CONSOLIDATED STATEMENTS

Transcription

1 CONSOLIDATED STATEMENTS 57

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3 C ONSOLIDATED H IGHLIGHTS millions of euros Net sales 8,758 11,867 12,567 13,168 12,466 Income from operations * 1,551 1,967 1,548 2,034 2,213 Income before income taxes * 1,415 1, ,264 1,622 Income from continuing operations, group share, before amortization of good will Net income Group share (95) * Adjusted retroactively to reflect reclassifications. euros Income from continuing operations per share before amortization of goodwill * * Adjusted following the 1 for 4 split on July 3, millions of euros Balance sheet total 26,330 28,435 29,228 26,802 25,802 Shareholders equity 3,887 3,972 3,788 3,793 3,774 Cash flow * 922 1, ,528 1,961 * Adjusted retroactively to reflect reclassifications. 59

4 C ONSOLIDATED B ALANCE S HEET AT D ECEMBER 31 (in millions of euros) ASSETS Notes Current assets Cash and cash equivalents Marketable securities Treasury shares ,143 Trade receivables and related accounts 5 1,423 1,373 1,577 Net deferred taxes Inventories and work in progress ,517 3,522 3,727 Other receivables and prepaid expenses 7 1,235 1,315 1,534 Total current assets 8,266 8,325 9,941 Fixed assets Long-term financial assets Equity interests Other long-term investments 9 1,252 1,233 1,705 Other financial assets ,661 1,826 2,264 Tangible assets 10 6,653 6,855 7,120 Depreciation (2,678) (2,614) (2,489) 3,975 4,241 4,631 Goodwill 11 4,691 4,628 4,406 Amortization (1,496) (1,224) (1,115) 3,195 3,404 3,291 Brands and other intangible assets 12 9,223 9,368 9,392 Depreciation and amortization (518) (362) (291) 8,705 9,006 9,101 Total fixed assets 17,536 18,477 19,287 Total assets ,802 26,802 29,228 60

5 after before after after LIABILITIES Notes assignment assignment assignment assignment Short-term liabilities Financial liabilities, current portion Short term financial liabilities 13 2,038 2,038 3,114 4,447 Bank overdrafts ,338 3,338 3,978 5,390 Trade payables and related accounts 1,688 1,688 1,484 1,450 Other liabilities 14 2,541 2,436 2,746 2,763 4,229 4,124 4,230 4,213 Total short-term liabilities 7,567 7,462 8,208 9,603 Long-term deferred taxes Medium and long-term liabilities Repackaged notes Financial debt, less current portion 13 4,307 4,307 4,555 5,402 Other medium and long-term liabilities and provisions 15 1,136 1,136 1,151 1,322 Total medium and long-term liabilities 5,601 5,601 5,928 7,008 Minority interests 16 8,700 8,700 8,746 8,658 Shareholders equity Capital Consolidated reserves 3,678 3,531 3,534 3,493 Cumulative translation adjustment (267) (267) (104) (68) Income for the period Interim dividend paid 0 (51) Shareholders equity, group share 16 3,774 3,879 3,793 3,788 Total shareholders equity 12,474 12,579 12,539 12,446 Total liabilities 28 25,802 25,802 26,802 29,228 The notes are an integral part of the consolidated financial statements. 61

6 C ONSOLIDATED S TATEMENT OF I NCOME (in millions of euros, except for earnings per share expressed in euros) Notes Net sales ,466 13,168 12,567 Cost of sales (4,350) (4,712) (4,764) Gross margin 8,116 8,456 7,803 Design expenses 0 (31) (25) Marketing and selling expenses (4,647) (4,924) (4,743) General and administrative expenses (1,256) (1,467) (1,487) Income from operations ,213 2,034 1,548 Financial income 19 (269) (333) (499) Dividends from unconsolidated interests Other income and expenses, net 20 (340) (445) (468) Income before income taxes 1,622 1, Income taxes 21 (496) (356) (194) Income (loss) from investments in equity companies 8 1 (18) (42) Net income before amortization of goodwill and unusual items 1, (Group share: 2003: 428; 2002: 287; 2001: 75) Amortization of goodwill 22 (290) (253) (159) Net income before unusual items (Group share: 2003: 303; 2002: 178; 2001: 5) Unusual items (199) Net income Minority interests (534) (459) (98) Net income Group share (95) Net pre-tax income per share Net income per share (0.52) Number of shares used for the calculation 181,727, ,727, ,721,048 Net pre-tax income per share after dilution Net income per share after dilution (0.52) Number of shares used for the calculation 181,727, ,727, ,723,825 The notes are an integral part of the consolidated financial statements. 62

