ANNUAL REPORT 2004 - Luxottica Group

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade
accounts receivable are limited due to the large
number of customers comprising the Company’s
customer base. Ongoing credit evaluations of
customers’ financial condition are performed.
CONCENTRATION OF SALES UNDER LICENSE
AGREEMENT
In 1999, the Company signed a license agreement for
the design, production and distribution of frames under
the Chanel trade name. Since 1999, Chanel sales have
been increasing, representing approximately 4.4% of
total sales in 2004. In February 2004, the Company
announced the renewal of this license agreement. This
renewed license agreement expires in 2008.
CONCENTRATION OF SUPPLIER RISK
Oakley Inc. is one of the Company’s largest suppliers
of products to its retail division. For the 2002, 2003
and 2004 fiscal years, Oakley accounted for
approximately 11.8%, 8.7% and 6.8% of the total
merchandise purchases from suppliers, respectively.
In December 2004, the Company signed a new one
year purchase contract with Oakley. Management
believes that the loss of this vendor would not cause a
significant impact on the future operations of the
Company as it could replace this vendor quickly with
other products manufactured by the Company and
other third party suppliers.
As a result of the OPSM and Cole acquisitions, Essilor
S.A. has become one of the Company’s largest
suppliers to its retail division. For the 2004 fiscal year,
Essilor S.A. accounted for approximately 9.9% of the
Company’s total merchandise purchases. The
Company has not signed any specific purchase
contract with Essilor. Management believes that the
loss of this vendor would not cause a significant
impact on the future operations of the Company as it
could replace this vendor quickly with other third party
suppliers.
140
14. COMMITMENTS
AND CONTINGENCIES
ROYALTY AGREEMENTS
The Company is obligated under non-cancellable
license agreements with designers, which expire at
various dates through 2013. In accordance with the
provisions of such agreements, the Company is
required to pay royalties and advertising fees based
on a percentage of sales (as defined) with, in certain
agreements, minimum guaranteed payments in each
year of the agreements. In the first half of 2003, the
Company terminated its license agreement for the
production and distribution of the Giorgio Armani and
Emporio Armani eyewear collections and has signed a
ten-year worldwide license agreement for the
production and distribution of eyewear of Versace,
Versus and Versace Sport frames. The agreement is
renewable at the Company’s discretion for an
additional ten years. In the second part of 2003, a
license agreement was signed for the production and
distribution of products with the Prada and Miu Miu
trade names. The Prada license agreement expiration
date is in 2013. In June 2004, the Company signed a
new licensing agreement for the design, production
and worldwide distribution of Donna Karan and DKNY
prescription frames and sunglasses. The initial term of
the agreement is five years, which began on January
1, 2005 and is renewable for an additional five years.
In October 2004, the Company signed a new
licensing agreement for the design, production and
worldwide distribution of Dolce & Gabbana and D&G
Dolce & Gabbana prescription frames and
sunglasses. The initial term of the agreement is five
years, which will begin on January 1, 2006, with an
automatically renewable extension for an additional five
years upon meeting certain targets. On December 27,
2004 the Company and the current licensee agreed to
advance the initial term of the license to October 1,
2005.
Minimum payments required in each of the years
subsequent to December 31, 2004 are detailed as
follows: