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  • Location: GELDERLAND 
  • Founded: 1960-01-28
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    Annual Report 2005 LEGO Group


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    Selected Product Awards 2005 DUPLO Dora & Diego’s Animal Adventure: Dr. Toy: “Smart Play Smart Toy”: Product of Excellence VIKINGS Viking Fortress: Toys R Us: On the annual list of the Hottest DUPLO Thomas Load & Carry Set: New Toys for the 2005 holiday season National Parenting Center’s: Seal of Approval Winner Fall ‘05 KNIGHTS KINGDOM: Toy Industry Association: Boy Toy of the Year LEGOVILLE Fire Station: Parents’ Choice: Approved Seal Fall 2005: Toys KNIGHTS KINGDOM, Castle of Morcia: PIRATES Captain Redbeard’s Pirate Ship: Canadian Toy Testing Council: iParenting Media: Best Products of 2005 Award Children’s Choice Award 2005 - Toys & Games CREATOR Tub: Dr. Toy: “Smart Play Smart Toy”: Product of Excellence STAR WARS: Learning Express Toy Stores: Best Products Award - Best Construction Toy CREATOR Wild Hunter: Creative Child Magazine: Preferred Choice Award (Kids’ Builder Construction Category) TECHNIC Excavator: National Parenting Center’s: National Parenting Center’s: Seal of Approval Winner Spring 2005 Seal of Approval Winner Fall ‘05 Parents’ Choice: Dr. Toy: Top 10 Best Active Products for 2005 Recommended Seal Spring 2005: Toys Parents’ Choice: Recommended Seal Fall 2005 TECHNIC Street Bike: CREATOR Prehistoric Creatures, Designer Set: iParenting Media: 2005 Greatest Products Call Canadian Toy Testing Council: National Parenting Center’s: Children’s Choice Award 2005 Seal of Approval Winner Fall 2005 CITY Fire Station: Parents’ Choice: Recommended Seal Fall 2005 Dr. Toy: Best Vacation Toy for 2005 iParenting Media: CLIKITS Pretty in Pink Beauty Set: Best Products of 2005 Award - Toys & Games Creative Child Magazine: National Parenting Center’s: Seal of Excellence (Creative Play Category) Seal of Approval Winner Spring ‘05 iParenting Media: Parents’ Choice: Approved Seal Spring 2005: Best Products of 2005 Award - Toys & Games Doing & Learning/Toy Creative Child Magazine: Seal of Excellence (Kid’s CLIKITS Flashin’ Fashion Frame: Builder Construction Category) National Parenting Center’s: Seal of Approval Winner Fall ‘05 CITY Speed Boat: iParenting Media: CLIKITS Cool Carry All: 2005 Excellent Products Call - Toys & Games Dr. Toy: Best Vacation Products for 2005 CITY XXL Mobile Crane: CLIKITS Striped Sunny Jewels: Dr. Toy: “Smart Play Smart Toys”: Dr. Toy: “Smart Play Smart Toy”: Product of Excellence Best Products of Excellence RACERS Tiny Turbos: CITY Police Station: Dr. Toy: Best Vacation Products for 2005 National Parenting Center’s: Seal of Approval Winner Fall ‘05 National Parenting Center’s: Seal of Approval Winner Spring ‘05 iParenting Media: 2005 Greatest Products Call Parents’ Choice: Grandparents Magazine: Best Building Toy 8 and under Recommended Seal Spring 2005: Toys Parents’ Choice: Approved Seal Fall 2005: Toys RACERS Dirt Crusher: DINO T-1 Typhoon vs. T-Rex: Stiftung Warentest: iParenting Media: 2005 Greatest Products Call Test winner in the RC vehicle category


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    Financial Highlights – LEGO Group [ mD K K ] 2005 2004 2003 2002 2001 Income Statement: Revenue 7,050 6,315 6,792 9,601 9,000 Expenses (6,582) (6,252) (7,902) (8,795) (8,142) Profit/(loss) before special items, financial income and expenses and tax 468 63 (1,1 10) 806 858 Impairment of fixed assets 95 (723) (172) – – Restructuring expenses (104) (502) (283) – (122) Operating profit/(loss) 459 (1,162) (1,565) 806 736 Financial income and expenses (3) (75) 67 (189) (215) Profit/(loss) before tax 456 (1,237) (1,498) 617 521 Profit/(loss) on continuing activities 331 (1,473) (953) 348 420 Profit/(loss) on discontinuing activities 174 (458) 18 (22) (54) Net profit/(loss) for the year 505 (1,931) (935) 326 366 Balance Sheet: Assets relating to continuing activities 7,689 5,657 10,049 12,560 14,093 Assets relating to discontinuing activities – 2,432 – – – Total assets 7,689 8,089 10,049 12,560 14,093 Equity (incl. minority interest) 3,589 2,948 4,892 6,478 6,225 Provisions and debt relating to continuing activities 4,100 4,731 5,157 6,082 7,868 Provisions and debt relating to discontinuing activities – 410 – – – Cash Flow Statement: Cash flows from operating activities 1,057 774 944 1,853 1,227 Investment in property, plant and equipment 265 457 709 1,264 1,478 Cash flows from financing activities (1,070) (29) (560) (1,003) 870 Total cash flows 2,549 538 (215) (290) 771 Financial ratios (in %): Gross margin 58.0 57.7 61.3 70.0 65.4 Operating margin (ROS) 6.5 (18.4) (23.0) 8.4 8.2 Net profit margin 7.2 (30.6) (13.8) 3.4 4.1 Return on equity 18.1 (46.3) (16.7) 4.6 6.8 ROIC I 19.1 1.2 (12.8) 8.2 9.1 ROIC II 23.2 (23.6) (18.3) 8.2 7.8 Equity ratio 46.7 36.4 48.7 51.6 44.2 Equity ratio (incl. subordinated loan capital) 57.1 46.3 48.7 51.6 44.2 Employees: Average number of employees (full time), continuing activities 5,321 5,620 6,542 6,659 6,474 Average number of employees (full time), discontinuing activities 1,322 1,725 1,756 1,657 1,184 Financial ratios are defined in Accounting Policies. Comparative figures have been adjusted to reflect the changed classification of expenses relating to ”Contribution to Trade”.


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    REVENUE [ mD K K ] O P E R AT I N G P R O F I T / ( LO S S ) [ mD K K ] 10.000 800 9.000 400 0 8.000 (400) (800) 7.000 (1.200) 6.000 (1.600) 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 T O TA L A S S E T S [ mD K K ] E Q U I T Y R AT I O I N C L . S U B O R D I N AT E D LOA N C A P I TA L 15.000 60% 14.000 50% 13.000 40% 12.000 11.000 30% 10.000 20% 9.000 10% 8.000 7.000 0% 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 I N V E S T M E N T I N P R O P E R T Y, FREE CASH FLOW BEFORE PLANT AND EQUIPMENT [ mD K K ] FINANCING ACTIVITIES [ mD K K ] 1.600 4.000 1.400 3.500 3.000 1.200 2.500 1.000 2.000 800 1.500 600 1.000 400 500 200 0 0 (500) 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005


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    CONTENTS Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 REPORT 2005: MARKET AND RESULTS 2005 The market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Revenue and profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 RESULT OF THE ACTION PLAN FROM MARCH 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Fundamental change of processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Restoration of competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Rightsizing of activities, cost base and assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 The future strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1) Direct dialogue between the LEGO Group and LEGO consumers to drive innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2) Strengthened approach to sales and distribution channels to drive earnings and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3) Continued streamlining and optimisation of Group operations to improve earnings and service level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ORGANISATIONAL STRUCTURE AND LEADERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Group structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Management team and organisational structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 New Board members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 EMPLOYEES AND CORPORATE CULTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 A more result-oriented LEGO culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Focused Performance Management Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Developing talent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 CORPORATE RESPONSIBILITY OF THE LEGO GROUP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Global Compact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Revision of LEGO Group Code of Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Product quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Environmental obligations and action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Efforts to reduce workplace accidents and introduction of a global occupational health and safety policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Charity work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 EXPECTATIONS FOR 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ACCOUNTS: Financial Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Accounting Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Management’s Statement on the Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40


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    4 | ANNUAL REPORT 2005


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    INTRODUCTION ■ LEGO Group on the right track Two years ago, the LEGO Group changed income and expenses and tax of DKK 468 decline on the global toy markets, the its strategy in order to concentrate on its million, and a total profit before tax of DKK LEGO Group enjoyed increased sales core business: the LEGO brick and the 702 million – were better than expected and obtained increased market shares unique building system created around it. and confirm that we are on the right track. on all significant markets. This was the All over the world, LEGO® has for genera- We therefore consider the results satis- case on the largest toy market, the USA, tions given children and their families a factory and appreciate the great efforts and also the German core market saw very special playing experience. The made by the LEGO employees every- considerable increases. Total Group sales LEGO brick stirs children’s imagination where despite the uncertainty and the increased by approximately 12 per cent in and challenges their creativity through changing conditions they are going 2005. fun and creative play. The children “pro- through. gram” their play themselves, and their The LEGO Group’s total operating parents feel secure - not least due to the The results reflect encouraging sales expenses were reduced by DKK 314 mil- superior quality of the LEGO products. increases in respect of the innovated, lion, or 8 per cent, which is however set classic LEGO products and larger cost- off by increasing expenses for royalties, The development on our markets in the savings than anticipated, whereas the bonus to employees and currency past year has justified our belief in the improvement of the Group’s financial effects. Impairment losses and restructur- uniquely lasting nature of these values. position is attributable to the sale of ing expenses amounted to DKK 9 million This confirms the foundation for the assets and increased cash flows. The in 2005. Group’s survival as an independent, fami- sale of assets in both the continuing and ly-owned enterprise. the discontinuing parts of the business The liquidity position has improved con- accounts for nearly half of the profit for siderably as the sale of activities and The results of the LEGO Group for 2005 – the year before tax. assets, combined with improved earn- a profit before special items and financial Despite general low growth or an actual ings, meant that the Group had financial Kjeld Kirk Kristiansen Mads Øvlisen Jørgen Vig Knudstorp Vice-chairman Chairman President and CEO ANNUAL REPORT 2005 | 5