7 S TATEMENT OF C ONSOLIDATED C ASH F LOW (in millions of euros) I - OPERATING ACTIVITIES Net income group share (95) Minority interests in net income Elimination of income from companies accounted for by the equity method (1) Dividends received from equity companies 6 (1) 4 Amortization and net long-term and short-term provisions 1, ,672 Net gain (loss) on sale of fixed assets or treasury shares (837) Cash flow 1,961 1, Change in current assets (230) 117 (403) Change in short-term liabilities Change in working capital requirements (103) 426 (356) Net cash from operating activities ➀ 1,858 1, II - INVESTING ACTIVITIES Acquisition of intangible assets (74) (88) (135) Acquisition of property, plant & equipment (565) (538) (949) Acquisition of equity interests (36) (51) (417) Change in debt on fixed-assets (148) (53) 244 Disposal of non-financial fixed assets Reclassification of equity interests as marketable securities 0 0 (677) Disposal of unconsolidated equity interests ,122 Change in other long-term financial assets 10 (185) (181) Impact of changes in consolidation scope (114) (160) (895) Net cash from investing activities ➁ (809) (780) (739) III - FINANCING ACTIVITIES Proceeds from issuance of common stock Issuance of bonds and other financial debt 1, ,337 Principal repayments on short-term borrowings and long-term debt (2,216) (2,404) (2,477) Change in current accounts (251) (84) 318 Change in listed securities (170) Net cash from financing activities ➂ (724) (1,632) 1,100 IV - ACQUISITION AND DISPOSAL OF LVMH/ DIOR SHARES ➃ (33) V - DIVIDENDS PAID DURING THE PERIOD ➄ (437) (363) (508) VI - IMPACT OF CURRENCY TRANSLATION ➅ 6 18 (12) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ➀ + ➁ + ➂ + ➃ + ➄ + ➅ 77 (303) 336 Cash at the beginning of the period Cash at the end of the period NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 77 (303) 336 The statement of cash flows shows the change in cash (net of bank overdrafts) and cash equivalents consisting of short-term investments that can be readily converted into cash, excluding, since January 1, 2001, listed securities. The reconciliation between cash at the close of the period, as shown in the statement of cash flows, and the cash items on the balance sheet is presented in note

8 N OTES TO THE F INANCIAL C ONSOLIDATED S TATEMENTS NOTE 1 - SIGNIFICANT EVENTS AND CHANGES IN THE GROUP CONSOLIDATION In 2003: Wines and Spirits In June and September 2003, LVMH sold the Hine cognac brand and the Canard-Duchêne champagnes for 15 and 40 million euros respectively, but Moët Hennessy kept a portion of the Canard-Duchêne inventory. Fashion and Leather Goods During the year, LVMH increased its stake in Fendi from 67% to 84% for 191 million euros; this investment resulted in the recognition of additional goodwill in the amount of 73 million euros. In February 2003, LVMH increased its interest in Rossimoda, the Italian manufacturer of high-end shoes, from 45% to 97%; the total investment of 56 million euros was recognized as goodwill in the amount of 43 million euros. Perfumes and Cosmetics In December 2003, LVMH sold its Bliss skincare centers and cosmetics for 15.5 million euros, and the licenses held by LVMH for the Michael Kors, Marc Jacobs, and Kenneth Cole perfume brands were sold during the year for a total amount of 59 million euros. LVMH raised its stake in the Laflachère group (La Brosse and Dupont) from 57% to 99%; the 42 million euro investment resulted in additional goodwill of 48 million euros. Finally, the stake in the Acqua di Parma group, which was 50%, was increased to 100%, a 9 million euro investment. Watches and Jewelry In December 2003, LVMH signed a memorandum of understanding for the sale of the Ebel brand and the corresponding operating and industrial assets; the price stipulated by this memorandum, which will become definitive early in 2004, is 40 million euros. Other activities The auction house l Etude Tajan was sold at the end of 2003 for a nominal amount. The joint venture formed with diamond merchant De Beers (see financial year 2001) was consolidated proportionately as of financial year 2003; prior to that period, it was accounted for using the equity method. The companies acquired or sold were consolidated or deconsolidated respectively on the date of completion of the operation. 64

9 In 2002: Wines and Spirits In July 2002, LVMH purchased a 40% interest in Millennium Import LLC, a producer of high end vodkas distributed under the Belvédère and Chopin brands, for USD 76 million. The interest in Millennium was consolidated by the equity method as of that date. This transaction was accounted for on the balance sheet as an intangible asset of USD 71 million, amortized over 15 years, representing the perpetual license Millennium holds for the distribution of these brands in the United States. In May 2002, the Group sold the Pommery brand for 152 million euros. This sale also included the administrative and production sites, the wine cellars, the inventories and the distribution contracts, excluding the vineyards. The Pommery activities have not been consolidated since that date. Fashion and Leather Goods Donna Karan International Inc., DKI, purchased in December 2001 (see below: changes in consolidation for the 2001 financial year) was fully consolidated as of January 1, The total investment in Gabrielle Studio and DKI was allocated to the Donna Karan brand for 494 million euros; the consolidated goodwill of USD 224 million will be amortized over 20 years. During the financial year, LVMH strengthened its interest in the Fendi group, increased from 51% to 67%. This investment for 196 million euros generated additional goodwill of 75 million euros. The Emilio Pucci group, purchased in 2001 for 38 million euros, was fully consolidated as of January 1, The investment was allocated to the Pucci brand for 17 million euros. The consolidated goodwill will be amortized over 20 years. Finally, LVMH increased its interest in Thomas Pink from 70% to 100%, an investment of 28 million euros. Perfumes and Cosmetics In December 2002, the group sold the Hard Candy and Urban Decay brands for USD 1 million, which could change over the next three years because of an indexing clause; the 2002 results for these entities were included in the consolidated income until their sale. Other activities Based on an agreement of May 2002, LVMH s interest in Phillips was reduced from 75% to 27.5%, with LVMH transferring control to its former directors, Daniella Luxembourg and Simon de Pury. With this agreement, LVMH reestablished the financial situation of the Phillips group by discontinuing its financial aid, and in return received Phillips fixed assets and inventory. Phillips was deconsolidated as of January 1, 2002, and the activity over the first months of the year was not significant. In 2001: Wines and Spirits At the end of 2000, the Group acquired 60% and 90% respectively of the Newton (Napa Valley, California) and MountAdam (Eden Valley, South Australia) winegrowing estates for 34.5 million euros. These interests were fully consolidated over the full year in

