remaining 1.1% consisted of treasury shares, the transaction did not require any swap ratio. The merger resulted in the cancellation of all Cristallo's shares, assigning the Marcolin shares to the sole shareholder, Marmolada, except for the treasury shares, which were canceled at the end of October 2013. 12 The price of euro 4.25 per share coincided with the contractual valuation of Marcolin shares for the December 2012 acquisition. 77 Financial Statement for the year ended December 31,2014 The Extraordinary General Meeting of October 31, 2013 canceled the 681,000 treasury shares owned by the Parent Company, transferring the nominal value directly to the sole Shareholder, and eliminating the nominal value of the Company's shares in accordance with Italian Civil Code Article 2436, paragraphs 2 and 3. ***** 78 Marcolin Group General Information The explanatory notes set out below form an integral part of the annual Consolidated Financial Statements of the Marcolin group and were prepared in accordance with the accounting documents updated to December 31, 2014. For the purpose of providing exhaustive financial information, the Report on the Operations of the Marcolin group and Marcolin S.p.A. has been prepared, which contains additional information regarding the main events of the year, subsequent events, business outlook and other important financial and operational information of the business. The consolidated financial statements were prepared on the basis of the going-concern assumption, the accrual basis of accounting and the historical cost basis, revised as required for the measurement of certain financial instruments (with the exception of some revaluations performed in previous periods). The consolidated financial statements for the year ended December 31, 2014 include the financial statements of the Parent Company, Marcolin S.p.A., and those of its Subsidiaries and well as the Group's interests in jointly controlled entities and in Associates. Marcolin S.p.A. is incorporated under Italian law, listed in the Belluno Companies Register with no. 01774690273, and has shares that until February 14, 2013 were traded in Italy on the Mercato Telematico Azionario (electronic stock exchange) organized and managed by Borsa Italiana S.p.A. Marcolin S.p.A. is the Parent Company of the Marcolin group, which operates in Italy and abroad in the design, manufacturing and distribution of prescription frames and sunglasses, including by way of direct and indirect management of affiliates and partnerships started up located in major countries of interest worldwide, and through the management of qualified contract manufacturers. The addresses of the locations from which the Parent Company's main operations are performed are listed in the Report on Operations. The addresses of the subsidiaries and associates are as follows. Company Headquarters Address Marcolin Asia HK Ltd Marcolin Benelux Sprl Marcolin do Brasil Ltda Marcolin Deutschland Gm bh Marcolin Gm bH Marcolin Iberica SA Marcolin International BV Marcolin Portugal Lda Marcolin UK Ltd Marcolin Usa Inc Marcolin France Sas Eyestyle Retail Srl Eyestyle.com Srl Hong Kong Faimes, Benelux Barueri - SP, Brasil Ludwigsburg, Germany Fullinsdorf, Switzerland Barcellona, Spagna Am sterdam , Olanda Lisbona, Portugal Newbury, Uk New York, Usa Parigi, France Milano, Italy Longarone, Italy Units 2207-11, Tower I, Level 22 - Metroplaza, 223 Hing Fong Road - Kwai Fong, N.T. Rue al Cadorette, 2 - 4317 Av Tamboré, 1180 - 06460-000 Monreposstrasse, 55 Rheinstrasse, 26 - 4414 Juan De Austria, 116 - 4a Planta - 08018 Herikerbergweg 238 Rua Jose Travassos, 15/B 1600-410 Building 107 - New Greenham Park-RG19 6HN 232 Madison Avenue Lbby - NY 10016 45, rue Saint Sébas tien - 75011 Cors o Venezia, 36 - 20121 Zona Industriale Villanova, 4 - 32013 Eyestyle Trading (Shanghai) Co Ltd Shangai, China Viva Optique Inc d/b/a Viva International Group Somerville, Usa Unit 313, no.555 Anyuan Road, Jingan Dis trict Route 22 wes t, 3140 - 08876 NJ Viva Europa Inc Viva IP Inc Viva Brasil Comércio Produtos Opticos Ltda Viva Canada Inc Viva France Sas Viva Eyewear Hong Kong Ltd Viva Italia Srl Viva International Inc d/b/a Viva Japan Viva Eyewear UK Ltd Joint Ventures Viva Optique de Mexico SA de CV Viva Deutschland Gm bh Viva Eyewear Brillenvertriebs Gm bh Viva Nederland B.V. Viva Schweiz AG Viva Eyewear Australia Pty Ltd Sover - M ZAO Gin Hong Lin Intenational Co Ltd New Jersey, USA New Jersey, USA Sao Paulo, Bras il New Brunswick, Canada Pontault Combault, France New Territories, Hong Kong Operations Ceas ed Operations Ceas ed North Yorkshire, UK 3140 Route 22 West, Som erville, NJ 08876 3140 Route 22 West, Som erville, NJ 08876 Rua Um bú, 219 Térreo, Alphaville, 13098/325 Cam pinas, SP 671 Malenfant Blvd., Dieppe, NB, E1A 5T8 18 rue de Prè des Anulnes, Z.I. des Arpents, 77340 Pontault Com bault Workshop A-E, 8th Floor, Block 1, Kwai Tak Industrial Centre, Nos. 15-33 Kwai Tak Street, Kwai Chung Edo, Mexico Schwaebisch Gmund, Germ any Mondsee, Austria Rijswijk, Netherlands Wallis, Switzerland Rosebery NSW, Australia Moscow, Russia Hong Kong Boulevard Toluca No. 128, Col. San Andres Atoto, C.P. 53500, Naucalpan, Edo Oderstrasse 2, Schwaebisch Gmund Herzog-Odilo-Str. 101/16, 5310 Mondsee (Landesgericht Wels FN 246984 m) Amperelaan 4C, Rijswijk 3951 Agarn, Wallis 110 Dalm eny Avenue, Ros ebery NSW2018 Building 1, 8 Bolshoy Chudov Pereulok Ocean Centre 609, Harbour City 5, Canton Road Ts t Kowloon 1-2 Milner Court, Hornbeam Square South, Hornbeam Busines s Park, Harrogate, North Yorkshire, HG2 8NB Presentation currency These financial statements are presented in the Parent Company's presentation currency (Euro). 79 Financial Statement for the year ended December 31,2014 For the sake of a clear understanding of these consolidated financial statements, the amounts in the Statement of Financial Position, Income Statement, Cash flow Statement, Statement of Changes in Equity and explanatory Notes are presented in thousands of Euros. As a result of presenting the amounts in thousands of Euros, immaterial differences in the totals may emerge due to rounding off. Italian tax consolidation Marcolin S.p.A., together with the parent company, Cristallo S.p.A. (absorbed through a reverse merger) and its subsidiaries Eyestyle Retail S.r.l. and Eyestyle.com S.r.l., had opted for the Italian tax consolidation regime for IRES (corporate income tax) purposes for 2013, 2014 and 2015, which recognized Marmolada S.p.A. as the parent company. On June 13, 2014, pursuant to the Italian Income Tax Code ("TUIR"), Presidential Decree no. 917, Article 117 et seq of December 22, 1986, the ultimate parent company, 3 Cime S.p.A. notified the Italian Revenue Office of its adoption of the Italian tax consolidation regime with its subsidiaries, including Marcolin S.p.A., for 2014, 2015 and 2016. Accordingly, the tax consolidation in effect in 2013 was replaced with an identical agreement with 3 Cime S.p.A., which involved terminating the previous agreement and stipulating a new agreement for the three-year period. From the current year to December 31, 2016, the tax consolidation regime will enable each participant (including the Company), by way of partial recognition of the group's tax burden, to optimize the financial management of corporate income tax (IRES), for example by netting taxable income and tax losses within the tax group. Tax consolidation transactions are summarized below: • in years with taxable income, the subsidiaries pay 3 Cime S.p.A. the additional tax due to the tax authorities; • the consolidated companies with negative taxable income receive from 3 Cime S.p.A. a payment corresponding to 100% of the tax savings realized, accounted for on an accruals basis; • The payment is made only at the time of actual use by 3 Cime S.p.A. for itself and/or for other Group companies; • if 3 Cime S.p.A. and the subsidiaries do not renew the tax consolidation option, or if the requirements for continuance of tax consolidation should fail to be met before the end of the three-year period in which the option is exercised, tax loss carryforwards resulting from the tax return are split up proportionally among the companies that produced them. Issuance The financial statements were authorized for issue by the Board of Directors on March 27, 2015. ACCOUNTING STANDARDS Basis of preparation The consolidated financial statements were prepared according to the International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) issued by the International Accounting Standards Board (IASB) and approved by the European Union. The IFRS include all the revised international accounting standards (IAS) and all the interpretations of the International Financial Reporting Interpretations Committee (IFRIC), the former Standing Interpretations Committee (SIC). The accounting policies adopted to prepare the consolidated financial statements for the year ended December 31, 2014 are the same as those used in the prior year except as regards the adoption of the following new or revised IFRS or IFRIC. Accounting standards, amendments and interpretations effective from January 1, 2014 Application of the following new IFRS standards and/or standards revised by the International Accounting Standards Board and IFRIC interpretations became mandatory in 2014. Description 80 Approved as of the date of Effective date of the standard Marcolin Group this document IFRS 10 - "Consolidated Financial Statements" December 2012 Annual periods beginning on or after January 1, 2014 IFRS 11 - "Joint Arrangements" December 2012 Annual periods beginning on or after January 1, 2014 IFRS 12 - "Disclosures of Interests in Other Entities" December 2012 Annual periods beginning on or after January 1, 2014 April 2013 Annual periods beginning on or after January 1, 2014 IAS 27 (revised 2011) "Separate financial statements" December 2012 Annual periods beginning on or after January 1, 2014 IAS 28 (revised 2011) "Associates and joint ventures" December 2012 Annual periods beginning on or after January 1, 2014 December 2012 Annual periods beginning on or after January 1, 2014 Amendments to IFRS 10, "Consolidated financial statements", IFRS 12 and IAS 27 for investment entities November 2013 Annual periods beginning on or after January 1, 2014 Amendments to IAS 36, "Impairment of assets" December 2013 Annual periods beginning on or after January 1, 2014 Amendments to IFRS 10, 11 and 12 on transition guidance Amendment to IAS 32, "Financial instruments: Presentation", financial assets and financial liabilities on offsetting Amendment to IAS 39 "Financial instruments: Recognition and measurement", on novation of derivatives and hedge accounting December 2013 Annual periods beginning on or after January 1, 2014 June 2014 Annual periods beginning on or after January 1, 2014 IFRIC 21, "Levies" The adoption of the accounting standards, amendments and interpretations listed in the table above did not have any material effects on the Marcolin group's financial position or performance. Accounting standards, amendments and interpretations not applicable yet and not adopted early by the Group for the annual period beginning January 1, 2014 The following IFRSs, interpretations, amendments to existing standards and interpretations, or special provisions contained in the standards and interpretations approved by the IASB, and information with respect to their adoption in Europe as at the date of approval of the consolidated financial statements, are set forth below: Description Amendment to IAS 19 regarding defined benefit plans Annual improvements cycles 2010-2012 and 2011-2013 Amendment to IAS 16 "Property, plant and equipment" and IAS 38 "Intangible assets" Amendment to IFRS 11, "Joint arrangements" on acquisition of an interest in a joint operation IFRS 14 "Regulatory deferral accounts" IFRS 9 "Financial instruments" Approved as of the date of this document Effective date of the standard No Annual periods beginning on or after July 1, 2014 No Annual periods beginning on or after July 1, 2014 No Annual periods beginning on or after January 1, 2016 No Annual periods beginning on or after January 1, 2016 No Annual periods beginning on or after January 1, 2016 No Annual periods beginning on or after January 1, 2018 81 Financial Statement for the year ended December 31,2014 IFRS 15 "Revenue from contracts with customers" Amendments to IAS 27, "Separate financial statements" on the equity method Amendments to IFRS 10, "Consolidated financial statements" and IAS 28, "Investments in associates and joint ventures" No Annual periods beginning on or after January 1, 2017 No Annual periods beginning on or after January 1, 2016 No Annual periods beginning on or after January 1, 2016 No accounting standards and/or interpretations with mandatory application in annual periods beginning after December 31, 2014 were adopted early. The Marcolin group is evaluating the effects of the application of the above new standards, which are not currently considered to cause an impact. Financial statement format The consolidated financial statements consist of the Statement of Financial Position, Income Statement, Statement of Comprehensive Income, Statement of Cash Flows, Statement of Changes in Equity and the related explanatory Notes. In order to provide comparability, the previous period data was restated as necessary, with explanations given of the restatements. Some entries are described to provide a better understanding of certain accounts, where needed. The Company and the Group prepared the financial statements on the basis of the following accounting policies. Statement of Financial Position Assets and liabilities are classified separately as either current or non-current as envisaged by IAS 1. An asset is classified as current when it satisfies any of the following criteria: (a) it is expected to be realized in, or is intended for sale or consumption in, the entity’s normal operating cycle; (b) it is held primarily for the purpose of being traded; (c) it is expected to be realized within twelve months from the end of the reporting period; or (d) it is cash or a cash equivalent. All other assets are classified as non-current. A liability is classified as current when it satisfies any of the following criteria: (a) it is expected to be settled in the entity’s normal operating cycle; (b) it is held primarily for the purpose of being traded; (c) it is due to be settled within twelve months from the end of the reporting period; or (d) the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the end of the reporting period. All other liabilities are classified as non-current. As necessary, in accordance with IFRS 5, assets (and related liabilities) for which the book value will be recovered mainly through sale rather than continuing use are classified as “assets held for sale” and “liabilities relating to assets held for sale”. Income statement Costs are classified by function, stating separately the cost of sales, marketing and distribution expenses and administration expense in order to provide readers with more meaningful and relevant information than the alternative classification of costs by nature, in view of the business sector. In addition, it was decided to present two separate statements: the Income Statement and the Statement of Comprehensive Income. Statement of Changes in Equity 82 Marcolin Group The statement was prepared presenting items in individual columns with reconciliation of the opening and closing balances of each item forming equity. Statement of Cash Flows Cash flows from operating activities are presented using the indirect method. Based on this approach, the net profit for the year was adjusted to account for the effects of non-cash items on operating, investing and financing activities. Segment reporting Segment information was prepared on the basis of the geographical areas in which the Group operates, through its companies, by identifying the geographical areas as the primary segments of business. Basis of consolidation The scope of consolidation includes direct and indirect subsidiaries. Below is a list of the companies consolidated on a line-by-line basis and, for the sake of comprehensive disclosure, a list of the companies accounted for using the equity method. A summary of the 2014 reclassified financial statements of the subsidiaries (Income Statement and Statement of Financial Position), in comparison with the corresponding results of the previous year, is provided at the end of this Annual Report. 83 Financial Statement for the year ended December 31,2014 List of Subsidiaries and Associates Company Currency Share capital Equity Net profit / (loss) Consolidation method % ownership Direct Indirect 100.00% Marcolin Asia HK Ltd Marcolin Benelux Sprl Marcolin do Brasil Ltda Marcolin Deutschland Gmbh Marcolin GmbH Marcolin Iberica SA Marcolin International BV Marcolin Portugal Lda Marcolin UK Ltd Marcolin Usa Inc Marcolin France Sas Eyestyle Retail Srl Eyestyle.com Srl Eyestyle Trading (Shanghai) Co Ltd Viva Optique Inc d/b/a Viva International Group HKD EUR BRL EUR CHF EUR EUR EUR GBP USD EUR EUR EUR CNY USD 1,539,785 280,000 9,575,240 300,000 200,000 487,481 18,151 420,000 850,000 775,100 1,054,452 200,000 150,000 2,917,723 121,472,262 45,273,880 440,304 1,763,556 1,427,518 60,680 3,358,197 -1,321,426 8,962 997,334 74,541,463 3,029,156 572,364 355,544 1,697,444 115,651,236 15,396,083 6,964 -5,506,365 -241,168 -35,574 236,883 -93,155 102,140 230,412 -7,163,109 -153,943 -289,300 -204,334 -931,388 -6,713,452 Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Viva Europa Inc Viva IP Inc Viva Brasil Comércio Produtos Opticos Ltda Viva Canada Inc Viva France Sas Viva Eyewear Hong Kong Ltd Viva Italia Srl Viva International Inc d/b/a Viva Japan Viva Eyewear UK Ltd Joint Ventures Viva Optique de Mexico SA de CV Viva Deuts chland Gmbh Viva Eyewear Brillenvertriebs Gm bh Viva Nederland B.V. Viva Schweiz AG Viva Eyewear Australia Pty Ltd Sover - M ZAO Gin Hong Lin Intenational Co Ltd USD USD BRL CAD EUR HKD EUR YEN GBP 0 10,000 798,560 347,640 37,000 486,369 845,600 0 0 0 8,758 -5,286,154 209,276 558,364 56,133,720 43,051 -38,576,022 18,032,513 0 0 -3,362,497 -1,491,196 -744,670 -5,825,633 -1,882 0 9,682,684 Full Full Full Full Full Full Full Full Full 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% MXN EUR EUR EUR CHF AUD RUB HKD 3,694,685 25,000 35,000 18,000 100,000 1,000,000 306,000 19 28,430,647 217,245 73,351 37,897 284,213 2,369,282 130,893,000 19 5,133,754 567,245 38,351 19,897 133,952 -906,845 0 0 Equity Equity Equity Equity Equity Equity Full Full 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 100.00% 99.90% 100.00% 100.00% 100.00% 100.00% 99.82% 100.00% 89.90% 76.89% 100.00% 100.00% 100.00% 0.10% 10.10% 23.11% 100.00% 51.00% 50.00% The following changes since December 31, 2013 are reported: • Sover-M, a Russian company, has been included in the consolidation perimeter; • Ging Hong Lin International Co. Ltd was not consolidated because it was founded on December 31, 2014 and had no assets until that date. The line-by-line consolidation method will be used because the conditions for control as per the new international accounting standards (IFRS 11) are present. Basis of consolidation The consolidation method adopted is as follows: • the equity method is used to consolidate the companies in which the Group has more than 20% ownership ("associates") or over which the Group has significant influence even in another way; due to the use of the equity method, the carrying amount of the investee is aligned with the equity adjusted, as necessary to reflect the adoption of the IFRS approved by the European Commission and, includes the recognition of any goodwill identified at the time of the acquisition. The interest in the profits/losses realized by the associate after the acquisition date is recognized in the income statement, whereas the interest in changes in reserves after the acquisition date is recognized in the equity reserves. If the Group’s interest in the losses of an associate is equal to or in excess of its interest in the associate itself, taking into account all unsecured receivables, the value of the associate is written off and the Group does not recognize additional losses with respect to those attributable to it except and to the extent that the Group is required to answer for them. Unrealized profits and losses on transactions with associates are eliminated on the basis of the Group’s interest therein; • companies are consolidated on a line-by-line basis when the Group exercises control over them ("subsidiaries") by virtue of direct or indirect ownership of the majority of shares with voting rights or by exercise of dominant influence expressed by the power to govern, whether directly or indirectly, the company’s financial and operating policies, obtaining the related benefits regardless of any equity ownership. Any potential voting rights exercisable at the reporting date are considered for the purpose of determining control. Subsidiaries are 84 Marcolin Group • • • • • • consolidated from the date on which control is gained and are deconsolidated on the date from which such control ceases; the financial statements of the subsidiaries, associates and joint ventures are incorporated using the accounting policies of the Parent Company; consolidation adjustments are made as necessary to create consistency between items influenced by the application of different accounting policies; on consolidation, balances and transactions between consolidated subsidiaries are eliminated in full, i.e. receivables and payables outstanding at the end of the period, expenses and income, finance costs and financial income. Significant profits and losses realized between fully consolidated subsidiaries are also eliminated in full; significant profits included in products in stock originating from intercompany transactions are eliminated; any non-controlling interests in equity or net profit/(loss) are stated separately as noncontrolling interests under the consolidated equity; dividends distributed by fully consolidated companies are eliminated from the income statement, which incorporates the net profits or losses realized by such companies; financial statements presented in a different functional currency from that of the Parent Company are translated into euros by applying the current exchange rates in force on the reporting date to assets and liabilities, and the average exchange rates for the reporting period to revenues, costs, income and expenses. The related currency exchange differences are 13 recognized in the changes in equity. The following table lists the exchange rates used for translation: Currency Sym bol Closing exchange rate 12/31/2014 12/31/2013 Australian Dollar Brasilian Real Canadian Dollar Sw iss Franc Remimbi English Pound Hong Kong Dollar Japanese Yen Mexican Pesos Russian Rublo USA Dollar AUD BRL CAD CHF CNY GBP HKD JPY MXN RUB USD 1.483 3.221 1.406 1.202 7.536 0.779 9.417 145.230 17.868 72.337 1.214 1.542 3.258 1.467 1.228 8.349 0.834 10.693 144.720 18.073 45.325 1.379 Change Average exchange rate 2014 2013 (3.9)% 1.472 1.378 (1.1)% 3.121 2.869 (4.1)% 1.466 1.368 (2.1)% 1.215 1.231 (9.7)% 8.186 8.165 (6.6)% 0.806 0.849 (11.9)% 10.302 10.302 0.4% 140.306 129.663 (1.1)% 17.655 16.964 59.6% 50.952 42.337 (12.0)% 1.329 1.328 Change 6.8% 8.8% 7.1% (1.3)% 0.3% (5.1)% 0.0% 8.2% 4.1% 20.3% 0.0% Business combinations The Group's business combinations are accounted for with the acquisition method in accordance with IFRS 3, "Business Combinations". The cost of an acquisition is the fair value, at the control transfer date, of assets acquired, liabilities assumed, and equity instruments issued in exchange for the control of the acquired entity. Based on the acquisition method, the cost of the business combination is allocated to the identifiable acquired net assets, at the acquisition date, through the fair value measurement of the assets acquired and liabilities and contingent liabilities assumed, and goodwill is recognized to the extent of the excess of the business combination cost over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. If the initial accounting for a business combination can be determined only provisionally, adjustments to the values initially attributed are 13 Translation of foreign-currency financial statements Financial statements presented in a different functional currency are translated into euros in accordance with IAS/IFRS as follows: • assets and liabilities are translated at the current exchange rates in force on the reporting date; • revenues, costs, income and expenses are translated at the average exchange rate for the reporting period, considered to be a reasonable approximation of the actual exchange rates of the dates of the transactions; • currency exchange differences arising from translation of opening equity and the annual changes in equity are recognized in the “foreign currency translation reserve” under “other reserves”. 85 Financial Statement for the year ended December 31,2014 made within twelve months of the acquisition date. Non-controlling interests are recognized at the fair value of the net acquired assets. When a business combination is achieved in stages with subsequent share purchases, each stage is measured separately based on the cost and fair value of the assets, liabilities and contingent liabilities at each transaction date to determine the amount of any difference. If a subsequent acquisition enables to obtain control of an entity, the previously owned interest is restated based on the fair value of identifiable assets, liabilities and contingent liabilities, determined at the date on which control was obtained. With respect to the Group's business combinations: • the balances of the combination with the Viva group, recognized provisionally as at December 31, 2013, were finalized in 2014; • due to the time of acquisition (December 2014) and lack of relevant detailed information to fully determine the values, the aggregation of Sover-M was treated as provisional, and thus will be finalized in the financial statements for the year ended December 31, 2015. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted to prepare the consolidated financial statements are described hereunder: Property, plant, and equipment ("PP&E" or "tangible assets") Property, plant, and equipment are recorded at their acquisition or production cost, inclusive of ancillary costs incurred to bring the assets to working condition for their intended use, excluding land and buildings for which the deemed cost model was used on the transition date or business combination date based on the market value determined through an appraisal performed by an independent qualified appraiser. PP&E are stated net of depreciation except for land, which is not depreciated, and net of any impairment losses. Costs incurred for routine and/or cyclical maintenance and repairs are recognized directly in the income statement of the period in which they are incurred. Costs concerning the extension, renovation or upgrading of owned or leased assets are capitalized to the extent that they can be separately classified as an asset or part of an asset. The carrying value is adjusted by depreciation using the straight-line method calculated on the basis of estimated useful life. If the depreciable asset consists of distinctly identifiable components with useful lives that differ significantly from the other components of the asset, each component of the assets is depreciated separately, according to the component approach. Profits and losses deriving from the sale of assets or groups of assets are determined by comparing the sale price with the relevant net book value. Government grants relating to tangible assets are recorded as deferred revenues and credited to the income statement over the depreciation period for the assets concerned. Finance costs relating to purchases of a fixed asset are charged to the income statement, unless they are directly attributable to the acquisition, construction or production of an asset which justifies capitalizing them. Assets held under finance leases are recognized as tangible assets against the related liability. The lease payment is broken down into a finance cost, recognized in the income statement, and repayment of principal, recognized as a reduction of the relevant financial liability. Leases in which the lessor does not transfer substantially all the risks and rewards incidental to legal ownership are classified as operating leases. Lease payments under operating leases are recognized in the income statement on a straight-line basis over the duration of the operating lease. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, using the depreciation rates listed below: 86 Marcolin Group Category Buildings Non-operating machinery Depreciable equipment Operating machinery Office furniture and furnishings Exhibition stands Electronic machines Vehicles Trucks Depreciation Rate 3% 10% 40% 15.5% 12% 27% 20% 25% 20% Intangible assets Intangible assets consist of controllable, non-monetary assets without physical substance that are clearly identifiable and able to generate future economic benefits. These assets are recognized at purchase and/or production cost, inclusive of directly attributable expenses to bring the asset to working condition for its intended use, net of accumulated amortization (except for those assets with an indefinite useful life) and any impairment losses. Amortization commences when the asset is available for use and is systematically distributed over the asset’s useful life. If there is any indication that the assets have suffered an impairment loss, the recoverable amount of the asset is estimated and any impairment loss is recognized in the income statement. If an impairment loss subsequently reverses, the carrying amount of the asset is increased to the net carrying value that the asset would have had if there had been no impairment loss and if the asset had been amortized, recognizing the reversal of the impairment loss as income. Goodwill Goodwill is recognized at cost less any impairment losses. Goodwill acquired in a business combination is represented by the excess of the cost of the combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. Goodwill is not amortized, but it is reviewed for impairment annually, and whenever events or circumstances give rise to the possibility of an impairment loss, the recoverable amount is reviewed in accordance with IAS 36 ("Impairment of Assets"). If the recoverable amount is less than its carrying amount, goodwill is reduced to its recoverable amount. If goodwill has been allocated to a cashgenerating unit that is partially disposed of, the goodwill associated with the unit disposed of is included in the determination of any gain or loss on disposal. Trademarks and licenses Trademarks and licenses are recognized at cost. They have a finite useful life and are recognized at cost net of accumulated amortization. Amortization is calculated on a straight-line basis so as to allocate the cost of trademarks and licenses over their remaining useful lives. If, aside from amortization, impairment should emerge, the asset is written down accordingly; if the reasons for the writedown should cease to exist in future financial years, the carrying amount of the asset is increased to the net carrying value that the asset would have had if there had been no impairment loss and if the asset had been amortized. Trademarks are amortized on a straight-line basis over their estimated useful lives, ranging from 15 to 20 years. Software Software licenses acquired are capitalized on the basis of the costs incurred for their purchase and the costs necessary to make them serviceable. Amortization is calculated on a straight-line basis over their estimated useful lives (ranging from 3 to 5 years). Costs associated with software development and maintenance are recognized as costs in the period they are incurred. The direct costs include the costs for the personnel to develop the software. 