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    ■ INTRODUCTION resources of DKK 2,604 million at the end As part of our financial strategy, we sold Therefore, the challenge during the next of the year. The Group’s equity incl. minori- the majority shareholding in the LEGO- three years continues to be to increase ty interests amounted to DKK 3,589 million LAND Parks to Merlin Entertainments the Group’s earnings. Earnings clearly and the equity ratio was 47 per cent Group. A decision we were sad to make, have priority over top line growth. Not until against 36 per cent in 2004. but which was necessary in order to the platform now created generates satis- release financial and management factory earnings the Group will turn Consequently, the Group’s financial base resources for the survival of the Group. towards growth. In order to pilot the has improved considerably although the The LEGO Group and KIRKBI are minority Group in this direction, the Board has earnings from continuing activities have shareholders in the new enterprise, which decided to extend Corporate Manage- not yet reached a satisfactory level. also comprises Merlin’s Sea Life, Dun- ment and change and simplify the divi- geons and Earth Explorer family attrac- sion of responsibilities within Corporate The market for traditional toys is materially tions. This was a good solution. The parks Management in order to increase focus affected by discount products, and in are run by a professional operator, who is on both operational and strategic chal- order to be competitive, we must be able able to create focus and synergy through lenges in the coming three years. As from to manufacture high-quality toys at low the operation of several parks. Moreover, February 2006, Corporate Management cost. Therefore, labour intensive produc- the parks still offer the special LEGO will consist of Jørgen Vig Knudstorp, Pres- tions have for some years taken place experience, respecting the values and ident and CEO, Jesper Ovesen, Executive partly in our factory in Kladno, the Czech quality level of the LEGO brand. Vice President and Henrik Poulsen, Exec- Republic, and partly at sub-suppliers, for utive Vice President. example in China. This necessary sourc- During the first two years following the ing process has further accelerated and change of strategy, primary focus has Considerable challenges are still facing in 2005 meant that our factories in Korea been directed at establishing operational the LEGO Group and our employees, who and - partly - in Denmark and Switzerland, and financial control as well as stability. have - in this difficult, and for many also were closed down and the production These objectives have now been personally insecure, situation - loyally sup- was transferred to Kladno and to suppli- reached; however, the new direction con- ported the Group. The owners, the Board ers in Eastern Europe. The sourcing pro- tinues. We have not yet reached a safe and Corporate Management are very cess is expected to continue in the com- port of sustainable, value creating opera- grateful for the great effort made by the ing years. Corporate Management con- tions. We reached the goals set for this LEGO employees during the year. We are siders it very important to have an open year, but we aim at increasing our value aware that these loyal employees are dialogue with the employees concerning creation year by year. This is the shared among the Group’s most essential the challenges and their possible solu- objective of the owners, the Board of assets, particularly in view of the challeng- tions. Corporate Management has thus Directors and Corporate Management. ing future facing the Group. promised to provide timely information on the effects of the globalisation. Billund, February 2006 Mads Øvlisen, Jørgen Vig Knudstorp, Chairman President and CEO 6 | ANNUAL REPORT 2005


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    REPORT 2005 / MARKET AND RESULTS 2005 ■ Report 2005 Market and Results 2005 market still indicate considerable chal- lenges. The market Most toy suppliers witnessed a difficult Revenue and profit Jørgen Vig Knudstorp, year. A year characterised by the lack of The LEGO Group’s profit/loss before tax President and CEO growth, increased supplies and keen was considerably improved in 2005 from competition at the retail level where, for a loss of DKK 1,688 million in 2004 to a example, the supermarket chains’ private profit of DKK 702 million in 2005. The label products - often manufactured in improvement of DKK 2,390 million is, China - got more and more shelf space. among other things, attributable to the This trend is most obvious in the USA, the large impairments of fixed assets and the United Kingdom and Scandinavia, but is restructuring expenses incurred by the also gaining an impact on the continental LEGO Group in 2004. European market. The increasing compe- tition at the retail level is felt through The profit/loss before special items, finan- increased pressure on prices and conse- cial income and expenses and tax quently increased pressure on toy improved from DKK 63 million in 2004 to manufacturers’ profit margin. DKK 468 million in 2005. The improvement is attributable to an increase in revenue of The consumers are still to an increasing 12 per cent, corresponding to DKK 735 extent choosing the electronic products million, and at the same time the expens- instead of traditional toys. Moreover, child- es, excluding royalties and bonus, were ren are today at a younger age losing reduced by 8 per cent. In view of the fact interest in traditional toys, which are being that the year was affected by extensive replaced by other products, such as changes in the Group, and considering mobile phones. This highly affects the the negative development in the market requirements relating to the product for traditional toys, the results are consid- range of traditional toy-makers. Further- ered satisfactory. more, quickly changing fashion trends among the children are still shortening The development in sales of LEGO prod- the market life cycle of traditional toys. ucts from retailers to the consumers has These development trends mean that toy also been positive, with an average manufacturers are required to reduce the increase of 9 per cent compared with product development time and increase 2004. Retailers have reduced their inven- flexibility in order to maintain their position tories of LEGO products considerably in on the market. 2005, and the mix of inventories held by retailers at the end of the year has Although 2005 was a difficult year for the become healthier. entire toy industry, the LEGO Group man- aged to increase its market shares on a The increasing sales are also attributable global basis. However, the trends in the to a better and closer dialogue with retail- ANNUAL REPORT 2005 | 7


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    ■ REPORT 2005 REVENUE SPLIT 2004 ers than in previous years, and conse- Star Wars computer game sold more quently a better possibility of meeting the than 3 million copies and entered the top wishes and needs of the retailers. 10 of computer games sold in the USA. Products The increased focus on the LEGO Group’s core products has had a positive Result of the Action Plan effect on the results for 2005. The list of from March 2004 the year’s biggest-selling products includes classical themes such as LEGO At the beginning of 2004, the LEGO City, LEGO Vikings and Mobile Crane Group faced large challenges which from LEGO Technic as well as Ferrari jeopardised the Group’s survival as an Americas and Pacific - 28% models from LEGO Racers. An important independent, family-owned enterprise. element in the focus on core products The Action Plan for the last two years has Europe, Asia and Emerging - 58% has been the ’pre-school’ area with the resulted in stability and a considerable Direct to consumer - 9% reintroduction of the DUPLO line. Classic reduction of financial risks. Other - 5% products such as DUPLO Airport, DUPLO Zoo, DUPLO Princess Castle and DUPLO In the Action Plan, the LEGO Group Board Knights have contributed to the extensive and LEGO Group Leadership Team growth of the DUPLO line. emphasised three main themes: REVENUE SPLIT 2005 The BIONICLE line is still the LEGO Group’s 1. Set clear direction for the LEGO Group biggest-selling theme. However, sales did and fundamentally change the way we not live up to expectations in 2005. Two do business. new market-tuned themes, Vikings and 2. Restore competitiveness by focusing Dino, both surpassed expectations in on customers, in particular their profit- 2005, whereas one of the Group’s girls’ ability. products, CLIKITS, saw a decline in sales 3. Reduce the level of risk by rightsizing compared with 2004 despite several years’ our activities, cost base and assets to intense efforts in connection with the a lower revenue base. launching of the product. Consequently, the Group will not launch any new CLIKITS Fundamental change of processes products after 2006. The year 2005 primarily focused on fun- damentally improving the Group’s opera- As in previous years, the LEGO Group has tion and processes. The first part of the Americas and Pacific - 27% acquired the rights to manufacture con- extensive restructuring of the value chain Europe, Asia and Emerging - 59% struction toys tying in with cinema films. In was carried through, as the LEGO Group Direct to consumer - 10% 2005 especially Star Wars™ was a great Leadership Team decided to move the Other - 4% success, and - second only to the Bio- production activities from Switzerland to nicle line - the various Star Wars prod- Eastern Europe and to centralise the ucts were the LEGO Group’s biggest-sell- European distribution centres in the ing product line in 2005. Another success Czech Republic. This is expected to lead was the launching of a new Star Wars to increased efficiency, improved servic- computer game, which – in accordance ing of the European market and cost sav- with the LEGO Group’s strategy of focus- ings. At the same time, the number of ing on core products - took place in components for the various LEGO mod- cooperation with an external partner. The els was reduced, which made the value 8 | ANNUAL REPORT 2005


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    REPORT 2005 / RESULT OF THE ACTION PLAN FROM MARCH 2004 ■ ANNUAL REPORT 2005 | 9


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    ■ REPORT 2005 chain more flexible and resulted in cost classic lines and more ‘fad-driven’ prod- reductions. ucts. A number of new management process- The strengthening of competitiveness is es were established, including processes reflected by the favourable development to improve profitability calculations relat- in the LEGO Group’s market shares and ing to both customers and products. The earnings. Similarly, a number of the effort to improve the Group’s processes Group’s customers have enjoyed better also resulted in a more precise produc- earnings driven by increased sales of tion planning process which better LEGO products, a better profit margin ensures the possibility of adjusting the and an increased rate of inventory turn- production capacity to customer over. demand. Furthermore, the product devel- opment process has undergone funda- Rightsizing of activities, mental changes so that the product cost base and assets development time from the birth of an The reduction of risks through the right- idea to the finished product has been sizing of activities, cost base and assets reduced and, for several products, even continued in 2005. It was decided to out- halved. source the production of selected pro- duct lines, such as Bionicle boxes and Restoration of competitiveness the entire DUPLO range, and the Group’s The relations to key customers all over own tool factory in Switzerland was sold. the world were strengthened, and a clos- Moreover, considerable cost-savings in all er dialogue as well as an extensive cus- the functions of the Group have had full tomer satisfaction analysis increased the impact in 2005 as a consequence of LEGO organisation’s knowledge of the measures initiated in 2004. Due to these customers’ priorities and their attitude measures, the Group’s underlying costs towards possible improvements relating were reduced by a further DKK 314 million to the LEGO Group. Based on this knowl- in 2005 compared with 2004. Since 2003 edge, a number of measures have been the cost level has been reduced by more initiated, including efforts to increase the than DKK 1,600 million. The Group’s total individual customer’s profitability. More- assets were reduced by nearly DKK 5 bil- over, the Group’s sales force has been lion in the same period. strengthened through competence development and improved processes As planned, the LEGO Group sold a num- (the KAM improvement project). The ber of assets in 2005, including land, increased focus on core products and sales and production facilities in the USA, the introduction of new product lines Australia and Korea as well as company have furthermore resulted in a better bal- aircraft. Towards the end of the year, all Søren Torp Laursen Senior Vice President ance in the product portfolio between the the Group’s production facilities in Swit- Americas, Australia & New Zealand 10 | ANNUAL REPORT 2005


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    REPORT 2005 / RESULT OF THE ACTION PLAN FROM MARCH 2004 ■ zerland were put up for sale and are the Group has thus succeeded in estab- expected sold in 2006. Moreover, the lishing a considerably improved financial Group sold off two business activities in base. 2005, KOMPAN A/S and the LEGOLAND Parks. The financial position stabilised in the course of 2005. However, the LEGO The sale of the LEGOLAND Parks was Group is still facing considerable strate- decided in the autumn of 2004, as the gic challenges, including increasing com- parks constituted a business area which petition at the retail level, competition did not directly tie in with the core busi- from electronic products and the trend ness of the LEGO Group. The sale was that children are losing interest in toys at carried through in July 2005 and was a younger age. Challenges which should finally approved by the competition all be addressed in the prospective strat- authorities on 24 August 2005. The buyers egy in order to ensure long-term survival, were Blackstone Capital Partners in growth and lasting value creation for the cooperation with Merlin Entertainments Group. Group, which owns and runs Sea Life, Dungeons and Earth Explorer. These The future strategy attractions are based on the same funda- The overall objective of the Action Plan mental values as LEGOLAND and have was to return the LEGO Group to profit- proved very successful within the enter- ability and financial stability and at the tainment industry. same time keep the Group in the private ownership of the Kirk Kristiansen family. The transaction was carried through by As a natural continuation of the plan for merging the LEGOLAND Parks into a new the period 2004-2005, LEGO Group Lead- company together with Merlin Entertain- ership Team in 2005 developed a strategy ments Group. Together with KIRKBI, the addressing future challenges. LEGO Group holds 30 per cent of the share capital in the new company. The The strategy is based on a number of sales price for the Parks amounted to “assets” and values which differentiate the nearly DKK 2.8 billion. Net proceeds for LEGO Group from other players on the accounting purposes amounted to DKK toy market. The inheritance and history of 200 million. the LEGO Group play a decisive role, and the three classic LEGO values - “Creativ- The sale contributed to the financial posi- ity”, “Fun” and “Quality” - will form the future tion of the Group being improved from a basis of the Group, together with its net interest-bearing debt of more than unique “assets”: the brick, the modular DKK 3,000 million in 2002 to positive net construction system, the LEGO brand, liquidity of DKK 1,292 million at the end of LEGO’s loyal consumers and “commu- 2005. By implementing the Action Plan, nities”. Moreover, the Group’s direct ANNUAL REPORT 2005 | 11


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    ■ REPORT 2005 access to consumers in the form of own 2) Strengthened approach to sales and direct sales to consumers and a strong distribution channels to drive earn- position as a key partner to retailers is ings and sales considered a very important asset. The effort of creating extraordinary value for retail customers should con- The Group’s objective in the coming three centrate on more efficiently meeting years will therefore be to deliver creative the wishes and requirements of the quality toys to core consumers and retail- retailers. The Group will continue to ers at a satisfactory profit by refocusing focus on ensuring that the product on the Group’s lasting values and unique portfolio will, on a future basis, consist assets. This means that, in the period of innovative products and new cate- 2006-2008, the LEGO Group will focus on gories, supplemented with marketing improving value creation by still focusing measures in order to support retail on the Group’s special “assets”. In that sales. period, earnings and return on assets are given higher priority than sales growth. 3) Continued streamlining and optim- isation of Group operations to 1) Direct dialogue between improve earnings and service level the LEGO Group and LEGO The new strategy will focus on continu- consumers to drive innovation ing the modernisation, rightsizing and A closer relationship should be estab- optimisation of operating processes. lished between LEGO and the consu- The objective is, among other things mers. For example, loyal LEGO fans through outsourcing, to ensure materi- should be serviced through a number al improvement of the LEGO Group’s of measures, such as LEGO Factory. It is supply performance at a lower cost. the ambition that product development This effort will strengthen the two other and process improvements should take focus areas of the strategy, as retail place in close dialogue with LEGO fans, customers will enjoy increased flexibil- who should through different channels ity, and the consumers will see that have the possibility of presenting ideas their demand can be met more effi- to the Group’s designers. ciently. The many adult LEGO enthusiasts all In the long term, i.e. from 2009 and over the world, comprising an increas- onward, there will be focus on creating ingly active group of fans, should also moderate growth through the intensified be involved. The Ambassador Pro- innovative efforts initiated. gramme is an official programme which invites adult LEGO fans to share their enthusiasm for the LEGO idea and LEGO products and encourages Organisational Structure interaction in the global LEGO commu- and Leadership nities. Moreover, the LEGO Certified Professionals programme caters for Group structure adult fans who, wholly or partly, live by In the continued efforts to simplify the their LEGO hobby and therefore wish structure and adjust the business devel- to enter into cooperation with the opment of the LEGO Group, a number of Mads Nipper Senior Vice President LEGO Group. subsidiaries were sold within the Group in Product- & Marketing Development 12 | ANNUAL REPORT 2005


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    REPORT 2005 / ORGANISATIONAL STRUCTURE AND LEADERSHIP ■ ANNUAL REPORT 2005 | 13


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    ■ REPORT 2005 2005 and the ownership was transferred main divisions, Corporate Management, from Swiss to Danish ownership. comprising Jørgen Vig Knudstorp, Presi- dent and Chief Executive Officer (CEO), Moreover, as planned the Group’s direct and Jesper Ovesen, Executive Vice Presi- ownership and operation of the LEGO- dent and Chief Operating Officer (COO) LAND Parks were sold and replaced by a (responsible for Supply Chain and Central considerably smaller financial investment Functions), has been strengthened in the form of an ownership share of 15 through the appointment of Henrik Poul- per cent. (The Group structure is shown sen as Executive Vice President respon- on the cover of the Annual Report.) sible for Sales, Product Development and Marketing. Management team and organisational structure At the same time, the existing LEGO In order to secure the successful imple- Group Leadership Team was dissolved. mentation of the LEGO Group’s strategy, The changes in the organisation are a new organisational structure was intro- intended to ensure that Corporate Man- duced in February 2006 with the estab- agement will be able to focus on the stra- lishment of three main divisions. The inte- tegic direction of the Group, while the grated market and product development three Division Management Teams have organisation, the ”Markets & Products” been authorised to be in charge of day- division, is to focus on creating value for to-day operations. the customers (the retailers) and at the same time ensure a higher degree of New Board members innovation in product development driven At the General Meeting of LEGO Holding by consumer demand and a close dia- A/S on 2 May 2005, two new Board mem- logue with the dealers. bers were appointed. The new members are Armin F. Broger, The division “Community, Education and COO of Tommy Hilfiger in Europe, and Direct” is to develop the Group’s existing Torben Ballegaard Sørensen, CEO of and new direct-to-consumer sales chan- Bang & Olufsen, replacing Anders nels and ensure that the unique LEGO Moberg and Lars Kann-Rasmussen, who communities are catered for through wished to retire from the Board. direct dialogue. At the same time, this divi- sion is to ensure that future innovation is based on the Group’s thorough knowl- Employees and edge of consumer needs and, where Corporate Culture possible, actual cooperation should be entered into with the consumers. In order to support the successful imple- mentation of the strategy, 2006 will focus In order to ensure optimal operation and on strengthening personal leadership efficiency, all supplies of products via the throughout the organisation and on fur- value chain as well as supplies of servic- ther developing competences within sup- es via support functions, i.e. Supply Chain ply chain, key account management and and Central Functions, will now be united innovation. Moreover, efforts were made in in the division “Operations”. 2005 to establish a flatter organisation with Henrik Poulsen a simpler management structure in order Executive Vice President Besides the establishment of the three to ensure a more streamlined, responsive Markets, Product develop- ment & Marketing 14 | ANNUAL REPORT 2005


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    REPORT 2005 / EMPLOYEES AND CORPORATE CULTURE ■ ANNUAL REPORT 2005 | 15


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    ■ REPORT 2005 and profitable group. This work will contin- Group is able to pay Performance Man- ue in 2006. Furthermore, the Group’s agement Programme (PMP) bonuses to incentive-based remuneration scheme the employees. The Performance Man- will be further strengthened in order to agement Programme in 2006 has been continue the efforts towards a more result- simplified and targeted to support the oriented culture within the Group. Group’s strategy for the coming years and provide the individual employee with A more result-oriented LEGO culture further incentives and possibilities for rec- Also in 2005, the Group worked on direct- ognition of their efforts. The Performance ing the LEGO Group towards a more Management Programme is also intend- result-oriented culture. In order to do so, it ed to promote the understanding of how was necessary to modernise and the individual employee may contribute change communication between man- to the Group’s results and to improve indi- agement and employees, promote busi- vidual targets. ness understanding among the employ- ees and focus on motivation, develop- Developing talent ment and performance-based remunera- During 2005 the LEGO Group still tion to the employees. focused on developing leadership talent. The Group is in a process of consider- The objective of this effort is to motivate able change, which places heavy and retain high-potential employees and demands on the entire organisation. It is thus ensure continuity and consistency in difficult having to face a future where all the future leadership of the Group. employees have to constantly live with large - internal as well as external - chal- lenges and changes, without enjoying the Corporate responsibility job certainty previously characterising the LEGO Group. of the LEGO Group Social responsibility towards consumers, Corporate Management is therefore work- employees and the environment plays a ing on ensuring open, honest and timely central role in the LEGO Group’s inheri- communication in all situations. Together tance and history. Corporate Manage- with the introduction of many new dia- ment feels strongly about ensuring that logue possibilities between Corporate the Group will also in future maintain this Management and the employees, this commitment and that the Group’s activ- forms the basis of increased understand- ities and processes are carried out on a ing of the challenges facing the Group. sustainable basis. Therefore, in 2005 the LEGO Group initiated the preparation of Focused Performance its first coherent sustainability strategy, Jesper Ovesen Management Program which is expected approved and imple- Executive Vice President For the first time in three years, the LEGO mented in the course of 2006. This will Supply Chain & Central Functions 16 | ANNUAL REPORT 2005


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    REPORT 2005 / CORPORATE RESPONSIBILITY OF THE LEGO GROUP ■ involve increased information and training potential suppliers. This was done in of employees and leaders. order to determine whether the Group’s Code of Conduct sufficiently covered any Global Compact new issues that may arise in connection The LEGO Group joined the UN Global with the transfer of workplaces to these Compact in 2003 as the first - and so far countries. This resulted in a revision of the only - enterprise in the toy industry. As a Code of Conduct in 2005 and a change participant in Global Compact, the LEGO of procedures so that new, potential key Group is obliged to continue its work suppliers will be subjected to examination within the four areas: human rights, labour before an actual agreement is signed. standards, environment and the fight against corruption. In 2005 the LEGO The LEGO Group moreover participates Group integrated the principles from Glo- in the work within the toy industry of bal Compact into a number of group pol- ensuring that working conditions etc. with icies, so that these reflect the principles the suppliers fulfil a number of minimum and ideals expressed in Global Compact requirements. This work is carried out and a number of international declara- under the ICTI-CARE programme. Howev- tions, for example the UN Declaration of er, so far this only applies to China, Hong Human Rights. Particularly as regards the Kong and Macau. fight against corruption, Corporate Man- agement decided in the autumn of 2005 In 2005 the number of audits was to initiate a project with the objective of reduced from 92 audits in 2004 to 27 aud- developing and specifying internal guide- it visits and 12 follow-up visits. The reduc- lines for business integrity. The project will tion is attributable partly to the transfer of be carried through in 2006. the responsibility for the audits to the licence partners of the LEGO Group, and Revision of partly to the introduction of ICTI-CARE LEGO Group Code of Conduct approval of toy suppliers in China. This The LEGO Group Code of Conduct is a has resulted in considerable cost-savings set of guidelines on the behaviour and the possibility of using more resourc- expected of the Group and its suppliers es on follow-up and direct contact with in relation to a number of ethical stan- suppliers. dards in decisive areas. Product quality The comprehensive optimising and cost The LEGO Group wants to ensure contin- reduction in the LEGO Group value chain ued high product quality and has there- will result in the relocation, in whole or in fore revised its policy for the choice of part, of production in the coming years. materials in 2005. In this connection, the Ethical risk analyses were therefore pre- restrictions in respect of the use of PVC pared in respect of the countries of the and phthalates have been specified. ANNUAL REPORT 2005 | 17


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    ■ REPORT 2005 Consequently, the decorative paint used Efforts to reduce workplace accidents on play materials has been improved so and introduction of a global occupa- that, like the LEGO bricks, it contains no tional health and safety policy phthalates. Moreover, closer cooperation The health and safety of the employees has been introduced between the cus- have always been of special concern for tomer service call centres and Product the LEGO Group. Therefore, efforts are Development so that consumer com- constantly being made to secure healthy ments and wishes are to an even higher and safe working conditions at all the degree taken into consideration in the Group’s locations. This is done in recogni- product development process. tion of the human right to an acceptable working environment as well as the real- Environmental obligations and action isation that healthy and satisfied employ- It remains LEGO Group policy that envi- ees are more productive. ronmental considerations must be taken into account in all relevant processes, In 2005 a new occupational health and and that continuous efforts should be safety policy was drawn up and made to minimise any environmental approved, covering all the Group’s activ- impact caused by the Group’s activities. ities worldwide. The implementation of the policy will take place in 2006. A new health In 2005 the LEGO Group drew up a new and safety website has been established environmental policy which meets envi- for the employees in order to simplify glo- ronmental requirements, both globally bal communication relating to working and locally. The policy will be approved environment. and implemented in 2006. The LEGO Group continues to work towards global The LEGO Group continues to work implementation of the environmental towards global implementation of the management system ISO 14001. In 2005 occupational health and safety manage- global procedures and requirements ment system OHSAS 18001. The Group’s were developed, and a new environmen- activities in Denmark were certified in tal management intranet was established 2003. The implementation in the Czech to improve and simplify the Group’s com- Republic and the USA will be completed munication concerning environmental at the end of 2006, and at the same time, requirements, both locally and globally. Billund must be recertified. In Billund a system for the registration of In 2005 working environment at the sites waste was developed and implemented in Denmark was improved by means of in 2005. A system for registering additives work place assessments. The number of has also been implemented. All sub- registered health and safety problems stances have been mapped, and a new was nearly halved in 2005. A new system system for directions for use has been for registering and handling working envi- implemented. ronment problems is ready for implemen- tation in the spring of 2006. Unfortunately, Moreover, in 2005 the Group obtained the number of registered accidents environmental approval of the plastic resulting in absence has doubled from 27 moulding factory at Kornmarken, Billund. accidents in 2004 to 50 accidents in 2005. The approval was granted by the Munici- Such a heavy increase in the number of pality of Billund. accidents is not acceptable to the Group, 18 | ANNUAL REPORT 2005


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    REPORT 2005 / CORPORATE RESPONSIBILITY OF THE LEGO GROUP ■ ANNUAL REPORT 2005 | 19


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    ■ REPORT 2005 and in 2006 the Group will focus on iden- grammes, including donations from Edith tifying the reasons for the accidents and & Godtfred Kirk Christiansen’s Fund, via improving the efforts to reduce the num- Save the Children, for relief work in con- ber of accidents. nection with the tsunami disaster in Asia and donations from Ole Kirk’s Fund for In 2006 the organisation will continue to relief work in Pakistan in 2005. focus on the general work environment as well as staff well-being. In this connec- In 2006 the LEGO Group’s policy for char- tion, there will be focus on a number of ity work will be directed towards a num- factors affecting the well-being of the ber of global initiatives for supporting employees. The programme was intro- children’s possibilities relating to creative duced in the autumn of 2005 with a play and development. These initiatives health campaign offering the employees will to the widest possible extent give the at Billund health examinations. In 2006 employees the opportunity of active the employees will be offered to partici- involvement. pate in stop-smoking courses and con- trolled weight reduction programmes. Expectations for 2006 The registration of environmental and working environment data will be extend- 2006 will be another difficult year for the ed and standardised at all locations as LEGO Group. The size of the global toy the management systems are imple- market is still expected to contract, and mented. This will provide the LEGO the suppliers of traditional toys will there- Group with an overall picture of the fore still be facing strategic challenges. Group’s environmental impact and health and safety issues, which will enable the With the continued focus on the reestab- Group to make an improved, goal-orient- lishment of a strong core business with ed effort. classic construction toys, the Group expects to maintain its market position in Charity work 2006 based on a smaller, but financially The Group’s policy for charity work and stronger and more competitive Group. product donations also in 2005 aimed at helping children in need by providing No films supporting existing or new prod- support for creative play and develop- ucts will be launched in 2006, and Group ment. In December Danish employees revenues are expected to decrease had the possibility of participating as vol- slightly compared with 2005. The focus unteers in connection with the charity on earnings will continue, both through organisation Save the Children’s distribu- product and customer profitability and tion of LEGO Christmas presents to sick through streamlining, which will involve children in Danish hospitals. Moreover, transferring production - in whole or in the employees in the USA carried out part - to low-cost countries. fund raising for the victims of the hurri- cane Katrina. On this basis, a profit before tax in the region of DKK 500 million is expected in The Kirk family foundations also in 2005 2006 compared with DKK 456 million in supported a number of LEGO projects 2005, which reflects the need for a further and humanitarian and social pro- increase in earnings in the coming years. 20 | ANNUAL REPORT 2005


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    REPORT 2005 / EXPECTATIONS FOR 2006 ■


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    ■ REPORT 2005 22 | ANNUAL REPORT 2005


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    REPORT 2005 ■ ANNUAL REPORT 2005 | 23


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    Annual Report 2005 ■ ACCOUNTS 24 | ANNUAL REPORT 2005


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    FINANCIAL REPORT ■ FINANCIAL REPORT • The Group’s financial resources have Financial net expenses for the year decre- been improved from DKK -82 million ased to DKK 20 million, corresponding to at the end of 2004 to DKK 2,604 milli- an improvement of DKK 55 million compa- on at the end of 2005. red to 2004, and are attributable to the • Equity totals DKK 3,589 million includ- Group’s changed capital structure as well ing minority interests, corresponding as exchange gains. to an equity ratio of 47 per cent (57 per cent including subordinate loan Of the net profit for the year of DKK 505 mil- capital). Return on equity after tax lion, DKK 331 million is attributable to profit was 18 per cent. from continuing activities, whereas the pro- • Free cash flows of DKK 2,549 million fit from discontinuing activities amounts to have been realised for the year, of DKK 174 million. Jesper Ovesen which the majority relates to the Executive Vice President discontinuing activities. Due to the positive development in results & COO - Supply Chain & and balance sheet, the Group’s financial Central Functions ratios have improved considerably. The operating margin (ROS) is 7 per cent aga- The financial report is based on the con- inst -18 per cent in 2004. Moreover, the tinuing activities, the toy business, unless Group structure return on invested capital (ROIC) is 19 per otherwise stated. The discontinuing activ- As part of the simplification of the Group cent in 2005 against 1 per cent in 2004. ities relating to LEGOLAND Parks and structure, LEGO A/S in 2005 acquired a KOMPAN A/S are commented on separ- number of subsidiaries in INTERLEGO AG. Revenue ately at the end of the financial report. As LEGO Holding A/S owns both LEGO A/S In accordance with generally accepted and INTERLEGO AG, the structural chang- practice in the toy business, the account- es have no effect on this Annual Report, cf ing treatment of various contributions to also “LEGO Holding A/S Group - Group the retail sector was changed in 2005. Highlights structure”. Gross sales were reduced by various con- • In 2005 revenue increased by 12 per tributions granted to the retail sector to cent which is attributable to sales Net profit/loss for the year achieve certain gross sales. Previously, increases in all business areas. The net profit/loss for the year including such contributions were classified as • The gross margin of 58 per cent is discontinuing activities was a profit of DKK sales expenses. Comparative figures for on the same level as in 2004. 505 million against a loss of DKK 1,931 milli- previous years have been restated. • In 2005 total profit/loss before tax on in 2004, corresponding to an increase amounted to DKK 702 million against in results of DKK 2,436 million. In the financial year 2005, the Group achie- DKK -1,688 million in 2004. The profit ved revenue of DKK 7,050 million against of DKK 702 million comprises profit The Group’s core business - toys - has DKK 6,315 million in the previous year, cor- from continuing activities before tax seen considerable operating progress in responding to an increase of 12 per cent. of DKK 456 million and profit from 2005, and the profit/loss before special In local currencies sales increased by 9 discontinuing activities before tax of items and financial income and expenses per cent, whereas the positive effect from DKK 246 million. has increased from DKK 63 million in 2004 increasing exchange rates amounts to 3 • The profit/loss before special items, to DKK 468 million. The increase is due to a per cent. financial income and expenses and combination of increasing revenue and tax amounts to DKK 468 million cost savings. The increasing revenue is driven by sales against DKK 63 million in 2004. increases in all business areas, Europe, • Total assets have been reduced by Expenses of a nonrecurring nature paid in Asia and Emerging Markets, the Americas DKK 400 million to DKK 7,689 million. connection with restructuring and impair- and the Pacific and Direct to Consumer. The return on invested capital was 19 ment of fixed assets in 2005 amount to per cent (ROIC). DKK 9 million, whereas last year these amounted to DKK 1,225 million. ANNUAL REPORT 2005 | 25


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    Annual Report 2005 ■ FINANCIAL REPORT As in previous years, the exchange rate Restructuring expenses Tax effect on the Group’s sales is attributable In continuation of the measures initiated in Current Tax for the year amounts to DKK primarily to the development of the US dol- 2004, expenses for restructuring totalling 125 million against DKK 236 million in the lar. This has increased in 2005 - especially DKK 104 million were paid and provided for previous year. Irrespective of the loss in the autumn, which is the Group’s peak in 2005. This comprises expenses for clos- before tax, a tax expense was realised in season for sales. ing down and moving production as well 2004, which is due to the fact that deferred as reduction in the number of the Group’s tax relating to impairments of fixed assets Gross margin retail shops. A small part relates to allow- as well as provisions for restructuring was The gross margin of 58 per cent is on the ances to employees in connection with not capitalised. Sale of discontinuing activ- same level as in 2004. The increased reve- discontinuation of their employment. ities, primarily LEGOLAND Parks, did not nue in 2005 is set off by increasing pro- immediately result in tax payable. However, duction costs due to the higher activity. Profit/loss in associates tax has become payable in connection These expenses are not affected by The Group’s investment in Merlin Enter- with the Danish buildings which were changes in exchange rates to the same tainments Group Luxemburg S.á.r.l. yielded comprised by the sales transaction, but extent as revenue. a profit after tax of DKK 17 million. The which were not previously owned by investment was made in August 2005. LEGOLAND A/S. Expenses Other operating expenses amount to DKK Financial income and expenses The deferred tax assets for the year amount 3,702 million in 2005 against DKK 3,713 milli- Net financial expenses amounted to DKK to DKK 430 million and provisions for on last year. Sales and distribution 20 million in 2005, which is an improve- deferred tax to DKK 196 million. The deferred expenses and administrative expenses ment of DKK 55 million compared with tax assets are primarily attributable to activ- have increased in 2005 due, among other 2004. Raising of mortgage loans as well as ities in the LEGO Group’s sales companies, things, to increased activity and staff release of liquidity at the sale of LEGO- in which it is expected that tax loss carry- bonus. Other operating expenses have LAND Parks made it possible to change forwards may be utilised for set-off against decreased in spite of increasing royalty the Group’s capital structure and in this future earnings within a few years. payments based on increased sales. connection settle loans from credit institu- tions existing at the beginning of 2005. Balance sheet Licence and royalty expenses Consequently, interest expenses were In the continued efforts to reduce risks, The LEGO Group has entered into a num- reduced in 2005. further adjustment was made in 2005 of ber of royalty and licence agreements with the Group’s balance sheet to the future inventors, designers and other licensees The interest risk of the LEGO Group is level of activity, and therefore total assets with a view to using intellectual rights, attempted minimised by ensuring a have been reduced by 5 per cent from including protected trademarks. In 2005, match between liabilities and assets. Fur- DKK 8,089 million in 2004 to DKK 7,689 mil- DKK 300 million was paid according to thermore, risks from the use of interest lion. The mix is significantly improved such agreements against DKK 224 million swaps and options are hedged. towards more liquid assets in connection the year before. Expenses relating to licenc- with the sale of the ownership shares in es and royalty are included in production The Group’s exchange risk relates to the the LEGOLAND Parks, KOMPAN A/S and costs and other operating expenses. lack of balance between income and other fixed assets. expenses in the individual currencies as Impairment of fixed assets well as excess assets over liabilities in sub- Property, plant and equipment According to the accounting policies sidiaries. The exchange risks relate primar- Property, plant and equipment amount to applied, impairment tests have been per- ily to US dollars, EUR, Swiss francs and DKK 1,199 million, a decrease of DKK 395 formed where there is internal or external Japanese yen and are as far as possible million, which is primarily attributable to indication of impairment of individual attempted hedged by matching pay- buildings and production equipment assets or groups of assets. In 2005, no fur- ments received and made as well as which were classified as being available ther need for impairment has been identi- deposits and loans in the same currency. for sale in connection with the decision to fied, but instead reversals have been In addition, forward contracts and curren- close down the production in Switzerland. made of impairments previously made of cy options are applied. DKK 46 million and DKK 49 million, respec- In accordance with group policy, the tively, in connection with sale and reas- Net financial expenses for the year are investment level was also low in 2005. sessment of fixed assets. positively affected by exchange adjust- Gross investments in property, plant and ments of DKK 81 million. equipment amount to DKK 265 million in 26 | ANNUAL REPORT 2005


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    FINANCIAL REPORT ■ 2005, a reduction of 42 per cent (DKK 192 and if the subordinate loan capital of DKK Discontinuing activities million) compared with the previous year. 800 million is included, the equity ratio In 2004, it was decided to sell the Group’s In 2005 a profit of DKK 79 million was real- amounts to 57 per cent. LEGOLAND Parks, and the transaction ised from the sale of property, plant and was carried through in July 2005 to Merlin equipment. Long-term debts Entertainments Group, which is owned by In 2005 the LEGO Group continued its Blackstone Capital Partners, for EUR 375 Fixed asset investments efforts to change the Group’s capital million. In connection with the sale, a jointly Gross fixed asset investments amount to structure. Long-term debts to credit institu- owned company was established, in DKK 326 million and are primarily attribut- tions have at the beginning of the year which Blackstone Capital Partners holds able to the investment in the associate been paid; partly in connection with the 70 per cent, the LEGO Group holds 15 per Merlin Entertainments Group Luxemburg sale of the LEGOLAND Parks, and partly by cent and KIRKBI holds the remaining 15 S.á.r.l., the jointly owned company which raising mortgage loans totalling DKK 551 per cent. The investment in the associate was founded in connection with the million. Total long-term debts have been Merlin Entertainments Group Luxemburg Group’s sale of the LEGOLAND Parks. Prof- reduced by 44 per cent or DKK 1,039 milli- S.á.r.l. has been recognised as a fixed it after tax from the investment amounts to on to DKK 1,312 million. asset investment in the balance sheet. DKK 17 million in 2005. In connection with the current financing of The profit after tax of the discontinuing Current assets investments and operations, the Group activities amounts to DKK 174 million for At the end of 2005 inventories were on the must ensure an adequate and flexible 2005 against DKK -458 million in 2004. The same level as in the previous year, where- liquidity base, which is achieved through profit for the year includes operating profit as trade receivables are somewhat higher continued focus on cash flows as well as for the period 1 January - 30 June 2005 as based on the higher realised sales in the securing adequate drawing rights. The well as profit from the sale of the LEGO- 4th quarter. liquidity base comprises deposits in banks LAND Parks, a total of DKK 147 million. To as well as guaranteed drawing rights. this should be added a profit of DKK 99 The Group’s credit risk relating to debtors’ million from sale of the remaining KOMPAN lack of ability to pay is attempted mini- It is attempted to limit credit risks in con- A/S shares. mised by using a global credit insurance nection with financial partners by using programme. partners with high creditworthiness. Fixed assets for sale are in all materiality Cash flows on the same level as last year, but the mix Cash flows from operating activities of the of the assets has changed. The majority of LEGO Group amounted to DKK 1,057 milli- fixed assets put up for sale at the begin- on in 2005 against DKK 774 million in 2004. ning of 2005 have been sold, but the deci- The positive cash flows in 2005 are prima- sion to close down the production facilities rily attributable to the net profit for the year. in Switzerland resulted in new assets The working capital has moreover been being put up for sale at the end of 2005. reduced as a consequence of continued focus on this. Equity At the end of 2005, equity amounted to Total free cash flows, including discontinu- DKK 3,589 million (including minority intere- ing activities, amount to DKK 2,549 million sts) against DKK 2,948 million at the end of against DKK 538 million in 2004. A positive 2004, an increase of 22 per cent. effect of DKK 2,386 million is attributable to the discontinuing activities, whereas DKK The net profit for the year has increased -1,621 million relates to reduction of the equity by DKK 535 million, whereas exchan- external loan capital. ge adjustments of foreign subsidiaries as well as adjustment of financial instruments Based on the net profit for the year as well affected equity by DKK 141 million. as cash flows from the sale of the LEGO- LAND Parks, the Group’s financial resour- Equity including minority interests corre- ces are significantly improved at the end sponds to an equity ratio of 47 per cent, of 2005 compared with the previous year. ANNUAL REPORT 2005 | 27


  • Page 30

    Annual Report 2005 ■ ACCOUNTING POLICIES Accounting Policies The Annual Report of LEGO Holding A/S as separate items. Assets and liabilities of statement, including amortisation, depre- has been prepared in accordance with discontinuing activities are recognised as ciation and impairment losses. the provisions of the Danish Financial separate items in the balance sheet. Statements Act applying to large enterpris- Assets are recognised in the balance es of reporting class C. Consolidation sheet when it is probable that future eco- The Consolidated Financial Statements of nomic benefits attributable to the asset will The accounting policies applied are LEGO Holding A/S comprise the Parent flow to the LEGO Group, and the value of unchanged compared to previous years. Company and the companies in which the asset can be measured reliably. LEGO Holding A/S directly or indirectly In order to meet industry standards for the holds more than 50 per cent of the votes Liabilities are recognised in the balance recognition of expenses relating to “Contri- or otherwise exercises control. These sheet when it is probable that future eco- bution To Trade” (CTT), it has been decided companies are listed in the section “LEGO nomic benefits will flow out of the LEGO to set off these against revenue. Previously, Holding A/S Group - Group structure”. Group, and the value of the liability can be CTT was classified as sales and distribu- measured reliably. tion expenses. The amount is DKK 472 mil- The Consolidated Financial Statements lion for 2005 (DKK 389 million for 2004). were prepared on the basis of the financial Assets and liabilities are initially measured statements of the companies comprised, at cost. Subsequently, assets and liabilities In accordance with international account- as a combination of items of a uniform are measured as described for each item ing standards, the profit from investments nature and according to the same below. in subsidiaries is recognised after tax. Tax accounting policies. concerning investments in subsidiaries Certain financial assets and liabilities are was previously stated as a separate item Elimination has been made of intercompa- measured at amortised cost, which under corporation tax. The amount is DKK ny sales and purchases, interest, divi- involves the recognition of a constant 200 million for 2005 (DKK 210 million for dends, shareholdings, receivables and effective interest rate over the maturity 2004). payables as well as of intercompany prof- period. Amortised cost is calculated as The comparative figures have been restat- its and losses. original cost less any repayments and with ed accordingly. addition/deduction of the cumulative Minority interests amortisation of any difference between True and fair view At the calculation of group results and cost and the nominal amount. The LEGO Group has chosen to depart group equity, the shares of the results and from the requirements of the Danish equity of the subsidiaries attributable to Recognition and measurement take into Financial Statements Act as to the format minority interests are recognised as sep- account predictable losses and risks of the income statement and the balance arate items in the income statement and occurring before the presentation of the sheet in order to give a true and fair view the balance sheet. Minority interests are Annual Report which confirm or invalidate of continuing and discontinuing activities, recognised on the basis of remeasure- affairs and conditions existing at the bal- which are presented as separate items. ment of acquired assets and liabilities to ance sheet date. The departure does not affect the profit, fair value at the time of acquisition of the total assets and liabilities or equity. subsidiaries. Translation policies The balance sheets of foreign subsidiaries Discontinuing activities On subsequent changes to minority inter- are translated into Danish kroner at the A discontinuing activity is defined as a ests, the changed share is included in exchange rates at the balance sheet date, business area for which a decision con- results as of the date of the change. whereas the income statements are trans- cerning discontinuation has been made lated at calculated average exchange and published. Recognition and measurement rates. Exchange adjustments arising on Revenues are recognised in the income consolidation are recognised directly in Net profit/loss on discontinuing activities, statement as earned, including recogni- equity. profit and loss on disposal of assets and tion of value adjustments of financial settlement of liabilities related to this as assets and liabilities. Furthermore, all Where intercompany loans are long-term, well as the related tax effect are presented expenses are recognised in the income these are considered an addition to the 28 | ANNUAL REPORT 2005


  • Page 31

    ACCOUNTING POLICIES ■ net assets of the subsidiary, and ex- Income Statement The same principle is applied for associ- change adjustments are recognised ates in the Consolidated Financial State- directly in equity. Exchange adjustment of Revenue ments. external loans contracted for the hedging Revenue comprises the value of goods of such intercompany loans are also rec- and services delivered in the period. Reve- Financial income and expenses ognised directly in equity. nue is recognised exclusive of VAT and net Financial income and expenses comprise of discounts relating to sales. interest, financial expenses in respect of Other balance sheets in foreign curren- finance leases, realised and unrealised cies are translated into Danish kroner at Amortisation and depreciation exchange adjustments, price adjustment the exchange rates at the balance sheet Intangible assets are amortised, and pro- of securities, amortisation of mortgage date. Realised and unrealised gains and perty, plant and equipment are depreci- loans as well as extra payments and losses are recognised in the income ated over the expected useful lives of the repayment under the on-account taxation statement. assets: scheme. Derivative financial instruments Straight-line amortisation/depreciation: Corporation tax and deferred tax Derivative financial instruments are initially Intangible assets 5 years Current tax for the year, based on calcu- recognised in the balance sheet at cost Buildings 25 years lated taxable income for the year, is and are subsequently measured at their Plant and machinery 2-20 years expensed together with the change for fair values. Positive and negative fair values Other fixtures and fittings, the year in deferred tax calculated under of derivative financial instruments are tools and equipment 3-10 years the liability method. included as prepayments and deferred Minor acquisitions are expensed in the income, respectively. year of acquisition. Any changes in deferred tax due to chan- Changes in the fair values of derivative ges to tax rates are recognised in the financial instruments that are designated Leases income statement. and qualify as fair value hedges of a rec- Leases in respect of property, plant and ognised asset or a recognised liability are equipment where the Group does not Provision has been made for calculated recognised in the income statement as assume substantially all the risks and tax payable and for deferred tax on tem- are any changes in the fair value of the rewards of ownership are classified as porary differences between the carrying hedged asset or the hedged liability. operating leases and are recognised in amount and the tax base of assets and lia- the income statement on a straight-line bilities calculated at the balance sheet Changes in the fair values of derivative basis over the term of the contract. date. financial instruments that are designated and qualify as hedges of expected future Incentives (such as rent-free periods, redu- The provision for deferred tax reflects the cash flows are recognised in equity. If the ced periods, reimbursement of expenses, effect of any tax loss carry-forwards etc. to future transaction results in the recognition etc.) relating to operating leases are the extent it is considered likely that these of assets or liabilities, amounts previously recognised on a straight-line basis over can be utilised against future taxable inco- recognised in equity are transferred from the term of the contract. me. To the extent calculated deferred tax equity and recognised in the cost of the is positive, this is recognised in the balan- asset or the liability, respectively. If the Special items ce sheet as a deferred tax asset at the future transaction results in income or Special items comprise material amounts expected realisable value. expenses, amounts recognised in equity of a nonrecurring nature that do not relate are transferred to the income statement in to ordinary operating activities, including, the period in which the hedged item for example, impairment of intangible affects the income statement. assets and property, plant and equipment Balance Sheet to recoverable amount, restructuring ex- penses and reversals, if any. Research and development costs Research costs are recognised in the Profit on investments income statement as incurred. Develop- in subsidiaries and associates ment costs including overhead costs are The proportionate share of the profit for recognised in the balance sheet as intan- the year after tax is recognised in the inco- gible assets if the costs are assessed to me statement of the Parent Company. generate future economic benefits for the ANNUAL REPORT 2005 | 29


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    Annual Report 2005 ■ ACCOUNTING POLICIES Group. Other development costs are reviewed on an annual basis to determine bonds held to maturity. The investments expensed in the period in which they incur. whether there is any indication of impair- are measured at amortised cost. Development costs are amortised from ment other than that expressed by normal the commencement of the commercial amortisation and depreciation. Inventories use of the product over its expected use- Inventories are measured at cost based ful life. The recoverable amount of the asset is on the FIFO principle. Where the cost is calculated as the higher of net selling higher than the net realisable value, write- It is assessed that currently no costs qual- price and value in use. down is made to this lower value. ify for capitalisation according to these conditions, as most of the costs relating to Where a recoverable amount cannot be Work in progress and finished goods are novelty projects are marketing expenses determined for the individual asset, the measured at direct costs with addition of which relate to the development and smallest group of assets for which the indirect production costs. Financial ex- maintenance of the LEGO brand. recoverable amount can be determined is penses are not included. reviewed for impairment. Property, plant and equipment Receivables Property, plant and equipment are meas- Properties and other assets for which a Receivables are measured at amortised ured at cost less accumulated deprecia- recoverable amount cannot be deter- cost, which usually corresponds to nomi- tion and less any accumulated impair- mined as the asset does not on an individ- nal value. ment losses. Land is not depreciated. ual basis generate future cash flows are reviewed for impairment together with the Provisions for bad debts are made on the Cost comprises costs of materials, com- group of assets to which they are attribut- basis of an individual assessment of the ponents, sub-supplier services, direct able. risk relating to each receivable. labour and indirect production costs. Financial expenses are not included. Impairment of intangible assets and prop- Prepayments and erty, plant and equipment as well as any deferred income Leases in respect of property, plant and reversals of these are recognised in spe- Prepayments include expenses incurred equipment in terms of which the individual cial items. in respect of subsequent financial years, companies assume substantially all the as well as fair value adjustments of deriva- risks and rewards of ownership are classi- Investments in subsidiaries tive financial instruments. fied as finance leases. At the inception of and associates the lease, finance leases are measured in Investments in subsidiaries are recog- Deferred income includes payments the balance sheet at the lower of the fair nised in the balance sheet of the Parent received in respect of income relating to value of the leased asset and the net Company under the equity method as the subsequent financial years, as well as neg- present value of future lease payments. proportionate ownership shares of the net ative fair value adjustments of derivative When computing the net present value, asset value of the enterprises. financial instruments. the interest rate implicit in the lease is applied as the discount rate or an approxi- Investments in associates are included in Securities mated value. Assets acquired under the balance sheet of the Group and the Securities available for sale are measured finance leases are subsequently treated Parent Company under the equity method. at fair value at the balance sheet date. like the other property, plant and equip- ment of the Company. Subsidiaries and associates with a nega- Dividend tive net asset value are recognised at zero. Dividend distribution for the year pro- The remaining lease obligation is capital- Receivables from such enterprises are set posed by Management is disclosed as a ised and recognised in the balance sheet off against the negative net asset value. separate equity item. under debt, and the interest element on Should the negative net asset value the lease payments is recognised in the exceed the receivable, the amount is rec- Other provisions income statement over the term of the ognised in provisions. Provisions are recognised when - in con- lease. sequence of an event occurred before or Current asset investments on the balance sheet date - the Group Impairment of fixed assets and other investments has a legal or constructive obligation, and The carrying amounts of intangible assets Current asset investments recognised in it is probable that economic benefits must and property, plant and equipment are fixed asset investments comprise listed be given up to settle the obligation. 30 | ANNUAL REPORT 2005


  • Page 33

    ACCOUNTING POLICIES ■ Financial debts Cash flows from operating activities repayment of interest-bearing debt and Financial debts are recognised initially at Cash flows from operating activities are payment of dividend to shareholders. the proceeds received net of transaction calculated as the net profit/loss for the expenses incurred. Subsequently, the year adjusted for non-cash operating Financial resources loans are measured at amortised cost. items, changes in working capital and cor- Financial resources comprise cash at poration tax paid. bank and in hand etc. that can readily be Other debts are measured at amortised turned into cash, and with only an insignifi- cost, usually corresponding to nominal val- Cash flows from investing activities cant risk of value changes, reduced by ue. Cash flows from investing activities com- short-term debt to credit institutions. prise payments relating to acquisitions and disposals of intangible assets, proper- Short-term receivables from and short- Cash Flow Statement ty plant and equipment as well as fixed term debt to KIRKBI companies are includ- asset investments. ed in financial resources. The cash flow statement shows cash flows for the year broken down by operating, Cash flows from financing activities investing and financing activities, changes Cash flows from financing activities com- for the year in financial resources as well prise changes in the size or composition as financial resources at the beginning of the share capital and expenses relating and end of the year. to this, as well as the raising of loans, Financial ratios Financial ratios have been calculated in accordance with the “Guidelines and Financial Ratios 2005” issued by the Danish Society of Finan- cial Analysts. GROSS MARGIN: Gross profit x 100 Revenue OPERATING MARGIN (ROS): Profit before financials and tax x 100 Revenue NET PROFIT MARGIN: Net profit for the year x 100 Revenue RETURN ON EQUITY: Net profit for the year x 100 Average Equity ROIC I: EBITA before special items x 100 Average invested capital ROIC II: EBITA after special items x 100 Average invested capital Moreover, the following is shown: EQUITY RATIO: Equity (including minority interests) x 100 Total liabilities and equity, end of year Average invested capital is calculated as property, plant and equipment, inventories and receivables excluding tax receivables less provi- sions, excluding provisions relating to restructuring and deferred tax, and less short-term debt, excluding mortgage loans and corporation tax. At the statement of ROIC II, provisions relating to restructuring are moreover deducted. ANNUAL REPORT 2005 | 31


  • Page 34

    Annual Report 2005 ■ MANAGEMENT’S STATEMENT ON THE ANNUAL REPORT Management’s Statement on the Annual Report The Board and Corporate Management ments Act. We consider the accounting Group and the Parent Company and of have today presented and adopted the policies applied appropriate and the esti- the results of the Group and Parent Com- Annual Report of LEGO Holding A/S for mates made reasonable. Furthermore, we pany operations and cash flows. 2005. consider the overall Annual Report pres- entation true and fair. Therefore, in our We recommend that the Annual Report be The Annual Report was prepared in accor- opinion the Annual Report gives a true adopted at the Annual General Meeting. dance with the Danish Financial State- and fair view of the financial position of the Billund, 14 February 2006 Corporate Management Jørgen Vig Knudstorp, Jesper Ovesen Henrik Poulsen President and CEO Executive Vice President Executive Vice President Board of Directors Mads Øvlisen, Kjeld Kirk Kristiansen, Chairman Vice-chairman Armin Broger Mogens Johansen Torben Ballegaard Sørensen Lars Gunnar Bertelson Brock 32 | ANNUAL REPORT 2005


  • Page 35

    AUDITORS’ REPORT ■ Auditors’ Report To the Shareholders Standards. Those standards require that Opinion of LEGO Holding A/S we plan and perform the audit to obtain In our opinion, the Annual Report gives a reasonable assurance that the Annual true and fair view of the Group’s and the We have audited the Annual Report of Report is free of material misstatement. An Parent Company’s assets, liabilities, equity LEGO Holding A/S for the financial year audit includes examining, on a test basis, and financial position at 31 December 2005, prepared in accordance with the evidence supporting the amounts and 2005, and of the results of the Group’s and Danish Financial Statements Act. disclosures in the Annual Report. An audit the Parent Company’s operations and also includes assessing the accounting cash flows for the financial year 2005 in The Annual Report is the responsibility of policies applied and significant estimates accordance with the Danish Financial Company’s Management. Our responsibil- made by Management, as well as evaluat- Statements Act. ity is to express an opinion on the Annual ing the overall annual report presentation. Report based on our audit. We believe that our audit provides a rea- sonable basis for our opinion. Basis of Opinion We conducted our audit in accordance Our audit has not resulted in any qualifica- with International and Danish Auditing tion. Billund, 14 February 2006 PricewaterhouseCoopers Statsautoriseret Revisionsinteressentskab Lars Holtug Harald Birkwald State Authorised Public Accountant State Authorised Public Accountant ANNUAL REPORT 2005 | 33


  • Page 36

    Annual Report 2005 ■ ACCOUNTS 34 | ANNUAL REPORT 2005


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    INCOME STATEMENT ■ Income Statement 1 January - 31 December [ mDKK ] Parent Company Group 2004 2005 Note 2005 2004 90 122 Revenue 7,050 6,315 (29) (11) Production costs 2 (2,959) (2,672) 61 111 Gross profit/(loss) 4,091 3,643 – – Sales and distribution expenses 2 (2,584) (2,523) (25) (83) Administrative expenses 1, 2 (599) (587) 115 – Other operating income 79 133 (1) (5) Other operating expenses 2 (519) (603) 150 23 Profit/(loss) before special items, 468 63 financial income and expenses and tax (46) – Impairment of fixed assets 3 95 (723) – – Restructuring expenses 4 (104) (502) 104 23 Operating profit/(loss) 459 (1,162) Profit/(loss) from subsidiaries (1,659) 363 after tax – – Profit/(loss) from associates – 17 after tax 17 – 2 13 Financial income 5 139 104 (42) (47) Financial expenses 5 (159) (179) (1,595) 369 Profit/(loss) before tax 456 (1,237) (30) 41 Corporation tax 6 (125) (236) (1,625) 410 Profit/(loss) from continuing activities 331 (1,473) 50 125 Profit/(loss) from discontinuing activities 7 174 (458) (1,575) 535 Net profit/(loss) for the year 505 (1,931) Minority interests’ share of net profit/(loss) – – for the year (30) (356) (1,575) 535 LEGO Holding A/S’ share of net profit/(loss) for the year 535 (1,575) Proposed distribution of profit for LEGO Holding A/S – – Dividend (1,575) 535 Retained earnings (1,575) 535 Distributed ANNUAL REPORT 2005 | 35


  • Page 38

    Annual Report 2005 ■ BALANCE SHEET Balance Sheet at 31 December [ mDKK ] Parent Company Group 2004 2005 Note 2005 2004 Assets 29 22 Land and buildings 900 1,172 – – Plant and machinery 187 299 1 1 Other fixtures and fittings, tools and equipment 82 91 Fixed assets under construction and prepayments – – for property, plant and equipment 30 32 30 23 Property, plant and equipment 8, 9 1,199 1,594 – – Deferred tax assets 12 430 448 2,835 3,375 Investments in subsidiaries 11 – – – 197 Investments in associates 10, 11 197 – – – Current asset investments and other investments 10, 11 75 – 2,835 3,572 Fixed asset investments 702 448 2,865 3,595 Total fixed assets 1,901 2,042 – – Inventories 13 709 712 – – Trade receivables 1,856 1,630 198 655 Receivables from subsidiaries 14 – – – – Corporation tax receivable 68 97 2 2 Other receivables 136 256 – – Prepayments 109 205 200 657 Receivables 2,169 2,188 172 – Fixed assets for sale 301 403 – – Securities 641 – 1 1 Cash at bank and in hand 1,968 312 373 658 Total current assets 5,788 3,615 3,238 4,253 Assets relating to continuing activities 7,689 5,657 239 – Assets relating to discontinuing activities 7 – 2,432 3,477 4,253 Total assets 7,689 8,089 36 | ANNUAL REPORT 2005


  • Page 39

    BALANCE SHEET ■ Balance Sheet at 31 December [ mDKK ] Parent Company Group 2004 2005 Note 2005 2004 Liabilities and equity 123 123 Share capital 15 123 123 2,490 3,158 Retained earnings 3,158 2,490 – – Proposed dividend for the year – – 2,613 3,281 Equity 3,281 2,613 – – Minority interests 16 308 335 – – Provision for pensions 67 87 50 21 Provision for deferred tax 12 196 175 – – Other provisions 17 702 645 50 21 Provisions 965 907 800 800 Subordinate loan capital 19 800 800 – 133 Debt to credit institutions 512 1,551 800 933 Long-term debt 18 1,312 2,351 – 1 Debt to credit institutions 5 139 – – Trade payables 630 571 – – Corporation tax 134 78 14 15 Other payables 650 289 – 2 Deferred income 404 396 14 18 Short-term debt 1,823 1,473 814 951 Total debt 3,135 3,824 3,477 4,253 Liabilities and equity relating to continuing activities 7,689 7,679 – – Provisions and debt relating to discontinuing activities 7 – 410 3,477 4,253 Total liabilities and equity 7,689 8,089 Security and contingent liabilities 20 Related parties 23 ANNUAL REPORT 2005 | 37


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    Annual Report 2005 ■ STATEMENT OF CHANGES IN EQUITY Statement of Changes in Equity [ mDKK ] Share Retained Proposed capital earnings dividend Total Equity at 1 January 2005 123 2,490 2,613 Exchange adjustments relating to foreign subsidiaries 165 165 Fair value adjustment of forward exchange contracts for hedging of future purchases and sales in foreign currencies (44) (44) Adjustment of other financial instruments 20 20 Other adjustments (8) (8) Retained earnings 535 535 Equity at 31 December 2005 123 3,158 – 3,281 38 | ANNUAL REPORT 2005


  • Page 41

    CASH FLOW STATEMENT ■ Cash Flow Statement 1 January - 31 December [ mDKK ] Parent Company Group 2004 2005 Note 2005 2004 Profit/(loss) before tax relating (1,385) 369 to continuing activities 456 (1,237) 50 163 Profit/(loss) before tax relating to discontinuing activities 246 (451) 79 8 Amortisation, depreciation and impairment losses 437 2,104 1,353 (533) Other adjustments 21 (289) 109 97 7 850 525 Change in working capital: – – Change in inventories (19) 72 (154) (457) Change in receivables (188) 134 (5) 3 Change in short-term debt 496 111 (159) (454) 289 317 – (27) Corporation tax paid (82) (68) (62) (474) Cash flows from operating activities 1,057 774 (138) (1) Purchase of property, plant and equipment (265) (457) – (250) Fixed asset investments made (326) – – 588 Sale of discontinuing activities 2,604 – 173 – Sale of fixed assets 549 250 35 337 Cash flows from investing activities 2,562 (207) – – Dividend paid – (19) – 136 Raising of long-term debt 551 – 800 – Subordinate loan capital – 800 (621) – Repayment of long-term debt (1,621) (810) 179 136 Cash flows from financing activities (1,070) (29) 152 (1) Total cash flows 2,549 538 (151) 1 Financial resources at 1 January (82) (620) – – Financial ressources relating to disposal of activities 137 – 1 – Financial resources at 31 December 22 2,604 (82) Items of the cash flow statement cannot be directly derived from changes in the balance sheet ANNUAL REPORT 2005 | 39


