The Benetton Group Annual Report 1996

With regard to the dispute with Eco Swiss China Time Ltd. and Bulova Corp., ongoing legal procedures
seek to quash or overturn the arbitration award of June 23, 1995, which ordered Benetton
International N.V. to pay compensation of US$ 23.7 million to Eco Swiss China Time Ltd. and US$ 2.8
million to Bulova Corp., together with costs and the related interest.
Stockholders will remember that in 1986, Benetton International N.V., a subsidiary of Benetton
Group S.p.A., signed a license contract with Eco Swiss China Time Ltd. (the licensee) and Bulova Corp.
(colicensee) for the use of the Benetton trademark in the timepiece sector. The duration of the contract
was eight years and therefore expired in 1994.
Significant problems in the relationship with Eco Swiss China Time Ltd. began to emerge at the end of
1989, such that, in 1991, Benetton International N.V. sent that company a letter notifying its intention to
terminate the contract. The grounds indicated by Benetton were essentially that:
– royalties were not being paid, or were inadequate;
– the license was effectively being sublicensed to a subsidiary company of Eco Swiss China Time Ltd.;
– the company refused to accept its share of the audit fees incurred by Arthur Andersen;
– a number of group companies had gone bankrupt (including Eco Swiss S.p.A., the European
subholding of the Eco Swiss Group).
Eco Swiss China Time Ltd. and Bulova Corp. did not accept the termination of the contract and, on the
basis of an arbitration clause, took the case to arbitration in the Netherlands.
Benetton International N.V. presented two appeals against the award: the first, based on the merits of
the case, requesting that the award be quashed, and the second, raising objections based on legal
grounds, that the award be overturned.
Benetton International N.V., having previously applied for a stay of execution, obtained through the
courts a temporary stay in regard to Eco Swiss China Time Ltd., pending the decision of the competent
tribunals on the questions indicated above.
On March 21, 1997, the Supreme Court in The Hague accepted the petition by Benetton
International N.V. and remitted the case for consideration by the European Court of Justice in
Luxembourg. This decision has had favorable consequences for Benetton International N.V., since it also
resulted in the adjournment of proceedings before the Supreme Court in The Hague concerning a
request by Eco Swiss China Time Ltd. to lift the stay of execution on the payment of the arbitration
award.
This positive result encourages Benetton International N.V. in the defense of its case and interests. Any
risks which could emerge from the final outcome of proceedings are adequately covered by existing
provisions.
The agents' leaving indemnity reserve was created in prior years and is prudently maintained to reflect
contingencies associated with the interruption of agency contracts in certain circumstances covered
by Italian law. The provision of an additional Lire 9,282 million during 1996 follows utilizations during the
year.
The exchange fluctuation reserve reflects the net effect of adjusting the unhedged foreign currency
receivables and payables of Italian companies in the Group using year-end exchange rates.
21. RESERVE FOR EMPLOYEE TERMINATION INDEMNITIES
Movements in this reserve during the year were as follows:
Balance as of January 1, 1996 58,736
Provision for the year 13,752
Indemnities paid during the year (9,995)
Other movements 28
Balance as of December 31, 1996 62,521
"Other movements" reflect the opening balances of companies acquired during 1996.
Related provisions charged in expense in 1994 and 1995 were Lire 13,595 million and Lire 17,114 million
respectively.