87 Financial Statement for the year ended December 31,2014 Research & development costs Research and development costs for new products and/or processes are recognized as an expense as incurred unless they meet the conditions for capitalization under IAS 38. Impairment of tangible and intangible assets IAS 36 requires impairment testing of tangible and intangible assets when there is any indication that those assets have suffered an impairment loss. For intangible assets with an indefinite life, such as goodwill, testing for impairment is performed at least annually. The recoverable amount is determined by comparing the carrying amount of the asset with its fair value less costs to sell and value in use, whichever is greater. Value in use is determined on the basis of the present value of estimated future cash flows from operating activities. For purposes of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). If an asset’s recoverable value is less than its carrying value, the carrying value is reduced to its recoverable value. This reduction is an impairment loss that is recognized as an expense immediately. If there are indications that an impairment loss should be reversed, the recoverable amount of the asset is recalculated and the carrying value is increased to that new value. The increased carrying value must not exceed the net carrying value the asset would have had without any impairment loss. An impairment loss with respect to goodwill may not be reversed. Financial derivatives Derivative financial instruments are used by the Group solely for hedging purposes, in order to reduce Companies' exposure to currency risks. All financial derivatives are measured at fair value, in compliance with IAS 39. Under IAS 39, financial derivatives qualify for hedge accounting only if, at the inception of the hedge, there is formal designation and documentation of the hedging relationship, the hedge is expected to be highly effective, the effectiveness of the hedge can be reliably measured and the hedge is highly effective throughout the financial reporting periods for which the hedge was designated. If the hedge is effective, the following accounting policies apply: Fair value hedge – If a financial derivative is designated as a hedge of the exposure to changes in fair value of a recognized asset or liability due to a particular risk, and could affect profit or loss, the gain or loss from remeasuring the hedging instrument at fair value is recognized in the income statement. The hedged item is adjusted to fair value for the portion of risk hedged, and the adjustment is recognized in profit or loss; Cash flow hedge – If a financial derivative is designated as a hedge of the exposure to the future cash flow variability of a recognized asset or liability, the effective portion of changes in fair value of the financial derivative is recognized directly in equity. The cumulative gain or loss is reversed from equity and recognized in profit or loss in the period in which the hedged transaction is recognized. The profit or loss associated with a hedge (or part of a hedge) that has become ineffective is entered in the income statement immediately. If a hedged instrument or a hedging relationship is terminated, but the hedged transaction has not occurred yet, the cumulative gain or loss that has remained recognized in equity from the period when the hedge was effective is reclassified into profit or loss when the forecast transaction occurs. If the forecast transaction is no longer expected to occur, the related cumulative gain or loss that has remained recognized in equity is immediately recognized in the income statement; If hedge accounting cannot be applied, the gains or losses arising on changes in the fair value of the financial derivative are recognized immediately in the income statement. Fair value measurement The Group measures financial instruments (derivatives) at their fair values at the end of each reporting period. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that a transaction to sell an asset or to transfer a liability takes place: in the principal market for the asset or liability; or in absence of a principal market, the most advantageous market for the asset or liability. 88 Marcolin Group The principal market or most advantageous market must be accessible to the Group. The fair value of an asset or liability is measured adopting assumptions that market participants would use to determine the price of the asset or liability, assuming that they act to best satisfy their economic interest. Fair value measurement of a non-financial asset considers a market participant's capacity to generate economic benefits from the highest and best use of the asset or from the sale to another participant that can obtain its highest and best use. The Group uses valuation techniques appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or stated in the financial statements are categorized into the following levels of the fair value hierarchy: • Level 1 - quoted (unadjusted) prices in active markets for identical assets or liabilities that the entity can access at the measurement date; • Level 2 - inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; • Level 3 - valuation techniques for which the inputs are unobservable for the asset or liability. The fair value measurement is categorized entirely in the same level of the fair value hierarchy of the lowest level input used for measurement. For recurring assets and liabilities, the Group determines whether there have been any transfers between levels of the fair value hierarchy and reviews the categorization (based on the lowest level input that is significant to the entire measurement) at the end of each reporting period. Inventories Inventories are stated at the lower of average purchase or production cost and the corresponding estimated realizable value based on market prices. Estimated realizable value represents the estimated selling price in normal market conditions less all direct selling costs. Purchase cost was adopted for products purchased for resale and for materials directly or indirectly used, purchased and used in the production process, whereas production cost was adopted for finished and semi-finished products. Purchase cost is determined on the basis of the cost actually incurred, inclusive of directly attributable ancillary costs, including transport and customs expenses and excluding trade discounts. Production cost includes the cost of materials used, as defined above, and all directly and indirectly attributable manufacturing costs. Obsolete and slow-moving inventories are written down to reflect their useful life or realizable value. Financial assets – Loans and receivables Trade receivables, current loan receivables and other current receivables with fixed maturities, excluding those assets arising on financial derivatives and all financial assets for which prices on an active market are unavailable and whose fair value cannot be determined reliably, are stated at amortized cost calculated using the effective-interest method. Financial assets without fixed maturities are stated at cost. Receivables maturing after more than a year that do not accrue interest or that accrue interest at below-market rates are discounted using market rates and recognized as noncurrent assets. Reviews are carried out regularly to determine the presence of any objective evidence that the financial assets taken individually or within a group of assets may have suffered an impairment loss. If such evidence exists, the impairment loss is shown as a cost in the income statement for the period. Trade receivables are adjusted to their realizable value by means of a provision for irrecoverable amounts when there are objective indications that the Group will not be able to collect the receivable at its original value. Cash and bank balances Cash and bank balances include cash, demand deposits at banks and other highly liquid short-term investments, i.e. with an original duration of up to three months, and are stated at the amounts actually on hand at the reporting date. 89 Financial Statement for the year ended December 31,2014 Assets held for sale and related liabilities These items include non-current assets (or disposal groups of assets and liabilities) whose carrying value will be recovered mainly through sale rather than through continuing use. Assets held for sale (or disposal groups) are recognized at their net carrying value or fair value less costs to sell, whichever is less. If those assets (or disposal groups) should cease to be classified as assets held for sale, the amounts are not reclassified or presented for comparative purposes with the classification in the most recent Statement of Financial Position. Equity Share capital Share capital consists of the subscribed and paid-up capital. Direct issue costs of new share issues are classified as a direct reduction of equity after deferred taxes. Treasury shares Treasury shares are shown as a deduction of equity. The original cost of treasury shares and revenues arising on subsequent sale are recognized as changes in equity. The nominal value of the treasury shares owned is directly deducted from share capital, while the value exceeding the nominal value is used to reduce the treasury share reserve included in the retained earnings/(losses) reserves. Share-based payments (stock option plan) Currently there are no such payments. Employee benefits Post-employment benefit plans are classified, according to their characteristics, as either defined contribution plans or defined benefit plans. Defined benefit plans, such as that of the "fondo trattamento di fine rapporto" ("TFR", severance indemnity provision) in place until the 2007 Italian Financial Law became effective, are plans under which guaranteed employee benefits are paid upon termination of employment. The defined benefit plan obligation is determined on the basis of actuarial assumptions and is recognized on an accruals basis consistently with the employment service necessary to obtain the benefits; the obligation is measured annually by independent actuaries. The benefits accrued in the year, determined with actuarial methodology, are recognized in the income statement with the personnel costs, whereas the notional interest cost is recognized in net financial income/(costs). Actuarial gains and losses from changes in actuarial assumptions are recognized directly in the equity of the year they emerge, in accordance with Revised IAS 19, effective from January 1, 2013. On January 1, 2007, the 2007 Financial Law and related enactment decrees brought significant changes to employee severance indemnity regulations, including the possibility for the employee to choose, by June 30, 2007, how to allocate his or her accruing benefits. New accruing severance indemnities may be assigned by the employee to selected pension funds or kept within the company (in the latter case the company will pay the severance pay contributions into a treasury account held at the INPS). Pursuant to these changes, the severance indemnity provision accrued up to the date of the employee's decision (defined benefit plans) was recalculated by independent actuaries, excluding the component of future salary raises. Severance indemnities accruing from the date of the employee's decision, and in any case from June 30, 2007, are considered a defined contribution plan, so the accounting treatment is similar to that in effect for all other contribution payments. Provisions for risks and charges Provisions for risks and charges consist of allowances for present obligations (either legal or constructive) toward third parties that arise from past events, the settlement of which will probably require an outflow of financial resources, and the amount of which can be estimated reliably. Provisions are stated at the discounted best estimate of the amount the company should pay to settle the obligation or to transfer it to third parties as at the reporting date. Changes in estimates are reflected in the income statement of the period in which the change occurs. 90 Marcolin Group Risks for which the emergence of a liability is merely possible are identified in the section relating to commitments and guarantees without making any allowances for them. Trade payables and other non-financial liabilities Payables with settlement dates that are consistent with normal terms of trade are not discounted to present value and are recorded at their face value. Financial liabilities Borrowings (loans) are initially recognized at cost, corresponding to the fair value of the liability less their transaction costs. They are subsequently measured at amortized cost; any difference between the amount financed (net of transaction costs) and the nominal value is recognized in the income statement over the life of the loan, using the effective interest method. If there is a change in the anticipated cash flows and management is able to estimate them reliably, the value of borrowings is recalculated to reflect such changes. Loans are classified among current liabilities if they mature in less than 12 months from the end of the reporting period and if the Group does not have an unconditional right to defer their payment for at least 12 months. Loans are derecognized when they are paid off or when all risks and costs associated with them have been transferred to third parties. Revenues and income Revenues are measured at their fair value net of returns, sales, discounts, allowances, and bonuses. The Group recognizes sales revenues when all risks and rewards of ownership of the goods are effectively transferred to the customers under the terms of the sales agreement. The revenues are recognized net of an allowance representing the best estimate of lost margin due to any product returns from customers. The allowance is calculated based on past experience. Revenues are stated net of returns, discounts, vouchers, bonuses and taxes directly connected with the sale of the goods and supply of the services. Revenues from services are recognized by reference to the state of completion of the transaction at the end of the reporting period. Interest income is accrued on a time basis by reference to the effective interest rate applicable to the related asset. Dividends are recognized when the shareholder’s rights to receive payment are established. This normally occurs when the dividend distribution resolution is approved at the General Meeting. Cost of sales The cost of sales includes the cost of producing or acquiring the goods and products sold. It includes all the costs of materials, processing, and expenses directly associated with production. It also includes the depreciation of buildings, plant and equipment, the amortization of the intangible assets used in production and inventory impairment losses. Royalties The Group accounts for royalty expense on an accruals basis according to the substance of the agreements stipulated. Other costs The costs are recognized according to the relevance and matching principles. Financial income and costs Interest is accounted for according to the accrual concept on the basis of the interest rate established by contract. If not established by contract, interest is recognized using the effective interest method, i.e. using the interest rate that makes all inflows and outflows of a specific transaction financially equivalent. 91 Financial Statement for the year ended December 31,2014 Translation of foreign currency amounts Transactions in currency other than the Euro are translated into local currency using the exchange rates in force on the transaction date. Foreign exchange differences realized in the period are recognized in the income statement. Foreign currency receivables and payables are adjusted at the exchange rate in force on the reporting date, recognizing the entire amount of profit or loss arising on exchange as financial income or finance costs in the income statement. Income tax expense Income taxes are stated in the income statement, except for those regarding items recognized directly in equity, for which the tax effect is also recognized directly in equity. Deferred taxes are calculated on the temporary differences generated between the value of the assets and liabilities reported in the financial statements and the value attributed to those assets and liabilities for tax purposes. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which they may be recovered. The carrying value of deferred tax assets is reviewed at the end of each reporting period and, as necessary, is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Any such reductions are reversed if the conditions causing them should cease to exist. Deferred tax assets and deferred tax liabilities are measured at the tax rates that are expected to apply when the assets are realized or the liabilities are settled, considering the tax rates in force and those that have been enacted or substantially enacted by the reporting date. Other taxes not relating to income, such as property and equity taxes, are included in the operating items. 92 Marcolin Group FINANCIAL RISK FACTORS Financial risks Financial risk management is an integral part of the Marcolin group’s activities and is performed centrally by the Parent Company based on strategies to cover specific areas, i.e. through hedges of foreign exchange risks and risks deriving from fluctuations of interest rates. The Group also uses some derivative instruments to minimize the impact of such risks on its results. Although the derivatives were designated exclusively to hedge against the risk of exchange rate variability on purchases from suppliers in U.S. dollars, they do not qualify for hedge accounting because they do not fully meet the strict requirements, including formal ones, of the applicable accounting standard. Currency risk The Group operates on an international level, so it is exposed to foreign exchange risk (particularly as regards the U.S. dollar). Currency risk is managed centrally by the Parent Company, which examines and monitors fluctuations in the balances of its various foreign currency items in order to evaluate whether to apply hedges through dealings on the derivatives market. The Company has a specific policy in place for managing currency risk. This activity makes it possible to keep under control the main currency positions not covered by natural hedging. According to the sensitivity analysis performed, a change in exchange rates should not significantly impact the Group’s consolidated financial statements. Details of the hedging contracts in place on the reporting date are as follows. Currency hedges (euro/000) Type Financial Institution Notional Currency forward purchase Veneto Banca 1,000 Currency forward purchase Veneto Banca 1,000 Currency Maturity date Mark to Market USD 03.25.2015 94 USD 05.28.2015 89 The Group is exposed mainly with the U.S. dollar on purchases of finished and semi-finished products from suppliers in the Far East, net of the cash flows from sales conducted in U.S. dollar markets. The hedging instruments in place on December 31, 2014 have a fair value of euro 183 thousand, accounted for in "short-term borrowings" in these financial statements. To determine the fair value of the currency forwards purchased, the Group used valuation techniques that are appropriate in the circumstances and for which sufficient information is available on the market. Level 2 inputs of the fair value hierarchy defined by IFRS 7 are used in the valuation techniques. For the currency derivatives, the potential decrease in the fair value of the currency forwards held by the Group as at December 31, 2014, due to a hypothetical sudden adverse change of 5% in the Euroto-Dollar exchange rate (depreciation of the Dollar), would be euro 78 thousand. Conversely, the potential increase in fair value arising on appreciation of the Dollar would be euro 87 thousand. Interest rate risk As a result of the fixed-rate euro 200 million bond issue subscribed in November 2013, the Group's debt structure changed significantly, and the Group now has low interest rate risk. The section on liquidity risk provides a quantitative analysis of the Group's exposure to cash flow risk relating to interest rates on loans. Information on outstanding loans is provided subsequently in these notes. 93 Financial Statement for the year ended December 31,2014 Interest rate sensitivity analysis Interest rate sensitivity analysis was performed, assuming a 25 basis-point increase and a 10 basispoint decrease of the Euribor/Swap yield curves, published by Reuters for December 31, 2014. In this manner, the Group determined the impact that such changes would have on income and on equity. The sensitivity analysis excluded financial instruments that are not exposed to significant interest rate risk, such as short-term trade receivables and payables. The interest on bank borrowings was recalculated using the above assumptions and the investment position in the year, recalculating the higher/lower annual finance costs. For cash and bank balances, the average balance of the period was calculated using the book values at the beginning and end of the year. The effect on income of a 25 basis-point increase/10 basis-point decrease in the interest rate from the first day of the period was calculated on the amount thus determined. According to the sensitivity analysis performed on the basis of the above criteria, the Group is exposed to interest rate risk on its expected cash flows. If interest rates should rise by 25 basis points, income would decrease by euro 116 thousand due to higher interest expense with banks and third parties with respect to the increase in financial income on bank accounts. If interest rates should fall by 10 basis points, income would increase by euro 46 thousand. Credit risk The Group has no significant concentration of credit risk. Receivables are recognized net of writedowns for risk of counterparty default, calculated based on available information regarding the customer’s solvency and any useful statistical records. Guidelines have been implemented for managing customer credit, supervised by the designated business function (Credit Management), to ensure that sales are conducted only with reasonably reliable and solvent parties, and through the setting of differentiated credit exposure ceilings. Receivables and other current assets are set forth below by the main areas in which the Group operates in order to evaluate country risk. Receivables by geographical area and other current assets 12/31/2014 12/31/2013 Italy Rest of Europe 19,969 18,907 17,577 19,141 North America 26,959 25,854 Rest of World 29,653 21,919 (euro/000) Total 94,157 85,821 Liquidity risk Prudent management of liquidity risk entails keeping a sufficient level of liquidity and having sources of funding available to meet working capital requirements by means of adequate credit lines. Due to the dynamic nature of its business, the Group has always preferred the flexibility of obtaining funding through the use of credit lines. As noted in the Report on Operations, since 2013 the Parent Company has had a revolving credit facility of nominal euro 25 million available for short-term cash flow requirements. At present, based on its available sources of funding and credit facilities, the Group considers its access to funding to be sufficient for meeting the financial requirements of ordinary operations and for the capital expenditures planned. The types of credit lines available and the base rate on the reference date are reported herein. Liquidity analysis Liquidity analysis was performed on loans and trade payables. Principal repayments and nondiscounted interest were specified by time brackets. Future interest amounts were determined using 94 Marcolin Group forward interest rates taken from the spot-rate curve published by Reuters at the end of the reporting period. None of the cash flows included in the table were discounted. Within 1 year From 1 to 3 years Loans and bonds (excluding capital lease) 40,227 4,478 193,107 - Interest expense on loans and bonds 17,486 34,252 34,101 - 1,126 1,566 (euro/000) Capital lease Trade payables From 3 to 5 More than 5 years years - 102,322 - - - - Fair value measurement of loans For the fair value measurement of loans, future cash flows were estimated using implicit forward interest rates from the yield curve of the measurement date, and the latest Euribor fixing was used to calculate the current coupon. The values calculated in this manner were discounted based on discount factors related to the different maturities of such cash flows. Borrowings-maturity (euro/000) Within 1 year Credit lines used Loans 2,283 - 8,951 Other financiers 6,472 From 1 to 3 years - From 3 to 5 More than years 5 years - - 0 4,163 Credit lines used Loans 8,951 2,283 712 191,017 Intercompany 12/31/2013 Total 202,363 - 191,017 213,597 15,039 17,707 4,162 - - 712 - 15,039 21,244 2,450 1,250 - 24,944 Other financiers 5,070 3,537 191,914 - 200,521 12/31/2014 41,353 - 240,504 5,988 193,164 USE OF ESTIMATES The preparation of consolidated financial statements requires making estimates that could affect the carrying value of some assets, liabilities, income and expenses, and disclosures concerning contingent assets and liabilities at the reporting date. Estimates were used mainly to determine the recoverability of intangible assets, the useful lives of tangible assets, the recoverability of receivables (including deferred tax assets), the valuation of inventories and the recognition or measurement of provisions. The estimates and assumptions are based on data that reflect currently available information. The estimates and assumptions that involve a significant risk of changes in the carrying values of assets and liabilities are described hereunder. Goodwill Pursuant to IAS 36, the Group performs impairment tests annually. Recoverable values are calculated based on "value in use". The calculations require using estimates of the future performance of the cash-generating units (CGUs) to which goodwill belongs (business plan forecasts), the discount rate (WAAC) and the prospective growth rate to be applied to the forecast cash flows (“g” rate). 95 Financial Statement for the year ended December 31,2014 Impairment of non-current assets When there is indication that the net carrying value could exceed the recoverable value, non-current assets are reviewed to determine whether they have suffered impairment losses, in accordance with the accounting standards adopted. The recoverable amount is analyzed by comparing the carrying amount of the asset with its fair value less costs to sell and value in use, whichever is greater. If any such indication exists, management is required to perform subjective evaluations based on information available within the Group and on the market, and based on the management's knowledge. If indications of impairment should exist, the Group calculates the potential impairment using the valuation techniques it considers to be the most appropriate. Proper identification of impairment indications and estimates of potential impairment are dependent on factors that may vary over time, affecting the measurements and estimates made by management. Provision for doubtful debts The provision for doubtful debts reflects management’s estimates of future losses on trade receivables. The Group estimates the provision for doubtful debts on the basis of expected losses, determined according to knowledge of the customer, past experience for similar receivables, current and historic past-due receivables, losses and collected receivables, careful monitoring of credit quality and forecasts of economic and market conditions. Provision for inventory impairment The provision for inventory impairment reflects management’s estimates regarding the losses expected by the Group, determined on the basis of past experience and both past and anticipated market trends. Deferred tax assets Recognition of deferred tax assets is based on expectations of profits in future years. Estimates of future earnings used to recognize deferred tax assets are dependent on factors that may vary over time and significantly affect estimates of deferred tax assets. 96 Marcolin Group ANALYSIS OF CONSOLIDATED FINANCIAL POSITION Comments and the most significant changes in the items compared to the consolidated financial statements for the year ended December 31, 2014 are described hereunder (the amounts are in thousands of euros, unless specified otherwise). BUSINESS COMBINATIONS Acquisition of Viva International group As described in the Report on Operations, in December 2013 the Marcolin group, through Marcolin USA, Inc., acquired the Viva International group, one of the most important eyewear businesses in the U.S. market. The acquisition date is December 3, 2013. After carrying out the preliminary and preparatory activities, the acquisition, which received antitrust approval from the U.S. Federal Trade Commission, was completed by Marcolin USA, Inc., which became the owner of the entire share capital of Viva Optique, Inc. (Parent Company of the acquired group) as at December 31, 2013. According to IFRS 3, "Business Combinations", this acquisition consisted of a business combination, and as such was accounted for with the acquisition method. As permitted by IFRS 3, given the significance of the acquisition and the proximity to the 2013 reporting date, the initial accounting for the business combination was determined only provisionally in the financial statements for the year ended December 31, 2013, and goodwill was determined on the basis of provisional, partial identification of the fair values of the acquired assets, liabilities and contingent liabilities. During 2014, the above business combination was definitively accounted for with respect to the identification and measurement of the assets and liabilities acquired. The business combination disclosures required by IFRS 3 are provided hereunder. Combining entities The combining entities are Marcolin USA, Inc., the acquirer, and the Viva International group, the acquiree group of companies. The following table sets forth the acquired companies and the percentage of equity instruments with voting rights acquired directly by Marcolin USA, Inc. as at December 31, 2013: Com pany Viva Optique Inc d/b/a Viva International Group Viva IP Inc Viva International Inc - in liquidazione Viva Europa Inc Viva Canada Inc Viva Optique de México SA de CV Miracle Optics Inc - in liquidazione Viva Eyew ear UK Ltd Viva Italia Srl - in liquidazione Viva Eyew ear Hong Kong Ltd Viva Brasil Comércio de Produtos Opticos Ltd Viva France Sas Viva Eyew ear Australia Pty Ltd Viva Schw eiz AG Viva Netherlands B.V. Viva Deutschland Gmbh Viva Eyew ear Brillenvertriebs Gmbh Registered Offices U.S. (New Jersey) U.S. (New Jersey) U.S. (New Jersey) U.S. (New Jersey) Canada Messico U.S. (California) UK Italia Hong Kong Brasile Francia Australia Svizzera Paesi Bassi Germania Austria Currency Share Capital USD USD USD USD CAD MXN USD GBP EUR HKD BRL EUR AUD CHF EUR EUR EUR 121,872,715 10,000 347,640 3,694,685 93,600 100 798,560 37,000 1,000,000 50,000 18,000 25,000 35,000 % ow nership Direct Indirect 100% 100% 100% 100% 100% 50% 100% 100% 100% 100% 100% 50% 50% 50% 50% 50% 97 Financial Statement for the year ended December 31,2014 Cost of business combination The cost of the business combination was euro 117.297 million, represented by the sum of acquiree equity instruments acquired. It is detailed below (amounts in thousands of euros): (curr/000) Corresponding amount paid by Marcolin USA Inc. at closing on Dec.3, 2013 Other corresponding amounts paid by Marcolin USA Inc. at closing on Dec.3, 2013 Price paid though 3Cime SpA at closing on Dec.3, 2013 Deferred price to be paid to HVHC Inc. after Dec.31, 2013 Purchase price EUR USD 85,689 1,841 22,095 7,672 117,297 116,348 2,500 30,000 10,417 159,266 Transaction costs were recognized in the income statement of the year they were incurred (in accordance with the applicable accounting standard). Fair value of acquired assets, liabilities and contingent liabilities The fair value of the net acquired assets is euro 38.977 million, detailed as follows (in thousands of euros): 98 Marcolin Group (curr/000) Assets Non-current assets Property, plant, and equipment Intangible assets Goodw ill Investments Deferred tax assets Total non-current assets Definitive Fair Value EUR Definitive Fair Value USD 3,184 9,383 1,950 9,846 24,363 4,323 12,740 Carrying Value in Viva Goup Statem ents EUR Carrying Value in Viva Goup Statem ents USD 2,648 13,368 33,080 3,724 14,781 65,793 1,950 3,005 89,254 5,056 20,069 89,334 2,648 4,080 121,189 21,187 22,462 1,483 13,404 58,536 82,899 28,767 30,499 2,014 18,200 79,480 112,560 25,865 23,114 1,483 13,404 63,866 153,120 35,119 31,384 2,014 18,200 86,717 207,906 2,069 2,809 2,069 2,809 634 326 560 3,589 861 442 761 4,873 184 1,939 4,191 250 2,632 5,691 Current liabilities Trade payables Current financial liabilities Current liabilities Current tax liabilities 18,420 675 11,901 2,443 25,011 916 16,159 3,317 18,420 675 5,378 2,443 25,011 916 7,302 3,317 Other current liabilities Total current liabilities Total liabilities Acquired net assets 6,895 40,334 43,923 38,977 9,362 54,765 59,638 52,922 6,895 33,811 38,002 115,118 9,362 45,908 51,599 156,307 Current assets Inventories Trade and other receivables Other current assets Cash and bank balances Current financial assets Total current assets Total assets Liabilities Non-current liabilities Non-current financial liabilities Non-current provisions Deferred tax liabilities Other non-current liabilities Total non-current liabilities Goodwill recognized pursuant to the business combination Goodwill of euro 78.320 million (as at December 3, 2013) emerged as the difference between the cost of the business combination and the acquirer's interest in the net fair value of the acquired assets and liabilities, as shown in the table below: (curr/000) Net fair value at acquisition date Minority interest Net fair value acquisition date Purchase price Goodw ill EUR USD 38,977 38,977 117,297 52,922 52,922 159,266 78,320 106,343 The goodwill represents the future economic benefits arising from the business combination, due primarily to the Viva group's legacy of expertise and know-how developed over the years; they form a potential contribution to future earnings and generation of cash flows deriving from the ability to satisfy customer demands, quantifiable in terms of higher profitability and cash flows. 