10 Fashion and Leather Goods In January 2001, pursuant to an agreement signed in December 2000, LVMH acquired all of the stock of American company Gabrielle Studio, owner of the Donna Karan New York brand, for USD 405 million. Moreover, in March 2001, LVMH established with Donna Karan International Inc. (DKI), a company traded on the New York Stock Exchange, which holds the exclusive operating license for the Donna Karan brand, a merger project in which LVMH would contribute to DKI its stake in Gabrielle Studio and an offer from LVMH to purchase almost all the capital of DKI at a price of USD per share, representing a total of USD 185 million. This project was approved by DKI s Shareholders Meeting of November 27, Following this operation, LVMH holds 100% of the preferred stock and 89.40% of the common stock of the new Donna Karan group. Gabrielle Studio was fully consolidated for the entire fiscal year while the stake in Donna Karan International was only as of The USD 405 million investment in Gabrielle Studio was fully allocated to the value of the Donna Karan New York brand. In December 2001, LVMH's 25.50% stake in Fendi was increased to 51%; LVMH acquired Prada's interest in the joint venture originally formed for this investment. This operation represented an additional investment of 295 million euros, 255 million of which will be paid over a 4-year period. Most of this amount, i.e. 404 million euros (206 million euros attributable to the Group) was allocated to the value of the Fendi brand; 136 million euros were recorded as goodwill to be amortized over 30 years. The Fendi investment has been consolidated on a proportionate basis since July 2000; at December 31, 2001, Fendi s balance sheet was fully consolidated. Perfumes and Cosmetics The Group s 65% interest in American cosmetics company Fresh, acquired in September 2000 for 18 million euros, has been fully consolidated since January 1, Selective Retailing In January 2001, LVMH acquired 55% of the Paris department store La Samaritaine for 256 million euros, including 88 million euros through a reserved capital increase. The amount of the investment primarily reflected real estate holdings estimated at 471 million euros (182 million euros for the group share, after deferred taxes). The goodwill on this investment, including brand value, is 57 million euros, to be amortized over 20 years. La Samaritaine has been fully consolidated since January 1, Watches and Jewelry In January 2001, LVMH and the De Beers group signed an agreement to form a 50/50 joint venture. This agreement was approved by the European Commission in July. Starting in 2002, this company had an exclusive license for the world-wide sale of diamond jewelry in a network of stores to be created under the De Beers name. Since July 2001, this joint venture has been accounted for using the equity method. Other activities In January 2001, Mrs. Daniella Luxembourg and Mr. Simon de Pury, the founders of the Geneva art gallery de Pury et Luxembourg Art, transferred their full interest in de Pury et Luxembourg Art to Phillips. This contribution was remunerated with a 25% interest in Phillips, and a payment of USD 10 million. Following this operation, Phillips became Phillips, de Pury & Luxembourg (PPL). 66

11 In November 2001, within the framework of a memorandum of understanding signed in July, PPL s UK activities and the operations of British auction company Bonhams & Brooks merged within a joint entity 49.9% held by PPL, with PPL retaining control of its international activities. The transfer of de Pury & Luxembourg Art to Phillips resulted in goodwill of 54 million euros, added to the initial goodwill of 95 million euros. De Pury & Luxembourg Art has been fully consolidated in Phillips since January 1, 2001; as of November 2001, the stake in the joint venture with Bonhams & Brooks has been accounted for on the equity basis. In December 2001, the group s 50% stake in the luxury product Internet site eluxury was increased to 99.99%, through subscription to a capital increase. This operation resulted in goodwill of 45 million euros, corresponding to the value of the customer base and prior site development costs. This interest was accounted for by the equity method over 2001; it was fully consolidated on December 31, In January 2001, the sub-group Télématique Victoire Multimédia was transferred to the Jet Multimédia group in exchange for 479,125 shares in Jet Multimédia with a guaranteed price. This disposal resulted in a gross capital gain of 25 million euros * * * Pro forma data and impact on cash flow: Pro forma simplified income statements are presented below for financial years 2002 and 2003 on the basis of the following assumptions: 2002 disposals and acquisitions are considered to have been made at January 1, 2002; In cases of a disposal in 2003, a comparable number of months of operations is used in 2002 and 2003; In cases where minority interests were acquired in 2003, these operations are deemed to have been made in These pro forma data do not necessarily represent the results that would have effectively been recorded in the consolidated statements if the operations described had taken place on the date stated. Moreover, they cannot be used to forecast future trends in consolidated results millions of euros pro forma pro forma Net sales 12,466 13,114 including - Christian Dior Couture Wines and Spirits 2,116 2,237 - Fashion and Leather Goods 4,149 4,224 - Perfumes and Cosmetics 2,181 2,285 - Watches and Jewelry Selective Retailing 3,039 3,337 Income from operations 2,213 2,046 Income before income taxes 1,607 1,440 Net income from continuing operations before amortization of goodwill, group share Net income before unusual items, group share

12 The net decrease in balance sheet items resulting from changes in consolidation in the year breaks down as follows: millions of euros Brands and other intangible assets (7) Shareholders equity (27) Goodwill 188 Minority interests (69) Net tangible assets 8 Net financial debt 253 Net current assets (57) Other debts at more than one year 5 Other assets 14 Other debts at less than one year (16) The impact of the changes in consolidation on the Group s cash flow, as shown in the consolidated statement of cash flows, net of the cash flow of the companies purchased or sold and net of deferred payments on these acquisitions, was 209 million euros (160 million euros in 2002). This figure in 2003 primarily represents the effects of the increase in LVMH's interests in Fendi (191 million euros), Rossimoda (57 million euros) and La Brosse & Dupont (42 million euros); it also represents the deferred payments for Fendi securities acquired previously, i.e. 86 million euros. On the other hand, disposals contributed 160 million euros; this amount primarily reflects the sale of Hine and Canard-Duchêne, and the sale of the Michael Kors, Marc Jacobs, and Kenneth Cole perfume licenses. In 2002, this primarily included the investments in Fendi (196 million euros), Millennium (77 million euros), Thomas Pink (28 million euros), and the positive impact of the disposal of certain Pommery assets (152 million euros). NOTE 2 - ACCOUNTING PRINCIPLES - RULES - METHODS The consolidated financial statements of the Christian Dior group are prepared in accordance with generally accepted accounting principles in France, defined by the law of January 3, 1985 and Regulation from the Accounting Regulatory Commission published on June 22, 1999; these principles have been consistently applied over the last three financial years. The basic accounting principles used to prepare these financial statements are described below Principles of consolidation The accounts of companies in which Christian Dior has direct or indirect exclusive control are fully consolidated. The accounts of companies in which Christian Dior has joint control are consolidated using the proportionate method. For the companies owned jointly with the Diageo group, only those parts of the balance sheet and statement of income relating to LVMH group activity are included in the accompanying financial statements (see note 2.15). Investments in companies in which Christian Dior has a significant direct or indirect influence are accounted for using the equity method. The Group does not exercise exclusive or joint control, or significant de facto influence over entities or structures in which no legal stake is held ( ad hoc entities ). The list of the companies included in the scope of consolidation is presented in note

13 2.2 - Foreign currency translation, hedging of exchange and interest rate risks a - Currency translation The accounts of foreign companies are converted as follows: at the exchange rate at year end for balance sheet items; at the average rates of the financial year for statement of income items. Translation adjustments from the application of these rates have been recorded in shareholders equity under Foreign currency translation. b - Currency transactions Foreign currency transactions executed by the consolidated companies are converted into their functional currency at the currency rates on the date of the transactions. Receivables and liabilities denominated in foreign currencies are converted at the currency rates on December 31: unrealized currency gains and losses resulting from this conversion are recorded on the income statement, unless they result from the conversion of loans in currencies or other instruments allocated to hedge long-term investments in the same currency: in this case, they are recorded under shareholders' equity as currency translation adjustments. Exchange gains and losses resulting from the conversion of transactions or intra-group receivables and liabilities in foreign currencies, or their elimination, are recorded in the income statement, unless they come from long-term intra-group financing operations that can be classified as quasi-investment securities: in this case, they are recorded under shareholders' equity as translation adjustments. c - Currency contracts and options Forward currency contracts, currency options and related contracts still active at closing are revalued at the prices at December 31. Unrealized gains and losses from this conversion are: Either recorded in the income statement as adjustments on unrealized gains or losses on the hedged assets or liabilities to which these instruments were allocated; Or deferred, if they have been assigned to hedge operations in the following financial year; Or booked as income if they have not been assigned. Deferred unrealized gains and losses are included in Other current assets and Other liabilities. d - Hedging Currency gains and losses arising from hedges on an underlying commercial asset are recorded as operating income or expenses, except for premiums and discounts of forward contracts, which are recorded on a prorated basis as financial income or expenses. The impact of currency hedges with a financial underlying asset or non-allocated exchange instruments is recognized as financial income or expense. e - Interest rate hedging Gains and losses from interest rate hedging contracts (swap contracts, CAP, forward rate agreements, collars, etc.) are accounted for on a prorated basis over the period of the related contracts. If interest rate swaps mature after the maturity of the operations hedged, where applicable, the unrealized losses at year end are recorded in the income statement. The unrealized gains are not recorded. 69

14 2.3 - Brands and other intangible assets Intangible assets are recorded as assets at their purchase price plus goodwill, if any. Only the acquired brands that are well-known and individually identifiable are recorded as assets, using their value at the time of purchase. This value is not amortized. The book value and current value of brands are determined for each accounting period, using the procedures described in note 12. When the book value of a brand becomes permanently greater than its current value, a set-aside for depreciation is made for the amount of the difference. Expenses incurred to create a new brand or to develop an existing one are recorded under expenses. Other intangible assets are amortized over their estimated useful lives: leasehold acquisition rights term of the lease software 1 to 5 years Goodwill and related intangible assets Goodwill is defined as the difference between the purchase price of the securities of consolidated companies and the Group s share in their net assets on the purchase date. This calculation is made after the net assets of the acquired company have been restated according to Group accounting principles and after revaluation to fair value, when fair value differs from net book value on the purchase date. The value of certain intangible assets, such as brands, market share, or business goodwill are not reported separately from goodwill. Goodwill is recorded depending on whether it is positive or negative, under Goodwill on the asset side or under Contingencies on the liabilities side. For the changes in group consolidation since fiscal 2000, goodwill has been recorded in the operating currency of the acquired company. It was previously recorded in euros. Goodwill is amortized over periods ranging from 5 to 40 years, depending on their estimated duration when first consolidated. This estimation refers to the purchased company in its own market, in terms of positioning, age and geographic location. Business goodwill acquired under French law is amortized over a period that may not exceed 18 years. The book value and current value of goodwill are determined using the procedures described in note 12. When the book value of goodwill becomes permanently greater than its current value, a set-aside equal to the difference is made for amortization Tangible assets Tangible assets are generally recorded in the consolidated balance sheet at their acquisition cost. This includes goodwill, if any. Assets acquired under financial lease agreements are recorded as fixed assets on the basis of the present value of future rents and the resulting financial liability is simultaneously recorded in liabilities. Tangible assets are depreciated principally according to the straight-line method at rates based on the estimated useful lives below: Buildings 20 to 50 years Plant and equipment 3 to 20 years Retail improvements 3 to 10 years Vineyards 18 to 25 years Other assets 3 to 10 years 70

15 Vineyard preparations and development costs are capitalized until the vineyards become productive (generally three years) and are included in Tangible assets in progress Financial assets Unconsolidated investments are recorded at cost. In case of a difference considered to be permanent between the utility value of such a Group investment and its book value, a provision for depreciation in this amount is booked. The utility value of investments is measured based on criteria such as the value of the Group s share in net assets, the stock price or the outlook for earnings and cash flow. These criteria are weighted for the effects on the Group of holding the investments, in terms of strategy or synergies with existing businesses Inventories and work in progress Inventories are recorded at the lower of cost or market value. Cost price is determined either using the weighted average cost method or the first-in first-out (FIFO) method. Considering the aging process for champagne and cognac, these inventories are often held for more than one year. However, in line with industry practice, they are classified as current assets. Financial fees are not taken into account in the evaluation of inventories Trade accounts receivable and other receivables Receivables are recorded at their face value. An allowance for write-down is established when the inventory value is less than book value, based on the probability of recovery Treasury shares Treasury shares are recorded at acquisition cost. Shares held under French market regulations governing stock price adjustments, shares held for employee stock option plans and shares held by subsidiaries on a short-term basis are recorded as assets in the balance sheet. Shares held on a long-term basis or for the purpose of future cancellation or exchange are deducted from shareholders equity, including the realized capital gains and losses. When the market value of the shares, calculated as described in 2.10 below, becomes less than the acquisition price, a provision for depreciation equal to the amount of the difference is recorded. For shares allocated to option plans, the calculation of depreciation is made on a per-plan basis when the corresponding options are assumed to be exercisable (market value of the share greater than the option exercise price), and in relation to the average cost price for all plans in question when they are assumed to be non-exercisable (market value of the share less than the option exercise price). Moreover, when the value of the shares allocated to option plans, net of depreciation, is greater than the exercise price stipulated by each of the plans, a provision for charges is recorded for the amount of the difference Short-term investments Short-term investments and equivalent receivables (investment fund units, money market funds, etc.) are stated at the acquisition cost. A write-down allowance is recorded when the acquisition value is higher than the market value. 71

16 Shares of mutual funds, cash mutual funds and similar securities are valued at their published net asset value. Market value for traded securities is determined by reference to the average price quoted on the related stock exchange during the last month of the year, translated at the year-end exchange rate if applicable. Market value of non-traded securities is based on their estimated realizable value. The calculation is made by line of securities, without offsetting between the gains and loss recorded. In case of partial sale of an investment, the FIFO or weighted average price methods are used to determine the gain or loss to be recognized Cash and cash equivalents Cash and cash equivalents include cash in bank and short-term deposits with are immediately available, minus restricted cash Bond issues Bond issue costs and redemption premiums on convertible bonds are recorded as financial costs over the life of the bond. Provisions for redemption premiums are funded annually and recorded under Financial debt. Issue premiums on bonds issued above par are deducted from issuance costs. The issuance costs of subordinated securities are amortized over 15 years Design costs - Research and development costs As of January 1, 2003, design costs are included in the cost of sales line. Research and development costs, including packaging costs, are recorded as expenses in the year in which they are incurred Income taxes, deferred taxes Deferred income taxes arise out of timing differences between the net book assets of consolidated companies as reported in the consolidation and the amount resulting from the application of tax rules. These are recorded based on the known tax situation at the end of the year. Tax savings from carried-over fiscal deficits are recorded as deferred taxes only when their recovery is deemed probable. Taxes that would become payable in the event that retained earning of subsidiaries are distributed are set aside if such a distribution is probable Recognition of income Net sales revenues The net sales revenues of the Group include both retail sales in the Group's stores and wholesale sales to distributors and agents. 72

17 Retail sales come basically from Selective Retailing and the following lines: Fashion and Leather Goods, certain brands of Perfumes and Cosmetics, and Watches and Jewelry. These sales are recorded at the time of purchase by the customers. Wholesale sales come from Wines and Spirits activities and from certain brands of Perfumes and Cosmetics or Watches and Jewelry. These sales are recorded when ownership is transferred, that is, upon shipping. Activities in partnership with Diageo A significant part of the sales revenue from Wines and Spirits is earned through the distribution agreements with Diageo, which most often consist of joint ventures. These joint ventures ensure the delivery and sale of the brands of both groups. The distribution agreements govern the breakdown of the balance sheet and income statement of these entities between LVMH and Diageo. Because of these agreements, LVMH only consolidates the net sales and share of joint-venture expenses that applies to its own brands. Product repurchase agreements Companies in the Perfumes and Cosmetics division, and to a lesser extent in Fashion and Leather Goods, repurchase unsold or outdated products from their customers or distributors. Reserves are funded on a percentage of realized sales revenue and margin to cover the costs of such repurchased or destroyed products. Re-invoiced shipping and transportation costs Shipping and transportation costs re-billed to customers are included in net sales, because the associated expenses were recorded under commercial expenses. Marketing cooperation agreements and product rights It is common usage, especially in the marketing of Wines and Spirits, to pay for product reference rights or to participate in advertising agreements with the distributor. These expenses are recorded as commercial costs and not as a reduction of net sales Other income and expenses The primary business of the Group is the management and development of its brands and stores. Operating income derives from these activities, whether they involve recurring or non-recurring operations, main or incidental. Other income and expenses reflects income statement items which may not be inherent to the Group s operating activity, because of their nature or frequency. Significant amounts of other income and expenses are recorded as unusual items. Income before taxes is equivalent to the notion of Net income of consolidated companies. Net income is income net of taxes, excluding goodwill amortization expense and before unusual items Earnings per share Earnings per share are calculated based on the weighted average number of common shares outstanding during the year. Fully diluted earnings per share are computed as described above, plus the weighted average number of shares assuming the exercise of all outstanding options. This calculation takes into account the corresponding reduction in interest expense and the tax effect. 73

18 Pensions, retiree medical costs and other commitments to current or retired employees When retirement indemnities, pensions, medical costs and other commitments are covered by contributions paid by the companies of the Group to outside organizations which assume the commitment for the payment of the allocations or the reimbursement of medical costs, these contributions are recognized as expenses for the year in which they are due; no liability is shown on the balance sheet. When the consolidated companies pay pensions, medical costs and other liabilities directly, the related total actuarial commitment appears as a provision on the balance sheet. Changes to this commitment are recorded as expenses for the period. When this commitment is covered, in whole or in part, by funds paid by the companies of the group to financial agencies, the amount of these dedicated investments is deducted on the balance sheet from the actuarial commitment. The actuarial commitment is calculated on the basis of valuations specific to each country and to each company of the group; these valuations include assumptions for salary increases, inflation, life expectancies, employee turnover and return on dedicated investments. The cumulative effects of the actuarial differences are amortized when they exceed 10% of the total gross commitment of dedicated financial assets or of the market value of the dedicated financial assets at year end. These differences are amortized beginning in the year following their determination, over the residual average working life of the employees concerned Use of estimates In the normal process of preparing the consolidated financial statements, the determination of certain accounting balances on the balance sheet or the income statement requires the use of assumptions, estimates or assessments. This includes the valuation of the intangible assets, the determination of the amount of the provisions for risks and contingencies, or provisions for depreciation of inventories. These assumptions, estimates or assessments are prepared on the basis of information or positions existing on the date the statements are prepared which may in some instances prove different from reality. 74

19 NOTE 3 - MARKETABLE SECURITIES, CASH AND CASH EQUIVALENTS A - Marketable securities Units of traded or non-traded SICAV and FCP Traded marketable securities Provision for depreciation (15) (17) (34) Marketable securities Portfolio market value B - Cash and cash equivalents Term deposits, greater than 3 months Term deposits, less than 3 months Ordinary bank accounts Cash and cash equivalents Including restricted accounts As of December 31, 2003, net cash and cash equivalents at closing, as shown in the table of cash flows, totaled 459 million euros; the reconciliation of this amount with the data presented below is as follows: millions of euros 2003 Marketable securities (units of SICAV and FCP, net) 33 Cash and cash equivalents 855 Bank overdrafts (429) Net cash and cash equivalents

20 NOTE 4 - TREASURY SHARES At December 31, 2003: LVMH held 11,973,630 shares, 11,828,630 of which were allocated to stock option plans and the remainder, i.e., 145,000 shares, to stock price equalization. Dior held 3,678,220 shares, 3,160,000 of which were allocated to stock option plans and the remainder, i.e., 518,220 shares, to stock price equalization. LVMH and DIOR stock portfolios are allocated as follows millions of euros Number Amount Less than 1 year: option plans 14,988, marketable securities: - gross amount 663, ,217 - provision for depreciation (8) (137) (345) 15,651, ,143 - Provisions for risks and contingencies (4) (4) (4) Net portfolio value 15,651, ,139 In 2003, the following transactions were executed in Dior s stock portfolio: Stock price equalization stock option or short-term investment plans millions of euros Number Amount Number Amount As of December 31, , ,769, Purchases 514, Sales (130,900) (3) Reclassification (7,000) 7,000 Change in provisions 2 11 As of December 31, , ,160, The market value is based on the average quoted price of a DIOR share in December, which was euros. 76

