LensCrafters 2006 Annual Report Download - page 152

Concentration of supplier risk
Oakley Inc. is one of the largest suppliers of products to the Company’s Retail Division. For the
2004, 2005 and 2006 fiscal years, Oakley accounted for approximately 6.8%, 4.9% and 5.7% of the
total merchandise purchases from suppliers, respectively. In 2006, Oakley Inc. and the Company
signed a new agreement, as the previous one expired in 2005, establishing commercial terms
retroactive to January 1, 2006 through December 31, 2008, substantially consistent with the
previous contract. Management believes that the loss of this vendor would not have a significant
impact on the future operations of the Company as it could replace this vendor quickly with others.
As a result of the OPSM and Cole acquisitions, Essilor S.A. has become one of the largest
suppliers to the Company’s Retail Division. For the 2004, 2005 and 2006 fiscal years, Essilor S.A.
accounted for approximately 9.9%, 10.0%, and 15.0% of the Company’s total merchandise
purchases, respectively. The Company has not signed any specific purchase contract with Essilor.
Management believes that the loss of this vendor would not have a significant impact on the future
operations of the Company as it could replace this vendor quickly with other third-party suppliers.
15. COMMITMENTS AND CONTINGENCIES
Royalty agreements
The Company is obligated under non-cancellable distribution agreements with designers, which
expire at various dates through 2015. 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 June 2004, the Company signed a new license 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 license
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 began on January 1, 2006, with an automatically renewable extension for an
additional five years upon meeting certain targets. On October 7, 2005, the Company announced
the signing of a 10-year license agreement for the design, production and worldwide distribution of
prescription frames and sunglasses under the Burberry name. The agreement began on January
1, 2006. On February 27, 2006, the Company announced that it entered into a 10-year license
agreement for the design, production and worldwide distribution of prescription frames and
sunglasses under the Polo Ralph Lauren name. The agreement commences on January 1, 2007.
Based on the agreement, Luxottica Group provided for an advance payment on royalties to Ralph
Lauren on January 2007 for a total amount of US$ 199 million. In December 2006, the Company
announced the signing of a 10-year license agreement for the design, manufacturing and
worldwide distribution of exclusive ophthalmic and sun collections under the Tiffany & Co. name.
The launch of the first collection is expected for early 2008. The distribution of Tiffany’s collections
will start with Tiffany’s own stores as well as in North America, Japan, Hong Kong, South Korea,
key Middle East markets and Mexico and will extend over time to additional markets and through
new distribution channels.
>152 | ANNUAL REPORT 2006