99 - Financial Statement for the year ended December 31,2014 Future economic benefits are assured by the Viva group's collective business strategies and information regarding licensor relationships, relationships with the distribution network in the American market, products distributed and customer demands, implemented in the past in order to gain esteem and win over new customers and markets. This intangible legacy of practical knowledge summarizes the business know-how of the group acquired. Acquisition of Sover-M On December 15, 2014 in Moscow, Marcolin SpA signed a joint-venture agreement with Victoria Chizhova, Founder and General Manager of Sover-M, a well-established business operating in the Russian eyewear market As of December 31, 2014 Marcolin controlled 51% of Sover-M, based in Moscow. The Russian company's share capital on that date was 306 thousand rubles, and its equity was 130.893 million rubles. The financial statements are presented in Russian rubles. Goodwill recognized pursuant to the business combination Goodwill of euro 610 thousand (as at December 31, 2014) emerged as the difference between the cost of the business combination and the acquirer's interest in the net fair value of the acquired assets and liabilities, resulting from the difference between the euro 1.532 million price paid and the corresponding interest in equity of euro 922 thousand, translated at the December 31, 2014 exchange rate. The goodwill represents the future economic benefits arising from the business combination, due primarily to the company's legacy of expertise and knowledge of the local market. The joint venture is part of Marcolin's international expansion plan, which by increasing the distribution of its products in Russia to satisfy customer demands, creates the basis for direct, effective management of the Russian market, representing a potential contribution to future profitability and to the generation of cash flows, quantifiable in terms of higher earnings and cash flows. The fair value of the net acquired assets was determined only provisionally, so the respective definitive values and value attributed to goodwill could differ from the values reported at this reporting date. 1. PROPERTY, PLANT, AND EQUIPMENT The composition of and annual changes in the item are set forth below: Property, plant and equipement Land and buildings Plant and machinery Industrial and commercial equipment Other PP & E Assets under contrstruction 13,907 1,361 50 (1,358) 215 4,688 1,391 (979) 0 973 1,208 1 (794) 50 3,286 1,558 (440) (1,205) 149 103 661 (60) - Total (euro/000) Net value at beginning of 2014 Increases Decreases Depreciation Translation difference Fair Value revaluations Im pairment Reclassification and other movements Net value at end of 2014 (34) 14,141 14 5,114 114 1,552 (123) 3,225 1 22,957 6,179 (450) (4,336) 414 1 (79) 625 (108) 24,657 The Group's 2014 capital expenditures totaled euro 6.179 million: • • • 100 the increase of euro 1.361 million for land and buildings refers primarily to the Fintec building purchased for euro 380 thousand and to office renovation totaling euro 600 thousand by Marcolin France, Marcolin Brazil and Marcolin UK HK Branch; plant and machinery purchases of euro 1.391 million refer to industrial plant and machinery purchased by the Parent Company to renew production lines; equipment purchases of euro 1.208 million refer mainly to the Parent Company; Marcolin Group • • other purchases totaling euro 1.558 million, mainly consist of computer hardware for euro 907 thousand, office furniture for euro 287 thousand and exhibition stands for 314 thousand; the euro 661 thousand increase in assets under construction and advances refers largely to the downpayment of euro 380 thousand on the Fortogna building; the rest refers to advances for plant and equipment purchases. Depreciation is euro 4.336 million and consists of: • euro 2.031 million recognized in the components of cost of sales; • euro 819 thousand recognized in distribution and marketing expenses; • euro 1.486 million recognized in general and administration expenses. The undepreciated values of property, plant and equipment and their accumulated depreciation as at December 31, 2014 are shown in the following table: Property, plant and equipement Land and buildings Plant and machinery Industrial and commercial equipment Other PP & E 29,128 (14,987) 19,682 (14,568) 14,412 (12,860) 12,726 (9,501) 625 76,573 (51,916) 14,141 5,114 1,552 3,225 625 24,657 Total Goodwill 29,341 10,552 (28) (4,571) 266,833 - 107 1,862 610 10,569 (48) 210 57 37,213 (3) 278,010 Assets under contrstruction Total (euro/000) Undepreciated value Accumulated depreciation Net Value 2. INTANGIBLE ASSETS AND GOODWILL The composition of and changes in this item are set forth below: Software Concessions, licenses and trademarks Other Intangible assets under formation and advances 1,567 3,633 (16) (1,143) 25,983 10 (277) 1,744 6,792 (3,151) 46 117 (12) - (142) 0 1,266 2,907 6,807 (14,802) 12,180 Intangible assets and goodwill (euro/000) Net value at beginning of 2014 Increases Decreases Amortization Increases from Business Combination (Sover-M) Translation difference Reclassification and other movements Net value at end of 2014 630 12,000 18,015 The annual increase of euro 10.552 million is attributable mainly to the following: • other intangible assets include, among the other, lump sums paid by the Parent Company to some licensors to extend licenses; • software of euro 3.633 million for new business application and their implementation, euro 922 thousand of which refers to the Parent Company and euro 2.711 million to Viva Optique. Amortization is euro 4.571 million and consists of: - euro 60 thousand recognized in the components of cost of sales; - euro 4.009 million recognized in distribution expenses; - euro 798 thousand recognized in general and administration expenses. The unamortized value of intangible assets and goodwill and their accumulated amortization as at December 31, 2014 are shown in the following table: 101 Financial Statement for the year ended December 31,2014 Intangible assets and goodwill (euro/000) Undepreciated value Accumulated depreciation Net Value Total Software Concessions, licenses and trademarks 17,504 (10,696) 17,260 (5,080) 6,807 12,180 Other Intangible assets under formation and advances 12/31/2014 Goodwill 29,121 (11,106) 210 - 64,095 (26,882) 278,010 - 18,015 210 37,213 278,010 Goodwill, which is affected by translation differences attributable to the Viva International acquisition, increased by euro 610 thousand in the year (for provisional goodwill regarding the new acquisition of Sover-M in Russia). Goodwill was tested for impairment to assess the fairness of the carrying amount as at December 31, 2014. The recoverable amount of goodwill was estimated using the Marcolin group's value in use, and was taken as the enterprise value emerging from the application of the unlevered free cash flow method to the projected cash flows of the Marcolin group's continuing operation (including Viva International cash flows). The following assumptions were made to determine value in use: • • • • the cash-generating unit was identified in the Marcolin group (cash flows from projected operating/financing activities of Marcolin S.p.A. and its Italian and foreign subsidiaries); The new organizational structure resulting from Viva International integration represents the full integration of all Viva structures into Marcolin; Viva's previous structures lost their identity in the integration process through acquisitions, mergers and business division transfers conducted within the vast international reorganization of the Group, which is now managed as a single unit coordinated by the Parent Company using a centralized model; the main data sources used were the Group's 2015 - 2017 business plan projections, the consolidated financial statements for the year ended December 31, 2013, the draft financial statements for the year ended December 31, 2014, and the 2015 Budget; the 2015 - 2017 business plan was approved by the Parent Company's Board of Directors on February 26, 2015; the terminal value was calculated by capitalizing the available cash flow expected perpetually from 2018 (estimated on the basis of the last year in the business plan, given an increase in the "g" rate from the last year stated). It has been assumed that it will grow at a "g" rate of 2.3%, conservatively considering the inflation projections for the countries in which Marcolin is present. The terminal value was adjusted to account for the Parent Company's transfer of the provision for severance indemnities; the cash flow discount rate (WAAC) is 8.8%, calculated in line with the Capital Asset Pricing Model (CAPM) used for valuation in doctrine and in standard practice. This rate reflects current market estimates referring to: 1) the cost of capital for debt (Kd = 3.0%, after taxes); 2) the expected return on the risk capital invested in Marcolin (Ke = 9.6%), weighted considering the source of the Group's main cash flows. Weighted Kd/Ke was determined under the applicable accounting standards by considering the average financial structure of Marcolin's main comparables, assuming that the value of the entity's projected cash flows does not derive from its specific debt/equity ratio. Based on the results of the analysis performed, goodwill did not suffer any impairment losses. Moreover, sensitivity analysis was performed on the Group's enterprise value, determined with the previously described methods, assuming: • changes in WAAC; • changes in the g rate. In this case, a half-percentage point increase in WAAC would result in a euro 41 million decrease in the enterprise value (given the same g), whereas a half-percentage point decrease in the g rate would 102 Marcolin Group result in an euro 37.9 million decrease in the enterprise value (given the same WAAC). In both cases no impairment losses would affect the Profit and Loss. In the case of conservative 100 bp reductions of WAAC and the "g" rate, the impairment test and sensitivity analysis results produced recoverable amounts in line with the invested capital presented at December 31, 2014 for the Marcolin group, without any impairment losses, even considering the combined reduction of such parameters. In addition, a stress test was performed assuming higher capital expenditures than those budgeted, and estimating possible cash outflows that the Group could incur to renew certain licenses upon their expiration. The stress test confirmed that the coverage amounts remain positive, with broad safety margins. Accordingly, it is reasonable to conclude that the carrying value of goodwill stated in the December 31, 2014 financial statements is consistent with its fair value. Concessions, licenses and trademarks include the Web trademark. This asset, which was obtained in November 2008 for euro 1.8 million and whose purchase price was determined by an independent professional appraiser, is amortized over 18 years. Concessions, licenses and trademarks also include euro 10 million for an option that will enable the Group to extend a licensing agreement beyond its expiration date (2015) to December 2022. This cost will be amortized over 7 years starting from 2016. 3. INVESTMENTS IN ASSOCIATES The investments in associates, totaling euro 1.877 million, consist primarily of investments in noncontrolled companies of the Viva group, including euro 799 thousand in Viva Australia (a 50%-owned distributor), euro 796 thousand in Viva Mexico (50%-owned), euro 118 thousand in Viva Schweiz and euro 109 thousand in Viva Germany (50%-owned). 4. DEFERRED TAX ASSETS AND LIABILITIES The net deferred tax assets as at December 31, 2014 are euro 31.149 million (euro 26.902 million in 2013), the balance of euro 38.536 million in deferred tax assets and euro 7.387 million in deferred tax liabilities. The amount is primarily attributable to the Parent Company, for euro 9.555 million (euro 11.331 million in 2013), followed by Marcolin U.S.A. for euro 8.381 million (euro 6.385 million in 2013), Viva group subsidiaries for euro 10.032 million (euro 1.328 million in 2013) and Marcolin France for euro 1.278 million (euro 1.431 million in 2013). The amount refers to: • euro 18.711 million (euro 2.023 million referring to the Parent Company) in temporary differences generated between the value of the assets and liabilities reported in the financial statements and the value attributed to those assets and liabilities for tax purposes; • euro 12.438 million (euro 7.534 million referring to the Parent Company) in deferred tax assets recognized on tax losses generated in periods before 2014. Recognition of deferred tax assets was made possible by the prospect of realizing the assets due to the expectation of future taxable profits according to the business plans prepared by the Group. More information is provided in Note 28, regarding income taxes. 5. OTHER NON-CURRENT ASSETS 103 Financial Statement for the year ended December 31,2014 The balance at December 31, 2014 is euro 846 thousand (euro 870 thousand in 2013), and refers primarily to prepaid commissions on the Parent Company's euro 25 million senior revolving credit facility. 6. NON-CURRENT FINANCIAL ASSETS This item amounted to euro 5.455 million on December 31, 2014, and refers primarily to: • euro 5.232 million for a loan granted by the Parent Company to a third party, on which interest accrues at market rates and whose repayments are due from January 1, 2013 (in semiannual installments until 2022); • the remaining balance on a similar loan granted by Marcolin USA is recognized among current financial assets because the repayments commenced in 2013 and will end in 2015. 7. INVENTORIES Inventories are detailed below: Inventories 12/31/2014 12/31/2013 Finished goods 96,745 76,400 Raw material 17,927 10,509 Work in progress 11,633 9,991 Gross inventory Inventory provision 126,305 (26,230) 96,901 (28,600) Net inventory 100,075 68,301 (euro/000) Net inventories rose by euro 31.774 million from the previous year. The increase in closing inventories is attributable to an increase in “current” finished product inventories, due to higher sales and management's decision to improve customer service by reducing delivery time and investing in supplies of continuing products (to be “never out of stock”). In contrast, inventories of products from former collections (obsolete and slow-moving stock) fell considerably from those of 2013. The inventory increase is also attributable to discontinuity represented by products with new brands, particularly Zegna and Pucci, which will be launched shortly, and to the expansion of collections offered and models produced; The euro 29.404 million increase in gross inventories is attributable to: • finished products, up by euro 20.345 million due to articles of new collections and new brands, mainly in the luxury segment, in order to satisfy the order increase; • raw materials and semi-finished goods, up by euro 7.418 million to satisfy the order increase and improve service; • work in progress, up by euro 1.642 million, reflecting the greater production needed to meet the order increase. The inventory impairment provision provides adequate coverage for obsolete and slow-moving inventory, taking into account the composition of and possibility to sell such inventory. The inventory impairment provision has fallen as a percentage of gross inventories due to the scrapping of obsolete components. 8. TRADE RECEIVABLES The composition of the trade receivables is as follows 104 Marcolin Group Trade receivables 12/31/2014 12/31/2013 Gross trade receivables 86,374 77,818 Provision for bad debts (5,798) (5,991) Net trade receivables 80,576 71,827 (euro/000) Gross trade receivables rose by euro 8.556 million. They were largely affected by the increased sales, and particularly by the acceleration of business at the end of 2014 due to a concentration of deliveries at the end of the year. Credit quality remained consistent with that of recent years. In 2014 the recent improvement in the average collection period, or "days sales outstanding" (DSO), lost momentum, but the extreme emphasis on credit management and client selection made it possible to keep the DSO, up by 2 days, under control even with difficult markets and rising sales. The amount of receivables recognized was not discounted, since all receivables are due within 12 months. Trade receivables not past-due are set forth below by geographical area (IFRS 7) below: Receivables not overdue by geographical area 12/31/2014 12/31/2013 (euro/000) Italy Rest of Europe 11,382 13,546 8,560 12,428 North America Rest of World Total 16,516 23,497 64,941 18,325 16,756 56,070 The following table shows the undisputed trade receivables due and past due (in an aging analysis): Ageing analysis of trade receivables not protested Gross Provision Net value (euro/000) December 31, 2013 Not past due Past due by less than 3 months Past due by 3 to 6 months Past due by more than 6 months 56,070 13,235 3,097 2,888 (146) (372) (721) (1,571) 55,924 12,862 2,376 1,316 Total 75,289 (2,810) 72,479 64,941 11,336 3,762 3,482 83,521 (34) (428) (573) (2,178) (3,213) 64,907 10,909 3,189 1,304 80,308 December 31, 2014 Not past due Past due by less than 3 months Past due by 3 to 6 months Past due by more than 6 months Total In some markets in which the Group operates, receivables are regularly collected after the date stipulated by contract, without this necessarily indicating collection issues or financial difficulties. Consequently, there are trade receivable balances that were not considered impaired even though they were past due. The balance of these trade receivables is set forth in the table below by past-due category: 105 Financial Statement for the year ended December 31,2014 Trade receivables overdue but not impaired 12/31/2014 12/31/2013 (euro/000) Past due by less than 3 months 10,324 12,862 Past due by more than 3 months 4,213 3,693 14,536 16,555 Total For the sake of exhaustive disclosure, an aging analysis of disputed receivables and the related writedowns is set forth below: Ageing analysis of protested trade receivables (euro/000) Gross value Provision Net value December 31, 2013 Past due by less than 12 months 210 (210) - Past due by more than 12 months 2,367 (2,329) 38 Total December 31, 2014 2,577 (2,539) 38 Past due by less than 12 months 139 (98) 41 Past due by more than 12 months 2,714 (2,487) 227 Total 2,853 (2,586) 268 The changes in the provision for doubtful debts are set forth below: Provision for doubtful debts 12/31/2014 12/31/2013 Opening amount Increases from Business Combination (Viva) Provisions Use / reversal Reclassification and others Translation difference 5,991 494 (660) (370) 344 4,731 1,062 450 (730) 612 (134) Period end Total 5,798 5,991 (euro/000) The provision for doubtful debts decreased by euro 192 thousand from the prior year. The provision is deemed adequate for presenting receivables at their estimated realizable value given their composition and age and the related guarantees. Some trade receivables are covered by the types of guarantees typically used for sales on international markets. 9. OTHER CURRENT ASSETS The composition of other current assets is shown below: Other receivables 12/31/2014 12/31/2013 Tax credits 8,414 6,765 Other receivables 3,660 6,225 Other 2,024 1,004 14,098 13,994 (euro/000) Total other receivables 106 Marcolin Group This item, euro 14.099 million (euro 13.994 million in 2013), presents a decrease of euro 105 thousand from the prior year. As noted, in 2014 Marcolin S.p.A. and Italian companies Eyestyle Retail and Eyestyle.com adopted the Italian tax consolidation regime for corporate income tax (IRES) purposes, which recognizes 3 Cime S.p.A. as the ultimate parent company. The balance of other receivables consists mainly of receivables of euro 2.597 million due from 3 Cime S.p.A. for the tax consolidation income accrued on the annual tax losses considered recoverable. Tax credits increased by euro 1.649 million mainly on account of the higher tax advances paid during the year by Marcolin USA and Viva Optique. 10. CURRENT FINANCIAL ASSETS This item, euro 2.042 million at December 31, 2014 (euro 1.759 million in 2013), includes the euro 1.859 million portion currently due on a loan granted by Marcolin USA to a third party on which interest accrues at market rates, and the euro 182 thousand mark-to-market value of the hedging instruments used by the Parent Company. 11. CASH AND BANK BALANCES This item represents the value of cash deposits and highly liquid financial instruments, i.e. those with a maturity of up to three months. It fell by euro 1.602 million in the period. The change in this item is described in the consolidated statement of cash flows, which provides information on the 2014 movements in cash and bank balances. 12. EQUITY The Parent Company’s share capital is euro 32,312,475 and is composed of 61,458,375 ordinary shares without par value. The composition of share capital did not change in 2014. The consolidated statement of changes in equity provides more detailed information on this item. 13. NON-CURRENT FINANCIAL LIABILITIES This item, euro 199.152 million, was euro 195.891 million at the end of 2013; it has increased by euro 3.261 million. The difference is due primarily to an increase in financial payables of euro 1.994 million, and euro 1.267 million for the annual deferred transaction cost on the bond issue (under the amortized cost method). The liability consists mainly of the bond notes issued by the Parent Company, subscribed for a 14 nominal euro 200 million in 2013. 14 The notes, which have a six-year maturity and provide for voluntary early redemption, were issued in a single tranche on November 14, 2013. The key features are summarized below: Purchasers: the notes may be offered and placed (1) in the United States, solely with qualified institutional buyers pursuant to Rule 144A of the U.S. Securities Act; (2) in Europe and in Italy solely with qualified investors pursuant to Directive 2003/71/EC, as subsequently amended and integrated, Italian Legislative Decree 58/1998 and CONSOB Regulation 11971/1999 for Issuers, unless in circumstances which are exempt from public offer rules. Listing: (1) on the Luxembourg Stock Exchange for trading on the Euro MTF Market, and (2) with Borsa Italiana S.p.A. for trading on the extramot pro multilateral trading facility. Issue Price: 100% (one hundred percent) of the nominal value of the notes, plus any accrued interest from the issue date. Maturity Date: November 15, 2019. 107 Financial Statement for the year ended December 31,2014 The notes issued, maturing in 2019, were classified as medium/long-term liabilities, and the related payable was accounted for in accordance with IAS 39 (amortized cost) in order to defer the transaction costs pertaining to future periods and to recognize them with the effective interest rate method. As noted, within the scope of the refinancing transaction, a super senior revolving credit facility was granted, for a maximum amount of euro 25 million, by Banca IMI S.p.A., IKB Deutsche Industriebank AG, Natixis S.A., UniCredit S.p.A. and Goldman Sachs, to be used for ordinary cash flow demands. The credit facility had used for euro 20 million at the end of 2014. With respect to this financing, costs (totaling euro 635 thousand) were deferred, including euro 108 thousand pertaining to 2014. Ministry of productive activities (technological innovation) BOND Intesa San Paolo S.p.A., Goldman Sachs International, IKB Deutsche Industrie Bank AG, Natixis S.A., Unicredit S.p.A. Unicredit S.p.A. Currency Original amount (euro) Residual amount (euro) Maturity date Interest rate euro 793,171 165,087 06.26.2016 1.012% euro euro euro 200,000,000 20,000,000 5,000,000 200,000,000 20,000,000 5,000,000 11.14.2019 06.03.2019 12.31.2018 8.5% Notes Subsidized loan obtained under the law 46/82, repayable in 10 annual installments from June 26, 2007 Bond issued the 14th November 2013 - Half-yearly interests in 15th of May and 15th of November Super Senior RCF - Revolving Eurib or 1/2/3 facility agreement - Euro months + 25.000.000 - signed the 18th spread 4% November 2013 Eurib or 3 months + spread Loan guaranteed by SACE, granted on December 18, 2014, repayable in 16 quarterly installments from March 31, 2015 For the sake of exhaustive disclosure, the net financial position is set forth below. More information is provided in the Report on Operations. Net financial position / (indebtedness) 12/31/2014 12/31/2013 Cash and cash equivalents Financial receivables Short-term borrowings Current portion of long-term borrowings Long-term borrowings 36,933 7,497 (40,021) (1,332) (199,152) 38,536 8,890 (17,626) (81) (195,891) Total (196,074) (166,172) (euro/000) In additional to the commitments described subsequently (see Note 20), for the Revolving Credit Facility commitments to comply with financial covenants exist at a consolidated level for Marcolin S.p.A. and its subsidiaries. According to an analysis conducted at the time of preparation of this report, the covenants were complied with as at December 31, 2014. Form: notes issued in registered form represented by (1) a global certificate representing the notes issued pursuant to Regulation S of the 1933 U.S. Securities Act, and (2) a global certificate representing the notes issued pursuant to Rule 144A of the 1933 U.S. Securities Act. Interest Rate: annual fixed rate of 8.5% (eight point five percent), payable semi-annually. Interest Payment Dates: May 15 and November 15 of each year, from May 15, 2014 to the maturity date. 108 Marcolin Group 14. NON-CURRENT PROVISIONS 15 This item amounts to euro 8.919 million (euro 18.287 million. million in 2013), a decrease of euro 9.368 The amounts of the long-term provisions and the relevant changes are shown below: Long term provision (euro/000) Provision for severance employee indemnities Provision for agency terminations Provision for other risks Total 3,391 83 (122) 326 - 1,711 0 (67) 35 37 (25) 13,186 1,089 (12,147) 20 1,402 18,287 1,172 (12,335) 361 57 1,377 3,551 8,919 12/31/2013 Allowances Use / reversal Actuarial loss / (gain) Translation difference Other changes 12/31/2014 3,678 1,690 The employee severance indemnity provision ("TFR") recognized in the Parent Company's financial 16 statements for euro 3.269 million , was measured with an actuarial calculation at the end of the 17 year. The additional information required under Revised IAS 19 is provided hereunder: • sensitivity analysis of each significant actuarial assumption at the end of the year, showing effects of changes in actuarial assumptions reasonably possible at that date, in absolute terms; • next year's service cost; • the average vesting period of the defined benefit obligation; • payments foreseen under the plan. Sensitivity analysis DBO* at 12/31/2014 Inflation rate +0.25% Inflation rate - 0.25% Actuarial rate +0.25% Actuarial rate - 0.25% Turnover rate -1% Turnover rate +1% 3,717 3,619 3,590 3,749 3,636 3,703 * Defined Benefit Obligation Next year service cost Vesting period 2015 Service Cost Resting period 15 0.00 9.2 It is affected by reclassification, specifically for euro 1.154 million from a provision for risks and charges deemed non-current. 16 The provision consists of the benefits that accrued to employees until December 31, 2006 to be paid upon or subsequent to termination of employment: the TFR accruing from January 1, 2007 is treated as a defined contribution plan. By paying the contributions into (public and/or private) social security funds, the Company complies with all relevant obligations. 17 The parameters used for the actuarial calculation are: 1) mortality rate: Table RG 48 of the Public Accounting Office; 2) disability rates: INPS table by age and gender; 3) personnel turnover rates: 5%; 4) frequency of severance payments: 2%; 5) discount/interest rate: 0.91%; 6) TFR growth rate: 1.95% for 2015, 1.2% for 2016, 1.5% for 2017 and 2018, 2% for 2019 on; 7) inflation rate: 1.95% for 2015, 2.4% for 2016, 2.625% for 2017 and 2018, 3% for 2019 on. 109 Financial Statement for the year ended December 31,2014 Years Payments foreseen 1 2 3 4 5 343 246 227 235 202 The provision for agency termination presents the liability with respect to agents, and is calculated in accordance with the applicable regulations. Finally, the provision for other risks presents the estimated amount, in a medium/long-term time horizon, of the potential losses regarding some licenses, calculated on the basis of future earnings projections, given the expected turnover growth and related contractual obligations. The provision was used following to the materialization of the conditions for its adjustment, on the basis of the best available information. 15. OTHER NON-CURRENT LIABILITIES At the end of the period the amount of other non-current liabilities was euro 4.742 million (compared to the euro 3.954 million of 2013), an increase of euro 788 thousand year on year, primarily concerning other non-trade payables due after 12 months by Viva Optique. 16. TRADE PAYABLES The following table sets forth the trade payables by geographical area: Trade payables by geographical area 12/31/2014 12/31/2013 Italy Rest of Europe 30,654 17,939 9,946 8,554 North America 19,047 20,708 (euro/000) Rest of World Total 42,652 102,299 17,509 64,711 The euro 37.059 million increase in trade payables is attributable to the inventory increase of the last quarter of the year, supporting the sales growth. The average payment period for suppliers, or days payable outstanding (DPO), improved considerably, in the Parent Company's case from 114 to 141 days. The recognized trade payables were not subject to discounting, as the amount is a reasonable representation of their fair value in consideration of the fact that there are no payables due beyond the short term. In compliance with the disclosure requirements of IFRS 7, it is reported that on December 31, 2014 there were no past-due trade payables, excluding the accounts being disputed by the Company with suppliers, which are of immaterial amounts. 17. CURRENT FINANCIAL LIABILITIES 110 Marcolin Group The current financial liabilities amount to euro 41.353 million (compared to the euro 17.707 million of 2013), up by euro 17.708 million year on year. The item includes: • euro 35.532 million in short-term borrowings from banks (euro 11.233 million in 2013); • euro 3.185 million due to other financiers, primarily the interest accrued on the bond notes; • euro 2.606 in other financial payables due within 12 months, including euro 1.685 million for financial liabilities with the HVHC, Inc. group for the acquisition of Viva, owed by Marcolin USA Inc. The following table presents the maturities of the financial payables, which are classified as either current financial liabilities or non-current financial liabilities. Borrowings-maturity (euro/000) Within 1 year From 1 to 3 years From 3 to 5 More than years 5 years Total Credit lines used 15,039 - - - 15,039 Loans 24,944 21,244 2,450 1,250 - Other financiers 5,070 3,537 191,914 - 200,521 12/31/2014 41,353 - 240,504 5,988 193,164 The disclosures regarding the hedges in place on December 31, 2014 are presented below. All the agreements in effect were stipulated by the Parent Company, Marcolin S.p.A. Financial liabilities at fair value through profit and loss During the year, the Parent Company stipulated derivative contracts regarding the U.S. dollar exchange rate with Veneto Banca Holding to mitigate the risk of exchange rate variability, some of which were still in effect on the reporting date. The fair value of such instruments on December 31, 2014 was a positive euro 182 thousand. Although the derivatives were designated exclusively to hedge against the risk of exchange rate variability on purchases from suppliers in U.S. dollars, they do not qualify for hedge accounting because they do not fully meet the strict requirements, including formal ones, of the applicable accounting standard. On the reporting date, no derivatives to hedge against interest rate risk were in place. 