21 NOTE 5 - TRADE RECEIVABLES & RELATED ACCOUNTS Gross 1,517 1,507 1,680 Provision for depreciation (94) (134) (103) Net value 1,423 1,373 1,577 NOTE 6 - INVENTORIES AND WORK-IN-PROGRESS Aging wines and brandies 1,787 1,683 1,707 Other raw materials and products in process ,185 2,147 2,169 Merchandise Finished products 1,311 1,146 1,243 1,927 1,988 2,164 Total gross value 4,112 4,135 4,333 Provision for depreciation (595) (613) (606) Total net value 3,517 3,522 3,727 See also note 27 Information by business groups. NOTE 7 - OTHER RECEIVABLES & PREPAID EXPENSES Currency hedging operations State - corporate income tax 47 - other taxes and duties Trade accounts: advances and down payments Prepaid expenses Other receivables net Net value 1,235 1,315 1,534 The balance of currency hedging consists primarily of unrealized gains from the revaluation of currency hedging contracts at year-end. In the case of an unrealized loss, it is the prepaid expense resulting from the difference (see note 14). 77

22 NOTE 8 - EQUITY INTERESTS A - Value of equity investments Bonhams & Brooks PS&N Ltd (United Kingdom) De Beers LV Ltd (United Kingdom) (1) 9 16 e-luxury.com Inc (United States) (2) Millennium Import LLC (United States) 4 7 Other investments Total B - Income (loss) from investments in equity companies (included in the value of equity investments) Bonhams & Brooks PS&N Ltd NS (4) De Beers LV Ltd (1) (9) (4) e-luxury.com Inc (2) (31) Millennium Import LLC 4 2 Other investments (3) (7) (7) Total 1 (18) (42) (1) Company consolidated on a proportionate basis as of (2) Company fully consolidated on December 31, At December 31, 2003, the data on the principal equity investments were as follows: millions of euros Net sales Net income Total assets Shareholders equity Bonhams & Brooks PS&N Ltd (*) 60.2 (0.7) Millennium Import LLC (*) (*) provisional data NOTE 9 - OTHER LONG-TERM INVESTMENTS Gross value Provisions Net Net Net Bouygues SA (France) Securities 819 (314) LVMH treasury shares 455 (51) Other interests 466 (123) Total 1,740 (488) 1,252 1,233 1,705 78

23 interest book dends equity income value millions of euros % value collected (2) Bouygues SA (France) 4.6 % , Tod's Spa (Italie) 3.5 % Interests in various Internet funds ND 27 ND ND (USA) (1) Project Sloane Ltd Joseph (UK) (1) 10 % Interparfums Inc. (USA) (1) 18 % Other interests 49 1 Investments less than 20% Pechel Industries SAS (France) 40 % L Capital FCPR (France) (1) 44 % (5) SFMI Micromania SA (France) (1) 35 % Sociedad Textil Lonia SA (Spain) (1) 25 % Other interests 1 Investments between 20% and 50% Other investments 24 Investments greater than 50% 24 LVMH treasury shares 404 TOTAL 1, (1) The accounting data shown are prior to December 31, The figures for year-end 2003 were not available at the time of this report. (2) Average of December 2003 market prices. Interests of more than 20%, which appear in the table above, are not consolidated when the Group does not exert a significant influence on these companies. Investment in Bouygues The LVMH group has an interest in Bouygues, managed as part of the Group s portfolio. In that context, the prospects for a rise in the value of this investment must be assessed over the medium term. At December 31, 2000, this investment was included in the short-term investment portfolio. Therefore, it was reclassified on June 30, 2001 as a long-term investment, after deducting the block sold in July 2001 (2,650,000 shares). A depreciation has been booked for value of the stake in Bouygues, which was calculated based on criteria that take into account the durable decline in valuation by the market of the stocks in the media and telecommunications sector. 79

24 Gucci investment Between 1999 and 2001, LVMH was involved in a dispute with the Pinault Printemps- Redoute (PPR) and Gucci groups. This dispute concerned the validity of two reserved capital increases, on February 18 and March 19, 1999, which reduced LVMH s stake in Gucci from 34.4% to about 20%. In September 2001, the PPR, Gucci and LVMH groups settled this dispute through a transactional agreement providing for the following: - the purchased by PPR from LVMH in October 2001 of 8.6 million Gucci shares at USD 94 per share, a total of USD 806 million (897 million euros) ; - the distribution by Gucci in December 2001 of an exceptional dividend of USD 7 per share, which represented, based on the residual LVMH stake on this date, receipts of USD 81 million (90 million euros); - the launch by PPR in March 2004 of a tender offer for all the Gucci stock at a price of USD per share. In December 2001, LVMH sold its residual interest of 11.6 million shares to Crédit Lyonnais worth USD 1,037 million (about USD per share), or 1,150 million euros. The share sale contract contains an earn-out provision entitling LVMH to an additional payment until March 2004 depending on the price of a Gucci share and dividends paid by Gucci during this period. LVMH s total capital gains on the sale of 20.1 million Gucci shares totaled 774 million euros, and 864 million euros when the exceptional dividend is taken into account. 80