  • Page 42

    Annual Report 2005 ■ NOTES Notes [ mDKK ] Note 1. Fee to auditors appointed by the general meeting Parent Company Group 2004 2005 2005 2004 Fee to PricewaterhouseCoopers: 1 1 Audit 7 8 – 3 Non-audit services 9 9 Fee to Ernst & Young: – – Audit – – – – Non-audit services – 1 1 4 Total, continuing activities 16 18 The fee concerning discontinuing activities is disclosed in note 7. Note 2. Employees and remuneration Parent Company Group 2004 2005 2005 2004 4 25 Wages and salaries 2,064 2,179 – – Pensions 114 119 – – Other and social security expenses 96 101 4 25 2,274 2,399 – – Including amount relating to discontinuing activities 171 364 Staff expenses relating to discontinuing activities comprise only 6 months in 2005. Including salaries and remuneration to: – 19 Corporate Management 19 9 – 2 Board of Directors 2 1 – 21 21 10 Employees Average number of full-time employees: 6 6 Continuing activities 5,321 5,620 – – Discontinuing activities 1,322 1,725 40 | ANNUAL REPORT 2005


  • Page 43

    NOTES ■ Notes [ mDKK ] Note 3. Impairment of fixed assets According to the accounting policies, impairment tests are performed where there is internal or external indication of impairment of indi- vidual assets or group of assets. In 2005 a number of impairment tests of the carrying amounts of the Group’s fixed assets were carried out. The carrying amounts of fixed assets have been compared with the recoverable amount, determined as the higher of the net selling price and the value in use of the asset. Where the recoverable amount is lower than the carrying amount of the asset, an impairment loss has been recognised. The calculations have been made considering the cash flows and the business of the LEGO Group comprising assets related to the fol- lowing groups: Play Materials, Brand Retail and Shop@Home, In connection with the tests made in 2005, no need for further impairment of fixed assets was identified; on the contrary, reversals were made of impairments made in previous years of DKK 46 million in connection with reassessment of fixed assets and DKK 49 million in con- nection with sales. Parent Company Group 2004 2005 2005 2004 – – Land and buildings (83) 335 – – Plant and machinery (2) 188 46 – Other fixtures and fittings, tools and equipment (10) 200 46 – (95) 723 Note 4. Restructuring expenses Parent Company Group 2004 2005 2005 2004 – – Staff and staff related expenses 37 368 – – Building and lease expenses 54 84 – – Other 13 50 – – 104 502 ANNUAL REPORT 2005 | 41


  • Page 44

    Annual Report 2005 ■ NOTES Notes [ mDKK ] Note 5. Financial income and expenses Parent Company Group 2004 2005 2005 2004 Financial income: 1 13 Interest income from subsidiaries – – 1 – Other interest income 59 46 – – Exchange gain 81 59 2 13 140 105 – – Including amount relating to discontinuing activities 1 1 Financial income relating to 2 13 continuing activities 139 104 Financial expenses: 40 46 Other interest expenses 120 190 – – Other financial expenses 45 – 2 1 Exchange losses – – 42 47 165 190 – – Including amount relating to discontinuing activities 6 11 Financial expenses relating to 42 47 continuing activities 159 179 42 | ANNUAL REPORT 2005


  • Page 45

    NOTES ■ Notes [ mDKK ] Note 6. Corporation tax Parent Company Group 2004 2005 2005 2004 3 (25) Current tax for the year (132) (63) (36) 11 Adjustment of deferred tax (39) (207) – – Other taxes etc – 3 – 17 Adjustment concerning previous years (26) 24 (33) 3 (197) (243) (3) (38) Including amount relating to discontinuing activities (72) (7) (30) 41 (125) (236) Tax on the profit/(loss) for the year is specified as follows: Parent Company Group % mDKK mDKK % Calculated 28% tax on profit/(loss) (28) (43) for the year before investment and tax (197) (28) Tax effect of: – – Higher/lower tax rate in subsidiaries (4) – – – Non-deductible expenses (48) (7) 19 29 Non-taxable income 121 17 11 17 Adjustment of tax relating to previous years (26) (4) – – Effect of deferred tax not capitalised (8) (1) – – Other (35) (5) 2 3 (197) (28) (38) Including amount relating to discontinuing activities (72) 41 (125) ANNUAL REPORT 2005 | 43


  • Page 46

    Annual Report 2005 ■ NOTES Notes [ mDKK ] Note 7. Discontinuing activities In 2004 it was decided to sell the Group’s LEGOLAND Parks and related activities, as these are not considered part of the core business. The sale was carried through in July 2005, and therefore the amounts for 2005 only comprise the period 1 January - 30 June, whereas the amounts for 2004 comprise the whole year. Therefore, the figures are not directly comparable. KOMPAN A/S has also been classified as a discontinuing activity as a consequence of the LEGO Group’s sale of the majority holding in 2004 and the sale of the remaining shares in 2005. Parent Company Group 2004 2005 2005 2004 – – Revenue 493 1,230 – (14) Expenses (541) (1,196) – – Impairment of fixed assets – (528) – 78 Gain from sale of LEGOLAND Parks 200 – 53 99 Share of profit and gain from sale, KOMPAN A/S 99 53 – – Financial income and expenses (5) (10) 53 163 Profit/(loss) before tax from discontinuing activities 246 (451) (3) (38) Tax (72) (7) 50 125 Profit/(loss) from discontinuing activities 174 (458) Fee to PricewaterhouseCoopers: – – Audit – 1 – 12 Non-audit services 32 1 – 12 Total 32 2 196 – Fixed assets, cf. note 8 – 2,301 43 – Current assets – 131 239 – Total assets – 2,432 – – Provisions – 12 – – Debt – 398 – – Total liabilities – 410 Cash flows from: Operating activities (73) Investing activities 2,533 Financing activities (74) Total cash flow 2,386 44 | ANNUAL REPORT 2005


  • Page 47

    NOTES ■ Notes [ mDKK ] Note 8. Property, plant and equipment Group Other fixtures and fittings, Fixed assets Dis- Land and Plant and tools and under con- continuing buildings machinery equipment struction activities Cost at 1 January 3,196 3,062 1,138 32 4,391 Exchange adjustment at 1 January 119 32 72 1 194 Additions 8 122 34 30 71 Disposals (1,431) (325) (213) – (4,656) Transfers – 18 15 (33) – Cost at 31 December 1,892 2,909 1,046 30 – Depreciation and impairment losses at 1 January 2,024 2,763 1,047 – 2,090 Exchange adjustment at 1 January 38 24 52 – 91 Depreciation for the year 91 243 88 – 110 Impairment losses for the year 45 – – – – Reversals of impairments made in previous years (128) (2) (10) – – Depreciation, assets sold (1,038) (306) (213) – (2,331) Transfers (40) – – – 40 Depreciation and impairment losses at 31 December 992 2,722 964 – – Carrying amount at 31 December 900 187 82 30 – According to the official property assessment, the value of the Danish land and buildings amounts to DKK 629m. The corresponding carrying amount is DKK 466m at 31 December 2005. No fixed assets have been capitalised in connection with finance leases. ANNUAL REPORT 2005 | 45


  • Page 48

    Annual Report 2005 ■ NOTES Notes [ mDKK ] Note 9. Property, plant and equipment Parent Company Other fixtures and fittings, Dis- Land and tools and continuing buildings equipment activities Cost at 1 January 155 4 376 Additions 1 – – Disposals (17) (2) (376) Cost at 31 December 139 2 – Depreciation and impairment losses at 1 January 126 3 180 Depreciation for the year 8 – – Depreciation, assets sold (17) (2) (180) Depreciation and impairment losses at 31 December 117 1 – Carrying amount at 31 December 22 1 – According to the official property assessment, the value of the Danish land and buildings amounts to DKK 124m. The corresponding carrying amount is DKK 22m at 31 December 2005. No fixed assets have been capitalised in connection with finance leases. 46 | ANNUAL REPORT 2005


  • Page 49

    NOTES ■ Notes [ mDKK ] Note 10. Fixed asset investments Group Current asset investments Investments and other in associates investments Cost at 1 January – 42 Additions 250 76 Elimination of intercompany gains on purchases (70) – Disposals – (42) Cost at 31 December 180 76 Value adjustments at 1 January – (42) Adjustment for the year 17 (1) Disposal – 42 Value adjustments at 31 December 17 (1) Carrying amount at 31 December 197 75 Note 11. Fixed asset investments Parent Company Current asset Investments Investments investments in in and other subsidiaries associates investments Cost at 1 January 5,381 – 41 Additions – 250 – Elimination of intercompany gains on purchases – (70) – Disposals – – (41) Cost at 31 December 5,381 180 – Value adjustments at 1 January (2,546) – (41) Exchange adjustments 184 – – Net profit/(loss) for the year 363 17 – Other adjustments (7) – – Disposal – – 41 Value adjustments at 31 December (2,006) (17) – Carrying amount at 31 December 3,375 197 – ANNUAL REPORT 2005 | 47


  • Page 50

    Annual Report 2005 ■ NOTES Notes [ mDKK ] Note 12. Deferred tax Parent Company Group 2004 2005 2005 2004 – – Deferred tax asset at 1 January 448 588 (14) (50) Provision for deferred tax at 1 January (175) (115) (14) (50) Deferred tax, net at 1 January 273 473 (36) 29 Change in deferred tax (39) (207) (50) (21) Deferred tax, net at 31 December 234 266 – – Including amount relating to discontinuing activities – (7) (50) (21) 234 273 Specified as follows: – – Deferred tax asset 430 448 (50) (21) Provision for deferred tax (196) (175) (50) (21) Deferred tax, net at 31 December 234 273 Deferred tax - Group Deferred Provision for Deferred tax Deferred tax tax asset deferred tax net 2005 net 2004 Fixed assets 17 (40) (23) (63) Current assets 24 – 24 75 Inventories 116 – 116 96 Provisions 23 4 27 51 Debt 49 3 52 23 Tax loss carry-forwards 199 – 199 147 Other 2 (163) (161) (56) 430 (196) 234 273 Tax loss carry-forwards - Group 2005 2004 Tax assets relating to tax loss carry-forwards have been capitalised based on an assessment of whether they can be utilised within a few years. The Group’s capitalised tax losses expires as follows: Within 1 year – 4 Within 2 years – – Within 3 years 5 – Within 4 years 11 18 Within 5 years 2 – After 5 years 181 125 199 147 The Group’s non-capitalised deferred tax assets amount to DKK 350 million. 48 | ANNUAL REPORT 2005

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