18. CURRENT PROVISIONS The table below presents the most significant changes of the year: Current provisions Provisions for sales returns Other provisions Total 16,704 4,583 550 21,287 550 (2,645) (422) (2,745) 67 (5,390) (355) 48 (1,342) (1,294) (euro/000) 12/31/2013 Allowances Use /reversal Actuarial loss / (gain) Translation difference Other changes 12/31/2014 13,686 1,113 14,799 The provisions for sales returns reflect the estimate made, on the basis of the best available information, of potential losses emerging on product returns from customers and product warranties, for euro 13.686 million. 111 Financial Statement for the year ended December 31,2014 Apart from the Parent Company, the provisions were reported mainly by Viva Optique, Marcolin U.S.A. and Marcolin France. The other provisions, which totaled euro 1.113 million, refer to potential risks originating mainly from: 1) legal obligations; 2) the current portion of potential losses regarding some licenses, calculated on the basis of earnings projections, given the expected business growth and related contractual obligations. 19. OTHER CURRENT LIABILITIES Below are the details of the other liabilities: Other current liabilities 12/31/2014 12/31/2013 (euro/000) Payables to personnel Social security payables Other accrued expenses and deferred income Total 11,073 8,666 2,276 2,212 479 630 13,827 11,508 The other current liabilities consist primarily of euro 11.073 million due to personnel (euro 8.666 million in 2013) and euro 2.276 million in social security (euro 2.212 million in 2013). 20. COMMITMENTS AND GUARANTEES Guarantees associated with the bond issue With a notarial deed dated October 31, 2013, the Board of Directors passed a resolution to issue nonconvertible senior-secured notes; with a determination deed drawn up by a specifically designated director on November 7, 2013, and in implementation of the Board of Directors' mandate of October 31, 2013, the terms and conditions for the issuance of notes of nominal euro 200,000,000 were established. The notes are secured by collateral provided by the Issuer, controlling shareholder Marmolada S.p.A. and some subsidiaries of the Issuer to discharge the payment obligations assumed by the Issuer with the bondholders: • a pledge over the shares of the Issuer representing 100% (one hundred percent) of share capital; • a pledge over the Issuer's intellectual property rights; • a security assignment over insurance policy receivables due to the Issuer; • a security assignment over trade receivables due to the Issuer; • a security assignment over receivables due to the Issuer by Marcolin USA, Inc. originating from loans granted to provide the company with the financing necessary to pay the purchase price/acquire the share capital of Viva Optique Inc.; • a pledge over all Marcolin (UK) Limited shares owned by the Issuer; • a pledge over all Marcolin France S.a.s. shares owned by the Issuer; • a pledge over all Marcolin (Deutschland) Gmbh shares owned by the Issuer; • a pledge over all Marcolin USA, Inc. shares owned by the Issuer;; • a pledge over all shares of Viva Optique Inc., directly controlled by Marcolin USA, Inc., owned by Marcolin USA, Inc.; • a pledge over 65% of the shares of Viva Europa Inc., controlled indirectly by the Issuer, through Viva Optique Inc.; • a pledge over 65% of the shares of Viva Eyewear Ltd (UK), controlled indirectly by the Issuer, through Viva Europa Inc.; • a security agreement over all material assets of Marcolin USA, Inc.; • a security agreement over all material assets of Viva Optique, Inc. 112 Marcolin Group Licenses The Group has contracts in effect to use trademarks owned by third parties for the production and distribution of eyeglass frames and sunglasses. Those contracts require payment of guaranteed minimum royalties over the duration of the contracts; at December 31, 2014 these future commitments amounted to euro 323.395 million (euro 328.847 million in 2013), including euro 57.464 million falling due within the next year. Guaranteed minimum Royalties due 31.12.2014 31.12.2013 (euro/000) Within one year In one to five years After five years Total 57,464 58,930 222,444 43,487 323,395 216,222 53,695 328,847 Rent and leases Details of the rent and operating lease commitments are shown below, in accordance with IAS 17: Commitments (euro/000) 12/31/2014 12/31/2013 2,053 3,826 1,266 7,145 2,059 3,649 444 6,152 961 514 807 678 Rent due Within one year In one to five years After five years Total Operating lease payments Within one year In one to five years After five years Total 1,475 1,485 Total commitments 8,620 7,637 - - The rent commitments refer mainly to the office leases of the American companies. The Group also has guarantees for third parties of euro 162 thousand (euro 161 thousand in 2013). 113 Financial Statement for the year ended December 31,2014 MARCOLIN GROUP CONSOLIDATED INCOME STATEMENT The Group's consolidated income statement results are presented in comparison with the 2013 results. Because the Marcolin group acquired control of the Viva group in December 2013, the comparative figures of these financial statements are not truly meaningful for the purpose of comparison with the 2013 income statement results. The 2013 figures include the Viva group's results for the month of December (when control was acquired), and whereas the 2014 figures include the results for the entire year. In order to provide comparability of the annual income statement data, the Report on Operations presents pro-forma data on the basis of the same consolidation perimeter; accordingly, the Report on Operations may be referred to for the description of the 2014 changes compared to the prior year (considering Marcolin and the Viva group for 12 months, both in 2013 and in 2014). 21. REVENUE The following table sets forth the 2014 net sales revenue by geographical area: Net Sales by geographical area 2014 Turnover (euro/000) % on total 2013 Turnover % on total Europe 130,406 36.0% 91,414 43.1% U.S.A. 140,187 38.7% 61,421 28.9% Asia 30,701 8.5% 23,130 10.9% Rest of World 60,839 16.8% 36,362 17.1% Total 362,133 100.0% 212,327 100.0% The 2014 revenue is euro 362.133 million, compared to euro 212.327 million for 2013 (including euro 8.163 million referring to the Viva group solely for the month of December). As noted above, comparison of the 2014 and 2013 revenue with a consistent perimeter may be found in the Report on Operations. 22. COST OF SALES The following table shows a detailed breakdown of the cost of sales: Cost of sales (euro/000) Purchase of materials and finished products Changes in inventories Cost of personnel Outsourced processing Amortization, depreciation and writedowns Other costs Total 2014 % of revenue 125,668 (25,398) 19,480 10,478 2,091 13,041 145,360 34.7% (7.0)% 5.4% 2.9% 0.6% 3.6% 40.1% 2013 % of revenue 51,187 (1,049) 17,474 6,946 2,170 5,154 81,883 24.1% (0.5)% 8.2% 3.3% 1.0% 2.4% 38.6% The cost of sales is euro 145.360 million, compared to euro 81.883 for 2013 (including euro 3.429 million referring to the Viva group solely for the month of December) 114 Marcolin Group The Report on Operations provides the cost of sales in both absolute terms and in comparison with 2013 on the basis of a constant perimeter. The other expenses refer principally to purchasing charges (transport and customs) and business consulting services. 23. DISTRIBUTION AND MARKETING EXPENSES Below is a detailed breakdown of the 2014 distribution and marketing expenses: Distribution and marketing expenses 2014 % of revenue (euro/000) Cost of personnel Commissions Amortization Royalties Advertising and PR Other cos ts Total 59,152 9,831 4,828 44,391 23,845 27,202 169,250 16.3% 2.7% 1.3% 12.3% 6.6% 7.5% 46.7% 2013 % of revenue 30,152 6,229 2,219 33,115 14,839 15,133 101,688 14.2% 2.9% 1.0% 15.6% 7.0% 7.1% 47.9% They amount to euro 169.250 million, against euro 101.688 million for 2013. The personnel expenses include non-recurring costs of euro 1.158 million deriving from ad-personam agreements referring to changes in certain positions, and costs for reorganizing the business functions. With respect to advertising and public relations ("PR") expenses, the Group continued to invest in advertising and marketing to promote the brands it handles, including both portfolio and house brands. Although in some cases the volumes were not at full capacity, Marcolin is aware of the importance of ongoing advertising and promotional support, so it maintained its level of advertising expense planned in 2014 to foster the sales of the brands in the portfolio. Concerning royalties, in a year of heavy investment in this area, 2014 was impacted by certain licenses with revenue streams that were not at full capacity (new licenses and/or new collections), so the guaranteed minimum royalties required under certain licensing agreements were not adequately absorbed. Pursuant to certain operations and agreements stipulated during the year, in 2015 it will be possible to improve the profitability of some licenses, thanks to better absorption of royalties and advertising contributions which in 2014 were not fully saturated by the sales realized. Other costs include business expenses such as: • • • • • • • shipping costs on sales; marketing expenses incurred for the sales network; services regarding the sales area; rent payments; travel expenses; telephone and insurance expenses; entertainment expenses. 24. GENERAL AND ADMINISTRATION EXPENSES The general and administrative expenses are set forth below: 115 Financial Statement for the year ended December 31,2014 General and administration expenses (euro/000) Cost of personnel Writedowns of receivables Amortization and writedowns Other costs Total 2014 2013 12,685 494 2,039 16,493 31,711 8,387 450 1,077 10,793 20,707 The 2014 general and administrative expenses amount to euro 31.711 million, against euro 20.707 million for 2013 (including euro 1.078 million referring to Viva for the month of December). The personnel expenses include non-recurring reorganization costs of euro 260 thousand. The other costs include: • compensation of directors, statutory auditors, the independent auditing firm and other external professionals; • general and administrative services; • information technology expenses; • general and administrative consulting services; • other general and administrative expenses (sundry purchases, telephone expenses, insurance, travel expenses, rent and rentals). 25. EMPLOYEES The 2014 average and end-of-period number of employees of the various Group companies (including the work force on temporary contracts) is broken down below in comparison with the previous year: Employees Category Managers Staff Manual workers Total Final number 12/31/2014 57 854 594 Average number 12/31/2013 68 882 531 1,505 1,481 2014 61 876 556 2013 54 956 489 1,493 1,499 2014 2013 % sui ricavi Transport refund Release of provision Other income Total other income 3,069 146 1,713 4,928 1,331 285 1,738 3,354 0.6% 0.1% 0.8% 1.6% Losses on receivables Other expenses (809) (1,444) (0.7)% Total other expenses (809) (1,444) (0.7)% Total operating income and expenses 4,119 1,909 0.9% The average number for 2013 refers to a constant perimeter. 26. OTHER OPERATING INCOME AND EXPENSES The other operating income and expenses are set forth below: Other operating income and expenses (euro/000) The balance of this item is net operating income of euro 4.119 million. 116 Marcolin Group Other income consists mainly of euro 353 thousand charged to customers for advertising materials, other charges to customers of euro 570 thousand, contingent gains (unrealized costs regarding previous periods, costs that were less than the amount originally estimated for them) and insurance compensation. Other expenses refer primarily to the lump sum paid by Marcolin USA for costs regarding Viva integration. 27. FINANCIAL INCOME AND COSTS The financial income and costs are presented below: Financial income and costs 2014 2013 18,203 2,886 Financial costs (31,033) (24,655) Total (12,830) (21,769) (euro/000) Financial income The composition of financial income is shown below: Financial income 2014 2013 - - 633 468 17,569 2,419 (euro/000) Interest income Other income Gains on currency exchange Total 18,202 2,886 The composition of finance costs is shown below: Financial costs 2014 2013 (20,944) (20,348) Financial discounts (2,029) (909) Losses on currency exchange (8,060) (3,398) (31,033) (24,655) (euro/000) Interest expense Total Financial income and costs result in net finance costs of euro 12.830 million. This item, the balance between costs of euro 31.033 million and income of euro 18.202 million, was influenced by the following items: • • profits on currency exchange of euro 17.569 million, including euro 5.250 million in profits on currency exchange and euro 12.318 million in financial income referring to end-of-period adjustments to a receivable due to Marcolin S.p.A. from Marcolin USA Corp. denominated in U.S. dollars, which increased due to the appreciation of the U.S. dollar; interest expense of euro 20.944 million, consisting of euro 17.000 million on the bond notes issued by Marcolin S.p.A., paid semiannually in May and November, euro 1.375 million in reversed bond issue transaction costs, accounted for under IFRS with the financial method of amortized cost over the life of the bond notes (maturing November 2019), euro 1.310 in net 117 Financial Statement for the year ended December 31,2014 • • interest costs (including euro 926 thousand referring to the Parent Company, Marcolin S.p.A., and euro 384 thousand referring to subsidiaries), and euro 1.252 million in additional finance costs regarding actualization and translation differences, including euro 580 thousand referring to the Parent Company; the financial discounts totaled euro 2.029 million, nearly entirely attributable to foreign subsidiaries; the losses on currency exchange were euro 8.060 million, consisting of euro 7.839 million in foreign exchange losses (and inclusive of the end-of-period adjustments to items in foreign currency) and euro 220 thousand in negative translation differences. Currency exchange differences emerging on trade transactions resulted in a net cost of euro 2.589 million (including euro 1.394 million referring to the Parent Company), to which must be added additional financial income of euro 12.318 million referring to the aforementioned receivable due to Marcolin S.p.A. from Marcolin USA Corp. 28. INCOME TAX EXPENSE Income taxes are euro 6.695 million, including current taxes of euro 4.254 million, deferred taxes of euro 5.795 million, income from tax consolidation of euro 2.597 million and tax income referring to the previous period of euro 758 thousand. Income tax expense (euro/000) Current taxes Deferred taxes Income from Tax Consolidation Taxes relating to prior year Total income taxes 12.31.2014 (4,254) (5,795) 2,597 758 (6,695) 12.31.2013 (3,616) (582) 3,998 (2) (202) The Parent Company's current taxes of 2014 are euro 1.566 million, and those of foreign subsidiaries are euro 2.688 million. The Parent Company's deferred taxes are euro 6.861 million, and those of foreign subsidiaries are euro 1.066 million. Income from tax consolidation is euro 2.428 million for the Parent Company, euro 74 thousand for Eyestyle.com and euro 95 thousand for Eyestyle Retail. The current tax burden was determined on the basis of the taxable income of each company, taking into account the use of any accumulated tax losses and applying the tax rules and tax rates in force in each country. On June 13, 2014, pursuant to the Italian Income Tax Code ("TUIR"), Presidential Decree no. 917, Article 117 et seq. of December 22, 1986, the ultimate parent company, 3 Cime S.p.A. notified the Italian Revenue Office of its adoption of the Italian tax consolidation regime with its subsidiaries, including Marcolin S.p.A., for 2014, 2015 and 2016. Accordingly, the tax consolidation in effect in 2013 was replaced with an identical agreement with 3 Cime S.p.A., which involved terminating the previous agreement and stipulating a new agreement for the new three-year period. From the current year to December 31, 2016, the tax consolidation regime will enable each participant (including the Company), by way of partial recognition of the group's tax burden, to optimize the financial management of corporate income tax (IRES), for example by netting taxable income and tax losses within the tax group. Deferred tax amounts and the changes therein are presented in the following tables: 118 Marcolin Group Deferred tax assets (euro/000) Tem porary differences 12/31/2014 Tax on tam porary differences 12/31/2014 Tem porary differences 12/31/2013 Tax on tem porary differences 12/31/2013 40,458 24,242 20,474 11,618 8,090 3,500 2,538 2,098 (1,029) 978 879 155 114,001 12,438 8,977 7,029 4,404 2,993 1,120 705 577 (392) 307 329 49 38,536 15,128 11,401 23,791 10,490 8,657 4,266 1,442 2,098 1,254 634 14,241 93,403 5,381 4,375 7,215 3,565 3,030 1,448 396 577 394 206 4,472 31,060 Tem porary differences 12/31/2014 Tax on tam porary differences 12/31/2014 Tem porary differences 12/31/2013 Tax on tem porary differences 12/31/2013 (12,951) (9,363) (8,665) (8,069) (689) (598) (460) 4,592 (36,204) (3,558) (15) (2,946) (2,219) 53 (197) 53 1,442 (7,387) (265) (10,086) (4,084) (477) (804) (168) 2,521 (13,362) (35) 152 (1,621) (182) (277) (46) 882 (1,127) Accumulated tax losses Grants and compensation deductible on a cash basis Inventory provisions Provision for return risks Intangible assets subject to taxation Taxed provision for doubtful debts Unrealized currency exchange differences Income from CFC (controlled foreign companies) Non-deductible temporary amortization Supplementary client indemnity provision Other Provisions for risks and charges Total deferred tax assets Deferred tax liabilities (euro/000) Unrealized currency exchange differences Property, plant and equipment and intangible assets Equity-method accounting of JV and other equity investments Finance costs deducted on a cash basis Other Discounting of receivables/payables to present value Actuarial gain / losses on TFR under IAS Intercompany profit Total deferred tax liabilities Total deferred assets / liabilities 77,797 31,148 80,041 29,933 29. FINANCIAL INSTRUMENTS BY TYPE The financial instruments are set forth by uniform category in the table below, which presents their fair value in accordance with IFRS 7. For the fair value measurement of loans, future cash flows were estimated using implicit forward interest rates from the yield curve of the reporting date, and the latest Euribor fixing was used to calculate the current coupon. The values calculated in this manner were discounted based on discount factors related to the different maturities of such cash flows. The hedging agreements used by the Group are classified as O.T.C. (over-the-counter) instruments, so they do not have a public price available on official exchange markets. Discounted cash flow models were used to measure such derivatives. Categories of financial assets Cash and bank balances Trade receivables Financial assets 80,576 7,497 36,933 Financial assets at fair value through P/L - - - Held to maturity investments - - - Financial assets available for sale - - - 80,576 7,497 36,933 (euro/000) Loans and other financial receivables Total 119 Financial Statement for the year ended December 31,2014 Categories of financial liabilities Trade payables Financial liabilities Bond Financial liabilities at fair value through P/L - - - Derivatives used for hedging - - - 102,322 43,918 194,196 - 2,391 - 102,322 46,309 194,196 (euro/000) Other financial liabilities at amortized cost Liabilities as under IAS 17 Total 120 Marcolin Group DISCLOSURE OF ATYPICAL, UNUSUAL AND RELATED-PARTY TRANSACTIONS The information with respect to atypical and unusual transactions and transactions with related parties is disclosed in this section. Significant non-recurring events and transactions Significant non-recurring events and transactions that impacted the Group’s financial position, financial performance and cash flows in 2014 have to do with the Viva group integration and reorganization activities, described in detail in the Report on Operations. Atypical and unusual transactions There were no atypical and/or unusual transactions, including with other Group companies, nor were there any transactions outside the scope of the ordinary business activity in 2014 that could significantly impact the financial position, financial performance or cash flows of Marcolin S.p.A. and the Group. Transactions with related parties with and equity-accounted associates In addition to the transactions between the consolidated companies, during the year transactions took place with the equity-accounted associates and other related parties. They were of a trade nature, conducted on an arm's length basis; the related-party transactions regarded licensing agreements in particular. The transactions and outstanding balances with respect to related parties as at December 31, 2014 are shown below, as required by IAS 24: Company (euro/000) Other related parties Tod's S.p.A Pai Partners Sas Coffen Marcolin Family O.T.B. Group 3 Cime S.p.A. Total Expenses Revenues Payables Receivables 2,317 164 703 1,798 4,981 747 8 755 755 80 235 3,495 4,566 238 2 2,597 2,838 Type Related party Related party Related party Related party Consolidating All related party transactions are carried out at arm's length. The remuneration of the Group's Directors, Statutory Auditors and Strategic Management (Others) is reported below: 2014 (euro/000) Base fee Salaries and benefits Total 2013 Board of Directors Statutory Auditors 389 674 1,063 100 100 Other - Board of Directors Statutory Auditors Other 368 642 1,010 90 90 - Other information pursuant to Italian Civil Code Article 2427, point 6 bis The following table presents the 2014 fees of the auditing firm, Pricewaterhouse Coopers S.p.A., for audit performed by that firm, as required under Italian Civil Code Article 2427, point 6 bis. Audit and other services (euro/000) Audit Other consulting services Total Am ount 219 96 314 121 Financial Statement for the year ended December 31,2014 SEGMENT REPORTING The following information is set forth according to the geographical areas in which the Group operates. Segment reporting is based on aggregation by geographical area according to the location of the Group's companies. Accordingly, the sales by geographical segment refer to the source of the sales rather than to the end market. Segment reporting ITALY Net sales Intersegment sales Net sales third parties Gross profit In % of net sales Operating profit Interes in P / (L) of equity-accountes associated Assets Investments in Associates Liabilities Capital expenditure Amortization and depreciation Other non cash items 2014 2013 * 2014 2013 * 150,531 150,531 66,415 44.1% 9,915 590,806 (376,806) (5,952) 2,585 123,464 133 123,331 56,426 45.7% 1,744 706 504,675 86 (296,575) 3,936 (4,613) 4,190 37,145 37,145 21,654 58.3% 558 17,696 (13,457) (434) (446) 37,297 37,297 22,550 53.3% 1,023 18,666 (11,195) 1 (176) (17) 50,337 50,337 24,241 48.2% 13,366 46,980 (4,208) (15,411) (385) (779) 53,052 53,052 28,503 53.0% 3,907 25,362 (11,802) 66 (450) (71) NORTH AMERICA (euro/000) OTHER & CONSOLIDATION MARCOLIN GROUP 2014 2013 * 2014 2013 * 2014 2013 * 158,059 158,059 82,404 52.1% (3,612) 192 338,139 951 (176,415) (4,214) (3,148) 156,225 156,225 93,804 59.8% 10,377 291,915 (143,046) 384 (3,412) 204 (33,938) (33,938) 22,059 -65.0% (296) (192) (373,304) 3,257 184,584 1,533 4,366 (157,711) (133) (157,578) (70,839) -20.2% (7,093) (706) (285,978) (15) 122,954 192 2,735 83 362,133 362,133 216,773 59.9% 19,932 620,318 212,327 212,327 130,444 61.5% 9,959 554,639 71 (339,664) 4,579 (5,916) 4,389 No secondary segments were identified. 122 REST OF EUROPE 2013 * Segment reporting Net sales Intersegment sales Net sales third parties Gross profit In % of net sales Operating profit Interes in P / (L) of equity-accountes associated Assets Investments in Associates Liabilities Capital expenditure Amortization and depreciation Other non cash items FRANCE 2014 (euro/000) (397,505) (9,452) 2,578 Marcolin Group INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS 123 Independent Auditors' Report 124 Marcolin Group INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS 125 Independent Auditors' Report 126 Marcolin S.p.A. MARCOLIN S.P.A. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014 STATEMENT OF FINANCIAL POSITION INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF CHANGES IN EQUITY STATEMENT OF CASH FLOWS 127 Financial Statement for the year ended December 31,2014 128 Marcolin S.p.A. STATEMENT OF FINANCIAL POSITION Notes (euro) ASSETS NON-CURRENT ASSETS Property, plant and equipement Intangible assets Goodwill Investments in subsidiaries and associates Deferred tax assets Other non-current assets Non-current financial assets Trade and other receivables Other current assets Current financial assets Cash and bank assets 19,867,035 19,112,694 18,608,547 12,874,093 2 3 189,722,123 64,494,172 189,722,123 62,776,456 27 5 16,194,550 527,249 12,479,312 635,365 4 108,189,552 418,107,375 97,623,500 394,719,396 6 63,061,005 36,406,628 7 8 10 70,200,670 7,581,511 10,067,529 46,620,711 9,491,153 8,293,616 9 Total current assets TOTAL ASSETS EQUITY Share capital Additional paid-in capital Legal reserve 12/31/2013 1 2 Total non-current assets CURRENT ASSETS Inventories 12/31/2014 18,879,129 6,686,481 169,789,844 107,498,589 587,897,219 502,217,985 32,312,475 24,517,276 3,853,132 32,312,475 24,517,276 3,853,132 45,420,428 102,485,993 45,656,915 116,033,529 11 Other reserves Retained earnings / (losses) Profit / (loss) for the year TOTAL EQUITY 4,483,252 (8,515,035) 213,072,557 213,858,292 LIABILITIES NON-CURRENT LIABILITIES Non-current financial liabilities Non-current provisions 12 13 196,386,463 5,833,006 190,865,437 17,662,880 Deferred tax liabilities Other non-current liabilities 27 14 6,639,787 50,000 1,148,159 50,000 208,909,256 209,726,476 Total non-current liabilities CURRENT LIABILITIES Trade payables 15 98,380,343 41,739,808 Current financial liabilities Current provisions 16 17 57,412,011 2,335,077 23,862,423 6,328,582 Tax liabilities Other current liabilities 27 18 1,506,159 6,281,816 1,734,452 4,967,952 165,915,406 78,633,217 TOTAL LIABILITIES 374,824,662 288,359,693 TOTAL LIABILITIES AND EQUITY 587,897,219 502,217,985 Total current liabilities 129 Financial Statement for the year ended December 31,2014 INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME Notes 2014 % 2013 % (euro) NET REVENUES 20 150,420,471 100.0% 123,373,808 100.0% COST OF SALES 21 (84,054,391) (55.9)% (66,975,552) (54.3)% DISTRIBUTION AND MARKETING EXPENSES 22 (54,010,868) (35.9)% (50,239,376) (40.7)% GENERAL AND ADMINISTRATIVE EXPENSES Other operating income and expenses: -other operating income -impairement / reversals of equity investments -other operating expenses TOTAL OPERATING INCOME / (EXPENSES) 23 25 (12,820,941) (8.5)% (11,906,114) (9.7)% 11,506,656 7.6% 0.0% (0.3)% 7.3% 10,610,708 (705,501) (338,348) 9,566,859 8.6% (0.6)% (0.3)% 7.8% GROSS PROFIT 66,366,080 (495,582) 11,011,074 OPERATING PROFIT - EBIT Financial income and costs: Financial income Financial costs 10,545,345 NET PROFIT / (LOSS) FOR THE YEAR 7.0% 56,398,257 3,819,625 27 15.9% (16.4)% 3,151,905 (17,205,154) 2.6% (13.9)% (822,894) 9,722,451 (0.5)% 6.5% (14,053,249) (10,233,624) (11.4)% (8.3)% (5,239,199) (3.5)% 4,483,252 3.0% 1,718,589 1.4% (8,515,035) (6.9)% 2014 2013 4,483,252 (8,515,035) - Effect (actuarial gains/losses) on defined benefit plans, net of taxes of euro -89.7 thousand in 2014 (euro 46.2 thousand in 2013) (236,486) 122,075 TOTAL OTHER ITEMS THAT WILL NOT SUBSEQUENTLY RECLASSIFIED TO PROFIT OR LOSS (236,486) 122,075 - hedge accounting, net of related tax effect of € 0 million in 2014 (€ -119.508 in 2013) - 315,066 TOTAL OTHER ITEMS THAT WILL BE SUBSEQUENTLY RECLASSIFIED TO PROFIT OR LOSS - 315,066 4,246,766 (8,077,894) Other items that will not subsequently be reclassified to profit or loss: Other items that will be subsequently reclassified to profit or loss TOTAL CONSOLIDATED NET PROFIT FOR THE YEAR 130 3.1% 23,878,744 (24,701,638) (euro) NET PROFIT FOR THE YEAR 45.7% 26 TOTAL FINANCIAL INCOME AND COSTS PROFIT BEFORE TAXES Income tax expense 44.1% Marcolin S.p.A. Actuarial profit / (losses) reserve Retained earning / (losses) Profit / (losses) of the year Total STATEMENT OF CHANGES IN EQUITY 31,958,355 24,517,276 3,609,506 - 8,376,097 - (572,750) 18,658,227 5,445,301 91,992,012 354,120 - 243,626 - - (8,376,097) (315,066) - 5,201,675 92,173,627 (5,445,301) - 83,836,584 - - - 24,000,000 - - - - - 24,000,000 - - - 22,107,590 - - - - - (8,515,035) 22,107,590 (8,515,035) - - - - - 315,066 122,075 - - 437,141 - - - - - 315,066 122,075 - (8,515,035) (8,077,894) 32,312,475 24,517,276 3,853,132 46,107,590 - - (450,675) 116,033,529 (8,515,035) 213,858,292 32,312,475 - 24,517,276 - 3,853,132 46,107,590 - - - (450,675) - (8,515,035) 8,515,035 - 213,858,292 (5,032,501) 4,483,252 Balance as of Januay 1, 2013 Allocation of 2012 profit Merger impact Share capital increase Nov. 29, 2013 Share capital increase Dec. 3, 2013 - Result of the year - Other components of overall result Total compehensive income Balance as of Decem ber 31, 2013 Balance as of January 1, 2014 Allocation of 2013 profit Dividends Other - Result of the year - Other components of overall result Total compehensive income Balance as of Decem ber 31, 2014 Cash flow hedge reserve Other reserves Additional paid-in capital Legal Reserve Share capital (euro) Additional paid-in capital Other reserves - - - - - - - 116,033,529 (8,515,035) (5,032,501) - - - - - - - (236,487) - - - - - - - - (236,487) - 4,483,252 32,312,475 24,517,276 3,853,132 46,107,590 - - (687,162) 102,485,993 4,483,252 - 4,483,252 (236,487) 4,246,765 213,072,557 131 Financial Statement for the year ended December 31,2014 STATEMENT OF CASH FLOWS 2014 N o t es 2013 (euro) OPERATING ACTIVITIES Profit for the period Depreciation and amortization 1.2 4,483,252 5,514,842 6,13,17 130,382 3.17 - Income tax expense 27 5,239,199 Accrued interest expense 26 Adjustments to other non-cash items 26 Provisions Impairment losses/(reversals) on investments Cash generated by operations 822,894 (7,829,501) 8,361,068 (8,515,035) 4,157,050 1,405,626 705,501 (1,718,589) 13,404,695 1,221,346 10,660,595 (Increase) decrease in trade receivables 7 (21,133,435) (Increase) decrease in other receivables 8 (410,088) (Increase) decrease in inventories 6 (24,322,916) 2,949,712 (13,646,877) (Decrease) increase in trade payables 15 38,926,573 (Decrease)/increase in other liabilities 14,16 619,106 (Use) of provisions 13,17 (Decrease)/increase in current tax liabilities (6,641,373) - 27 Adjustments to other items (89,839) Income taxes paid - (3,159,924) (704,748) 415,687 (5,625,390) 1,035,149 144,556 (630,434) Interest paid (17,857,193) (12,421,073) Cash used for current operations (30,909,164) (31,643,341) Net cash from /(used in) operating activities (22,548,095) (20,982,746) (4,002,767) (1,894,063) INVESTING ACTIVITIES (Purchase) of property, plant and equipment 1 Proceeds from the sale of property, plant and equipment 1 (Purchase) of intangible assets 2 (3,994,819) (Purchase) of Investments in subsidiaries and associates 3 (1,717,716) Net cash outflow on business combinations net of the liquidity acquired 124,189 (946,373) Net cash from /(used in) investing activities 42,460 180,624 (1,715,001) 76,706 (10,537,486) (3,309,274) 18,031,390 2,321,665 FINANCING ACTIVITES Net increase / (decrease) in granted loans 12.16 Bank borrow ing: - (Decrease) 4,10 (21,856) - Increase - (88,069,124) - Loans taken out: - new loans 12.16 42,190,000 252,600,000 - repayments 12.16 (14,921,305) (163,630,491) - 24,000,000 Net cash from /(used in) financing activities Capital increase 45,278,230 27,222,050 Net increase/(decrease) in cash and cash equivalents 12,192,648 2,930,031 Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 11 6,686,481 3,756,449 18,879,129 6,686,480 *On September 1, 2014 Marcolin SpA acquired the business unit "International" from Viva Eyewear UK Ltd 132 Marcolin S.p.A. NOTES TO THE SEPARATE FINANCIAL STATEMENTS OF MARCOLIN S.P.A. FOR THE YEAR ENDED DECEMBER 31, 2014 Introduction In December 2012 Cristallo purchased from Marcolin's former shareholders 78.6% of Marcolin S.p.A.'s share capital, at a price of euro 4.25 per share (total payment of euro 207,579,057), financed with a short-term credit facility (for euro 87,500,000) and equity for euro 160,740,000 (from the financial resources made available by the sole shareholder, Marmolada S.p.A., through the subscription and payment of two subsequent capital increases with additional paid-in capital). In 2013 Marcolin S.p.A. ("the Company") and its parent company, Cristallo S.p.A., were involved in a reverse merger whereby Cristallo was incorporated into Marcolin. As a result of the change of control, since Marcolin was listed on the electronic share market (Mercato Telematico Azionario - MTA) segment of the Italian stock exchange, Cristallo had to launch a mandatory full public tender offer ("Offer") of the remaining ordinary Marcolin shares outstanding, representing 21.4% of the Issuer's share capital (the offering prospectus was approved by Consob Resolution on December 21, 2012). The acceptance period began in January 2013 and ended in February 2013. On the closing date of the Offer, shares corresponding to approximately 78.0% of the shares involved in the public offer and 16.7% of Marcolin's share capital were tendered. Those shares, added to the Marcolin shares already owned by Cristallo S.p.A. and the treasury shares (corresponding to 1.1% of capital), resulted in Cristallo owning 59,891,105 shares, equal to 96.4% of the Issuer's 18 share capital, on the Offer payment date. Therefore, under Consolidated Finance Act Article 108, first paragraph, the legal conditions were present for the obligation to buy, and right to buy, the remaining outstanding shares not tendered into the Offer, corresponding to 3.6% of the Issuer's share capital. As a result of those events, Cristallo owned 100% of Marcolin's share capital. Therefore, under Borsa Italiana Provision n. 7645 of February 7, 2013, the delisting of the Issuer's shares from the electronic share market was arranged for February 14, 2013. Cristallo financed the procedure with liquid resources of euro 29,669,093 and additional equity of euro 27,300,000, made available by the sole shareholder, Marmolada S.p.A., through another capital increase. In 2013, procedures for the merger of Cristallo into Marcolin commenced within the scope of an extensive reorganization and optimization plan for the business, industrial and strategic purposes of the Group of which Cristallo and Marcolin are part. The reverse merger enabled Marcolin to retain its own business and legal relationships, with significant savings in terms of costs and organizational demands compared to a direct merger. The main objective of the merger, which was part of the reorganization and restructuring plan described in the public offering prospectus, was to shorten the chain of command in order to improve flexibility and operational efficiency, reduce corporate and administrative expenses, and rationalize the financial indebtedness involving the Group companies, thereby resulting in greater financial stability. Since Cristallo used bank loans to finance the original acquisition of Marcolin (indebtedness that was assumed by the surviving company), the merger is legally defined as a "merger as a result of acquisition with debt", so the procedures set forth in Italian Civil Code 2501-bis and 2501-quinquies were followed. On June 26, 2013, Marcolin S.p.A.'s Board of Directors presented the plan of merger through absorption of Cristallo S.p.A. into Marcolin S.p.A., as well as the Directors' Report on the merger plan prepared in accordance with the Italian Civil Code; on July 8, 2013 Marcolin's extraordinary General Meeting approved the merger plan as well as new By-Laws that used the current text of the absorbed entity. The deed of merger was stipulated on October 28, 2013 and became effective for tax, accounting and legal purposes on the same date. 18 The price of euro 4.25 per share coincided with the contractual valuation of Marcolin shares for the December 2012 acquisition. 