25 NOTE 10 - TANGIBLE ASSETS Gross Amorti- Net Net Net value zation value value value Property 973 (9) Vineyards 430 (54) Buildings 1,681 (597) 1,084 1,368 1,547 Technical facilities, equipment and tools 2,749 (1,600) 1, Other tangible assets 820 (418) 402 1,053 1,078 Total 6,653 (2,678) 3,975 4,241 4,631 Including fixed assets financed by capital 298 (123) or long-term leases The changes in tangible assets for financial year 2003 break down as follows: millions of euros Gross Amorti- Net value zation value Balance at December 31, ,855 (2,614) 4,241 Acquisitions Disposals, decommissioning (359) 163 (196) Allocations to amortization (415) (415) Impact of changes in consolidation Impact of currency fluctuations (408) 178 (230) Balance at December 31, ,653 (2,678) 3,975 including acquisitions financed by capital 2 or long-term leases Acquisitions of Tangible Assets primarily represent investments in the retail networks of Louis Vuitton, Sephora and DFS and renovation work on property held by La Samaritaine. 81

26 NOTE 11 - GOODWILL Currency Amortization Gross Depre- Net Net Net period value ciation value value value Amortization DFS 20 1,996 (769) 1,227 1,321 1,415 Sephora 5 to (155) Louis Vuitton (58) Fendi (53) La Brosse & Dupont (47) La Samaritaine (9) Rossimoda (4) 39 Other (< 40 million euros) 390 (197) Goodwill in euros 3,965 (1,292) 2,673 2,718 2,747 Miami Cruiseline USD (51) Donna Karan USD (18) Millennium USD (5) e-luxury USD 3 32 (21) Other (< 30 million euros) Divers 130 (60) Goodwill in foreign currencies 651 (155) Goodwill 4,616 (1,447) 3,169 3,368 3,261 Business Goodwill 75 (49) Total 4,691 (1,496) 3,195 3,404 3,291 The goodwill on Sephora includes the value of selective retailing brands in Perfumes and Cosmetics: Sephora, present in several European countries, as well as Carmen, Laguna and Boïdi in Italy, and Beauty Shop (Marinopoulos Group) in Greece. The goodwill on Louis Vuitton does not represent a price paid for acquiring the brand, because this was developed by the Group. It is the result of successive acquisitions of minority interests in the various legal structures of the Louis Vuitton sub-group. DFS Goodwill: The successive global crises that have occurred since the takeover of DFS by LVMH the economic crisis in Southeast Asia, the attacks on the World Trade Center each had substantial temporary impacts on the business and earnings of DFS. In addition, the economic situation in Japan, the major changes in this country, and the yen/dollar parity in 2001 reduced the number of Japanese tourists, the leading customers of DFS, and their purchasing power. 82

27 In order to determine both the durable drop in business activity and profitability of DFS, and the greatest income swings compared to what was expected when the Group acquired DFS, it was decided in 2001: - To take an exceptional charge of 323 million euros, bringing the net book value of goodwill to a level that can be justified by discounted future cash flows; - To reduce the total amortization period for goodwill from 40 years to 20 years. The net book value on December 31, 2001 of 1,415 million euros will thus be amortized by 1/15 th. Valuation methods for goodwill are the same as those described in note 3 for brands. The changes in the net balance of goodwill over the period break down as follows: Gross Depreciation Net millions of euros value Amortization value Balance at December 31, ,549 (1,181) 3,368 Allocations to amortization and provisions (293) (293) Impact of changes in consolidation Impact of currency fluctuations (120) 23 (97) Other 3 3 Balance at December 31, ,616 (1,447) 3,169 See: note 1 changes in consolidation. note 22 charges net of increases and decreases in goodwill. The effects of changes in consolidation are related to the increase during the year in LVMH's stake in Fendi, Rossimoda and Laflachère. 83

28 NOTE 12 - BRANDS AND OTHER INTANGIBLE ASSETS Gross Depre- Net Net Net value ciation value value value Amortization Brands (*) 8,681 (221) 8,460 8,771 8,861 Leasehold rights 212 (73) Other 330 (224) Total 9,223 (518) 8,705 9,006 9,101 (*) Brands break down as follows: Currency Gross Depre- Net Net Net value ciation value value value Amortization Louis Vuitton 2,058 2,058 2,058 2,058 Hennessy 1,067 1,067 1,067 1,067 Moët Parfums Christian Dior Guerlain Fendi 809 (2) Céline 351 (70) Veuve Clicquot Parfums Givenchy Loewe Château d'yquem Krug Other (< 100 M ) 343 (25) Total brands in euros 7,137 (97) 7,040 7,048 7,164 Tag Heuer CHF Donna Karan New York USD Ebel CHF 117 (117) Other (< 100 M ) 221 (7) Total brands in currencies 1,544 (124) 1,420 1,723 1,697 TOTAL 8,681 (221) 8,460 8,771 8,861 The leasehold rights primarily represent the stores under the Louis Vuitton and Christian Dior Couture brands and the Sephora banner. The acquired brands not detailed in the other item above are primarily: Wines and Spirits: Newton Vineyards, MountAdam, Ruinart and Mercier; Fashion and Leather Goods: Givenchy, Kenzo, Christian Lacroix, Berluti, Thomas Pink and Pucci; Perfumes and Cosmetics: Parfums Kenzo, Bliss, Make Up For Ever, BeneFit Cosmetics and Fresh; Watches and Jewelry: Zenith, Fred, Chaumet and Omas; Other activities: La Tribune and Investir newspapers. 84