133 Financial Statement for the year ended December 31,2014 The merger took place by assigning the shares of the surviving company, originally owned by the absorbed entity (98.9% of the share capital), to Marmolada S.p.A., Cristallo's sole shareholder. Since the remaining 1.1% consisted of treasury shares, the transaction did not require any swap ratio. The merger resulted in the cancellation of all Cristallo's shares, as the Marcolin shares were assigned to the sole shareholder, Marmolada, except for the treasury shares, which were canceled at the end of October). The Extraordinary General Meeting of October 31, 2013 canceled the 681,000 treasury shares owned by the Company, transferring the nominal value directly to the sole Shareholder, and eliminating the nominal value of the Company's shares in accordance with Italian Civil Code Article 2436, paragraphs 2 and 3. The continuity principle of Assirevi OPI Document n. 2 was adopted for the merger, i.e. significance was given to the pre-existence of the control relationship between the Companies involved in the merger and the cost incurred by Cristallo S.p.A. for the original acquisition of the Marcolin group. Accordingly, on the effective merger date, the current values of the assets and liabilities and related goodwill of Marcolin S.p.A., which had been reflected in the purchase price of the 100% stake owned directly by Cristallo S.p.A., emerged in the separate financial statements of Marcolin S.p.A., the surviving company, to the extent allocated to the assets, liabilities and goodwill in the financial statements of Cristallo (now Marcolin) as at the same date. In other words, the mergers resulted in the alignment of the financial statements as at the merger date with the post-merger separate financial statements of the surviving company, thus realizing “legal consolidation”. ***** 134 Marcolin S.p.A. General Information The explanatory notes set out below form an integral part of the separate financial statements of Marcolin S.p.A. and were prepared in accordance with the accounting documents updated to December 31, 2014. For the purpose of providing exhaustive financial information, the Report on the Operations has been prepared, which contains additional information regarding the main events of the year, subsequent events, business outlook and other important financial and operational information of the business. Marcolin S.p.A. is incorporated under Italian law, listed in the Belluno Companies Register with n. 01774690273, and has shares that until February 14, 2013 were traded in Italy on the Mercato Telematico Azionario (electronic stock exchange) organized and managed by Borsa Italiana S.p.A. Marcolin S.p.A. is the Parent Company of the Marcolin group, which operates in Italy and abroad in the design, manufacturing and distribution of eyeglass frames and sunglasses, including through direct and indirect management of business affiliates located in major countries of interest worldwide and qualified contract manufacturers. The addresses of the locations from which the Company's main operations are performed are listed in the Report on Operations. Pursuant to Article 2497-bis, paragraph 4 of the Italian Civil Code, we note that Marcolin S.p.A. is not subject to management and coordination activities by any entity. The financial statements were authorized for issue by the Board of Directors on March 27, 2015. 135 Financial Statement for the year ended December 31,2014 ACCOUNTING STANDARDS Basis of preparation The 2014 financial statements were prepared according to the International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) issued by the International Accounting Standards Board (IASB) and approved by the European Union. The IFRS include all the revised international accounting standards (IAS) and all the interpretations of the International Financial Reporting Interpretations Committee (IFRIC), the former Standing Interpretations Committee (SIC). The accounting policies adopted to prepare the financial statements for the year ended December 31, 2014 are the same as those used in the prior year except as regards the adoption of the following new or revised IFRS or IFRIC. Accounting standards, amendments and interpretations effective from January 1, 2014 Application of the following new IFRS standards and/or standards revised by the International Accounting Standards Board and IFRIC interpretations became mandatory in 2014. Description IFRS 10 - "Consolidated Financial Statements" IFRS 11 - "Joint Arrangements" IFRS 12 - "Disclosures of Interests in Other Entities" Amendments to IFRS 10, 11 and 12 on transition guidance IAS 27 (revised 2011) "Separate financial statements" IAS 28 (revised 2011) "Associates and joint ventures" Amendment to IAS 32, "Financial instruments: Presentation", on offsetting financial assets and financial liabilities" Amendments to IFRS 10, "Consolidated financial statements", IFRS 12 and IAS 27 for investment entities" Amendments to IAS 36, "Impairment of assets" Amendment to IAS 39 ‘Financial instruments: Recognition and measurement’, on novation of derivatives and hedge accounting IFRIC 21, "Levies" Approved as of the date of this document Effective date of the standard December 2012 Annual periods beginning on or after January 1, 2014 December 2012 Annual periods beginning on or after January 1, 2014 December 2012 Annual periods beginning on or after January 1, 2014 April 2013 Annual periods beginning on or after January 1, 2014 December 2012 Annual periods beginning on or after January 1, 2014 December 2012 Annual periods beginning on or after January 1, 2014 December 2012 Annual periods beginning on or after January 1, 2014 November 2013 Annual periods beginning on or after January 1, 2014 December 2013 Annual periods beginning on or after January 1, 2014 December 2013 Annual periods beginning on or after January 1, 2014 June 2014 Annual periods beginning on or after January 1, 2014 The adoption of the accounting standards, amendments and interpretations listed in the table above did not have any material effects on Marcolin’s financial position or performance. 136 Marcolin S.p.A. Accounting standards, amendments and interpretations not applicable yet and not adopted early by the Group for the annual period beginning January 1, 2014 The following IFRSs, interpretations, amendments to existing standards and interpretations, or special provisions contained in the standards and interpretations approved by the IASB, and information with respect to their adoption in Europe as at the date of approval of the financial statements, are set forth below: Description Amendment to IAS 19 regarding defined benefit plans Annual improvements cycles 2010-2012 and 2011-2013 Amendment to IAS 16 "Property, plant and equipment" and IAS 38 "Intangible assets" Amendment to IFRS 11, "Joint arrangements" on acquisition of an interest in a joint operation IFRS 14 "Regulatory deferral accounts" IFRS 9 "Financial instruments" IFRS 15 "Revenue from contracts with customers" Amendments to IAS 27, "Separate financial statements" on the equity method Amendments to IFRS 10, "Consolidated financial statements" and IAS 28, "Investments in associates and joint ventures" Approved as of the date of this document Effective date of the standard No Annual periods beginning on or after July 1, 2014 No Annual periods beginning on or after July 1, 2014 No Annual periods beginning on or after January 1, 2016 No Annual periods beginning on or after January 1, 2016 No Annual periods beginning on or after January 1, 2016 No Annual periods beginning on or after January 1, 2018 No Annual periods beginning on or after January 1, 2017 No Annual periods beginning on or after January 1, 2016 No Annual periods beginning on or after January 1, 2016 No accounting standards and/or interpretations with mandatory application in annual periods beginning after December 31, 2014 were adopted early. Marcolin S.p.A. is evaluating the effects of the application of the above new standards, which are not currently considered to bring impact. The 2014 financial statements were prepared according to the International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) issued by the International Accounting Standards Board (IASB) and approved by the European Union. Regulation no. 1606, enacted by the European Parliament and European Council in July 2002, provided for the compulsory application of IAS/IFRS to the accounts of companies listed on EU regulated markets starting from 2005. The IFRS include all the revised international accounting standards (IAS) and all the interpretations of the International Financial Reporting Interpretations Committee (IFRIC), the former Standing Interpretations Committee (SIC). The accounting standards used are the same as those used in the previous year. The financial statements were prepared on the basis of the going-concern assumption, the accrual basis of accounting and the historical cost basis, revised as required for the measurement of certain financial instruments (with the exception of some revaluations performed in previous periods). The currency used in the primary economic environment in which the Company operates ("functional currency") is the Euro. 137 Financial Statement for the year ended December 31,2014 For the purpose of clarity, the amounts in the Statement of Financial Position, Income Statement, Statement of Comprehensive Income, Statement of Cash Flows, Statement of Changes in Equity and explanatory Notes are presented in thousands of Euros, unless specified otherwise. Financial statement format and significant accounting policies The Company adopted the following formats for the financial statements. In summary: • In the Statement of Financial Position, assets and liabilities are classified separately as either current or non-current. Current assets are those intended to be realized, sold or consumed in the Company's normal operating cycle; current liabilities are those expected to be settled either in the Company's normal operating cycle or within twelve months from the end of the reporting period; • in the Income Statement costs are classified by function; • the Statement of Comprehensive Income is presented separately from the Income Statement, and the individual items are stated in compliance with Revised IAS 1; • the indirect method is used for the Statement of Cash Flows, with presentation of cash flows from operating, investing and financing activities; • the Statement of Changes in Equity presents separately the profit/(loss) for the year and all revenues and expenses not recognized in profit or loss, but recognized directly in equity on the basis of specific IAS/IFRS accounting standards, and presents separately transactions with Shareholders. In order to facilitate comparability, the data of the previous was restated as necessary, providing the related explanations thereof. The significant accounting policies adopted to prepare the separate financial statements of Marcolin S.p.A. are as follows: Property, plant, and equipment ("PP&E" or "tangible assets") Property, plant, and equipment are recorded at their acquisition or production cost, inclusive of ancillary costs incurred to bring the assets to working condition for their intended use, excluding land and buildings for which the deemed cost model was used on the transition date or business combination date based on the market value determined through an appraisal performed by an independent qualified appraiser. PP&E are stated net of depreciation except for land, which is not depreciated, and net of any impairment losses. Costs incurred for routine and/or cyclical maintenance and repairs are recognized directly in the income statement of the period in which they are incurred. Costs concerning the extension, renovation or upgrading of owned or leased assets are capitalized to the extent that they can be separately classified as an asset or part of an asset. The carrying value is adjusted by depreciation using the straight-line method calculated on the basis of estimated useful life. If the depreciable asset consists of distinctly identifiable components with useful lives that differ significantly from the other components of the asset, each component of the assets is depreciated separately, according to the component approach. Profits and losses deriving from the sale of assets or groups of assets are determined by comparing the sale price with the relevant net book value. Government grants relating to tangible assets are recorded as deferred revenues and credited to the income statement over the depreciation period for the assets concerned. Finance costs relating to purchases of a fixed asset are charged to the income statement, unless they are directly attributable to the acquisition, construction or production of an asset which justifies capitalizing them. Assets held under finance leases are recognized as tangible assets against the related liability. The lease payment is broken down into a finance cost, recognized in the income statement, and repayment of principal, recognized as a reduction of the relevant financial liability. 138 Marcolin S.p.A. Leases in which the lessor does not transfer substantially all the risks and rewards incidental to legal ownership are classified as operating leases. Lease payments under operating leases are recognized in the income statement on a straight-line basis over the duration of the operating lease. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, using the depreciation rates listed below: Category Buildings Light structures General-purpose machinery General-purpose plastic machinery Depreciable equipment Special-purpose machines Special-purpose plastic machines Office furniture and furnishings Exhibition stands Electronic machines Non-instrumental vehicles Instrumental vehicles Depreciation rate 3% 10% 10% 10% 40% 16% 15.5% 12% 27% 20% 25% 20% Intangible assets Intangible assets consist of controllable, non-monetary assets without physical substance that are clearly identifiable and able to generate future economic benefits. These assets are recognized at purchase and/or production cost, inclusive of directly attributable expenses to bring the asset to working condition for its intended use, net of accumulated amortization (except for those assets with an indefinite useful life) and any impairment losses. Amortization commences when the asset is available for use and is systematically distributed over the asset’s useful life. If there is any indication that the assets have suffered an impairment loss, the recoverable amount of the asset is estimated and any impairment loss is recognized in the income statement. If an impairment loss subsequently reverses, the carrying amount of the asset is increased to the net carrying value that the asset would have had if there had been no impairment loss and if the asset had been amortized, recognizing the reversal of the impairment loss as income. Goodwill Goodwill is recognized at cost less any impairment losses. Goodwill acquired in a business combination is represented by the excess of the cost of the combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. Goodwill is not amortized, but it is reviewed for impairment annually, and whenever events or circumstances give rise to the possibility of an impairment loss, the recoverable amount is reviewed in accordance with IAS 36 ("Impairment of Assets"). If the recoverable amount is less than its carrying amount, goodwill is reduced to its recoverable amount. If goodwill has been allocated to a cashgenerating unit that is partially disposed of, the goodwill associated with the unit disposed of is included in the determination of any gain or loss on disposal. Trademarks and licenses Trademarks and licenses are recognized at cost. They have a finite useful life and are recognized at cost net of accumulated amortization. Amortization is calculated on a straight-line basis so as to allocate the cost of trademarks and licenses over their remaining useful lives. If, aside from amortization, impairment should emerge, the asset is written down accordingly; if the reasons for the writedown should cease to exist in future financial years, the carrying amount of the asset is increased to the net carrying value that the asset would have had if there had been no impairment loss and if the asset had been amortized. Trademarks are amortized on a straight-line basis over their estimated useful lives, ranging from 15 to 20 years. 139 Financial Statement for the year ended December 31,2014 Software Software licenses acquired are capitalized on the basis of the costs incurred for their purchase and the costs necessary to make them serviceable. Amortization is calculated on a straight-line basis over their estimated useful lives (ranging from 3 to 5 years). Costs associated with software development and maintenance are recognized as costs in the period they are incurred. The direct costs include the costs for the personnel to develop the software. Research & development costs Research and development costs for new products and/or processes are recognized as an expense as incurred unless they meet the conditions for capitalization under IAS 38. Investments in subsidiaries and associates Investments in subsidiaries and associates are valued at acquisition cost net of any impairment losses. If the reasons for writedowns made no longer apply, the equity investments are revalued to the extent of such writedowns. Impairment of tangible and intangible assets IAS 36 requires impairment testing of tangible and intangible assets when there is any indication that those assets have suffered an impairment loss. For intangible assets with an indefinite life, such as goodwill, testing for impairment is performed at least annually. The recoverable amount is determined by comparing the carrying amount of the asset with its fair value less costs to sell and value in use, whichever is greater. Value in use is determined on the basis of the present value of estimated future cash flows from operating activities. For purposes of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). If an asset’s recoverable value is less than its carrying value, the carrying value is reduced to its recoverable value. This reduction is an impairment loss that is recognized as an expense immediately. If there are indications that an impairment loss should be reversed, the recoverable amount of the asset is recalculated and the carrying value is increased to that new value. The increased carrying value must not exceed the net carrying value the asset would have had without any impairment loss. An impairment loss with respect to goodwill may not be reversed. Financial derivatives Derivative financial instruments are used by the Company solely for hedging purposes, in order to reduce Company's exposure to currency risks. All financial derivatives are measured at fair value, in compliance with IAS 39. Under IAS 39, financial derivatives qualify for hedge accounting only if, at the inception of the hedge, there is formal designation and documentation of the hedging relationship, the hedge is expected to be highly effective, the effectiveness of the hedge can be reliably measured and the hedge is highly effective throughout the financial reporting periods for which the hedge was designated. If the hedge is effective, the following accounting policies apply: Fair value hedge – If a financial derivative is designated as a hedge of the exposure to changes in fair value of a recognized asset or liability due to a particular risk, and could affect profit or loss, the gain or loss from remeasuring the hedging instrument at fair value is recognized in the income statement. The hedged item is adjusted to fair value for the portion of risk hedged, and the adjustment is recognized in profit or loss; Cash flow hedge – If a financial derivative is designated as a hedge of the exposure to the future cash flow variability of a recognized asset or liability, the effective portion of changes in fair value of the financial derivative is recognized directly in equity. The cumulative gain or loss is reversed from equity and recognized in profit or loss in the period in which the hedged transaction is recognized. The profit or loss associated with a hedge (or part of a hedge) that has become ineffective is entered in the income statement immediately. If a hedged instrument or a hedging relationship is terminated, but the hedged transaction has not occurred yet, the cumulative gain or loss that has remained recognized in equity from the period when the hedge was effective is reclassified into profit or loss when the forecast transaction occurs. If the forecast transaction is no longer expected to occur, the related cumulative gain or loss that has remained recognized in equity is immediately recognized in the income statement; 140 Marcolin S.p.A. if hedge accounting cannot be applied, the gains or losses arising on changes in the fair value of the financial derivative are recognized immediately in the income statement. Fair value measurement The Company measures financial instruments (derivatives) at their fair values at the end of each reporting period. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that a transaction to sell an asset or to transfer a liability takes place: • in the principal market for the asset or liability; • or in absence of a principal market, the most advantageous market for the asset or liability. The principle market or most advantageous market must be accessible to the Company. The fair value of an asset or liability is measured adopting assumptions that market participants would use to determine the price of the asset or liability, assuming that they act to best satisfy their economic interest. Fair value measurement of a non-financial asset considers a market participant's capacity to generate economic benefits from the highest and best use of the asset or from the sale to another participant that can obtain its highest and best use. The Company uses valuation techniques appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or stated in the financial statements are categorized into the following levels of the fair value hierarchy: • Level 1 - quoted (unadjusted) prices in active markets for identical assets or liabilities that the entity can access at the measurement date; • Level 2 - inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; • Level 3 - valuation techniques for which the inputs are unobservable for the asset or liability. The fair value measurement is categorized entirely in the same level of the fair value hierarchy of the lowest level input used for measurement. For recurring assets and liabilities, the Company determines whether there have been any transfers between levels of the fair value hierarchy and reviews the categorization (based on the lowest level input that is significant to the entire measurement) at the end of each reporting period. Inventories Inventories are stated at the lower of average purchase or production cost and the corresponding estimated realizable value based on market prices. Estimated realizable value represents the estimated selling price in normal market conditions less all direct selling costs. Purchase cost was adopted for products purchased for resale and for materials directly or indirectly used, purchased and used in the production process, whereas production cost was adopted for finished and semi-finished products. Purchase cost is determined on the basis of the cost actually incurred, inclusive of directly attributable ancillary costs, including transport and customs expenses and excluding trade discounts. Production cost includes the cost of materials used, as defined above, and all directly and indirectly attributable manufacturing costs. Obsolete and slow-moving inventories are written down to reflect their useful life or realizable value. Financial assets – Loans and receivables Trade receivables, current loan receivables and other current receivables with fixed maturities, excluding those assets arising on financial derivatives and all financial assets for which prices on an active market are unavailable and whose fair value cannot be determined reliably, are stated at amortized cost calculated using the effective-interest method. Financial assets without fixed maturities are stated at cost. 141 Financial Statement for the year ended December 31,2014 Receivables maturing after more than a year that do not accrue interest or that accrue interest at below-market rates are discounted using market rates and recognized as non-current assets. Reviews are carried out regularly to determine the presence of any objective evidence that the financial assets taken individually or within a group of assets may have suffered an impairment loss. If such evidence exists, the impairment loss is shown as a cost in the income statement for the period. Trade receivables are adjusted to their realizable value by means of a provision for irrecoverable amounts when there are objective indications that the Company will not be able to collect the receivable at its original value. Cash and bank balances Cash and bank balances include cash, demand deposits at banks and other highly liquid short-term investments, i.e. with an original duration of up to three months, and are stated at the amounts actually on hand at the reporting date. Assets held for sale and related liabilities These items include non-current assets (or disposal groups of assets and liabilities) whose carrying value will be recovered mainly through sale rather than through continuing use. Assets held for sale (or disposal groups) are recognized at their net carrying value or fair value less costs to sell, whichever is less. If these assets (or disposal groups) should cease to be classified as assets held for sale, the amounts are not reclassified or presented for comparative purposes with the classification in the most recent Statement of Financial Position. Equity Share capital Share capital consists of the subscribed and paid-up capital. Direct issue costs of new share issues are classified as a direct reduction of equity after deferred taxes. Treasury shares Treasury shares are shown as a deduction of equity. The original cost of treasury shares and revenues arising on subsequent sale are recognized as changes in equity. The nominal value of the treasury shares owned is directly deducted from share capital, while the value exceeding the nominal value is used to reduce the treasury share reserve included in the retained earnings/(losses) reserves. Share-based payments (stock option plan) Currently there are no such payments. Employee benefits Post-employment benefit plans are classified, according to their characteristics, as either defined contribution plans or defined benefit plans. Defined benefit plans, such as that of the "fondo trattamento di fine rapporto" ("TFR", severance indemnity provision) in place until the 2007 Italian Financial Law became effective, are plans under which guaranteed employee benefits are paid upon termination of employment. The defined benefit plan obligation is determined on the basis of actuarial assumptions and is recognized on an accruals basis consistently with the employment service necessary to obtain the benefits; the obligation is measured annually by independent actuaries. The benefits accrued in the year, determined with actuarial methodology, are recognized in the income statement with the personnel costs, whereas the notional interest cost is recognized in net financial income/(costs). Actuarial gains and losses from changes in actuarial assumptions are recognized directly in the equity of the year they emerge, in accordance with Revised IAS 19, effective from January 1, 2013. On January 1, 2007, the 2007 Financial Law and related enactment decrees brought significant changes to employee severance indemnity regulations, including the possibility for the employee to choose, by June 30, 2007, how to allocate his or her accruing benefits. Accruing severance pay may be assigned by the employee to selected pension funds or kept within the company (in the latter case the company will pay the severance pay contributions into a treasury account held at the INPS). 142 Marcolin S.p.A. Pursuant to these changes, the severance indemnity provision accrued up to the date of the employee's decision (defined benefit plans) was recalculated by independent actuaries, excluding the component of future salary raises. Severance indemnities accruing from the date of the employee's decision, and in any case from June 30, 2007, are considered a defined contribution plan, so the accounting treatment is similar to that in effect for all other contribution payments. Provisions for risks and charges Provisions for risks and charges consist of allowances for present obligations (either legal or constructive) toward third parties that arise from past events, the settlement of which will probably require an outflow of financial resources, and the amount of which can be estimated reliably. Provisions are stated at the discounted best estimate of the amount the company should pay to settle the obligation or to transfer it to third parties as at the reporting date. Changes in estimates are reflected in the income statement of the period in which the change occurs. Risks for which the emergence of a liability is merely possible are identified in the section relating to commitments and guarantees without making any allowances for them. Trade payables and other non-financial liabilities Payables with settlement dates that are consistent with normal terms of trade are not discounted to present value and are recorded at their face value. Financial liabilities Borrowings (loans)e initially recognized at cost, corresponding to the fair value of the liability less their transaction costs. They are subsequently measured at amortized cost; any difference between the amount financed (net of transaction costs) and the nominal value is recognized in the income statement over the life of the loan, using the effective interest method. If there is a change in the anticipated cash flows and management is able to estimate them reliably, the value of borrowings is recalculated to reflect such changes. Loans are classified among current liabilities if they mature in less than 12 months from the end of the reporting period and if the Company does not have an unconditional right to defer their payment for at least 12 months. Loans are derecognized when they are paid off or when all risks and costs associated with them have been transferred to third parties. Revenues and income Revenues are measured at their fair value net of returns, sales, discounts, allowances, and bonuses. The Company recognizes sales revenues when all risks and rewards of ownership of the goods are effectively transferred to the customers under the terms of the sales agreement. The revenues are recognized net of an allowance representing the best estimate of lost margin due to any product returns from customers. The allowance is calculated based on past experience. Revenues are stated net of returns, discounts, vouchers, bonuses and taxes directly connected with the sale of the goods and supply of the services. Revenues from services are recognized by reference to the state of completion of the transaction at the end of the reporting period. Interest income is accrued on a time basis by reference to the effective interest rate applicable to the related asset. Dividends are recognized when the shareholder’s rights to receive payment are established. This normally occurs when the dividend distribution resolution is approved at the General Meeting. Cost of sales The cost of sales includes the cost of producing or acquiring the goods and products sold. It includes all the costs of materials, processing, and expenses directly associated with production. It also includes the depreciation of buildings, plant and equipment, the amortization of the intangible assets used in production and inventory impairment losses. Royalties The Company accounts for royalty expense on an accrual basis according to the substance of the agreements stipulated. 143 Financial Statement for the year ended December 31,2014 Other costs The costs are recognized according to the relevance and matching principles. Financial income and costs Interest is accounted for according to the accrual concept on the basis of the interest rate established by contract. If not established by contract, interest is recognized using the effective interest method, i.e. using the interest rate that makes all inflows and outflows of a specific transaction financially equivalent. Translation of foreign currency amounts Transactions in currency other than the Euro are translated into local currency using the exchange rates in force on the transaction date. Foreign exchange differences realized in the period are recognized in the income statement. Foreign currency receivables and payables are adjusted at the exchange rate in force on the reporting date, recognizing the entire amount of profit or loss arising on exchange as financial income or finance costs in the income statement. Income tax expense Income taxes are stated in the income statement, except for those regarding items recognized directly in equity, for which the tax effect is also recognized directly in equity. Deferred taxes are calculated on the temporary differences generated between the value of the assets and liabilities reported in the financial statements and the value attributed to those assets and liabilities for tax purposes. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which they may be recovered. The carrying value of deferred tax assets is reviewed at the end of each reporting period and, as necessary, is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Any such reductions are reversed if the conditions causing them should cease to exist. Deferred tax assets and deferred tax liabilities are measured at the tax rates that are expected to apply when the assets are realized or the liabilities are settled, considering the tax rates in force and those that have been enacted or substantially enacted by the reporting date. Other taxes not relating to income, such as property and equity taxes, are included in the operating items. Italian tax consolidation Marcolin S.p.A., together with the parent company, Cristallo S.p.A. (absorbed through a reverse merger) and its subsidiaries Eyestyle Retail S.r.l. and Eyestyle.com S.r.l., had opted for the Italian tax consolidation regime for IRES (corporate income tax) purposes for 2013, 2014 and 2015, which recognized Marmolada S.p.A. as the parent company. On June 13, 2014, pursuant to the Italian Income Tax Code ("TUIR"), Presidential Decree no. 917, Article 117 et seq. of December 22, 1986, the ultimate parent company, 3 Cime S.p.A. notified the Italian Revenue Office of its adoption of the Italian tax consolidation regime with its subsidiaries, including Marcolin S.p.A., for 2014, 2015 and 2016. Accordingly, the tax consolidation in effect in 2013 was replaced with an identical agreement with 3 Cime S.p.A., which involved terminating the previous agreement and stipulating a new agreement for the new three-year period. From the current year to December 31, 2016, the tax consolidation regime will enable each participant (including the Company), by way of partial recognition of the group's tax burden, to optimize the financial management of corporate income tax (IRES), for example by netting taxable income and tax losses within the tax group. Tax consolidation transactions are summarized below: in years with taxable income, the subsidiaries pay 3 Cime S.p.A. the additional tax due to the tax authorities; the consolidated companies with negative taxable income receive from 3 Cime S.p.A. a payment corresponding to 100% of the tax savings realized, accounted for on an accruals basis. The payment is made only at the time of actual use by 3 Cime S.p.A. for itself and/or for other Group companies; 144 Marcolin S.p.A. if 3 Cime S.p.A. and the subsidiaries do not renew the tax consolidation option, or if the requirements for continuance of tax consolidation should fail to be met before the end of the three-year period in which the option is exercised, tax loss carryforwards resulting from the tax return are split up proportionally among the companies that produced them. FINANCIAL RISK FACTORS Market risks The Company operates on an international level and is exposed to foreign exchange risk (particularly as regards the U.S. dollar), so one of its objectives is to review and monitor fluctuations in the balances of its various foreign currency items in order to evaluate whether to apply hedges through dealings on the derivatives market. This method makes it possible to keep the main currency positions substantially balanced. According to the sensitivity analysis performed, a change in exchange rates should not significantly impact the Company's financial statements. Details of the hedging contracts in place on the reporting date are as follows. Currency hedges (euro/000) Type Financial Institution Notional Currency forward purchase Veneto Banca 1,000 Currency forward purchase Veneto Banca 1,000 Currency Maturity date Mark to Market USD 03.25.2015 94 USD 05.28.2015 89 The Company is exposed mainly with the U.S. dollar on sales of finished and semi-finished products from suppliers in the Far East, net of the cash flows associated with purchases in U.S. dollar markets. The hedging instruments in place on December 31, 2014 have a fair value of euro 183 thousand, accounted for in "short-term borrowings" in these financial statements. To determine the fair value of the currency forwards purchased, the Group used valuation techniques that are appropriate in the circumstances and for which sufficient information is available on the market. Level 2 inputs of the fair value hierarchy defined by IFRS 7 are used in the valuation techniques. For the currency derivatives, the potential decrease in the fair value of the currency forwards held by the Company as at December 31, 2014, due to a hypothetical sudden adverse change of 5% in the Euro-to-Dollar exchange rate (depreciation of the Dollar), would be euro 78 thousand. Conversely, a potential increase in fair value arising on appreciation of the Dollar would be euro 87 thousand. In keeping with its strategy, the Company stipulates derivative transactions solely for hedging purposes. If, however, such transactions do not meet all the conditions necessary to qualify for hedge accounting laid down in IAS 39, they are not accounted for as hedging transactions. Interest rate risk In 2013, the subscription of a euro 200 million bond issue with a fixed interest rate of 8.50% maturing in 2019, replacing pre-existing variable-rate loans, reduced considerably the Company's exposure to interest rate risk, which remains only on some short-term credit lines, for immaterial amounts, used by the Company to meet temporary cash flow requirements. The section describing liquidity risk provides information on the quantitative analysis of the Company's exposure to cash flow risk relating to interest rates on loans. Information on outstanding loans is provided subsequently in these Notes. Interest rate sensitivity analysis 145 Financial Statement for the year ended December 31,2014 Interest rate sensitivity analysis was performed, assuming a 25 basis-point increase and a 10 basispoint decrease of the Euribor/Swap yield curves, published by Reuters for December 31, 2014. In this manner, the Company determined the impact that such changes would have had on the income statement and on equity. The sensitivity analysis excluded financial instruments that are not exposed to significant interest rate risk, such as short-term trade receivables and payables. The interest on bank borrowings was recalculated using the above assumptions and the investment position in the year, recalculating the higher/lower annual finance costs. For cash and bank balances, the average balance of the period was calculated using the book values at the beginning and end of the year. The effect on income of a 25 basis-point increase/10 basis-point decrease in the interest rate from the first day of the period was calculated on the amount thus determined. According to the sensitivity analysis performed on the basis of the above criteria, the Company is exposed to interest rate risk on its expected cash flows. If interest rates should rise by 25 basis points, income would decrease by euro 101 thousand due to higher interest expense with banks and third parties with respect to the increase in financial income on intercompany loans and bank accounts. If interest rates should fall by 10 basis points, income would increase by euro 40 thousand. Credit risk The Company does not have a significant concentration of credit risk. Receivables are recognized net of writedowns for risk of counterparty default, calculated based on available information regarding the customer’s solvency and any useful statistical records. Guidelines and internal policies have been implemented for managing customer credit, supervised by the designated business function (Credit Management), to ensure that sales are conducted only with reasonably reliable and solvent parties, and through the setting of differentiated credit exposure ceilings. Receivables and other current assets are set forth below by the main areas in which the Company operates. Receivables by geographical area 12/31/2014 12/31/2013 (euro/000) Italy Rest of Europe 20,138 20,818 19,805 16,676 North America Rest of World 12,175 24,651 6,125 13,506 Total 77,782 56,112 Liquidity risk Prudent management of liquidity risk entails keeping a sufficient level of liquidity and having sources of funding available by means of adequate credit lines. Due to the dynamic nature of its business, the Company prefers the flexibility of obtaining funding through the use of credit lines. At present, based on its available sources of funding and credit lines, the Company considers its access to funding to be sufficient for meeting the financial requirements of ordinary operations and for the investments envisioned in its business plans and budgets. The types of credit lines available and the base rate on the reference date are reported subsequently in these Notes. Liquidity analysis Liquidity analysis was performed on loans, derivatives, and trade payables. Borrowings were specified by time bracket for principal repayments and non-discounted interest. Future interest amounts were 146 Marcolin S.p.A. determined using forward interest rates taken from the spot-rate curve published by Reuters at the end of the reporting period. None of the cash flows included in the table was discounted. Within 1 year From 1 to 3 years Loans and bonds (excluding capital lease) 57,245 2,500 193,753 - Interest expense on loans and bonds 17,181 34,119 34,101 - 167 134 (euro/000) Capital leas e Trade payables From 3 to 5 More than 5 years years - - 98,380 - - Fair value measurement of loans For the assessment of the fair value of loans secured, future cash flow was estimated on the basis of forward interest rate implicit in the interest rate relative to the valuation date and, as regards calculation of the coupon in progress, the most recent fixing available of the Euribor. The values calculated in this manner were discounted based on discount factors related to the different maturities of such cash flows. Borrowings-maturity (euro/000) Credit lines used Loans Other financiers Intercompany 12/31/2013 Credit lines used Loans Other financiers Intercompany 12/31/2014 Within 1 year 8,951 From 1 to 3 years - 2 3,439 11,471 23,862 (1) From 3 to 5 More than years 5 years - - - - 201 - 1 - 200 190,664 - 1 190,664 Total 8,951 1 3,641 202,134 214,728 15,039 - - - 15,039 21,243 2,450 1,250 - 24,943 2,435 126 191,914 - 194,475 18,695 57,412 2,577 646 193,810 - 19,341 - 253,798 USE OF ESTIMATES The preparation of financial statements requires management to make estimates that could affect the carrying value of some assets, liabilities, income and expenses, and disclosures concerning contingent assets and liabilities at the reporting date. Estimates were used mainly to determine the recoverability of intangible assets, the useful lives of tangible assets, market values used to evaluate impairment, the value of investments in subsidiaries and associates, the recoverability of receivables (including deferred tax assets), the valuation of inventory and the recognition or measurement of provisions. The estimates and assumptions are based on data that reflect currently available information. Estimates and assumptions that involve a significant risk of changes in the carrying values of assets and liabilities are described hereunder. Impairment of non-current assets When there is indication that the net carrying value exceeds the recoverable value, non-current assets are reviewed to determine whether they have suffered an impairment loss, in accordance with the accounting principles adopted. The recoverable value is represented by the fair value less costs to sell, or value in use, whichever is greater. The recoverable values were calculated based on value in use. Those calculations require 147 Financial Statement for the year ended December 31,2014 using estimates of future performance, the discount rate and the prospective growth rate to be applied to the forecast cash flows. If any such indication exists, management is required to perform subjective evaluations based on information available within the Company and on the market. If indications of impairment should exist, the Company calculates the potential impairment using the valuation techniques it considers to be the most appropriate. Proper identification of impairment indications and estimates of potential impairment are dependent on factors that may vary over time, affecting the measurements and estimates made by management. Deferred tax assets Recognition of deferred tax assets is based on expectations of profits in future years. Estimates of future earnings used to recognize deferred tax assets are dependent on factors that may vary over time and significantly affect estimates of deferred tax assets. 1. PROPERTY, PLANT, AND EQUIPMENT The composition of and changes in the item for the past two years are set forth below: Property, plant and equipement Land and buildings Plant and machinery Industrial and commercial equipment Other PP & E Assets under contrstruction Total 11,675 267 (36) (519) 4,857 693 (954) 1,042 457 (742) 1,635 403 (6) (396) 159 73 - 19,368 1,894 (42) (2,611) (euro/000) Net value at beginning of 2013 Increases Decreases Depreciation Impairment - - - - - - Reclassification and other movements - 83 24 47 (153) Net value at end of 2013 11,387 4,678 781 1,683 79 18,609 Net value at beginning of 2014 Increases Decreases Depreciation Impairment Reclassification and other movements 11,387 543 (2) (526) - 4,678 1,391 (976) 14 781 858 (656) - 1,683 564 (4) (461) - 79 586 (60) (14) 18,609 3,942 (66) (2,619) - Net value at end of 2014 11,403 5,107 983 1,782 591 19,867 The capital expenditures of the year totaled euro 3.942 million (euro 1.894 million in 2013) and were made for purchases of: • plant and machinery for euro 1.391 million; • industrial and commercial equipment for euro 858 thousand; • hardware and office furniture, included in other PP&E, for euro 564 thousand; • land and buildings for euro 543 thousand. The change in assets under construction and advances refers primarily to the downpayment on the building in Fortogna. The undepreciated values of property, plant and equipment and their accumulated depreciation as at December 31, 2014 are shown in the following table: Property, plant and equipement Land and buildings Plant and machinery Industrial and commercial equipment Other PP & E Assets under contrstruction Total Undepreciated value Accumulated depreciation 19,509 (8,106) 19,670 (14,563) 12,955 (11,972) 6,999 (5,216) 591 - 59,724 (39,857) Net Value 11,403 5,107 983 1,782 591 19,867 (euro/000) 2. INTANGIBLE ASSETS AND GOODWILL The composition of and changes in this item are set forth below: 148 Marcolin S.p.A. Intangible assets and goodwill Software Concessions, licenses and trademarks Net value at beginning of 2013 Merger impact Increases Decreases Amortisation Reclassifications and other movements Other changes Net value at end of 2013 797 642 (384) 131 1,186 Net value at beginning of 2014 Increases Decreases Amortisation Reclassifications and other movements Other changes Net value at end of 2014 1,186 922 (545) 1,563 (euro/000) Other Intangible assets under formation and advances Total Goodwill 6,386 16 (112) 105 6,395 6,300 (1,050) 5,250 1,554 33 (872) (236) (436) 43 15,037 692 (872) (1,546) 0 (436) 12,874 189,722 189,722 6,395 (116) 6,279 5,250 8,099 (2,230) - 43 117 (9) 152 12,874 9,138 (9) (2,891) 19,113 189,722 189,722 11,118 The intangible assets include mainly the amounts recognized as a result of the 2013 merger, particularly the goodwill of euro 189.722 million. Goodwill was tested for impairment to evaluate whether its carrying value was consistent with its fair value at the reporting date. The recoverable value of goodwill was estimated using the Company’s value in use, and was taken as the enterprise value emerging from the application of the unlevered free cash flow method to the projected cash flows in a continuing operation. The methods and sensitivity analysis used for the test results are described in the subsequent section on impairment testing. The impairment test and sensitivity analysis results provided values consistent with the invested capital presented in the financial statements. No shortages emerged from the sensitivity analysis; therefore, it is reasonable to conclude that the carrying value of goodwill in the Company's financial statements is consistent with its fair value, as the test did not require writing down the value of goodwill in Marcolin S.p.A.'s financial statements. During the year investments of euro 9.138 million were made (euro 692 thousand in 2013), including payments by the Company to some licensors. The purchase cost and accumulated amortization of the intangible assets deducted directly from the cost are shown in the following table: Intangible assets and goodwill (euro/000) Undepreciated value Accumulated depreciation Net Value Software Concessions, licenses and trademarks 8,130 (6,566) 7,437 (1,157) 1,563 6,279 Other Intangible assets under formation and advances Total Goodwill 14,934 (3,816) 152 - 30,652 (11,539) 189,722 11,118 152 19,113 189,722 Concessions, licenses and trademarks include the Web trademark. This asset was obtained in late 2008 for euro 1.800 million after being appraised by an independent professional, and is amortized over an estimated useful life of 18 years. Concessions, licenses and trademarks also include euro 5.000 million for an option that will enable the Company to extend a licensing agreement beyond its expiration date (2015) to December 2022. This cost will be amortized over 7 years starting from 2016. 149 Financial Statement for the year ended December 31,2014 3. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES The investments in directly controlled subsidiaries and associates and their changes for the year are reported below: Subsidiaries 12/31/13 * Merger impact Writedowns of the year Subscription / disposal 12/31/2014 Marcolin Deutschland Gmbh Marcolin UK Ltd Marcolin Iberica SA Marcolin Gmbh Marcolin Portugal Lda Marcolin Benelux Sprl Marcolin do Brasil Ltda Marcolin Usa Inc Marcolin France Sas Marcolin International B.V. Eyestyle Retail Srl Eyestyle.com Srl Eyestyle Trading (Shanghai) Co Ltd Sover M ZAO Ging Hong Lin International Co Ltd 1,161 2,638 3,268 33 0 477 3,402 49,622 731 756 489 115 - - - 270 1,533 - 1,161 2,638 3,268 33 477 3,402 49,622 731 756 489 385 1,533 - Total 62,691 - - 1,803 64,494 (euro/000) * during 2013, due to the inverse merge w ith Cristallo, partecipation values w ere updated at their Fair Values at the acquisition date. At December 31, 2014 management did not find any indications of impairment in the values of the equity investments. With respect to Marcolin do Brasil Ltda, whose carrying value diverged from the Parent Company's equity, integration with Viva Brazil is being completed; the absorption merger took effect for legal purposes on January 1, 2015. A new General Manager with extensive experience in the eyewear industry has been hired to pursue the growth of the new entity through the projected synergies, with the aim of boosting sales and exploiting the operational gearing. Therefore, according to management, no indications of impairment exist that could require to write down the value of the equity investment. With respect to Eyestyle Retail Srl, and specifically to the recovery of key money (paid to the previous lessee for taking over the lease), management verified that the effective rental cost incurred by the subsidiary (including key money) was consistent with the market rate for the area, where payment of key money is standard practice and will potentially enable the company to recover the amount when a new lessee takes over the lease. Due to its losses, Eyestyle Trading Shanghai was recapitalized with a capital injection of euro 270 thousand. Information on the investments in associates is shown below: Associates (euro/000) FINITEC Srl in liquidation Total 12/31/2013 Merger impact Writedowns of the year 86 86 (86) (86) - Subscription / disposal - 12/31/2014 - Finitec S.r.l. was put into liquidation pursuant to a resolution of the Extraordinary General Meeting held on May 6, 2011. In 2014 the liquidation process of associate Finitec S.r.l. in liquidation was completed. On October 30, 2014, shareholder Marcolin was assigned assets of euro 240 thousand deriving from the liquidation. 150 Marcolin S.p.A. Marcolin purchased from Finitec an idle building (next to the Company's historical headquarters in Longorone), which will soon be used to expand the floor space dedicated to the business activity. Impairment testing Impairment testing, under IAS 36, is performed at least annually for intangible assets with an indefinite useful life, such as goodwill. Other intangible assets are tested whenever there are external or internal indications that they have suffered an impairment loss. The Group's total goodwill of euro 281.452 million as at December 31, 2014, of which euro 189.722 million refers to the Parent Company, was tested for impairment to assess the fairness of the carrying amount as at the reporting date. The new organizational structure resulting from Viva International integration represents the full integration of all Viva structures into Marcolin; Viva's previous structures lost their identity in the integration process through acquisitions, mergers and business division transfers conducted within the vast international reorganization of the Group, which is now managed as a single unit coordinated by the Parent Company using a centralized model. For this reason goodwill was measured at a Group level. The recoverable amount of goodwill was estimated using the Marcolin group's value in use, and was taken as the enterprise value emerging from the application of the unlevered free cash flow method to the projected cash flows of the Marcolin group's continuing operation (including Viva International cash flows). The following assumptions were made to determine value in use: • • • • the cash-generating unit was identified in the Marcolin group (cash flows from projected operating/financing activities of Marcolin S.p.A. and its Italian and foreign subsidiaries); the main data sources used were the Group's 2015 - 2017 business plan projections, the consolidated financial statements for the year ended December 31, 2013, the draft financial statements for the year ended December 31, 2014, and the 2015 Budget; the 2015 - 2017 business plan was approved by the Parent Company's Board of Directors on February 26, 2015; the terminal value was calculated by capitalizing the available cash flow expected perpetually from 2018 (estimated on the basis of the last year in the business plan, given an increase in the "g" rate from the last year stated). It has been assumed that it will grow at a "g" rate of 2.3%, conservatively considering the inflation projections for the countries in which Marcolin is present. The terminal value was adjusted to account for the Parent Company's transfer of the provision for severance indemnities; the cash flow discount rate (WAAC) is 8.8%, calculated in line with the Capital Asset Pricing Model (CAPM) used for valuation in doctrine and in standard practice. This rate reflects current market estimates referring to: 1) the cost of capital for debt (Kd = 3.0%, after taxes); 2) the expected return on the risk capital invested in Marcolin (Ke = 9.6%), weighted considering the source of the Group's main cash flows. Weighted Kd/Ke was determined under the applicable accounting standards by considering the average financial structure of Marcolin's main comparables, assuming that the value of the entity's projected cash flows does not derive from its specific debt/equity ratio. Based on the results of the analysis performed, goodwill did not suffer any impairment losses. Moreover, sensitivity analysis was performed on the Group's enterprise value, determined with the previously described methods, assuming: • • changes in WAAC; changes in the g rate. 151 Financial Statement for the year ended December 31,2014 In this case, a half-percentage point increase in WAAC would result in a euro 41 million decrease in the enterprise value (given the same g), whereas a half-percentage point decrease in the g rate would result in an euro 37.9 million decrease in the enterprise value (given the same WAAC). In both cases no impairment losses would affect the Profit and Loss. In the case of conservative 100 bp reductions of WAAC and the "g" rate, the impairment test and sensitivity analysis results produced recoverable amounts in line with the invested capital presented at December 31, 2014 for the Marcolin group, without any impairment losses, even considering the combined reduction of such parameters. In addition, a stress test was performed assuming higher capital expenditures than those budgeted, and estimating possible cash outflows that the Group could incur to renew certain licenses upon their expiration. The stress test confirmed that the coverage amounts remain positive, with broad safety margins. It is reasonable to conclude that the carrying value of goodwill in the Parent Company's financial statements is consistent with its fair value. With respect to the investments in subsidiaries and associates recognized in the separate financial statements, due to the positive results achieved in the recent past and in light of the 2015 forecast, management did consider any indications of impairment to exist. 4. NON-CURRENT FINANCIAL ASSETS Non-current financial assets were euro 108.190 million, compared to euro 97.624 million in 2013. The 2014 amount consists of: • • euro 102.957 million in loans granted to subsidiary Marcolin USA, Inc. used to finance the December 3, 2013 acquisition of Viva Optique, Inc.; a euro 5.000 million loan granted to a third party, accruing interest at market rates, whose repayment will commence on January 1, 2016 with semiannual installments until 2022. Mainly, the balance increase is due to end-of-period adjustments to the loan granted to Marcolin USA Inc. arranged in U.S. dollar. 5. OTHER NON-CURRENT ASSETS The other non-current assets, euro 527 thousand (euro 635 thousand in 2013), consist mainly of prepaid transaction costs for the euro 25 million senior revolving credit facility, deferred over the duration of the financing agreement. 6. INVENTORIES Inventories are detailed below. 152 Marcolin S.p.A. Inventories 12/31/2014 12/31/2013 (euro/000) Finished goods Raw material Work in progress Gross inventory Inventory provision Net inventory 49,536 16,294 11,633 32,511 10,509 9,991 77,463 (14,402) 53,012 (16,605) 63,061 36,407 Net inventories rose by euro 26.654 million from the previous year. The increase in closing inventories is attributable to an increase in “current” finished product inventories due to the higher sales, management's decision to improve customer service by reducing delivery time and increasing the supplies of continuing products (to be “never out of stock”), and the increase in models and designs in the collections produced. In contrast, inventories of products from non-current collections fell considerably from those of 2013. The inventory increase is also attributable to discontinuity represented by products with new brands, particularly Zegna and Pucci, which will be launched shortly. In detail: • • • the value of finished products rose by euro 17.025 million; the value of raw materials rose by euro 5.785 million; the value of work in progress rose by euro 1.642 million. 7. TRADE RECEIVABLES The composition of the trade receivables is as follows: Trade receivables 12/31/2014 12/31/2013 (euro/000) Gross trade receivables 72,433 48,229 Provision for bad debts (2,232) (1,609) Net trade receivables 70,201 46,621 Trade receivables (up by euro 23.580 million) were affected primarily by the sales growth. The increase in trade receivables is due particularly to the acceleration of business at the end of 2014, caused by a concentration of deliveries at the end of the year. The credit quality of receivables due from third parties remained consistent with that of recent years. In 2014 the recent improvement in the average collection period, or "days sales outstanding" (DSO), lost momentum, but the extreme emphasis on credit management and client selection made it possible to keep the DSO, which rose slightly, under control even in the most difficult markets. The amount of receivables stated in the financial statements was not discounted, since there are no long-term receivables or receivables due beyond the short term. For the purpose of providing the disclosures required by IFRS 7, the trade receivables due are set forth below by geographical area: 153 Financial Statement for the year ended December 31,2014 Receivables not overdue by geographical area 12/31/2014 12/31/2013 Italy 11,416 9,611 Rest of Europe 24,070 10,815 (euro/000) North America Rest of World Total 666 3,445 16,196 10,326 52,347 34,197 In compliance with IFRS 7, the following table provides an aging analysis of the undisputed trade receivables: Aging analysis of trade receivables not in protest (euro/000) 12/31/2013 Not past due Past due by less than 3 months Past due by 3 to 6 months Past due by more than 6 months Total Gross value Provision Net value 34,197 2,852 3,126 7,500 (136) (240) (788) 34,197 2,716 2,886 6,712 (1,164) 46,511 47,675 12/31/2014 Not past due Past due by less thank 3 months Past due by 3 to 6 months Past due by more than 6 months 52,347 9,388 1,119 8,250 (251) (319) (712) 52,347 9,137 799 7,538 Total 71,103 (1,282) 69,821 In some markets in which Marcolin S.p.A. operates, receivables are regularly collected after the date stipulated by contract, without this necessarily indicating collection issues or financial difficulties. Consequently, there are trade receivable balances that were not considered impaired even though they were past due. These trade receivables are set forth in the table below by past-due category. Trade receivables past due but not impaired (euro/000) Past due by less than 3 months Past due by more than 3 months Total 12/31/2014 12/31/2013 3,340 1,208 4,548 2,715 9,602 12,317 For the sake of exhaustive disclosure, an aging analysis of disputed receivables and the related writedowns is set forth below. Aging analysis of trade receivable in protest (euro/000) 12/31/2013 Past due by less than 12 months Past due by more than 12 months Total 12/31/2014 Past due by less than 12 months Past due by more than 12 months Total Gross value Provision Net value 37 669 706 (26) (573) (599) 11 96 107 103 1,033 1,135 (72) (878) (950) 30 155 185 Some trade receivables are covered by the types of guarantees typically used for sales on international markets. 154 Marcolin S.p.A. The changes in the provision for doubtful debts are set forth below: Provision for doubtful debts 2014 2013 (euro/000) Opening amount Provisions Restore Uses / reversals Reclassifications and other changes 1,760 50 Total (125) 548 1,959 100 (163) (136) - 2,232 1,760 Euro 50 thousand was allocated to the provision in the year, and euro 125 thousand of the provision was used. In 2014 the previously allocated provision for doubtful debts of Marcolin France was reduced by euro 31 thousand to discount it to present value. The trade receivables due from directly and indirectly controlled subsidiaries are set forth below: Receivables due from subsidiaries (euro/000) Marcolin Deutschland Gmbh Marcolin UK Ltd Marcolin Iberica SA Marcolin Gmbh Marcolin Portugal Lda Marcolin Benelux Sprl Marcolin Usa Inc Marcolin Internantional B.V. Marcolin Asia Ltd Marcolin do Brasil Ltda Marcolin France Sas Eyestyle.com Srl Eyestyle Retail Srl Eyestyle Trading (Shanghai) Co Ltd Viva Optique Inc d/b/a Viva International Group Viva France Sas Viva Eyewear UK Ltd Viva Eyewear Hong Kong Ltd Viva Canada Inc Viva IP Inc Total 12/31/2014 12/31/2013 2,183 1,527 1,451 476 1,488 535 11,595 3,612 5,204 8,546 446 744 7 543 11 449 2 38,820 798 736 975 370 1,401 261 5,485 1,470 206 2,611 7,143 445 694 22,595 8. OTHER CURRENT ASSETS The composition of other current assets is shown below. Other current assets 12/31/2014 12/31/2013 (euro/000) Tax credits Prepaid expenses Other receivables Total 4,064 602 2,915 7,582 5,241 409 3,841 9,491 155 Financial Statement for the year ended December 31,2014 The tax credits fell by euro 1.177 million on account of the lower taxes of the year, whereas other receivables fell by euro 925 thousand primarily as a result of the reduced amount of 2.428 million due from 3 Cime S.p.A. (compared to the euro 3.816 million of 2013 due from Marmolada, the former consolidator) pursuant to the Italian tax consolidation agreement signed in 2014. In fact, in 2014 Marcolin S.p.A. (with its subsidiaries Eyestyle Retail S.r.l. and Eyestyle.com S.r.l.) adopted the Italian tax consolidation regime for 2014, 2015 and 2016 for corporate income tax (IRES) purposes, which recognizes 3 Cime S.p.A. as the parent company. The relevant effects are reported in the financial statement results as at December 31, 2014. Consequently, net deferred tax was recognized on the allocation of the deferred tax assets on the losses reported by Marcolin S.p.A. (recognized as income from tax consolidation) based on the expectation of future taxable profits according to the Company's business plan. 9. CASH AND BANK BALANCES This item, which amounts to euro 18.879 million, represents the value of cash deposits and highly liquid financial instruments, i.e. those with a maturity of up to three months. Cash and bank balances rose by euro 12.193 million from December 31, 2013. 10. CURRENT FINANCIAL ASSETS This item, euro 10.078 million (8.293 million euro in 2013), consists primarily of the euro 9.885 million due from Group companies. The euro 979 thousand due from Marcolin France S.a.s. (recognized in previous periods) had been fully written down pursuant to the waiver to settle the subsidiary's losses. Given the profits reported recently by the subsidiary and the outlook for the next few years, it is currently considered likely that such accounts will be entirely recovered, so the writedowns were reversed. In early 2014 the Company received a repayment of euro 697 thousand from the subsidiary, after having received repayments totaling euro 5.414 million in 2011, 2012 and 2013. The current loan receivables due to Marcolin S.p.A. by subsidiaries and associates are listed below: • • • • • euro 5.836 million due from Marcolin International BV; euro 3.053 million due from Marcolin U.S.A. Inc.; euro 282 thousand due from Marcolin France Sas; euro 596 thousand due from Eyestyle Retail Srl; euro 119 thousand due from Eyestyle.com Srl. In accordance with EEC IVth Directive 78/660 Article 43, paragraph 1 no. 13, it is confirmed that as at December 31, 2014 the accounts did not include any loans to members of administrative, management, or control bodies, nor any guarantee commitments to any members of administrative, management, or control bodies, directors or statutory auditors. 11. EQUITY Marcolin S.p.A.’s share capital is euro 32,312,475.00, composed of 61,458,375 ordinary shares. The Statement of Changes in Equity provides more detailed information on this item. 156 Marcolin S.p.A. Item Uses in previous three years Amount Possible use Available portion (euro/000) Share capital 32,312 Share premium reserve 24,517 A-B-C Legal reserve 3,853 B Fair value reserve (First-time adoption or "FTA") B FTA reserve B Stock Option reserve Other reserves 45,420 Retained earnings 102,486 A-B-C 208,589 Total Non-distributable portion under Civil Code Art. 2426, comma 1 n. 5 c.c. Non-distributable portion under Civil Code Art. 2426 Distributable portion Restricted portion under TUIR Art.109 paragraph 4/b Key: A – to increase share capital B - to cover losses - loss coverage -other - - 24,517 600 101,557 126,675 2,609 124,065 C – to distribute to shareholders D – others 12. NON-CURRENT FINANCIAL LIABILITIES The item consists of euro 191.931 million regarding the bond notes, accounted for in accordance with IAS 39 (amortized cost method), and an increase in bank loans, the long-term portion of which is euro 3.676 million. The net financial position is set forth below. Additional information is provided in the Report on Operations. 157 Financial Statement for the year ended December 31,2014 Net financial position / (indebtedness) 12/31/2014 12/31/2013 Cash and cash equivalents Current financial receivables Short-term borrowings Current portion of long-term borrowings Long-term borrowings 18,879 118,257 (56,080) (1,332) (196,386) 6,686 105,917 (23,781) (81) (190,865) Total net financial indebtedness (116,662) (102,124) (euro/000) The following table presents the maturities of the financial payables, which are classified as current liabilities and non-current liabilities. Borrowings-maturity Within 1 year (euro/000) From 1 to 3 years From 3 to 5 More than years 5 years Total Credit lines used 15,039 - - - 15,039 Loans 21,243 2,450 1,250 - 24,943 2,435 126 191,914 - 194,475 Other financiers Intercompany 18,695 12/31/2014 - 57,412 646 2,577 193,810 - 19,341 - 253,798 In additional to the commitments described subsequently (see Note 20), for the revolving credit facility, commitments to comply with financial covenants exist at a consolidated level for Marcolin S.p.A. and its subsidiaries. According to an analysis conducted at the time of preparation of this report, the covenants were complied with as at December 31, 2014. 13. NON-CURRENT PROVISIONS The composition of non-current provisions is shown below: Long term provision (euro/000) 01.01.2013 Provisions Use / reversal Actuarial loss / (gain) Others 12/31/2013 Provision for severance employee indemnities Provision for agency terminations Provision for other risks Other provisions Total 3,386 83 (176) 326 37 3,656 1,254 96 (328) 35 1,057 11,582 (11,582) - 1,441 250 (570) 1,121 17,662 429 (12,656) 361 37 5,833 The long term provision consists primarily of the employee severance indemnity provision ("TFR") of euro 3.656 million. The provision for other risks presents the estimated amount, in a medium/long-term time horizon, of the potential losses regarding some licenses, calculated on the basis of future earnings projections, given the expected turnover growth and related contractual obligations. The provision was used for euro 11.582 million due to the materialization of the conditions for its adjustment, on the basis of the best available information. The employee severance indemnity provision ("TFR") recognized in the Company's financial 19 statements for euro 3.656 million , was measured with an actuarial calculation at the end of the year. 20 19 The provision consists of the benefits that accrued to employees until December 31, 2006 to be paid upon or subsequent to termination of employment: the TFR accruing from January 1, 2007 is treated as a defined contribution plan. By paying the contributions into (public and/or private) social security funds, the Company complies with all relevant obligations. 20 The parameters used for the actuarial calculation are: 1) mortality rate: Table RG 48 of the Public Accounting Office; 2) disability rates: INPS table by age and gender; 3) personnel turnover rates: 5%; 4) frequency of severance payments: 2%; 5) discount/interest rate: 0.91%; 6) TFR 158 Marcolin S.p.A. The additional information required under Revised IAS 19 is provided hereunder: • • • • sensitivity analysis of each significant actuarial assumption at the end of the year, showing effects of changes in actuarial assumptions reasonably possible at that date, in absolute terms; next year's service cost; the average vesting period of the defined benefit obligation; payments foreseen under the plan. Sensitivity analysis DBO* at 12/31/2014 Inflation rate +0.25% Inflation rate - 0.25% Actuarial rate +0.25% Actuarial rate - 0.25% Turnover rate -1% Turnover rate +1% 3,717 3,619 3,590 3,749 3,636 3,703 * Defined Benefit Obligation Next year service cost Vesting period 2015 Service Cost Resting period Years 0.00 9.2 Payments foreseen 1 2 3 4 5 343 246 227 235 202 14. OTHER NON-CURRENT LIABILITIES This item consists primarily of security deposits due after 12 months from the reporting date. 15. TRADE PAYABLES The following table sets forth the trade payables by geographical area: Trade payables by geographical area 12/31/2014 31.12.2012 Italy 30,056 17,846 Rest of Europe 23,665 4,267 North America Rest of World 8,940 5,688 35,720 13,939 (euro/000) Total 98,380 41,740 growth rate: 1.95% for 2015, 1.2% for 2016, 1.5% for 2017 and 2018, 2% for 2019 on; 7) inflation rate: 1.95% for 2015, 2.4% for 2016, 2.625% for 2017 and 2018, 3% for 2019 on. 159 Financial Statement for the year ended December 31,2014 The euro 56.641 increase in trade payables is attributable to the loose purchasing policy in place to deal with the sales and service level growth, involving a clear increase in inventories. The 2014 end-of-period amount is also affected by the recognition of payables due to some licensors under important license renewals that were stipulated in the year but will affect the cash flows of 2015. Excluding this effect in order to make comparison between the two years more meaningful, the average payment period, or "days payable outstanding" (DPO), for trade payables improved considerably year-on-year. The trade payables were not subject to discounting, as the amount is a reasonable representation of their fair value since there are no payables due after 12 months. In compliance with the disclosure requirements of IFRS 7, it is reported that on December 31, 2014 there were no past-due trade payables, excluding the accounts being disputed by the Company with suppliers. 16. CURRENT FINANCIAL LIABILITIES The amount represents the short-term borrowings of euro 57.412 million, including the euro 35.532 million short-term portion of medium/long-term loans, and other financial payables of euro 18.695 million due within 12 months from the reporting date (all of which due to subsidiaries). Financial liabilities at fair value through profit and loss During the year, the Marcolin S.p.A. stipulated derivative contracts on the U.S. dollar exchange rate with Veneto Banca Holding to protect itself against the risk of exchange rate variability, some contracts of which were still in effect on the reporting date. The fair value of such derivatives on December 31, 2014 was euro 182 thousand. Although the derivatives were designated to hedge against the risk of exchange rate variability on purchases from suppliers in U.S. dollars, they were not accounted for hedge accounting because they do not meet the strict requirements, including formal ones, of the applicable accounting standard. 17. CURRENT PROVISIONS The table below presents the most significant changes of the year in the current provisions: Current provisions (euro/000) Others Total 01.01.2013 Provision Use / reversal Actuarial loss / (gain) Others 6,329 140 (4,542) 6,329 140 (4,542) - 408 408 12/31/2013 2,335 2,335 The other provisions consist of allowances for risks regarding: • • • • 160 customer returns and product warranties (euro 1.148 million); future contingent liabilities of euro 29 thousand; contingent liabilities arising from legal obligations (euro 155 thousand); commitments of euro 1.003 million to cover losses of subsidiaries, consisting of euro 902 thousand for Marcolin France and euro 101 thousand for Marcolin Portugal. Marcolin S.p.A. 18. OTHER CURRENT LIABILITIES The other current liabilities are as follows. Other current liabilities 12/31/2014 12/31/2013 (euro/000) Payables to personnel (4,419) (3,314) Social security payables (1,812) (1,654) Other accrued expenses and deferred income Total (50) (6,282) 0 (4,968) The other current liabilities increased from 2013 manly as a result of amounts due to personnel and the related social security. 19. COMMITMENTS AND GUARANTEES Guarantees associated with the bond note issue: With a notarial deed dated October 31, 2013, the Board of Directors passed a resolution to issue nonconvertible senior-secured notes; with a determination deed drawn up by a specifically designated director on November 7, 2013, and in implementation of the Board of Directors' mandate of October 31, 2013, the terms and conditions for the issuance of notes of nominal euro 200,000,000 were established. The notes are secured by collateral provided by the Issuer, controlling shareholder Marmolada S.p.A. and some subsidiaries of the Issuer to discharge the payment obligations assumed by the Issuer with the bondholders: • • • • • • • • • • • • • • a pledge over the shares of the Issuer representing 100% (one hundred percent) of share capital; a pledge over the Issuer's intellectual property rights; a security assignment over insurance policy receivables due to the Issuer; a security assignment over trade receivables due to the Issuer; a security assignment over receivables due to the Issuer by Marcolin USA, Inc. originating from loans granted to provide the company with the financing necessary to pay the purchase price/acquire the share capital of Viva Optique Inc.; a pledge over all Marcolin (UK) Limited shares owned by the Issuer; a pledge over all Marcolin France S.a.s. shares owned by the Issuer; a pledge over all Marcolin (Deutschland) Gmbh shares owned by the Issuer; a pledge over all Marcolin USA, Inc. shares owned by the Issuer; a pledge over all shares of Viva Optique Inc., directly controlled by Marcolin USA, Inc., owned by Marcolin USA, Inc.; a pledge over 65% of the shares of Viva Europa Inc., controlled indirectly by the Issuer, through Viva Optique Inc.; a pledge over 65% of the shares of Viva Eyewear Ltd (UK), controlled indirectly by the Issuer, through Viva Europa Inc.; a security agreement over all material assets of Marcolin USA, Inc.; a security agreement over all material assets of Viva Optique, Inc. Other commitments: The Company's other commitments are as follows: 161 Financial Statement for the year ended December 31,2014 Commitments (euro/000) Rent due Within one year In one to five years After five years Total Operating lease payment Within one year In one to five years After five years Total Total commitments 12/31/2014 12/31/2013 172 694 353 1,219 163 82 18 45 0 63 13 97 0 110 1,282 354 245 The Company also has guarantees with third parties of euro 162 thousand (euro 161 thousand in 2013). Licenses The Company has contracts in effect to use trademarks owned by third parties for the production and distribution of eyeglass frames and sunglasses. Those contracts require payment of guaranteed minimum royalties over the duration of the contracts; at December 31, 2014 such future commitments amounted to euro 230.447 million (euro 238.711 million in 2013), including euro 39.953 falling due within the next year. Guaranteed minimum Royalties due (euro/000) Within one year In one to five years After five years Total 162 12/31/2014 12/31/2013 39,953 163,486 27,008 230,447 42,853 167,878 27,980 238,711 Marcolin S.p.A. INCOME STATEMENT As described in the Report on Operations, the balances partly include non-recurring costs incurred for special initiatives undertaken or pursued during the year, such as extraordinary costs for employees who left the company, consulting services and services associated with the non-recurring transactions of the year, and costs of investment and development that have not been matched by revenue streams yet. The effects of those costs are described in the Report on Operations in order to take them into account for the purpose of determining normalized income for 2014, comparable with 2013. The Company's main income statement items and changes therein are described in this section. 20. REVENUE The following table sets forth the net sales revenues of 2014 by geographical area: Net sales by geographical area (euro/000) 2014 Turnover 2013 Increase (decrease) % on total Turnover % on total Turnover Change Europe 70,784 47.1% 61,874 50.2% 8,910 14.4% U.S.A. Asia Rest of World 28,585 25,006 26,045 19.0% 16.6% 17.3% 20,331 18,160 16.5% 18.6% 14.7% 8,254 1,997 7,885 40.6% 8.7% 43.4% 150,420 100.0% 123,374 100.0% 27,047 21.9% Total 23,009 The 2014 sales revenues were euro 150.420 million, compared to the euro 123.474 revenues of 2013, representing a substantial increase of euro 27.046 million (21.9%) from the prior year. The Report on Operations describes the 2014 performance of sales. 21. COST OF SALES Below is a detailed breakdown of the cost of sales: Cost of sales (euro/000) Purchase of materials and finished products Changes in inventories Cost of personnel Outsourced processing Amortization, depreciation and writedowns Other costs Total 2014 % sui ricavi 2013 % sui ricavi Incremento (decremento) % 74,390 (26,560) 16,455 10,478 2,088 7,204 84,054 49.5% (17.7)% 10.9% 7.0% 1.4% 4.8% 55.9% 36,457 1,213 16,200 6,946 2,168 3,992 66,976 29.5% 1.0% 13.1% 5.6% 1.8% 3.2% 54.3% 37,933 (27,773) 255 3,532 (80) 3,211 17,079 104.0% (2290.3)% 1.6% 50.8% (3.7)% 80.4% 25.5% The cost of sales rose by euro 17.079 million, and was 55.9% of sales, compared to 54.3% in 2013. The product costs remained fairly consistent with those of the previous year, thanks to activities undertaken to contain the impact on margins of inflation, especially in the sourcing markets (China). The other expenses refer principally to purchasing costs (transport and customs) and business consulting services. 163 Financial Statement for the year ended December 31,2014 22. DISTRIBUTION AND MARKETING EXPENSES Below is a breakdown of the distribution and marketing expenses: Distribution and marketing expenses (euro/000) % sui ricavi 6.0% 2.1% 2.0% 10.0% 10.3% 5.5% 35.9% 2014 9,098 3,189 2,968 15,014 15,439 8,302 54,011 Cost of personnel Commissions Amortization Royalties Advertising and PR Other costs Total 2013 8,111 2,540 1,630 17,189 13,612 7,159 50,239 % sui ricavi 6.6% 2.1% 1.3% 13.9% 11.0% 5.8% 40.7% Incremento (decremento) 988 649 1,338 (2,174) 1,827 1,143 3,771 % 12.2% 25.6% 82.1% (12.6)% 13.4% 16.0% 7.5% Distribution and marketing expenses rose by euro 3.771 million (7.5%) from the previous year; the increase is the result of an increase in advertising and public relations ("PR") expenses, amortization and other expenses, despite a considerable decrease in royalty expense. Excluding amortization, the total annual increase is euro 2.433 million. The other expenses consist primarily of sales expenses, including transport costs, travel expenses, rent expense and entertainment expenses. 23. GENERAL AND ADMINISTRATION EXPENSES The general and administrative expenses are set forth below: General and administration expenses (euro/000) 2014 5,358 50 459 6,954 12,821 Cost of personnel Writedowns of receivables Amortization and writedowns Other costs Total % sui ricavi 3.6% 0.0% 0.3% 4.6% 8.5% 2013 5,217 100 402 6,187 11,906 % sui ricavi 4.2% 0.1% 0.3% 5.0% 9.7% Incremento (decremento) 141 (50) 57 767 915 % 2.7% (50.0)% 14.1% 12.4% 7.7% General and administration expenses increased by euro 915 thousand compared to the previous year. Other expenses, euro 6.954 million (up by euro 767 thousand year on year), refer mainly to: • compensation for Directors, Statutory Auditors and the independent auditing firm; • other general and administrative consulting services; • expenses regarding the Company's information technology systems. 24. EMPLOYEES The 2014 average and end-of-period number of employees (including the work force on temporary contracts) is broken down below in comparison with the previous year: Employees Category Managers Staff Manual workers Total 164 Final number 12/31/2014 Average number 12/31/2013 2014 2013 15 13 14 14 238 456 214 393 231 418 212 409 709 620 663 635 Marcolin S.p.A. 25. OTHER OPERATING INCOME AND EXPENSES The other operating income and expenses are set forth below: Other operating income and expenses 12/31/2014 12/31/2013 (euro/000) Transport refund 2,069 Other income 1,737 9,437 8,874 11,507 10,611 Reversals of impairment losses on equity investments - (706) Total reversals of imairment losses on equity investments - (706) Writedowns of receivables - - Other expenses (496) (338) Total other expenses (496) (338) 11,011 9,567 Total other income Total other operating income and expenses The balance of this item is net operating income of euro 11.011 million, compared to net operating income of euro 9.567 million for 2013 (up by euro 1.444 million). Other income consists mainly of euro 7.664 million in advertising expenses incurred by the Company that were charged to other Group companies, compared to euro 6.863 million in 2013. 26. FINANCIAL INCOME AND COSTS Financial income and costs are set forth below: Financial income and costs 2014 2013 (euro/000) Financial income Financial costs Total 23,879 3,152 (24,702) (17,205) (823) (14,053) The composition of financial income and finance costs is shown below: Financial income 2014 2013 (euro/000) Interest income Other income 8,454 776 83 279 Gains on currency exchange 15,341 2,097 Total 23,879 3,152 165 Financial Statement for the year ended December 31,2014 Financial costs 2014 2013 (20,165) (14,507) (119) (104) (4,417) (2,593) (24,702) (17,205) (euro/000) Interest expense Financial discounts Losses on currency exchange Total Financial income and costs result in net finance costs of euro 823 thousand, compared to euro 14.053 million for 2013. Marcolin S.p.A.'s balance between income of euro 23.879 million and costs of euro 24.701 million was influenced by the following components: • • • • interest income from foreign subsidiaries of euro 8.454 million; profits on currency exchange of euro 15.341 million, including euro 3.022 million in profits on currency exchange and euro 12.318 million in financial income referring to end-of-period adjustments to a receivable due to Marcolin S.p.A. from Marcolin USA Corp. denominated in U.S. dollars, which increased due to the appreciation of the U.S. dollar; interest expense of euro 20.165 million, consisting mainly of euro 17.000 million on the bond notes issued by Marcolin S.p.A., paid semiannually in May and November, euro 1.375 million in reversed bond issue transaction costs, accounted for under IFRS with the financial method of amortized cost over the life of the bond notes (maturing November 2019), euro 0.926 million in net interest costs, and euro 0.580 million in additional finance costs regarding actualization and translation differences; the losses on currency exchange were euro 4.417 million. The Company's foreign currency exchange in 2014 resulted in a net loss of euro 1.394 million (including fair value measurement of currency hedges in place at the end of the year), referring entirely to currency translation adjustments to receivables and payables at the end of the year. Foreign currency exchange referring to income and expenses (foreign exchange differences on trade transactions) was balanced, with an immaterial net gain. Fair value measurement of currency hedges (on purchases and sales) in place at the end of the year resulted in a net gain of euro 182 thousand. 27. INCOME TAX EXPENSE Current tax was determined by applying the tax rates in force to taxable income (profit for the year determined with the changes generated by the applicative tax rules). The tax expense is detailed below: Incom e tax expense (euro/000) Current taxes Deferred taxes Income from Tax Consolidation Taxes relating to prior year Total incom e taxes 2014 (1,566) (6,860) 2,428 759 (5,239) 2013 (869) (1,226) 3,816 (2) 1,719 The increase in total income taxes is attributable to the deferred taxes. The deferred taxes and the changes therein are set forth below: 166 Marcolin S.p.A. Deferred tax assets (euro/000) Tem porary differences 12/31/2014 % 27,396 13,831 7,906 2,478 2,098 1,509 978 740 155 143 27.5% 27,5%/31,4% 27,5%/31,4% 27.5% 27.5% 27.5% 31.4% 31.4% 31.4% 27,5%/31,4% Accumulated tax losses Inventory provisions Grants and compensation deductible on a cash basis Unrealized currency exchange differences Income from CFC (controlled foreign companies) Taxed provision for doubtful debts Supplementary client indemnity provision Provision for return risks Provisions for risks and charges Other Total deferred tax assets 57,234 Tem porary differences 12/31/2014 % Unrealized currency exchange differences Finance costs deducted on a cash basis Land and buildings Actuarial gain / losses on TFR under IAS Other (12,945) (8,069) (2,910) (460) - 27.5% 27.5% 31.4% 27.5% 31.4% Total deferred tax liabilities Total deferred assets / liabilities 7,534 3,917 2,443 682 577 415 307 232 49 41 16,196 Deferred tax liabilities (euro/000) Tax on tamporary Tem porary differences differences 12/31/2014 12/31/2014 2,932 16,110 147 1,442 2,098 1,509 1,254 2,667 14,241 177 Tax on tamporary differences % 12/31/2014 27.5% 27,5%/31,4% 27,5%/31,4% 27.5% 27.5% 27.5% 31.4% 31.4% 31.4% 27,5%/31,4% 42,577 806 4,492 40 396 577 415 394 837 4,472 49 12,479 Tax on tamporary Tem porary differences differences 12/31/2014 12/31/2014 Tax on tamporary differences % 12/31/2014 (3,560) (2,219) (914) 53 - (311) (3,134) (168) (104) 27.5% 27.5% 31.4% 27.5% 31.4% (85) (984) (46) (33) (24,384) (6,640) (3,716) (1,148) 32,850 9,556 38,861 11,331 28. FINANCIAL INSTRUMENTS BY TYPE The financial instruments are set forth by uniform category in the table below, which presents their fair value in accordance with IFRS 7. For the fair value measurement of loans, future cash flows were estimated using implicit forward interest rates from the yield curve of the reporting date, and the latest Euribor fixing was used to calculate the current coupon. The values calculated in this manner were discounted based on discount factors related to the different maturities of such cash flows. The hedging agreements used are classified as O.T.C. (over-the-counter) instruments, so they do not have a public price available on official exchange markets. Discounted cash flow models were used to measure the interest rate swaps. Categories of financial assets (euro/000) Loans and other financial receivables Trade receivables 70,201 Financial Cash and bank assets balances 118,258 18,879 Financial assets at fair value through P/L - - - Held to maturity investments - - - Financial assets available for sale - - - Total 70,201 118,258 18,879 167 Financial Statement for the year ended December 31,2014 Categories of financial liabilities Trade payables Financial liabilities Bond Financial liabilities at fair value through P/L - - - Derivatives used for hedging - - - 98,380 59,301 194,196 - 301 - 98,380 59,602 194,196 (euro/000) Other financial liabilities at amortized cost Liabilities as under IAS 17 Total 168 Marcolin S.p.A. INCOME AND EXPENSES WITH SUBSIDIARIES AND ASSOCIATES The intercompany transactions are mainly of a trade and/or financial nature and are conducted on an arm's length basis. The income and expenses with directly controlled subsidiaries are set forth below: Company (euro/000) Revenues from sales and Other income services Company Marcolin Asia Ltd. Marcolin (Deutschland) GmbH Marcolin GmbH Marcolin Iberica S.A. Marcolin Benelux S.p.r.l. Marcolin Portugal Lda Marcolin (UK) Ltd Marcolin Usa Inc. Marcolin International BV Marcolin France SAS Marcolin do Brasil Ltda Eyestyle.com Eyestyle Retail Eyestyle Trading (Shanghai) Co Ltd Viva Optique Sover M Total 871 3,644 935 3,863 2,281 845 3,231 28,024 8,425 2,662 43 113 54,936 Financial income Cost of raw, ancillary from non-current and consumable receivables materials and products 9 159 82 129 134 40 218 404 605 156 10 1,946 8,360 62 4 29 8,454 11 3 6,219 6,233 Cost of services 12/31/2014 1,812 84 81 52 728 1,464 704 252 5,177 (943) 3,718 1,017 3,993 2,334 833 2,720 35,321 62 8,326 2,818 4 71 (6,347) 53,927 RELATED-PARTY TRANSACTIONS Related party transactions were of a trade nature, conducted on an arm's length basis, and regarded licensing agreements in particular. The transactions and outstanding balances with respect to related parties as at December 31, 2014 are shown below, as required by IAS 24. Company (euro/000) Expenses Revenues Payables Receivables 2,317 747 755 238 164 703 1,798 4,981 8 755 80 235 3,495 4,566 Type Other related parties Tod's S.p.A Pai Patners Sas Coffen Marcolin Family Diesel 3 Cime S.p.A. Total Related party - Related party - Realted party 2 Related party 2,428 Consolidating 2,669 The remuneration of the Directors and Statutory Auditors is reported below (the table does not present Managers with strategic responsibilities because they are included in the category of the Company's Directors). 2014 (euro/000) 2013 Board of Directors Statutory Auditors 389 674 1,063 100 100 Base fee Salaries and benefits Total Other - Board of Directors Statutory Auditors Other 368 642 1,010 90 90 - Atypical and unusual transactions 169 Financial Statement for the year ended December 31,2014 In 2014 there were no atypical and/or unusual transactions, including with other Group companies, nor were there any transactions outside the scope of the ordinary business activity that could significantly impact the financial position, financial performance or cash flows of Marcolin S.p.A. Significant non-recurring events and transactions Significant non-recurring events and transactions that impacted the Company's financial position, financial performance and cash flows in 2014 have to do with the Viva group integration and reorganization activities, described in detail in the Report on Operations. 170 Marcolin S.p.A. INDEPENDENT AUDITORS' REPORT ON THE SEPARATE FINANCIAL STATEMENTS 171 Independent Auditors' Report 172 Marcolin S.p.A. INDEPENDENT AUDITORS' REPORT ON THE SEPARATE FINANCIAL STATEMENTS 173 Independent Auditors' Report 174 Marcolin S.p.A. BOARD OF STATUTORY AUDITORS' REPORT 175 176 Marcolin S.p.A. BOARD OF STATUTORY AUDITORS' REPORT FOR THE GENERAL MEETING OF MARCOLIN S.P.A. PURSUANT TO ITALIAN CIVIL CODE ARTICLE 2429, ARTICLE 2 For the attention of the Sole Shareholder, MARMOLADA S.p.A. Dear Sir/Madam, The external audit of the accounts for each of the three years ending December 31, 2013, 2014 and 2015 has been assigned to PricewaterhouseCoopers S.p.A. (the “Independent Auditors”), in accordance with Italian Legislative Decree 39/2010, Article 14 and Italian Civil Code Articles 2409-bis et seq., and pursuant to the justified proposal of this Board of Statutory Auditors. The Board of Directors has provided us with the report on operations and draft financial statements for the year from January 1, 2014 to December 31, 2014, showing a profit of Euro 4,483,252, approved on March 27, 2015. This Board of Statutory Auditors and the Independent Auditors have received a formal waiver of the terms under Italian Civil Code Article 2429 from the sole shareholder, Marmolada S.p.A. In November 2013, your Company acquired the entire share capital of U.S. company Viva Optique, Inc., thereby expanding its size and global business; in conjunction with that acquisition, MARCOLIN S.p.A. issued and listed a senior backed, non-convertible bond for a total principal amount of Euro 200 million, with a maximum term of 6 years and return rate of 8.5%; the bond is listed on the Luxembourg stock exchange and on the Extra Mot of the Italian stock exchange. The financial resources deriving from the bond issue were used by the Company partly to finance the acquisition of Viva Optique and partly to refinance the Group's debt. During the year ended on December 31, 2014, we performed the supervisory duties required by law, in observance of the provisions issued by Consob and also in accordance with the Board of Statutory Auditors' code of conduct recommended by the Italian association of certified accountants. With respect to our supervisory duties, we report that: · we attended the Board of Director meetings and verified the observance of the principles of fair management, laws and by-laws, and the correct use of the proxies assigned to the Directors; · the Board of Statutory Auditors attended the General Meetings of Shareholders, which were held in observance of the law to pass appropriate resolutions; · the Company's Board of Statutory Auditors held 5 meetings during the year to perform the statutory controls and to exchange information with the firm responsible for the external audit; · we obtained the information necessary to perform our general supervisory function by constantly participating in Board of Director meetings and meeting with management. We also obtained from the Directors, on a regular basis, information on the activities performed by the executive directors in execution of the powers assigned to them, on the most significant business, financial and equity transactions, on related-party transactions including infra-group transactions, and on any atypical or unusual transactions, in accordance (as necessary) with Italian Legislative Decree 58/1998, Article 150, paragraph 1. This took place in keeping with the Company's specific corporate governance procedure to ensure that Directors and Statutory Auditors have at their disposal all information needed to ensure the correct fulfillment of their duties. Based on the information obtained, we verified that the main operations carried out by the Company were consistent with the business purpose and with the law and by-laws, and we can confirm that those operations were not manifestly risky, hazardous, such as to compromise the integrity of the Company’s net worth, or in contrast to the decisions taken at the General Meeting or in conflict of interest. · during the Board of Director meetings we were given periodic and timely information on the activity performed by the Company and the Subsidiaries, and on the most significant business, financial and equity transactions, and we verified that those transactions were consistent with the business purpose and with the law and by-laws, and were not manifestly risky, hazardous, such as to compromise the integrity of the Company’s net worth, or in contrast to the decisions taken at the General Meeting or in conflict of interest; · during the year we met regularly with the Independent Auditors and with other heads of functions; no matters worthy of note emerged from the meetings. · the Board of Statutory Auditors attended the Internal Audit Committee meetings; 177 · we found no evidence of atypical or unusual transactions as defined in Consob Communication 6064293 of July 28, 2006; · we verified that there are no routine intercompany or related-party transactions that are in conflict of the Company's interest or inconsistent; the intercompany and related-party transactions are described adequately by the Directors in the Report on Operations and in the explanatory notes; all such transactions were carried out on an arm's length basis; · the Company applied the principles regarding procedures that companies must adopt to ensure the necessary conditions of fairness in the process of carrying out transactions with related parties; · in light of the information obtained, and by examining the statutory audit minutes book, we also noted that the Board of Statutory Auditors of the former parent company, Cristallo S.p.A., as within its competence, performed its supervisory activity in accordance with current legislation and did not report any anomalies and/or issues; · we evaluated, as within our competence, the adequacy of the Company’s organizational structure, internal control system, administrative and accounting systems, and their reliability to accurately represent business matters, by collecting information from department heads, by meeting with the Independent Auditors with the reciprocal exchange of data and information, and by attending Internal Audit Committee meetings, and given the business activity and the size of the Company, we deem the organization and systems to be adequate; · we monitored the implementation of organizational measures associated with business developments; · we checked the Company's observance of the law and by-laws. We inspected and obtained information about the organizational and procedural activities implemented by the Company and its subsidiaries in accordance with Italian Legislative Decree 231/01 on the administrative liability of entities for the crimes contemplated by such legislation (and as subsequently amended). The Supervisory Body reported on the activity performed during the year ended December 31, 2014, without finding any wrongdoing or specific violations of the Company’s and the subsidiaries' Organizational Model. As noted, PricewaterhouseCoopers S.p.A. audited the Company’s separate financial statements for the year ended December 31, 2014 and on today's date (after having received the formal waiver of the terms under Italian Civil Code Article 2429 from the sole shareholder, Marmolada S.p.A.., also to the benefit of this Board of Statutory Auditors) it submitted an unqualified opinion, stating that the Company's separate financial statements for the year ended December 31, 2014 were "prepared clearly and give a true and fair view of the financial position, results of operations and cash flows". The Independent Auditors also stated that the report on operations is consistent with the separate financial statements of the Company. The Board of Statutory Auditors performed its supervisory function with the full collaboration of the corporate boards and adequate documentation was always provided. No omissions, wrongdoing or irregularities were found. We checked the accounting policies of the separate financial statements, upon which we agree in that they correspond to the Italian Civil Code rules and are consistent with those applied in the previous year. Intangible assets were recognized and amortized with our consent, as necessary. On March 27, 2015 the Board of Directors of MARCOLIN S.p.A. approved the draft consolidated financial statements of MARCOLIN S.p.A. for the year ended December 31, 2014; those financial statements, drawn up according to IAS/IFRS, were also audited by PricewaterhouseCoopers S.p.A., which issued a clean opinion on the true and fair view of the financial position, results of operations and cash flows of the group. The Independent Auditors stated that the report on operations is consistent with the consolidated financial statements of MARCOLIN S.p.A. As within our competence, we acknowledge that the Directors' report on the consolidated financial statements describes adequately the situation of the companies of the group, the financial and business matters, the subsequent events, the annual business performance and the business outlook for the current year. We reviewed the report to verify compliance with Italian Legislative Decree 127/1991, Article 40, the correct identification of the consolidated companies in accordance with the international accounting standards, and the information as per Article 39 of the same Decree. On the basis of the controls performed, the Board of Statutory Auditors considers the report on operations to be correct and consistent with the consolidated financial statements. 178 Marcolin S.p.A. The explanatory notes contain the information required by the international accounting standards, present the accounting principles and policies adopted, and present the consolidation methods, which correspond to those used for the previous year. No claims were made to the Board of Statutory Auditors under Italian Civil Code Article 2408 or of any other nature. During the year we issued the opinions requested of the Board of Statutory Auditors in accordance with the law. In consideration of the foregoing, pursuant to the supervisory activity performed, and on the basis of the information exchanged with the Independent Auditors, we are in favor of the approval of the financial statements and we agree with the Board of Directors' proposal to allocate euro 224,163 to the legal reserve and to carry forward the residual annual profit of Euro 4,259,089. April 22, 2015 Dr. David Reali Dr. Mario Cognigni Rag. Diego Rivetti 179 Marcolin S.p.A. FINANCIAL SUMMARY OF SUBSIDIARIES 181 RECLASSIFIED FINANCIAL STATEMENTS OF SUBSIDIARIES Marcolin Benelux Sprl Marcolin International BV (euro/000) 2014 Property, plant and equipment Marcolin do Brasil Ltda (euro/000) 2013 2014 2014 12 Goodw ill - - - Investments - - 4,516 Deferred tax assets - - - - Other non-current assets - - - - - - Non-current financial assets - - - - 152 - Total non current assets - - 2013 39 - Intangible assets 41 (BRL/000) 2013 834 321 378 - - - 4,516 1,520 - - - - 122 39 53 4,516 4,516 2,827 500 Inventories 279 167 - - 4,494 2,053 Trade receivables 624 425 - - 13,081 11,635 10 67 - - 1,857 2,156 300 - 9 - 473 - - 301 - 13 - 3,007 1,213 1,251 - 961 1,013 9 4,526 - 13 4,529 19,905 22,732 - 18,851 19,351 280 280 18 18 9,575 9,575 - - 4,317 4,317 - - 25 25 - - - - - - - - (4,500) (4,500) 128 214 (5,564) (5,450) 2,195 4,695 7 (86) (93) (114) (5,506) (2,574) 440 433 (1,321) (1,228) 1,764 7,196 Long-term borrow ings - - - - - - Long-term provisions - - - - 718 865 Deferred tax liabilities - - - - - - Other non-current liabilities - - - - - - Total non-current liabilities - - - - 718 865 Other current assets Current financial assets Cash and bank balances Total current assets TOTAL ASSETS Share capital Additional paid-in capital Legal reserve Other reserves Retained earnings (losses) Profit (loss) for the year Non-controlling interest TOTAL EQUITY Trade payables 581 326 11 5,724 16,867 8,783 Short-term borrow ings - - 5,836 34 1,520 - Short-term provisions - - - - - - 24 32 - - 403 2,148 Other current liabilities 206 222 - - 1,460 359 Total current liabilities 811 580 5,847 5,758 20,251 11,290 811 - 580 - 5,847 - 5,758 - 20,968 - 12,155 - 1,251 1,013 4,526 4,529 22,732 19,351 Current tax liabilities TOTAL LIABILITIES TOTAL LIABILITIES AND EQUITY Marcolin Benelux Sprl Marcolin International BV (euro/000) 2014 NET REVENUES Marcolin do Brasil Ltda (euro/000) 2013 2014 (BRL/000) 2013 2014 2013 4,953 4,313 - - 19,485 16,505 COST OF SALES (2,203) (1,916) - - (9,401) (6,709) GROSS PROFIT DISTRIBUTION AND MARKETING EXPENSES 2,750 2,397 - - 10,084 9,796 (2,575) (2,342) - - (12,488) (9,941) GENERAL AND ADMINISTRATIVE EXPENSES (188) (183) (32) (114) (2,305) (1,121) 96 98 - - (8) 0 - other operating income 96 98 - - 3 0 - other operating expenses (0) (0) - - (11) - 83 (30) (32) (114) (4,718) (1,266) (58) (55) (62) 0 (64) (725) 9 5 - - 187 268 (67) (60) (62) 0 (251) (993) OTHER OPERATING INCOME / EXPENSES OPERATING PROFIT - EBIT FINANCIAL INCOME AND COSTS - financial income - financial costs PROFIT BEFORE TAXES 25 (86) (93) (114) (4,782) (1,991) (18) - - - (724) (583) Profit attributable to non-controlling interests - - - - - - NET PROFIT / (LOSS) FOR THE YEAR 7 (86) (93) (114) (5,506) (2,574) Income tax expenses 182 Marcolin S.p.A. RECLASSIFIED FINANCIAL STATEMENTS OF SUBSIDIARIES Marcolin Gm bh Marcolin Deutschland GmbH Eyestyle.com Srl (CHF/000) (euro/000) (euro/000) 2014 Property, plant and equipment 2013 2014 5 2013 2014 2013 8 3 4 13 - 11 Intangible assets - 502 724 - Goodw ill - - - - - - Investments - - - - - - Deferred tax assets - - - - 71 - Other non-current assets - - - - - - Non-current financial assets - - - - - - Total non current assets 12 10 13 11 573 724 Inventories 137 107 614 478 - - Trade receivables 291 163 1,455 1,098 9 4 83 Other current assets Current financial assets Cash and bank balances Total current assets TOTAL ASSETS Share capital 4 15 113 68 305 343 - 1,110 820 38 - - 378 820 378 - 10 775 787 - 663 673 4,112 4,125 - 2,842 2,853 352 925 - 97 821 200 200 4,650 4,650 150 150 Additional paid-in capital - - - - - - Legal reserve - - - - - - Other reserves - - - - 600 600 (104) (135) (2,981) (3,388) (190) (0) (36) 32 (241) 406 (204) (190) 61 96 1,428 1,669 356 560 Long-term borrow ings - - - 0 - - Long-term provisions - - - - - - Deferred tax liabilities - - - - - - Other non-current liabilities - - - - - - Total non-current liabilities - - - 0 - - 587 464 2,291 968 451 461 20 Retained earnings (losses) Profit (loss) for the year Non-controlling interest TOTAL EQUITY Trade payables Short-term borrow ings - - - - 119 Short-term provisions 24 25 168 151 - - Current tax liabilities 26 20 (281) (86) (0) (221) Other current liabilities 89 67 519 151 - - 726 577 2,698 1,184 570 261 TOTAL LIABILITIES 726 - 577 - 2,698 - 1,184 - 570 - 261 - TOTAL LIABILITIES AND EQUITY 787 673 4,125 2,853 925 821 Total current liabilities Marcolin Gm bh Marcolin Deutschland GmbH (CHF/000) 2014 NET REVENUES COST OF SALES Eyestyle.com Srl (euro/000) 2013 2014 (euro/000) 2013 2014 2013 2,440 2,489 7,509 6,949 0 (1,140) (1,086) (3,510) (3,100) - (0) - 0 (0) GROSS PROFIT DISTRIBUTION AND MARKETING EXPENSES 1,300 1,402 3,998 3,849 (1,141) (1,163) (3,895) (3,159) (113) (112) GENERAL AND ADMINISTRATIVE EXPENSES (179) (189) (262) (203) (162) (153) 25 26 91 192 1 5 25 26 91 192 5 5 - - - - (5) (0) OTHER OPERATING INCOME / EXPENSES - other operating income - other operating expenses OPERATING PROFIT - EBIT 4 76 (68) 678 (275) (261) (39) (44) (119) (131) (4) (0) 0 0 19 19 0 0 - financial costs (39) (45) (138) (151) (4) (0) PROFIT BEFORE TAXES FINANCIAL INCOME AND COSTS - financial income (36) 32 (187) 547 (279) (261) Income tax expenses - - (54) (140) 74 71 Profit attributable to non-controlling interests - - - - - - (36) 32 (241) 406 (204) (190) NET PROFIT / (LOSS) FOR THE YEAR 183 RECLASSIFIED FINANCIAL STATEMENTS OF SUBSIDIARIES Eyestyle Retail Srl Eyes tyle Trading Shanghai Co (euro/000) 2014 Property, plant and equipment Marcolin Iberica SA (CNY/000) 2013 2014 2014 - - 53 - 49 1,035 Goodw ill - - - - - - Investments - - - - - - 111 - - - 168 162 Other non-current assets - - - - - - Non-current financial assets - - - - - - Total non current assets 1,316 1,366 - - 221 212 64 80 - - 376 265 - - - - 2,665 2,216 550 158 1,643 8 66 55 54 - 155 - 679 926 Deferred tax assets Inventories Trade receivables Other current assets Current financial assets Cash and bank balances Total current assets TOTAL ASSETS Share capital - 2013 284 921 Intangible assets 330 (euro/000) 2013 0 - 32 - 633 924 822 668 1,984 - 270 1,636 1,797 1,797 - 642 642 4,711 4,932 - 4,283 4,495 487 200 200 2,918 931 487 Additional paid-in capital - - - - - - Legal reserve - - - - 98 98 Other reserves 1,000 1,000 - - 2,737 2,737 Retained earnings (losses) (338) - (289) - (201) - Profit (loss) for the year (289) (338) (931) (289) 237 (201) 572 862 1,697 642 3,358 3,121 Non-controlling interest TOTAL EQUITY Long-term borrow ings - - - - - - Long-term provisions 4 5 - - - - Deferred tax liabilities - - - - - - Other non-current liabilities - - - - - - Total non-current liabilities 4 5 - - - - Trade payables 801 745 100 - 1,258 942 Short-term borrow ings 596 383 - - - - Short-term provisions - - - - 112 91 Current tax liabilities 2 (373) - - 50 14 Other current liabilities 8 15 - - 154 327 1,407 769 100 - 1,574 1,374 TOTAL LIABILITIES Total current liabilities 1,412 - 774 - 100 - - 1,574 - 1,374 - TOTAL LIABILITIES AND EQUITY 1,984 1,636 1,797 642 4,932 4,495 Eyestyle Retail Srl Eyes tyle Trading Shanghai Co (euro/000) 2014 Marcolin Iberica SA (CNY/000) 2013 2014 (euro/000) 2013 2014 2013 NET REVENUES 110 90 - - 8,071 6,215 COST OF SALES (61) (62) - - (3,842) (3,448) GROSS PROFIT DISTRIBUTION AND MARKETING EXPENSES 49 27 - - 4,229 2,767 (267) (340) - - (3,775) (2,895) GENERAL AND ADMINISTRATIVE EXPENSES (143) (125) (931) (289) (352) (333) 6 0 - - 132 151 - other operating income 6 0 - - 132 151 - other operating expenses - - - - (0) (0) (355) (438) (931) (289) 233 (310) (28) (12) - - (2) 22 0 1 - - 32 38 OTHER OPERATING INCOME / EXPENSES OPERATING PROFIT - EBIT FINANCIAL INCOME AND COSTS - financial income - financial costs (29) (13) - - (34) (16) PROFIT BEFORE TAXES (384) (450) (931) (289) 231 (288) 95 111 - - 6 86 - - - - - - (289) (338) (931) (289) 237 (201) Income tax expenses Profit attributable to non-controlling interests NET PROFIT / (LOSS) FOR THE YEAR 184 Marcolin S.p.A. RECLASSIFIED FINANCIAL STATEMENTS OF SUBSIDIARIES Marcolin France Sas Marcolin Asia Ltd (euro/000) 2014 Property, plant and equipment Marcolin Portugal Lda (HK$/000) 2013 2014 7 (euro/000) 2013 2014 2013 432 (0) - 14 - 1,158 (0) 327 - 1,515 Intangible assets Goodw ill 247 247 - - - - - Investments 2,405 - - - 5 5 Deferred tax assets 1,278 1,432 (311) (311) - - Other non-current assets - - 1,049 1,123 - - Non-current financial assets - 1 - - - - Total non current assets 4,363 1,687 1,064 2,326 19 21 599 466 - 762 71 51 3,267 3,867 86,961 35,523 1,617 1,303 15 Inventories Trade receivables Other current assets 281 184 268 372 16 Current financial assets 685 3,015 7,128 - 121 - 2,515 1,086 - 2,524 - 75 7,347 11,709 - 8,617 10,305 94,357 95,421 - 39,180 41,506 1,824 1,843 - 1,444 1,465 420 Cash and bank balances Total current assets TOTAL ASSETS Share capital 1,054 1,054 1,540 1,540 420 Additional paid-in capital 877 877 - - - - Legal reserve 115 115 - - 64 64 Other reserves 1,798 1,798 - - - - Retained earnings (losses) (661) (318) 28,338 18,205 (577) (574) Profit (loss) for the year (154) (343) 15,396 10,133 102 (3) 3,029 3,183 45,274 29,878 9 (93) Long-term borrow ings - - - - - - Long-term provisions - - 136 - - - Deferred tax liabilities - - (43) (43) - - Other non-current liabilities - - - - - - Total non-current liabilities - - 93 (43) - - Trade payables 5,273 4,240 47,587 8,607 1,799 1,551 Short-term borrow ings 1,554 1,041 - - - - Short-term provisions 852 666 - - - - Current tax liabilities 350 433 1,069 659 17 (9) Non-controlling interest TOTAL EQUITY Other current liabilities 650 742 1,399 2,406 19 17 8,680 7,121 50,055 11,671 1,834 1,558 8,680 - 7,121 - 50,148 - 11,628 - 1,834 - 1,558 - 11,709 10,305 95,421 41,506 1,843 1,465 Total current liabilities TOTAL LIABILITIES TOTAL LIABILITIES AND EQUITY Marcolin France Sas Marcolin Asia Ltd (euro/000) 2014 Marcolin Portugal Lda (HK$/000) 2013 2014 (euro/000) 2013 2014 2013 NET REVENUES 18,538 19,809 71,262 27,991 1,785 1,377 COST OF SALES (8,417) (9,510) (46,004) (23,506) (845) (724) GROSS PROFIT DISTRIBUTION AND MARKETING EXPENSES 10,121 10,298 25,258 4,485 941 653 (8,969) (8,893) (18,320) (18,360) (742) (579) (177) GENERAL AND ADMINISTRATIVE EXPENSES (891) (513) (4,397) (3,755) (132) OTHER OPERATING INCOME / EXPENSES (164) (780) 20,528 28,399 48 109 317 345 20,528 28,399 49 110 (481) (1,125) - - (1) (1) 97 112 23,069 10,769 114 5 (97) (92) (4,584) 1,367 (10) (8) - other operating income - other operating expenses OPERATING PROFIT - EBIT FINANCIAL INCOME AND COSTS - financial income - financial costs PROFIT BEFORE TAXES Income tax expenses Profit attributable to non-controlling interests NET PROFIT / (LOSS) FOR THE YEAR 15 16 (174) 2,382 - - (111) (108) (4,410) (1,016) (10) (8) - 21 18,485 12,136 103 (3) (154) (364) (3,089) (2,002) (1) (0) - - - - - - (154) (343) 15,396 10,133 102 (3) 185 RECLASSIFIED FINANCIAL STATEMENTS OF SUBSIDIARIES Marcolin UK Ltd Marcolin USA Inc (GBP/000) 2014 Property, plant and equipment Sover - M ZAO (USD/000) 2013 2014 (RUB/000) 2013 45 Goodw ill 0 0 3,232 3,232 - - Investments - - 159,694 160,357 - - 4 4 10,699 9,404 - - 54 - - - - - Deferred tax assets Other non-current assets 0 805 2013 134 2,072 Intangible assets 470 7,164 2014 1,779 8 7,523 - Non-current financial assets - - 213 2,684 - - Total non current assets 2,263 49 181,472 184,006 1,787 - Inventories Trade receivables Other current assets 784 114 19,716 14,545 114,520 - 2,977 686 22,612 19,946 37,155 - 112 17 3,354 4,251 447 - Current financial assets 1,096 2,527 7,484 10,083 184 - Cash and bank balances 2,525 688 2,258 11,675 - - 7,494 9,757 - 4,032 4,082 - 55,423 236,896 - 60,500 244,506 152,306 154,093 - - Total current assets TOTAL ASSETS Share capital 850 850 775 775 306 Additional paid-in capital - - 72,525 72,525 - - Legal reserve - - - - - - Other reserves Retained earnings (losses) Profit (loss) for the year Non-controlling interest TOTAL EQUITY Long-term borrow ings - - (2,141) (2,141) 67 - (83) 1,339 10,545 6,948 130,520 - (468) 676 (5,376) 3,598 - - 299 2,865 76,329 81,705 130,893 - 1,018 - 129,003 133,473 - - Long-term provisions 16 - 67 - - - Deferred tax liabilities - - 524 598 2 - Other non-current liabilities - - 58 60 - - Total non-current liabilities 1,034 - 129,652 134,131 2 - Trade payables 6,713 689 20,201 13,572 15,598 - Short-term borrow ings 441 - 4,259 8,821 2,077 - Short-term provisions 466 147 2,804 2,674 - - Current tax liabilities 239 169 41 52 2,919 - Other current liabilities 565 212 3,609 3,551 2,604 - 8,424 1,216 30,915 28,670 23,198 - TOTAL LIABILITIES 9,458 - 1,216 - 160,567 - 162,801 - 23,200 - - TOTAL LIABILITIES AND EQUITY 9,757 4,082 236,896 244,506 154,093 - Total current liabilities Marcolin UK Ltd Marcolin USA Inc (GBP/000) 2014 NET REVENUES COST OF SALES Sover - M ZAO (USD/000) 2013 2014 (RUB/000) 2013 2014 2013 6,163 4,652 101,655 92,337 - (3,330) (2,089) (49,002) (40,331) - - GROSS PROFIT DISTRIBUTION AND MARKETING EXPENSES 2,833 2,563 52,653 52,006 - - (2,650) (1,479) (45,199) (39,330) - - GENERAL AND ADMINISTRATIVE EXPENSES (1,007) (341) (4,554) (4,989) - - 487 90 749 (360) - - 633 86 945 980 - - (146) 4 (197) (1,339) - - (336) 833 3,648 7,327 - - (11) 38 (11,765) (1,322) - - 59 38 491 333 - - OTHER OPERATING INCOME / EXPENSES - other operating income - other operating expenses OPERATING PROFIT - EBIT FINANCIAL INCOME AND COSTS - financial income - financial costs (70) (1) (12,256) (1,655) - - PROFIT BEFORE TAXES (348) 870 (8,117) 6,005 - - (82) (194) 2,741 (2,407) - - - - - - - - 430 676 (5,376) 3,598 - - Income tax expenses Profit attributable to non-controlling interests NET PROFIT / (LOSS) FOR THE YEAR 186 Marcolin S.p.A. RECLASSIFIED FINANCIAL STATEMENTS OF SUBSIDIARIES Viva Optique Inc d/b/a Viva Int. Group Viva France Sas (USD/000) 2014 Property, plant and equipment Viva Eyew ear UK Ltd (EUR/000) 2013 2014 12,459 Goodw ill 88,981 88,981 - - - - 2,323 1,673 - - (3,237) (7,127) 13,996 4,106 319 98 - - 56 45 29 30 - - Other non-current assets 40 2013 3,152 13,777 Deferred tax assets 28 1,086 2014 Intangible assets Investments 3,811 (GBP/000) 2013 - 1,181 12 1,500 Non-current financial assets - - - - - - Total non current assets 122,285 111,075 1,462 1,349 (3,237) (5,615) Inventories 19,905 22,207 704 2,395 - 4,018 Trade receivables 20,022 8,308 2,887 1,531 12,424 5,330 Other current assets 1,798 2,169 386 223 (4) 307 Current financial assets 3,906 (535) 548 - 960 - Cash and bank balances 2,371 10,085 - 2,865 9,274 4,289 48,002 170,286 - 42,234 153,310 4,525 5,987 - 7,013 8,362 22,655 19,417 - 13,945 8,330 121,472 121,873 37 34 - - (7,311) (7,311) 230 214 821 932 Total current assets TOTAL ASSETS Share capital Additional paid-in capital Legal reserve Other reserves Retained earnings (losses) - - - - - - 64 64 (0) (18) (0) (789) 8,140 4,905 1,037 3,468 7,529 2,383 (2,535) 2,511 (93) 590 9,683 1,488 119,830 122,042 1,210 4,289 18,033 4,013 Long-term borrow ings 1,632 2,728 - - - - Long-term provisions 3,234 - - - - 67 Deferred tax liabilities 4,414 2,754 - - - - Other non-current liabilities 5,639 5,324 - - - - Total non-current liabilities 14,918 10,806 - - - 67 Trade payables 3,170 Profit (loss) for the year Non-controlling interest TOTAL EQUITY 23,413 8,412 2,786 2,396 627 Short-term borrow ings 1,118 5,930 - - - - Short-term provisions 8,980 3,946 512 318 - 521 Current tax liabilities 674 1,301 1,071 756 753 286 1,353 873 408 602 5 272 35,538 20,462 4,777 4,073 1,385 4,249 50,456 - 31,268 - 4,777 - 4,073 - 1,385 - 4,316 - 170,286 153,310 5,987 8,362 19,417 8,330 Other current liabilities Total current liabilities TOTAL LIABILITIES TOTAL LIABILITIES AND EQUITY Viva Optique Inc d/b/a Viva Int. Group Viva France Sas (USD/000) 2014 Viva Eyew ear UK Ltd (EUR/000) 2013 2014 (GBP/000) 2013 2014 2013 NET REVENUES 100,713 107,000 18,607 17,488 16,029 22,674 COST OF SALES (47,920) (39,374) (7,073) (5,237) (9,447) (10,207) GROSS PROFIT DISTRIBUTION AND MARKETING EXPENSES 52,793 67,626 11,534 12,252 6,582 12,467 (57,072) (55,831) (8,843) (8,861) (5,289) (8,036) GENERAL AND ADMINISTRATIVE EXPENSES (6,608) (6,911) (2,134) (2,451) (1,586) (2,536) 3,022 2,299 (96) (29) 10,475 161 3,609 2,434 0 (27) 10,477 161 OTHER OPERATING INCOME / EXPENSES - other operating income (588) (135) (96) (2) (2) 0 OPERATING PROFIT - EBIT - other operating expenses (7,865) 7,183 462 911 10,182 2,057 FINANCIAL INCOME AND COSTS (1,571) (2,616) (360) (159) 414 (104) 427 223 99 - 1,261 22 - financial costs (1,997) (2,838) (459) (159) (847) (126) PROFIT BEFORE TAXES (9,181) 4,567 102 752 10,596 1,953 2,467 (2,056) (195) (162) (913) (465) - - - - - - (6,713) 2,511 (93) 590 9,683 1,488 - financial income Income tax expenses Profit attributable to non-controlling interests NET PROFIT / (LOSS) FOR THE YEAR 187 RECLASSIFIED FINANCIAL STATEMENTS OF SUBSIDIARIES Viva Brasil Com ércio Produtos Opticos Ltda Viva Eyew ear Hong Kong Ltd (HKD/000) 2014 Property, plant and equipment Viva Canada Inc (REAL/000) 2013 2014 2014 - 23,162 39 810 894 611 420 Goodw ill - - 803 811 - - 2,522 (199) - - - - Deferred tax assets 73 2013 Intangible assets Investments 255 (CAD/000) 2013 597 459 - - - - - 393 239 328 - - - - Non-current financial assets - - - - - - Total non current assets 2,761 23,546 1,652 1,779 1,031 1,449 Other non-current assets Inventories Trade receivables - 10,632 1,908 1,898 1,594 2,107 45,931 26,665 7,683 6,701 663 560 21 457 12 253 31 54 862 4,151 2,528 - 553 - 13,091 17,369 - 2,224 0 889 59,904 62,665 - 59,274 82,820 12,130 13,782 - 11,077 12,856 2,841 3,871 - 3,610 5,058 486 483 799 801 348 219 19,384 19,268 - - 2,864 2,532 Other current assets Current financial assets Cash and bank balances Total current assets TOTAL ASSETS Share capital Additional paid-in capital Legal reserve Other reserves - - - - - - (0) 454 - (118) 0 308 Retained earnings (losses) 42,089 43,870 (2,722) (288) (1,512) (528) Profit (loss) for the year (5,826) (5,862) (3,362) (2,309) (1,491) (882) 56,134 58,213 (5,286) (1,915) 209 1,649 Non-controlling interest TOTAL EQUITY Long-term borrow ings - - - - - - Long-term provisions - 252 340 358 - - Deferred tax liabilities - - - - - - Other non-current liabilities - - - - - - Total non-current liabilities - 252 340 358 - - 2,439 19,342 17,892 14,119 2,718 2,989 - - - - - - 3,733 3,422 549 - 905 394 359 450 188 158 7 5 - 1,142 98 136 31 21 6,531 24,356 18,728 14,413 3,662 3,409 6,531 - 24,607 - 19,068 - 14,771 - 3,662 - 3,409 - 62,665 82,820 13,782 12,856 3,871 5,058 Trade payables Short-term borrow ings Short-term provisions Current tax liabilities Other current liabilities Total current liabilities TOTAL LIABILITIES TOTAL LIABILITIES AND EQUITY Viva Brasil Com ércio Produtos Opticos Ltda Viva Eyew ear Hong Kong Ltd (HKD/000) 2014 NET REVENUES Viva Canada Inc (REAL/000) 2013 2014 (CAD/000) 2013 2014 2013 36,357 61,829 14,843 14,941 8,403 8,395 COST OF SALES (24,687) (36,945) (6,620) (5,737) (3,957) (3,293) GROSS PROFIT DISTRIBUTION AND MARKETING EXPENSES 11,670 24,884 8,223 9,204 4,446 5,102 (11,105) (17,508) (6,675) (6,417) (4,164) (4,429) GENERAL AND ADMINISTRATIVE EXPENSES (7,578) (12,640) (2,457) (2,860) (1,204) (1,426) 1,072 (3) 4 6 0 3 1,149 - 4 15 0 3 OTHER OPERATING INCOME / EXPENSES - other operating income - other operating expenses OPERATING PROFIT - EBIT FINANCIAL INCOME AND COSTS - financial income - financial costs PROFIT BEFORE TAXES Income tax expenses Profit attributable to non-controlling interests NET PROFIT / (LOSS) FOR THE YEAR 188 (77) (3) 0 (8) (0) (0) (5,941) (5,267) (905) (67) (923) (750) 133 (569) (1,875) (1,704) (296) (191) 316 0 1,718 - 55 - (183) (569) (3,594) (1,704) (351) (191) (5,808) (5,837) (2,780) (1,771) (1,219) (940) (18) (26) (582) (538) (272) 58 - - - - - - (5,826) (5,862) (3,362) (2,309) (1,491) (882) Marcolin S.p.A. RECLASSIFIED FINANCIAL STATEMENTS OF SUBSIDIARIES Viva IP Inc Viva Italia Srl (USD/000) 2014 Property, plant and equipment Intangible assets Goodw ill (EUR/000) 2013 2014 - 2013 - - - - - 10 10 - - Investments - - - - Deferred tax assets - - - - Other non-current assets - - 37 36 Non-current financial assets - - - - Total non current assets 10 10 37 36 Inventories - - - - Trade receivables - - - - Other current assets - - - - Current financial assets - - 6 - Cash and bank balances - - - 63 10 - 10 6 43 - 63 100 Total current assets TOTAL ASSETS Share capital 10 10 846 669 Additional paid-in capital - - (775) (598) Legal reserve - - 28 28 Other reserves - - - 10 (1) (1) (54) (109) - - (2) 99 9 9 43 100 Long-term borrow ings - - - - Long-term provisions - - - - Deferred tax liabilities - - - - Other non-current liabilities - - - - Total non-current liabilities - - - - Trade payables 1 1 - - Short-term borrow ings - - - - Short-term provisions - - - - Current tax liabilities - - - - Other current liabilities - - - - Total current liabilities 1 1 - - 1 - 1 - - - 10 10 43 100 Retained earnings (losses) Profit (loss) for the year Non-controlling interest TOTAL EQUITY TOTAL LIABILITIES TOTAL LIABILITIES AND EQUITY Viva IP Inc Viva Italia Srl (USD/000) 2014 (EUR/000) 2013 2014 2013 NET REVENUES - - - - COST OF SALES - - - - GROSS PROFIT DISTRIBUTION AND MARKETING EXPENSES - - - - - - - - GENERAL AND ADMINISTRATIVE EXPENSES - - - - OTHER OPERATING INCOME / EXPENSES - - (2) 99 - other operating income - - - 99 - other operating expenses - - (2) - OPERATING PROFIT - EBIT - - (2) 99 FINANCIAL INCOME AND COSTS - - - - - financial income - - - - - financial costs - - - - PROFIT BEFORE TAXES - - (2) 99 Income tax expenses - - - - Profit attributable to non-controlling interests - - - - NET PROFIT / (LOSS) FOR THE YEAR - - (2) 99 189 Marcolin S.p.A. SIGNIFICANT RESOLUTIONS PASSED AT GENERAL MEETING 191 192 Marcolin S.p.A. SIGNIFICANT RESOLUTIONS PASSED AT GENERAL MEETING Resolutions were passed at the Annual General Meeting, held at a first calling on April 23, 2015, to: • approve the Company's Separate Financial Statements and Report on Operations for the year ended December 31, 2014, and the Consolidated Financial Statements for the year ended December 31, 2014 of the Marcolin Group and the accompanying Report on Operations; • allocate the Company's net profit for the year of euro 4,483,252 as follows: - euro 224,163 to the legal reserve; euro 4,259,089 to retained earnings. Consequently, after such allocations, the amounts of those reserves will be as follows: - Legal reserve: euro 4,077,295; Retained earnings: euro 106,745,082. Milan; April 23, 2015 for the Board of Directors the Chairman Vittorio Levi 193 Marcolin S.p.A. 195 196
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